[Federal Register Volume 73, Number 237 (Tuesday, December 9, 2008)]
[Notices]
[Pages 74770-74797]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-28908]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59039; File No. SR-NYSEArca-2006-21]


Self-Regulatory Organizations; NYSE Arca, Inc.; Order Setting 
Aside Action by Delegated Authority and Approving Proposed Rule Change 
Relating to NYSE Arca Data

December 2, 2008.
    On May 23, 2006, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission'' or 
``SEC''), pursuant to section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed 
rule change (``Proposal'') to establish fees for the receipt and use of 
certain market data that the Exchange makes available. The Proposal was 
published for comment in the Federal Register on June 9, 2006.\3\ On 
October 12, 2006, the Commission issued an order, by delegated 
authority, approving the Proposal.\4\ On November 6, 2006, NetCoalition 
(``Petitioner'') submitted a notice, pursuant to Rule 430 of the 
Commission's Rules of Practice, indicating its intention to file a 
petition requesting that the Commission review and set aside the 
Delegated Order.\5\ On November 8, 2006, the Exchange submitted a 
response to the Petitioner's Notice.\6\ On November 15, 2006, 
Petitioner submitted its petition requesting that the Commission review 
and set aside the Delegated Order.\7\ On December 27, 2006, the 
Commission issued an order: (1) Granting Petitioner's request for the 
Commission to review the Delegated Order; (2) allowing any party or 
other person to file a statement in support of or in opposition to the 
action made by delegated authority; and (3) continuing the 
effectiveness of the automatic stay provided in Rule 431(e) of the 
Commission's Rules of Practice.\8\ The Commission received 25 comments 
regarding the Petition.\9\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 53952 (June 7, 2006), 71 
FR 33496 (June 9, 2006).
    \4\ Securities Exchange Act Release No. 54597 (October 12, 2006) 
71 FR 62029 (October 20, 2006) (``Delegated Order'').
    \5\ Letter from Markham C. Erikson, Executive Director and 
General Counsel, NetCoalition, to the Honorable Christopher Cox, 
Chairman, SEC, dated November 6, 2006 (``Notice'').
    \6\ Letter from Mary Yeager, Corporate Secretary, NYSE Arca 
Inc., to the Honorable Christopher Cox, Chairman, SEC, dated 
November 8, 2006 (``NYSE ARCA Petition Response'').
    \7\ Petition for Commission Review submitted by Petitioner, 
dated November 14, 2006 (``Petition'').
    \8\ Securities Exchange Act Release No. 55011 (December 27, 
2006).
    \9\ The comments on the Petition, as well as the earlier 
comments on the Proposal, are identified and summarized in section 
III below. NYSE Arca's responses to the commenters are summarized in 
section IV below. Comments on the Draft Order are summarized in 
section V below.
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    On June 4, 2008, the Commission published notice of a proposed 
order (``Draft Order'') approving the NYSE Arca proposed fees to give 
the public an additional opportunity to comment.\10\ The Commission 
received 16 comments and three economic assessments in response to the 
Draft Order.
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    \10\ Securities Exchange Act Release No. 57917 (June 4, 2008), 
73 FR 32751 (June 10, 2008) (``Draft Order'').
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    The Commission has considered the Petition, comments, and economic 
assessments submitted in response to the Proposal, Petition, and Draft 
Order. For the reasons described below, it is setting aside the earlier 
action taken by delegated authority and approving the Proposal 
directly.

Table of Contents

I. Introduction
II. Description of Proposal
III. Summary of Comments Received
    A. Commenters Opposing the Action by Delegated Authority
    1. Need for a Comprehensive Review of Market Data Issues
    2. Need for a Cost-Based Justification of Market Data Fees
    3. Exchange Act Rule 19b-4 Process
    4. Importance of Depth-of-Book Data
    5. Lack of Competition in Market Data Pricing
    6. Increase in Market Data Revenues
    7. Recommended Solutions
    B. Commenters Supporting the Action by Delegated Authority
IV. NYSE Arca Responses to Commenters
    A. Response to Commenters on Proposal
    B. Response to Commenters on Petition
V. Comments on the Draft Order
VI. Discussion
    A. Commission Review of Proposals for Distributing Non-Core Data
    B. Review of Competitive Forces Applicable to NYSE Arca
    1. Competition for Order Flow
    2. Availability of Alternatives to ArcaBook Data

[[Page 74771]]

    3. Response to Commenters on Competition Issues
    4. Response to Economic Assessments of the Draft Order
    a. Order Flow and Market Data Competition
    b. Substitutes for Depth-of-Book Data
    c. Efficacy of Regulatory Alternatives
    C. Review of Terms of the Proposal
VII. Conclusion

I. Introduction

    The Commission's Rules of Practice set forth procedures for the 
review of actions made pursuant to delegated authority. Rule 431(b)(2) 
provides that the Commission, in deciding whether to accept or decline 
a discretionary review, will consider the factors set forth in Rule 
411(b)(2). One of these factors is whether an action pursuant to 
delegated authority embodies a decision of law or policy that is 
important and that the Commission should review.
    The Petitioner and commenters raised a number of important issues 
that the Commission believes it should address directly at this time. 
In particular, section VI below addresses issues related to the nature 
of the Commission's review of proposed rule changes for the 
distribution of ``non-core'' market data, which includes the NYSE Arca 
data that is the subject of the Proposal. Individual exchanges and 
other market participants distribute non-core data independently. Non-
core data should be contrasted with ``core'' data--the best-priced 
quotations and last sale information of all markets in U.S.-listed 
equities that Commission rules require to be consolidated and 
distributed to the public by a single central processor.\11\ Pursuant 
to the authority granted by Congress under section 11A of the Exchange 
Act, the Commission requires the self-regulatory organizations 
(``SROs'') to participate in joint-industry plans for disseminating 
core data, and requires broker-dealers and vendors to display core data 
to investors to help inform their trading and order-routing decisions. 
In contrast, no Commission rule requires exchanges or market 
participants either to distribute non-core data to the public or to 
display non-core data to investors.
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    \11\ See section VI.A below for a fuller discussion of the 
arrangements for distributing core and non-core data.
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    Price transparency is critically important to the efficient 
functioning of the equity markets. In 2006, the core data feeds 
reported prices for more than $39.4 trillion in transactions in U.S.-
listed equities.\12\ In 2006, U.S. broker-dealers earned $21.7 billion 
in commissions from trading in U.S.-listed equities--an amount that 
does not include any revenues from proprietary trading by U.S. broker-
dealers or other market participants.\13\ Approximately 420,000 
securities industry professionals subscribe to the core data products 
of the joint-industry plans, while only about 5% of these professionals 
have chosen to subscribe to the non-core data products of 
exchanges.\14\
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    \12\ Source: ArcaVision (available at http://www.arcavision.com).
    \13\ Frank A. Fernandez, Securities Industry and Financial 
Markets Association Research Report, ``Securities Industry Financial 
Results: 2006'' (May 2, 2006) (``SIFMA Research Report''), at 7-9, 
21.
    \14\ See note 233 below and accompanying text.
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    In June 2008, NYSE Arca executed a 16.5% share of trading in U.S.-
listed equities.\15\ The reasonably projected revenues from the 
proposed fees for NYSE Arca's non-core data are $8 million per 
year.\16\ Commenters opposing the Proposal claimed that NYSE Arca 
exercised monopoly power to set excessive fees for its non-core data 
and recommended that the Commission adopt a ``cost-of-service'' 
ratemaking approach when reviewing exchange fees for non-core data--an 
approach comparable to the one traditionally applied to utility 
monopolies.\17\
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    \15\ See note 205 below and accompanying text.
    \16\ See note 318 below and accompanying text.
    \17\ The commenters' views are summarized in section III.A.2 
below.
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    In 2005, however, the Commission stated its intention to apply a 
market-based approach that relies primarily on competitive forces to 
determine the terms on which non-core data is made available to 
investors.\18\ This approach follows the clear intent of Congress in 
adopting section 11A of the Exchange Act that, whenever possible, 
competitive forces should dictate the services and practices that 
constitute the U.S. national market system for trading equity 
securities. Section VI discusses this market-based approach and applies 
it in the specific context of the Proposal by NYSE Arca. The Commission 
is approving the Proposal primarily because NYSE Arca was subject to 
significant competitive forces in setting the terms of the Proposal. 
The Commission believes that reliance on competitive forces, whenever 
possible, is the most effective means to assess whether proposed fees 
for non-core data meet the applicable statutory requirements.
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    \18\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37566-37568 (June 29, 2005) (``Regulation NMS 
Release'').
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    The Petitioner and commenters discussed and recommended solutions 
for a wide range of market data issues that were beyond the scope of 
the Proposal. The Petitioner particularly called attention to the data 
needs of users of advertiser-supported Internet Web sites, many of whom 
are individual retail investors. In this regard, the Commission 
recognizes that exchanges have responded by developing innovative new 
data products specifically designed to meet the reference data needs 
and economic circumstances of these Internet users.\19\
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    \19\ See Securities Exchange Act Release No. 57966 (June 16, 
2008), 73 FR 35182 (June 20, 2008) (File No. SR-NYSE-2007-04) (NYSE 
Real-Time Reference Prices); Securities Exchange Act Release No. 
57965 (June 16, 2008), 73 FR 35178 (June 20, 2008) (SR-NASDAQ-2006-
060) (Nasdaq Last Sale Data Feeds).
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    As noted in section III.A.1 below, some commenters also suggested 
that, pending a comprehensive resolution of all market data issues 
(including those related to core data), the Commission should impose a 
moratorium on all proposed rule changes related to market data. The 
Commission recognizes the importance of many of the issues raised by 
commenters relating to core data that are beyond the scope of the 
Proposal. It is continuing to consider these issues, and others, as 
part of its ongoing review of SRO structure, governance, and 
transparency.\20\ The Commission does not, however, believe that 
imposing a moratorium on the review of proposed rule changes related to 
market data products and fees would be appropriate or consistent with 
the Exchange Act. A primary Exchange Act objective for the national 
market system is to promote fair competition.\21\ Failing to act on the 
proposed rule changes of particular exchanges would be inconsistent 
with this Exchange Act objective, as well as with the requirements 
pertaining to SRO rule filings more generally. Accordingly, the 
Commission will continue to act on proposed rule changes for the 
distribution of market data in accordance with the applicable Exchange 
Act requirements.
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    \20\ See Securities Exchange Act Release No. 50699 (November 18, 
2004), 69 FR 71126 (December 8, 2004) (proposed rules addressing SRO 
governance and transparency); Securities Exchange Act Release No. 
50700 (November 18, 2004), 69 FR 71256 (December 8, 2004) (``Concept 
Release Concerning Self-Regulation'').
    \21\ Section 11A(a)(1)(C)(ii) of the Exchange Act, 15 U.S.C. 
78k-1(a)(1)(C)(ii).
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II. Description of Proposal

    Through NYSE Arca, LLC, the equities trading facility of NYSE Arca 
Equities, Inc., the Exchange makes available on a real-time basis 
ArcaBook\SM\, a compilation of all limit orders resident in the NYSE 
Arca limit order book. In addition, the Exchange makes available real-
time information relating to transactions and limit orders in debt 
securities that are traded

[[Page 74772]]

through the Exchange's facilities. The Exchange makes ArcaBook and the 
bond transaction and limit order information (collectively, ``NYSE Arca 
Data'') available to market data vendors, broker-dealers, private 
network providers, and other entities by means of data feeds. 
Currently, the Exchange does not charge fees for the receipt and use of 
NYSE Arca Data.
    The Exchange's proposal would establish fees for the receipt and 
use of NYSE Arca Data. Specifically, the Exchange proposes to establish 
a $750 per month access fee for access to the Exchange's data feeds 
that carry the NYSE Arca Data. In addition, the Exchange proposes to 
establish professional and non-professional device fees for the NYSE 
Arca Data.\22\ For professional subscribers, the Exchange proposes to 
establish a monthly fee of $15 per device for the receipt of ArcaBook 
data relating to exchange-traded funds (``ETFs'') and those equity 
securities for which reporting is governed by the CTA Plan (``CTA Plan 
and ETF Securities'') and a monthly fee of $15 per device for the 
receipt of ArcaBook data relating to those equity securities, excluding 
ETFs, for which reporting is governed by the Nasdaq UTP Plan (``Nasdaq 
UTP Plan Securities'').\23\ For non-professional subscribers, the 
Exchange proposes to establish a monthly fee of $5 per device for the 
receipt of ArcaBook data relating to CTA Plan and ETF Securities and a 
monthly fee of $5 per device for the receipt of ArcaBook data relating 
to Nasdaq UTP Plan Securities.\24\
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    \22\ In differentiating between professional and non-
professional subscribers, the Exchange proposes to apply the same 
criteria used by the Consolidated Tape Association Plan (``CTA 
Plan'') and the Consolidated Quotation Plan (``CQ Plan'') for 
qualification as a non-professional subscriber. The two plans, which 
have been approved by the Commission, are available at http://www.nysedata.com.
    \23\ The ``Nasdaq UTP Plan'' is the Joint Self-Regulatory 
Organization Plan Governing the Collection, Consolidation and 
Dissemination of Quotation and Transaction Information for Nasdaq-
Listed Securities Traded on Exchanges on an Unlisted Trading 
Privileges Basis. The plan, which has been approved by the 
Commission, is available at http://www.utpdata.com.
    \24\ There will be no monthly device fees for limit order and 
last sale price information relating to debt securities traded 
through the Exchange's facilities.
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    The Exchange also proposes a maximum monthly payment for device 
fees paid by any broker-dealer for non-professional subscribers that 
maintain brokerage accounts with the broker-dealer.\25\ For 2006, the 
Exchange proposed a $20,000 maximum monthly payment. For the months 
falling in a subsequent calendar year, the maximum monthly payment will 
increase (but not decrease) by the percentage increase (if any) in the 
annual composite share volume \26\ for the calendar year preceding that 
subsequent calendar year, subject to a maximum annual increase of five 
percent.
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    \25\ Professional subscribers may be included in the calculation 
of the monthly maximum amount so long as: (1) Nonprofessional 
subscribers comprise no less than 90% of the pool of subscribers 
that are included in the calculation; (2) each professional 
subscriber that is included in the calculation is not affiliated 
with the broker-dealer or any of its affiliates (either as an 
officer, partner or employee or otherwise); and (3) each such 
professional subscriber maintains a brokerage account directly with 
the broker-dealer (that is, with the broker-dealer rather than with 
a correspondent firm of the broker-dealer).
    \26\ ``Composite share volume'' for a calendar year refers to 
the aggregate number of shares in all securities that trade over 
NYSE Arca facilities for that calendar year.
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    Lastly, the Exchange proposes to waive the device fees for ArcaBook 
data during the duration of the billable month in which a subscriber 
first gains access to the data.

III. Summary of Comments Received

    The Commission received four comments from three commenters 
regarding the Proposal after it was published for comment.\27\ NYSE 
Arca responded to the comments.\28\ After granting the Petition, the 
Commission received 25 comments from 17 commenters regarding the 
approval of the Proposal by delegated authority.\29\ Nine commenters 
urged the Commission to set aside the action by delegated 
authority,\30\ and five commenters supported the action by delegated 
authority.\31\ One commenter expressed no views regarding the specifics 
of the Proposal, but urged the Commission to address market data fees 
as part of a more comprehensive modernization of SROs in light of 
recent market structure developments.\32\ NYSE Arca responded to the 
comments submitted after the Commission granted the Petition.\33\ Three 
commenters submitted additional comments

[[Page 74773]]

addressing NYSE Arca's response and arguments raised by other 
commenters, or provided additional information.\34\
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    \27\ Web comment from Steven C. Spencer, dated June 18, 2006 
(``Spencer Letter''); letter from Markham C. Erickson, Executive 
Director and General Counsel, NetCoalition, to Christopher Cox, 
Chairman, Commission, dated August 9, 2006 (``NetCoalition I''); and 
letters from Gregory Babyak, Chairman, Market Data Subcommittee of 
the Securities Industry Association (``SIA'') Technology and 
Regulation Committee, and Christopher Gilkerson, Chairman, SIA 
Technology and Regulation Committee, to Nancy Morris, Secretary, 
Commission, dated June 30, 2006 (``SIFMA I'') and August 18, 2006 
(``SIFMA II''). The SIA has merged into the Securities Industry and 
Financial Markets Association (``SIFMA'').
    \28\ Letters from Janet Angstadt, Acting General Counsel, NYSE 
Arca, to Nancy J. Morris, Secretary, Commission, dated July 25, 2006 
(``NYSE Arca Response I''), and August 25, 2006 (``NYSE Arca 
Response II'').
    \29\ Letters from Christopher Gilkerson and Gregory Babyak, Co-
Chairs, Market Data Subcommittee of SIFMA Technology and Regulation 
Committee, dated February 14, 2008 (``SIFMA VIII''); Ira D. 
Hammerman, Senior Managing Director and General Counsel, SIFMA, 
dated February 7, 2007 (``SIFMA VII''); Markham C. Erickson, 
Executive Director and General Counsel, NetCoalition, dated January 
11, 2008 (``NetCoalition V''); The Honorable Paul E. Kanjorski, 
Chairman, Subcommittee on Capital Markets, Insurance, and Government 
Sponsored Enterprises, dated December 12, 2007 (``Kanjorski 
Letter''); Melissa MacGregor, Vice President and Assistant General 
Counsel, SIFMA, dated November 7, 2007 (``SIFMA VI''); The Honorable 
Richard H. Baker, Member of Congress, dated October 1, 2007 (``Baker 
Letter''); Markham C. Erickson, Executive Director and General 
Counsel, NetCoalition, dated September 14, 2007 (``NetCoalition 
IV''); Ira D. Hammerman, Senior Managing Director and General 
Counsel, SIFMA, dated August 1, 2007 (``SIFMA V''); Jeffrey Davis, 
Vice President and Deputy General Counsel, The Nasdaq Stock Market 
(``Nasdaq''), dated May 18, 2007 (``Nasdaq Letter''); David T. 
Hirschmann, Senior Vice President, Chamber of Commerce of the United 
States of America, dated May 3, 2007 (``Chamber of Commerce 
Letter''); Markham C. Erickson, Executive Director and General 
Counsel, NetCoalition, dated March 6, 2007 (``NetCoalition III''); 
Ira D. Hammerman, Senior Managing Director and General Counsel, 
SIFMA, dated March 5, 2007 (``SIFMA IV''); Joseph Rizzello, Chief 
Executive Officer, National Stock Exchange (``NSX''), dated February 
27, 2007 (``NSX Letter''); Keith F. Higgins, Chair, Committee on 
Federal Regulation of Securities, American Bar Association 
(``ABA''), dated February 12, 2007 (``ABA Letter''); James A. 
Forese, Managing Director and Head of Global Equities, Citigroup 
Global Markets Inc. (``Citigroup''), dated February 5, 2007 
(``Citigroup Letter''); Meyer S. Frucher, Chairman and Chief 
Executive Officer, PHLX, dated January 31, 2007 (``PHLX Letter''); 
Amex, Boston Stock Exchange, Chicago Board Options Exchange, Chicago 
Stock Exchange, ISE, The Nasdaq Stock Market, NYSE, NYSE Arca, and 
Philadelphia Stock Exchange (``PHLX'') (collectively, the ``Exchange 
Market Data Coalition''), dated January 26, 2007 (``Exchange Market 
Data Coalition Letter''); Oscar N. Onyema, Senior Vice President and 
Chief Administrative Officer, American Stock Exchange LLC 
(``Amex''), dated January 18, 2007 (``Amex Letter''); Sanjiv Gupta, 
Bloomberg, dated January 17, 2007 (``Bloomberg Letter''); Richard M. 
Whiting, Executive Director and General Counsel, Financial Services 
Roundtable, dated January 17, 2007 (``Financial Services Roundtable 
Letter''); Markham C. Erickson, Executive Director and General 
Counsel, NetCoalition, dated January 17, 2007 (``NetCoalition II''); 
Michael J. Simon, Secretary, International Securities Exchange, LLC 
(``ISE''), dated January 17, 2007 (``ISE Letter''); Jeffrey T. 
Brown, Senior Vice President, Office of Legislative and Regulatory 
Affairs, Charles Schwab & Co., Inc. (``Schwab''), dated January 17, 
2007 (``Schwab Letter''); and Ira Hammerman, Senior Managing 
Director and General Counsel, SIFMA, dated January 17, 2007 (``SIFMA 
III''); and letter from David Keith, Vice President, Web Products 
and Solutions, The Globe and Mail, to the Honorable Christopher Cox, 
Chairman, Commission, dated January 17, 2007 (``Globe and Mail 
Letter'').
    \30\ SIFMA III and IV, and Bloomberg, Chamber of Commerce, 
Citigroup, Financial Services Roundtable, Globe and Mail, 
NetCoalition, NSX, and Schwab Letters.
    \31\ Amex, Exchange Market Data Coalition, ISE, Nasdaq, and PHLX 
Letters.
    \32\ ABA Letter at 1.
    \33\ Letter from Mary Yeager, Corporate Secretary, NYSE Arca, to 
the Honorable Christopher Cox, Chairman, Commission, dated February 
6, 2007 (``NYSE Arca Response III'').
    \34\ Nasdaq Letter; SIFMA IV, V, and VI; NetCoalition III and 
IV.
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    The comments submitted in connection with the Proposal and the 
Petition are summarized in this section. NYSE Arca's responses are 
summarized in section IV below.

A. Commenters Opposing the Action by Delegated Authority

1. Need for a Comprehensive Review of Market Data Issues
    Several commenters seeking a reversal of the staff's approval of 
the Proposal by delegated authority believed that recent regulatory and 
market structure developments warrant a broader review of market data 
fees and of the Commission's procedures for reviewing and evaluating 
market data proposals.\35\ According to these commenters, these 
developments include the transformation of most U.S. securities 
exchanges into for-profit entities; the increasing importance of 
single-market depth-of-book information following decimalization and 
the adoption of Regulation NMS; and the absence of competitive forces 
that could limit the fees that an exchange may charge for its depth-of-
book data. Some commenters believed that the Commission should consider 
not only market data fees, but also the contract terms governing the 
use of an exchange's market data, which may impose additional costs and 
include restrictions on the use of the data.\36\
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    \35\ Citigroup Letter at 2; SIFMA III at 10, 26; SIFMA IV at 15. 
See also ABA Letter at 1; Bloomberg Letter at 7-8; NetCoalition I at 
2; NetCoalition III at 13. Among other things, the Bloomberg and 
Citigroup Letters support the recommendations in SIFMA III. 
Bloomberg Letter at 8 n. 19; Citigroup Letter at 1.
    \36\ Citigroup Letter at 2; SIFMA III at 23.
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    In light of the significance and complexity of the issues raised, 
several commenters asked the Commission not only to reverse the staff's 
action, but also to impose a moratorium on the approval or processing 
of market data proposals while the Commission conducts a broader review 
of the issues associated with market data, including ``the underlying 
issues of market structure, market power, transparency, and ease of 
dissemination and analysis of market data.'' \37\
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    \37\ Citigroup Letter at 2. See also ABA Letter at 3; Financial 
Services Roundtable Letter at 1; NetCoalition III at 13; Schwab 
Letter at 1; SIFMA III at 26; SIFMA IV at 15.
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2. Need for a Cost-Based Justification of Market Data Fees
    Several commenters argued that the staff erred in approving the 
Proposal because NYSE Arca did not provide a cost-based justification 
for the Proposal's market data fees or other evidence to demonstrate 
that its proposed fees meet the applicable Exchange Act standards.\38\ 
They asserted that the Exchange Act requires that an exchange's market 
data fees be ``fair and reasonable,'' ``not unreasonably 
discriminatory,'' and ``an equitable allocation of costs,'' \39\ and 
that the Commission apply a cost-based standard in evaluating market 
data fees.\40\ One commenter argued that market data fees ``must be 
reasonably related to market data costs'' and that the Commission 
should require exchanges to identify and substantiate their market data 
costs in their market data fee proposals.\41\
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    \38\ Bloomberg Letter at 3; Petition at 5; SIFMA I at 6; SIFMA 
III at 20.
    \39\ Schwab Letter at 4; SIFMA III at 19; SIFMA IV at 7.
    \40\ Bloomberg Letter at 2; NetCoalition II at 3; NetCoalition 
III at 11; Schwab Letter at 3; SIFMA I at 6; SIFMA III at 16; SIFMA 
IV at 10.
    \41\ SIFMA III at 1, 20.
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    Several commenters argued that the Commission itself has recognized 
the need for a cost-based justification of market data fees.\42\ They 
believed that the Commission's position in its 1999 market information 
concept release \43\ ``underscores the fundamental role that a rigorous 
cost-based analysis must play in reviewing market data fee filings.'' 
\44\ In particular, these commenters cited the following statement from 
the release:
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    \42\ Bloomberg Letter at 2; NetCoalition II at 3; NetCoalition 
III at 11; Schwab Letter at 3; SIFMA III at 20; SIFMA IV at 10.
    \43\ Securities Exchange Act Release No. 42208 (December 9, 
1999), 64 FR 70613 (December 17, 1999) (``Market Information Concept 
Release'').
    \44\ NetCoalition II at 3. See also Bloomberg Letter at 2; SIFMA 
I at 6.

    [T]he fees charged by a monopolistic provider of a service (such 
as the exclusive processors of market information) need to be tied 
to some type of cost-based standard in order to preclude excessive 
profits if fees are too high or underfunding or subsidization if 
fees are too low. The Commission therefore believes that the total 
amount of market information revenues should remain reasonably 
related to the cost of market information.\45\
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    \45\ 64 FR at 70627 (cited in Bloomberg Letter at 2; 
NetCoalition II at 3; NetCoalition III at 11 n. 47; SIFMA III at 1). 
One commenter maintained that the cost-based analysis requirement is 
based on Congressional concerns regarding the dangers of exclusive 
processors, in the context of either consolidated or single-market 
data. NetCoalition II at 3.

    Similarly, a commenter stated that the Commission acknowledged in 
its Concept Release Concerning Self-Regulation that the amount of 
market data revenues should be reasonably related to the cost of market 
information.\46\ Another commenter, citing proceedings involving 
Instinet's challenge to proposed NASD market data fees,\47\ argued that 
the Commission in that case ``emphatically embraced the cost-based 
approach to setting market data fees * * *,'' and insisted on a strict 
cost-based justification for the market data fees at issue.\48\
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    \46\ NetCoalition III at 11 n. 47.
    \47\ Securities Exchange Act Release No. 20874 (April 17, 1984), 
49 FR 17640 (April 24, 1984), aff'd sub nom. NASD, Inc. v. SEC, 802 
F.2d 1415 (D.C. Cir. 1986).
    \48\ SIFMA IV at 10.
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    The commenters believed, further, that the costs attributable to 
market data should be limited to the cost of collecting, consolidating, 
and distributing the data,\49\ and that market data fees should not be 
used to fund regulatory activities or to cross-subsidize an exchange's 
competitive operations.\50\ One commenter maintained that, in the 
absence of cost data, the Commission cannot determine whether NYSE Arca 
uses market data revenues to subsidize competitive activities.\51\ In 
particular, the commenter believed that the Commission must scrutinize 
the cost justification for NYSE Arca's fees to ``be sure that NYSE Arca 
is not using its market power in the upstream data market as the 
exclusive processor for this data * * * to price squeeze its 
competitors in the downstream transaction market and to cross-subsidize 
its reduction in transaction fees.'' \52\
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    \49\ Citigroup Letter at 1; SIFMA III at 21. One commenter 
believed that the Commission ``should create standards that allow 
producers of market data to recover their costs and make a 
reasonable profit (e.g., a 10% return), but not an excessive 
profit.'' Schwab Letter at 6.
    \50\ SIFMA III at 8; SIFMA IV at 10. The commenter believed that 
other costs, including member regulation and market surveillance, 
should be funded by listing, trading, and regulatory fees, rather 
than market data fees. See SIFMA III at 21. Another commenter 
maintained that funding regulatory activities through an explicit 
regulatory fee, rather than through market data revenues, ``would be 
more logical and transparent * * *.'' NSX Letter at 2. See also 
Schwab Letter at 5.
    \51\ SIFMA IV at 10.
    \52\ SIFMA IV at 10.
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    One commenter argued that NYSE Arca's proposed fees are not an 
``equitable allocation'' of costs among its users and are unreasonably 
discriminatory because the fees are based on the number of people who 
view the data. Thus, a broker-dealer with many customers seeking to 
view

[[Page 74774]]

market data pays considerably more for market data than an institution 
or algorithmic trader that pays only for the data link to its computer 
systems.\53\
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    \53\ Schwab Letter at 4. The commenter argued that this fee 
structure ``is a subsidization program whereby exchanges rebate 
revenue to their favored traders based on market data fees imposed 
on retail investors.'' Id.
---------------------------------------------------------------------------

3. Exchange Act Rule 19b-4 Process
    One commenter argued that the Proposal fails to satisfy the 
requirements of Exchange Act Rule 19b-4 and Form 19b-4, because, among 
other things, the Proposal does not: (1) Explain why NYSE Arca must 
charge for data that it previously provided free of charge; (2) address 
the change in circumstances caused by the NYSE's conversion from a 
member-owned, not-for-profit entity to a shareholder-owned, for-profit 
entity; (3) address the effect of the fee on retail investors, whom the 
commenter believes will be denied access to NYSE Arca's data as a 
result of the fees; (4) explain how making available a faster single-
market data feed at a high price, while most investors must rely on 
slower consolidated market data products, is consistent with the 
mandates under the Exchange Act for equal access to and transparency in 
market data; and (5) include the contract terms governing access to and 
use of NYSE Arca's data or address the administrative costs and burdens 
that the contract terms impose.\54\ Another commenter, citing the 
Petition, asserted that the Proposal fails to satisfy the requirements 
of Form 19b-4 because it provides no disclosure regarding the burdens 
on competition that could result from its proposed fees or a 
justification for the proposed fees.\55\
---------------------------------------------------------------------------

    \54\ SIFMA III at 11-12.
    \55\ Bloomberg Letter at 3. See also Petition at 6-7.
---------------------------------------------------------------------------

    Commenters also raised more general concerns regarding the Exchange 
Act Rule 19b-4 rule filing process as it applies to proposed rule 
changes relating to market data. In light of the significant policy 
issues that market data proposals raise, commenters questioned whether 
such proposals should be eligible to be effective upon filing pursuant 
to Exchange Act Rule 19b-4(f)(6).\56\ One commenter believed that all 
market data proposals should be subject to notice and comment, and that 
the Commission should provide a 30-day comment period for such 
proposals.\57\ In addition, the commenter cautioned that the rule 
filing process should not become a ``rubberstamp'' of an exchange's 
proposal.\58\ One commenter suggested that the Commission narrow its 
delegation of authority with respect to proposed rule changes to 
exclude proposals that have generated significant public comment.\59\
---------------------------------------------------------------------------

    \56\ Baker Letter at 1-2; SIFMA III at 22; Bloomberg Letter at 
6.
    \57\ SIFMA III at 22.
    \58\ SIFMA I at 2 n. 3.
    \59\ NetCoalition III at 3-4.
---------------------------------------------------------------------------

4. Importance of Depth-of-Book Data
    One commenter maintained that because single-market depth-of-book 
data products have significant advantages over consolidated top-of-book 
products in terms of both speed and the depth of interest displayed, 
many broker-dealers believe that it is prudent to purchase single-
market depth-of-book data to satisfy their best execution and 
Regulation NMS order routing obligations.\60\ The commenter noted that 
NYSE Arca has indicated in its advertising materials that its ArcaBook 
data feed is approximately 60 times faster than the consolidated data 
feeds and displays six times the liquidity within five cents of the 
inside quote.\61\ The commenter also maintained that the NYSE has 
linked its depth-of-book products to best execution by stating that 
``NYSE Arca's market data products are designed to improve trade 
execution.'' \62\
---------------------------------------------------------------------------

    \60\ SIFMA III at 5-6. The commenter stated that depth-of-book 
information has become more important because of the reduction in 
liquidity at the inside quote and the increase in quote volatility 
since decimalization, and because depth-of-book quotations are 
likely to become more executable following the implementation of 
Regulation NMS. SIFMA III at 12-13. Similarly, another commenter 
maintained that, through Regulation NMS, the Commission ``has 
imposed a system that requires access to depth-of-book 
information.'' Schwab Letter at 5. Likewise, a commenter believed 
that market participants require depth-of-book information to trade 
effectively in decimalized markets. SIFMA IV at 8. See also 
NetCoalition III at 5.
    \61\ SIFMA III at 14 n. 24.
    \62\ SIFMA IV at 12.
---------------------------------------------------------------------------

    One commenter argued that the central processors that distribute 
consolidated data have little incentive to invest in modernizing their 
operations.\63\ Another commenter believed that the disparity between 
faster and more expensive depth-of-book proprietary data feeds and the 
slower, less costly, and less valuable consolidated data feeds results 
in a ``two-tiered structure with institutions having access to prices 
not reasonably available to small investors * * *,'' circumstances that 
the commenter believed ``recreate the informational advantage that once 
existed on the physical floors of the open outcry markets.'' \64\
---------------------------------------------------------------------------

    \63\ SIFMA III at 13.
    \64\ Financial Services Roundtable Letter at 3. One commenter 
believed that market participants who choose not to purchase depth-
of-book data will face the informational disadvantages that 
Regulation NMS seeks to eliminate. NSX Letter at 2.
---------------------------------------------------------------------------

    Another commenter believed that depth-of-book information should be 
considered basic information for retail investors as well as 
professional investors and that one goal of the National Market System 
should be to assure that ``all investors * * * whether professional or 
non-professional * * * have equal access to the same quality 
information, at a reasonable price, and at the same time.'' \65\ 
Similarly, a commenter believed that retail investors require 
quotations beyond the national best bid or offer to assess the quality 
of the executions they receive.\66\
---------------------------------------------------------------------------

    \65\ SIFMA IV at 13.
    \66\ NetCoalition III at 5 n. 16.
---------------------------------------------------------------------------

5. Lack of Competition in Market Data Pricing
    Commenters argued that there are no effective competitive or market 
forces that limit what an exchange may charge for its depth-of-book 
data.\67\ Although one commenter acknowledged the argument that 
competition in the market for liquidity and transactions could serve as 
a constraint on what exchanges may charge for their data products, the 
commenter believed that the consolidations of the NYSE with Archipelago 
and Nasdaq with BRUT and INET have limited this constraint.\68\ The 
commenter also asserted that competition in the market for order 
execution is not the same as competition in the market for market data, 
and that an economic analysis must consider the market for market data 
from the consumer's perspective.\69\ Because proprietary market data is 
a ``sole-source product,'' the commenter believed that no market forces 
operate on the transaction between an exchange and the consumer of its 
data.\70\ The commenter believed that the unique characteristics of the 
market for market data--including increased market concentration and 
market participants' obligation to purchase sole-source proprietary 
market data to trade effectively--resulted in a ``classic economic 
market failure * * * that requires comprehensive regulatory 
intervention to ensure `fair and reasonable' prices.'' \71\ Similarly, 
another commenter maintained that,

[[Page 74775]]

with respect to market data that is exclusive to an exchange, ``[t]here 
is no way for competitive forces to produce market-driven or `fair and 
reasonable' prices required by the Exchange Act * * *.'' \72\
---------------------------------------------------------------------------

    \67\ NetCoalition III at 9; SIFMA III at 16-17; SIFMA IV at 5.
    \68\ SIFMA III at 17.
    \69\ SIFMA IV at 5. See also NetCoalition III at 2.
    \70\ SIFMA IV at 5.
    \71\ SIFMA IV at 8. The commenter believed that Congress 
envisioned the Commission regulating exclusive processors in a 
manner similar to the way in which public utilities are regulated. 
SIFMA I at 5.
    \72\ NetCoalition III at 2.
---------------------------------------------------------------------------

    Other commenters believed that an exchange has a monopoly position 
as the exclusive processor of its proprietary data that ``creates a 
serious potential for abusive pricing practices,'' \73\ and urged the 
Commission to consider the lack of competition and the inability to 
obtain market data from other sources.\74\ One commenter asserted that 
``broker-dealers will * * * be forced to purchase market data at a 
fixed and * * * arbitrary price'' until market data fees are 
reformed.\75\
---------------------------------------------------------------------------

    \73\ Schwab Letter at 6. See also Spencer Letter.
    \74\ Citigroup Letter at 1. Similarly, a commenter believed that 
``[u]nless checked by effective regulatory oversight * * * exchanges 
have both the incentives and the power to charge whatever they can 
for the market data over which they have exclusive control.'' SIFMA 
III at 4. The commenter also asserted that ``[t]he lack of both 
economic market forces and comprehensive oversight of exchanges as 
the sole-source processors of market data * * * has allowed the 
exchange to simply `name their prices' * * *.'' SIFMA IV at 2.
    \75\ NSX Letter at 2.
---------------------------------------------------------------------------

    In addition, several commenters believed that the transformation of 
most U.S. securities exchanges from not-for-profit membership 
organizations to for-profit entities has eliminated an important 
constraint on market data fees as the for-profit exchanges seek to 
maximize value for their shareholders.\76\ In this regard, one 
commenter explained that ``exchanges are beholden to their shareholders 
to increase revenue, and market data is the revenue stream that holds 
the greatest potential for doing so.'' \77\ Other commenters argued 
that the advent of for-profit exchanges has eliminated the governance 
checks on market data pricing that operated when exchange members--
broker-dealers who were obligated to purchase consolidated market 
data--sat on the boards of the non-profit, member-owned exchanges.\78\
---------------------------------------------------------------------------

    \76\ ABA Letter at 2-3; Financial Services Roundtable Letter at 
2; Schwab Letter at 5; SIFMA III at 24.
    \77\ Schwab Letter at 5. See also NetCoalition II at 4; SIFMA 
III at 24; SIFMA IV at 2.
    \78\ Financial Services Roundtable Letter at 2; NetCoalition II 
at 4; SIFMA III at 15.
---------------------------------------------------------------------------

6. Increase in Market Data Revenues
    With respect to the increase in the NYSE Group's market data 
revenues following its merger with Archipelago, one commenter stated 
that ``NYSE Group's reported market data segment revenues totaled $57.5 
million in the third quarter of 2006: Up 33.7% from the same three-
month period in 2005.'' \79\ According to the commenter, the NYSE Group 
attributed its revenue growth in market data to the contribution of 
NYSE Arca's operations following the completion of the merger between 
the NYSE and Archipelago on March 7, 2006.\80\ The commenter maintained 
that Nasdaq has experienced similar growth in its market data revenues 
and that the exchanges ``propose to charge fees for a series of market 
data products that, when multiplied by the number of potential 
subscribers, are resulting in increased costs of doing business 
totaling tens of millions of dollars per year for some individual firms 
and hundreds of millions of dollars per year across the financial 
markets.'' \81\ The commenter identified the current fees for 
proprietary and consolidated market data products and claimed that 
investors ultimately pay these fees.\82\
---------------------------------------------------------------------------

    \79\ SIFMA III at 18-19 (citations omitted).
    \80\ SIFMA III at 18 (citation omitted).
    \81\ SIFMA III at 4.
    \82\ SIFMA IV at 14 and Appendix A.
---------------------------------------------------------------------------

7. Recommended Solutions
    To address the issues raised by market data fees, the commenters 
suggested several potential solutions. One commenter recommended that 
the Commission adopt a specialized market data form for market data 
rule proposals that would require a detailed justification of proposed 
fee changes by the SROs.\83\ The commenter believed that the form 
should, among other things, require an exchange to substantiate its 
historical costs of producing market data, its current market data 
revenues, how and why its costs have changed and the existing revenue 
is no longer appropriate, how the fee would impact market participants, 
how the revenues would be used, and the contract terms, system 
specifications, and audit requirements that would be associated with 
the proposed fee change.\84\
---------------------------------------------------------------------------

    \83\ SIFMA III at 21-22.
    \84\ SIFMA III at 21-22.
---------------------------------------------------------------------------

    The commenter also believed that the contract terms governing the 
use of market data should be included in market data rule filings and 
subject to notice and comment.\85\ The commenter maintained that the 
contract terms are effectively non-negotiable and that the compliance 
costs associated with them may affect the efficiency and transparency 
of the markets. Another commenter asserted that exchange market data 
contracts limit the use and dissemination of the data provided under 
the contracts, potentially impairing the flow and further analysis of 
the information, and impose administrative and technological burdens on 
firms.\86\
---------------------------------------------------------------------------

    \85\ SIFMA III at 23.
    \86\ Citigroup Letter at 2.
---------------------------------------------------------------------------

    The commenters also suggested structural changes to address market 
data issues, including requiring exchanges to place their market data 
operations in a separate subsidiary and to make their raw market data 
available to third parties on the same terms as they make the data 
available to their market data subsidiary and to the independent 
central processor.\87\ The commenters believed that this could 
encourage competition in providing market data products and services 
\88\ and create a mechanism for free market pricing.\89\
---------------------------------------------------------------------------

    \87\ Bloomberg Letter at 4; Kanjorski Letter at 1; NetCoalition 
I at 2; Schwab Letter at 7; SIFMA III at 24-25.
    \88\ SIFMA III at 25.
    \89\ Schwab Letter at 7.
---------------------------------------------------------------------------

    Finally, the commenters suggested that the Commission increase the 
quality and depth of the required consolidated quotation information to 
allow retail investors to determine the prices at which their orders 
will be executed and to observe pricing movements in the market.\90\ 
One commenter recommended that the Commission require exchanges to 
consolidate and distribute their top and depth-of-book data, and that 
the associated costs be paid by investors who act on the 
information.\91\
---------------------------------------------------------------------------

    \90\ Schwab Letter 5; SIFMA III at 25-26.
    \91\ NSX Letter at 2. Other commenters endorse this 
recommendation.NetCoalition III at 7, 13; SIFMA IV at 15.
---------------------------------------------------------------------------

B. Commenters Supporting the Action by Delegated Authority

    Several commenters who supported the approval of the Proposal by 
delegated authority argued that the staff applied the correct legal 
standard \92\ and that the broader policy questions raised by the 
Petition should be addressed in the context of Commission rulemaking, 
rather than in connection with a specific exchange market data 
proposal.\93\
---------------------------------------------------------------------------

    \92\ Amex Letter at 2; ISE Letter at 3; PHLX Letter at 2-3.
    \93\ Amex Letter at 4; PHLX Letter at 8.
---------------------------------------------------------------------------

    Several commenters rejected the assertion that a cost-based 
standard is the correct standard for the Commission to apply in 
reviewing market data fee proposals.\94\ In this regard, the commenters 
distinguished between the standards applicable to ``core'' market data 
(i.e., consolidated quotation and last sale data for U.S.-listed 
equities) and the standards applicable to

[[Page 74776]]

proprietary market data products.\95\ One commenter maintained that the 
Commission, in adopting Regulation NMS, authorized exchanges to 
distribute market data outside of the national market system plans, 
subject to the general fairness and nondiscrimination standards of Rule 
603 of Regulation NMS, but ``otherwise [left] to free market forces the 
determination of what information would be provided and at what 
price.'' \96\ Another commenter, noting that the Commission 
specifically considered and refrained from adopting the cost-based 
standard that NetCoalition proposes, argued that NetCoalition's 
approach ``would replace Regulation NMS * * * with a complex and 
intrusive rate-making approach that is inconsistent with the goals of 
the * * * [Exchange Act] and would be more costly than beneficial.'' 
\97\
---------------------------------------------------------------------------

    \94\ Exchange Market Data Coalition Letter at 2; ISE Letter at 
3; PHLXLetter at 4.
    \95\ Amex Letter at 1; ISE Letter at 2-3; PHLX Letter at 4-5.
    \96\ Amex Letter at 2. The commenter noted that exchange fees 
also aresubject to the requirements of Section 6(b)(4) of the 
Exchange Act. See also PHLX Letter at 7.
    \97\ Exchange Market Data Coalition Letter at 2. One commenter 
asserted that ``[a]pplying NetCoalition's proposed strict cost-based 
fee analysis to every exchange market data rule filing is unworkable 
and * * * is not required under the Act.'' ISE Letter at 3. 
Similarly, noting that SROs must ensure that market data is not 
corrupted by fraud or manipulation, another commenter believed that 
it would be virtually impossible to identify the costs specifically 
associated with the production of market data versus other SRO 
functions. PHLX Letter at 6.
---------------------------------------------------------------------------

    One commenter disagreed with the assertion that an exchange 
possesses monopoly pricing power with respect to its proprietary data 
products. It contended that assertions concerning an exchange's 
monopoly pricing power ``ignore * * * market reality and market 
discipline. If any exchange attempts to charge excessive fees, there 
simply will not be buyers for such products.'' \98\ Nasdaq noted that, 
as of April 30, 2007, over 420,000 professional users purchased core 
data, but less than 19,000 professional users purchased TotalView, 
Nasdaq's proprietary depth-of-book order product.\99\ It concluded that 
``[b]roker-dealers may claim they are required to purchase TotalView, 
but their actions indicate otherwise.'' \100\
---------------------------------------------------------------------------

    \98\ ISE Letter at 3. Similarly, another commenter noted that 
the users of data will purchase data ``if it provides them value and 
is priced reasonably.'' Amex Letter at 1.
    \99\ Nasdaq Letter at 6.
    \100\ Nasdaq Letter at 6.
---------------------------------------------------------------------------

    The commenters emphasized that the exchanges face significant 
competition in their efforts to attract order flow:

    Exchanges compete not only with one another, but also with 
broker-dealers that match customer orders within their own systems 
and also with a proliferation of alternative trading systems 
(``ATSs'') and electronic communications networks (``ECNs'') that 
the Commission has also nurtured and authorized to execute trades in 
any listed issue. As a result, market share of trading fluctuates 
among execution facilities based on their ability to service the end 
customer. The execution business is highly competitive and exhibits 
none of the characteristics of a monopoly as suggested in the 
NetCoalition Petition.\101\
---------------------------------------------------------------------------

    \101\ Exchange Market Data Coalition Letter at 4.

    Similarly, another commenter stated that ``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.'' \102\ It also 
noted that market data ``is the totality of the information assets that 
each Exchange creates by attracting order flow'' and emphasized that 
``[i]t is in each Exchange's best interest to provide proprietary 
information to investors to further their business objectives, and each 
Exchange chooses how best to do that.'' \103\ Commenters stated that, 
in the absence of a regulatory requirement to provide non-core market 
data, it is necessary to provide a financial or other business 
incentive for exchanges to make such data available.\104\
---------------------------------------------------------------------------

    \102\ Nasdaq Letter at 7.
    \103\ Id. at 3, 4.
    \104\ Amex Letter at 1; ISE Letter at 2; PHLX Letter at 7.
---------------------------------------------------------------------------

IV. NYSE Arca Responses to Commenters

A. Response to Commenters on Proposal

    In its responses to commenters on the Proposal, the Exchange argued 
that the Proposal establishes ``a framework for distributing data in 
which all vendors and end users are permitted to receive and use the 
Exchange's market data on equal, non-discriminatory terms.'' \105\ The 
Exchange asserted that the proposed professional and non-professional 
device fees for the NYSE Arca Data were fair and reasonable because 
they ``are far lower than those already established--and approved by 
the Commission--for similar products offered by other U.S. equity 
exchanges and stock markets.'' \106\ In particular, the Exchange noted 
that the proposed $15 per month device fee for each of the ArcaBook 
data products is less than both the $60 per month and $70 per month 
device fees that the NYSE and Nasdaq, respectively, charge for 
comparable market data products.\107\
---------------------------------------------------------------------------

    \105\ NYSE Arca Response I at 2.
    \106\ Id.
    \107\ NYSE Arca Response I at 2-3.
---------------------------------------------------------------------------

    With respect to its proposed fees, the Exchange noted, further, 
that it had invested significantly in its ArcaBook products, including 
making technological enhancements that allowed the Exchange to expand 
capacity and improve processing efficiency as message traffic 
increased, thereby reducing the latency associated with the 
distribution of ArcaBook data.\108\ The Exchange stated that ``[i]n 
determining to invest the resources necessary to enhance ArcaBook 
technology, the Exchange contemplated that it would seek to charge for 
the receipt and use of ArcaBook data.'' \109\ The Exchange also 
emphasized the reasonableness of its proposed fee relative to other 
comparable market data products, asserting, for example, that ``NYSE 
Arca is at the inside price virtually as often as Nasdaq, yet the 
proposed fee for ArcaBook is merely one-fifth of the TotalView fee.'' 
\110\ Moreover, it stated that its decision to commence charging for 
ArcaBook data was based on its view that ``market data charges are a 
particularly equitable means for funding a market's investment in 
technology and its operations. In contrast with transaction, 
membership, listing, regulatory and other SRO charges, market data 
charges cause all consumers of a securities market's services, 
including investors and market data vendors, to contribute.'' \111\
---------------------------------------------------------------------------

    \108\ NYSE Arca Response II at 2.
    \109\ Id. at 3.
    \110\ Id.
    \111\ Id. at 4.
---------------------------------------------------------------------------

    The Exchange stated that it proposes to use the CTA and CQ Plan 
contracts to govern the distribution of NYSE Arca Data and that it was 
not amending the terms of these existing contracts or imposing 
restrictions on the use or display of its data beyond those that are 
currently set forth in the contracts.\112\ Further, the Exchange 
specifically noted that these contracts do not prohibit a broker-dealer 
from making its own data available outside of the CTA and CQ 
Plans.\113\ Finally, the Exchange argued that by using this current 
structure, it believes that the administrative burdens on firms and 
vendors should be low.\114\
---------------------------------------------------------------------------

    \112\ NYSE Arca Response I at 3.
    \113\ Id. at n. 12 and accompanying text.
    \114\ Id. at 5.
---------------------------------------------------------------------------

B. Response to Commenters on Petition

    In its response to commenters on the Petition, the Exchange argued 
that recent market-based solutions have mooted the concerns expressed 
in the

[[Page 74777]]

Petition regarding the affordability of market data for internet 
portals.\115\ In particular, the Exchange noted that the NYSE recently 
submitted a proposed rule change for a market data product that would 
provide unlimited real-time last sale prices to vendors for a fixed 
monthly fee (``NYSE Internet Proposal'').\116\ The Exchange stated that 
this NYSE Internet Proposal ``would meet the needs of internet portals 
and add to the number of choices that are available to intermediaries 
and investors for their receipt of real-time prices.'' \117\ The 
Exchange asserted that the NYSE Internet Proposal ``provides a 
significant benefit to investors'' since ``it adds to the data-access 
alternatives available to them and improves the quality, timeliness and 
affordability of data they can receive over the internet.'' \118\
---------------------------------------------------------------------------

    \115\ NYSE Arca Response III at 5-6.
    \116\ See id. at 5.
    \117\ NYSE Arca Response III at 5.
    \118\ Id.
---------------------------------------------------------------------------

    The Exchange also reiterated the argument that the proposed market 
data fees meet the statutory standards for such fees under the Exchange 
Act.\119\ The Exchange argued that the fees represent an equitable 
allocation of fees and charges since they ``represent the first time 
that [the Exchange] has established a fee that a person or entity other 
than an [Exchange] member or listed company must pay'' and are being 
imposed ``on those who use the facilities of [the Exchange] but do not 
otherwise contribute to [the Exchange's] operating costs.'' \120\
---------------------------------------------------------------------------

    \119\ Id. at 11.
    \120\ Id.
---------------------------------------------------------------------------

    The Exchange argued that the proposed market data fees are not 
``unreasonably discriminatory'' since ``all professional subscribers 
are subject to the same fees and all nonprofessional subscribers are 
subject to the same fees.'' \121\ The Exchange noted that the only 
discrimination that occurs is the ``reasonable'' distinction that would 
require professional subscribers to pay higher fees than 
nonprofessional subscribers.\122\
---------------------------------------------------------------------------

    \121\ Id.
    \122\ Id.
---------------------------------------------------------------------------

    The Exchange asserted that the fees are fair and reasonable 
because: (1) ``They compare favorably to the level of fees that other 
U.S. markets and the CTA and Nasdaq/UTP Plans impose for comparable 
products''; (2) ``the quantity and quality of data NYSE Arca includes 
in Arca Book compares favorably to the data that other markets include 
in their market data products''; and (3) ``the fees will enable NYSE 
Arca to recover the resources that NYSE Arca devoted to the technology 
necessary to produce Arca Book data.'' \123\
---------------------------------------------------------------------------

    \123\ Id. at 11-12.
---------------------------------------------------------------------------

    The Exchange also rejected the Petitioner's assertion that the 
Exchange acted ``arbitrarily or capriciously'' by using a comparison of 
similar market data fees in setting the level of the proposed 
fees.\124\ The Exchange noted that in addition to studying ``what other 
markets charge for comparable products,'' the Exchange also considered: 
(1) The needs of those entities that would likely purchase the Arca 
Book data; (2) the ``contribution that revenues from Arca Book Fees 
would make toward replacing the revenues that NYSE Arca stands to lose 
as a result of the removal of the NQDS service from the Nasdaq/UTP 
Plan''; (3) ``the contribution that revenues accruing from Arca Book 
Fees would make toward NYSE Arca's market data business''; (4) the 
contribution that revenues accruing from Arca Book Fees would make 
toward meeting the overall costs of NYSE Arca's operations''; (5) 
``projected losses to NYSE Arca's business model and order flow that 
might result from marketplace resistance to Arca Book Fees''; and (6) 
``the fact that Arca Book is primarily a product for market 
professionals, who have access to other sources of market data and who 
will purchase Arca Book only if they determine that the perceived 
benefits outweigh the cost.'' \125\
---------------------------------------------------------------------------

    \124\ Id. at 12.
    \125\ Id. at 12-13.
---------------------------------------------------------------------------

    The Exchange also rejected the Petitioner's assertion that all 
proposed market data fees must be subjected to a rigorous cost-based 
analysis.\126\ The Exchange noted that the Petitioner ``is able to cite 
only one instance'' that supports such an assertion.\127\ The Exchange 
also noted that Petitioner ``fails to mention that a significant 
portion of the industry'' expressed opposition to a cost-based approach 
to analyzing market data fees in response to various Commission 
releases and other initiatives.\128\ The Exchange argued that a cost-
based analysis of market data fees is impractical because ``[i]t would 
inappropriately burden both the government and the industry, stifle 
competition and innovation, and in the end, raise costs and, 
potentially, fees.'' \129\
---------------------------------------------------------------------------

    \126\ Id. at 13.
    \127\ Id.
    \128\ Id. at 14-15. The Exchange referenced opposition in the 
industry to a cost-based analysis of market data fees expressed in 
connection with the Market Information Concept Release, the Concept 
Release Concerning Self-Regulation, the Regulation NMS initiative, 
and the Commission's Advisory Committee on Market Information.
    \129\ Id. at 15 (citing NYSE Response to Market Information 
Concept Release (April 10, 2000)) (emphasis in original).
---------------------------------------------------------------------------

    The Exchange also disputed Petitioner's argument that the 
Exchange's proposed market data fees amount to an exercise of monopoly 
pricing power.\130\ It noted that ``[m]arkets compete with one another 
by seeking to maximize the amount of order flow that they attract. The 
markets base the competition for order flow on such things as 
technology, customer service, transaction costs, ease of access, 
liquidity and transparency.'' \131\ The Exchange noted that ``[t]he 
Commission has prescribed top-of-the-book consolidated market data as 
the data required for best execution purposes'' and that there is ``no 
regulatory requirement'' for brokers to receive depth-of-book or other 
proprietary market data products.\132\ Accordingly, the Exchange 
asserted that no monopoly power exists, and that the marketplace 
determines the fees charged by the Exchange for depth-of-book market 
data.\133\ Further, the Exchange claimed that if the market data fees 
were excessive, market participants ``would forego Arca Book data and 
would choose to receive the depth-of-book service of other markets.'' 
\134\ It noted that:
---------------------------------------------------------------------------

    \130\ Id. at 16.
    \131\ Id. at 16. See also id. at 18 (``If too many market 
professionals reject Arca Book as too expensive, NYSE Arca would 
have to reassess the Arca Book Fees because Arca Book data provides 
transparency to NYSE Arca's market, transparency that plays an 
important role in the competition for order flow.'').
    \132\ Id. at 18.
    \133\ Id.
    \134\ Id.

    As a result of all of the choices and discretion that are 
available to brokers, the displayed depth-of-book data of one 
trading center does not provide a complete picture of the full 
market for the security. It displays only a portion of all interest 
in the security. A brokerage firm has potentially dozens of 
different information sources to choose from in determining if, 
where, and how to represent an order for execution.\135\
---------------------------------------------------------------------------

    \135\ Id. at 17.


    The Exchange also addressed other concerns raised by commenters in 
connection with the Petition. First, the Exchange indicated that it has 
no intention of retroactively imposing the proposed market data 
fees.\136\ The Exchange also disputed a commenter's statement which 
indicated that ``market data revenues of the NYSE Group (the parent 
company of Exchange and NYSE) for the third quarter of 2006 rose 33.7%

[[Page 74778]]

from the year-earlier.'' \137\ According to the Exchange, this 
statistic does not demonstrate ``a significant increase in market data 
revenues during 2006'' since the 2005 market data revenue from the NYSE 
Group used to generate this statistic did not include the Exchange's 
market data revenue because the Exchange was not part of the NYSE Group 
in 2005.\138\ The Exchange notes that the combined market data revenues 
for the Exchange and NYSE have actually declined slightly.\139\ Lastly, 
the Exchange rejects the commenters' contention that a significant 
speed variance exists between proprietary market data products and the 
consolidated data feed that markets make available under the CQ and 
Nasdaq/UTP Plans. The Exchange notes that the ``variations in speed are 
measured in milliseconds'' and that ``[f]rom a display perspective the 
difference is imperceptible.'' \140\ Furthermore, the Exchange notes 
that the CQ Plan participants have undertaken a technology upgrade that 
would reduce the latency of the consolidated feed from ``several 
hundred milliseconds to approximately 30 milliseconds.'' \141\
---------------------------------------------------------------------------

    \136\ Id. at 20.
    \137\ Id.
    \138\ Id.
    \139\ Id. at n. 50 and accompanying text. According to the 
Exchange, pro forma results indicate that the Exchange and NYSE 
received a combined $242 million in 2005, while they only received a 
combined $235 million in 2006.
    \140\ Id. at 21.
    \141\ Id.
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V. Comments on the Draft Order

    The Commission received 16 comments from 12 commenters regarding 
the Draft Order,\142\ three of which also submitted economic studies 
analyzing the Draft Order's rationale for approving the Proposal.\143\
---------------------------------------------------------------------------

    \142\ Letters from Ira D. Hammerman, Senior Managing Director 
and General Counsel, SIFMA, dated November 17, 2008 (``SIFMA X'') 
(attaching supplemental report by Securities Litigation & Consulting 
Group, Inc.); Markham C. Erickson, Executive Director and General 
Counsel, NetCoalition, dated October 14, 2008 (``NetCoalition VII'') 
(attaching report by Dr. David S. Evans dated October 10, 2008); 
Bart M. Green, Chairman, and John Giesea, President and CEO, 
Security Traders Association (``STA''), dated September 11, 2008 
(``STA Letter''); Jeffrey S. Davis, Vice President and Deputy 
General Counsel, Nasdaq OMX Group, Inc., dated September 10, 2008 
(``Nasdaq III'') and August 1, 2008 (``Nasdaq II''); Joseph 
Rizzello, Chief Executive Officer, NSX, dated September 9, 2008 
(``NSX II''); Richard Bartlett, Managing Director, Citigroup Global 
Markets Inc., dated July 11, 2008 (``Citigroup II''); David T. 
Hirschmann, President and Chief Executive Officer, Center for 
Capital Markets Competitiveness of the United States Chamber of 
Commerce, dated July 10, 2008 (``Chamber of Commerce II''); Michael 
J. Simon, Secretary, ISE, dated July 10, 2008 (``ISE II''); Markham 
C. Erickson, Executive Director and General Counsel, NetCoalition, 
dated July 10, 2008 (attaching report by Dr. David S. Evans) 
(``NetCoalition VI''); Markham C. Erickson, Executive Director and 
General Counsel, NetCoalition, dated July 10, 2008 (``NetCoalition 
V''); Ira D. Hammerman, Senior Managing Director and General 
Counsel, SIFMA, dated July 10, 2008 (attaching report by the 
Securities Litigation & Consulting Group, Inc.) (``SIFMA IX''); Mary 
Yeager, Corporate Secretary, NYSE Arca, to Florence Harmon, Acting 
Secretary, Commission, dated July 8, 2008 (``NYSE Arca IV''); and 
Christopher Perry, Thomson Reuters Markets, dated July 8, 2008 
(``Thomson Reuters Letter''); and web comments from William C. 
Martin, Principal, Indie Research, LLC and Founder, RagingBull.com, 
dated July 9, 2008 (``Indie Research Comment''); and Kreg Rutherford 
(``Rutherford Comment'').
    \143\ David S. Evans, ``Response to Ordover and Bamberger's 
Statement Regarding the SEC's Proposed Order Concerning the Pricing 
of Depth-of-Book Market Data'' (``Evans II''), which was submitted 
with NetCoalition VII; David S. Evans, ``An Economic Assessment of 
Whether `Significant Competitive Forces' Constrain an Exchange's 
Pricing of Its Depth-of-Book Market Data'' (``Evans Report''), which 
was submitted with NetCoalition VI; Securities Litigation and 
Consulting Group, Inc. (``SLCG''), ``An Economic Study of Securities 
Market Data Pricing by the Exchanges'' (``SLCG Study''), which was 
submitted with SIFMA IX and a supplemental analysis to the SLCG 
Study (``SLCG II''), which was submitted with SIFMA X; and Statement 
of Janusz Ordover and Gustavo Bamberger, dated August 1, 2008 
(``Ordover/Bamberger Statement'' or ``Statement''), which was 
submitted with Nasdaq II.
---------------------------------------------------------------------------

    NetCoalition and SIFMA did not believe that the Draft Order's 
analytical framework would meet the Commission's responsibilities under 
the Exchange Act for reviewing market data fees.\144\ In this regard, 
SIFMA stated that ``there is * * * no basis for the presumption in the 
[Draft] Order that [the] statutory requirements are satisfied if the 
Commission is able to conclude that `significant competitive forces' 
exist in the context of an exchange fee proposal.'' \145\ NetCoalition 
asserted that Congress urged the Commission not to rely on competitive 
forces in the context of exclusive processors of data.\146\
---------------------------------------------------------------------------

    \144\ NetCoalition V at 7-9; SIFMA IX at 9-11.
    \145\ SIFMA IX at 10.
    \146\ NetCoalition V at 9-10.
---------------------------------------------------------------------------

    Some commenters questioned the extent of exchange competition for 
order flow and whether such competition results in fair and reasonable 
market data fees.\147\ The SLCG Study asserted that competition for 
order flow does not assure competitive pricing for depth-of-book data 
and that reliance on competitive forces was inappropriate because the 
NYSE and Nasdaq exert monopoly pricing power with respect to their 
depth-of-book data.\148\ The Evans Report maintained that order flow 
competition is reflected in transaction fees and liquidity rebates, 
which are structured to attract order flow, but not in depth-of-book 
data fees, which do not vary according to the data purchaser's trading 
volume.\149\ NetCoalition and SIFMA also questioned whether the Draft 
Order's conclusion that depth-of-book data is not necessary to meet a 
broker-dealer's duty of best execution would be reached in other legal 
contexts.\150\
---------------------------------------------------------------------------

    \147\ Citigroup II at 2; Indie Research Comment; NetCoalition VI 
at 1; NSX II at 5; SIFMA IX at 3; STA Letter at 3.
    \148\ SLCG Study at 2 and 34.
    \149\ Evans Report at 13-16.
    \150\ NetCoalition V at 7; SIFMA IX at 20.
---------------------------------------------------------------------------

    Several commenters believed that the NYSE and NYSE Arca must be 
considered to be a single enterprise for purposes of analyzing market 
power with respect to depth-of-book data, and that the Draft Order 
erred in treating them as separate entities.\151\ In this regard, the 
Evans Report found that, because the NYSE and NYSE Arca are controlled 
by a single corporate entity that will coordinate the pricing of the 
depth-of-book products of its subsidiaries to maximize its own profits, 
the NYSE's depth-of-book data cannot act as a competitive constraint on 
the pricing of NYSE Arca's depth-of-book data.\152\
---------------------------------------------------------------------------

    \151\ SIFMA IX at 3; Evans Report at 5-6; SLCG Study at 12.
    \152\ Evans Report at 5-6.
---------------------------------------------------------------------------

    Commenters opposing the Draft Order also believed that the 
Commission must obtain and analyze data regarding NYSE Arca's costs of 
collecting and disseminating depth-of-book information to determine 
whether its proposed fees meet the Exchange Act's requirements.\153\ 
One commenter stated that, in the absence of cost data, the Commission 
lacks an effective basis for evaluating whether proposed market data 
fees are fair or reasonable.\154\ In addition, these commenters 
suggested that because the Commission concluded that a cost-based 
analysis was required in the context of a fee dispute between Nasdaq 
and the CTA, the Commission should require the same cost-based analysis 
for exchanges' market data fees.\155\ Another commenter believed that 
the exchanges' use of market data fees to fund rebates to order entry 
firms suggested that market data pricing is ``neither competitive nor 
efficient.'' \156\
---------------------------------------------------------------------------

    \153\ NetCoalition V at 15-18; SIFMA IX at 4.
    \154\ SIFMA IX at 4. Similarly, the SLCG Study maintained that 
it is not possible to assess the extent of NYSE Arca's market power 
in establishing fees for Arca Book data without information 
concerning the costs of collecting and distributing the data. 
Accordingly, the SLCG Study asserted that the Commission could not 
reasonably conclude that the NYSE was subject to competitive forces 
in establishing the proposed Arca Book data fees. SLCG Study at 31-
32.
    \155\ NetCoalition V at 15-18; SIFMA IX at 11-13.
    \156\ STA Letter at 3.
---------------------------------------------------------------------------

    NetCoalition and SIFMA asserted that the Draft Order would in 
effect be an amendment of Rule 19b-4 and thus

[[Page 74779]]

would constitute agency rulemaking that must be published for notice 
and comment under the Administrative Procedures Act.\157\ Another 
commenter believed that greater transparency prior to the publication 
of the Draft Order would have allowed the Commission to gather 
additional data.\158\
---------------------------------------------------------------------------

    \157\ NetCoalition V at 18; SIFMA IX at 16.
    \158\ Chamber of Commerce II at 2.
---------------------------------------------------------------------------

    Five commenters, including NYSE Arca, supported issuance of the 
Draft Order.\159\ They generally agreed that significant competitive 
forces operate in the distribution of non-core data and will constrain 
the exchanges in setting the terms for such data. For example, ISE 
agreed with the Draft Order's analysis of the relationship between non-
core data and attracting order flow, noting that it views its 
proprietary depth-of-book options data service as an important means to 
advertise the prices available on the ISE and to attract orders to 
ISE.\160\ It currently offers the service free of charge, but only 15% 
of its members have chosen to subscribe to the service.\161\
---------------------------------------------------------------------------

    \159\ ISE II, Nasdaq II, NYSE Arca IV, Rutherford Comment, and 
Thomson Reuters Letter.
    \160\ ISE II at 2.
    \161\ Id.
---------------------------------------------------------------------------

    Similarly, Thomson Reuters believed that the Commission's Draft 
Order correctly analyzed the competitive forces applicable to the 
establishment of fees for depth-of-book data.\162\ In particular, the 
commenter agreed that, in light of the competitive market for order 
flow and trade execution, an exchange would have strong competitive 
reasons to price its depth-of-book data so that the data would be 
distributed widely to those most likely to use it to trade.\163\ The 
commenter also believed that ``the application of market forces to the 
consolidation and distribution of market data is generally preferable 
to increased government supervision of the process of setting fees for 
and licensing subscribers to market data.'' \164\
---------------------------------------------------------------------------

    \162\ Thomson Reuters Letter at 3.
    \163\ Id.
    \164\ Id. at 2.
---------------------------------------------------------------------------

    The Ordover/Bamberger Statement noted that unnecessary regulation 
of a market characterized by effective competition can distort the 
operation of the market and produce ``unforeseen and unintended 
consequences,'' and that ``cost-based regulation can create significant 
inefficiencies and distortions.'' \165\ It identified market data and 
trade execution services as an example of ``joint products'' with 
``joint costs'' that determine a trading platform's total return.\166\ 
The Statement noted that competition among trading platforms could be 
expected to limit the return each platform earned from the sale of 
joint products, although different platforms could select different 
pricing strategies and means of recovering costs.\167\
---------------------------------------------------------------------------

    \165\ Ordover/Bamberger Statement at 2, 3 n. 4.
    \166\ Id. at 3-4.
    \167\ Id. at 4. See also id. at 3 n. 4 (``It is widely accepted 
that there is no meaningful way to allocate `common costs' across 
different joint products. For this reason, `cost-based' regulation 
of the price of market data would require inherently arbitrary cost 
allocations.'').
---------------------------------------------------------------------------

    Another commenter believed that NYSE Arca's proprietary data would 
benefit retail investors and that the Exchange's proposed fees are fair 
compensation for its data.\168\ Noting that U.S. exchanges face 
increasing competition from foreign markets, dark pools, and electronic 
communications networks, the commenter stated that it is important for 
U.S. exchanges to have the ability to offer real-time market data.\169\ 
Finally, NYSE Arca believed that the Commission's standard would spur 
innovation and allow markets to introduce new market data products more 
quickly, thereby enhancing the competitiveness of the U.S. securities 
markets.\170\
---------------------------------------------------------------------------

    \168\ Rutherford Comment.
    \169\ Id.
    \170\ NYSE Arca IV at 2.
---------------------------------------------------------------------------

VI. Discussion

    The Commission finds that the Proposal is consistent with the 
requirements of the Exchange Act and the rules and regulations 
thereunder applicable to a national securities exchange. In particular, 
it is consistent with section 6(b)(4) of the Exchange Act,\171\ which 
requires that the rules of a national securities exchange provide for 
the equitable allocation of reasonable dues, fees, and other charges 
among its members and issuers and other parties using its facilities, 
and section 6(b)(5) of the Exchange Act,\172\ which requires, among 
other things, that the rules of a national securities exchange be 
designed 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, in general, to protect investors and the 
public interest, and not be designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \171\ 15 U.S.C. 78f(b)(4).
    \172\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Commission also finds that the Proposal is consistent with the 
provisions of section 6(b)(8) of the Exchange Act,\173\ which requires 
that the rules of an exchange not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act. Finally, the Commission finds that the Proposal is consistent with 
Rule 603(a) of Regulation NMS,\174\ adopted under section 11A(c)(1) of 
the Exchange Act, which requires an exclusive processor that 
distributes information with respect to quotations for or transactions 
in an NMS stock to do so on terms that are fair and reasonable and that 
are not unreasonably discriminatory.\175\
---------------------------------------------------------------------------

    \173\ 15 U.S.C. 78f(b)(8).
    \174\ 17 CFR 242.603(a).
    \175\ NYSE Arca is an exclusive processor of the NYSE Arca Data 
under Section 3(a)(22)(B) of the Exchange Act, 15 U.S.C. 
78c(a)(22)(B), which defines an exclusive processor as, among other 
things, an exchange that distributes information with respect to 
quotations or transactions on an exclusive basis on its own behalf.
---------------------------------------------------------------------------

A. Commission Review of Proposals for Distributing Non-Core Data

    The standards in section 6 of the Exchange Act and Rule 603 of 
Regulation NMS do not differentiate between types of data and therefore 
apply to exchange proposals to distribute both core data and non-core 
data. Core data is the best-priced quotations and comprehensive last 
sale reports of all markets that the Commission, pursuant to Rule 
603(b), requires a central processor to consolidate and distribute to 
the public pursuant to joint-SRO plans.\176\ In contrast, individual 
exchanges and other market participants distribute non-core data 
voluntarily. As discussed further below, the mandatory nature of the 
core data disclosure regime leaves little room for competitive forces 
to determine products and fees. Non-core data products and their fees 
are, by contrast, much more sensitive to competitive forces. For 
example, the Commission does not believe that broker-dealers are 
required to purchase depth-of-book order data, including the NYSE Arca 
data, to meet their duty of best execution.\177\ The Commission 
therefore is able to use competitive forces in its determination of 
whether an exchange's proposal to distribute non-core data meets the 
standards of section 6 and Rule 603.
---------------------------------------------------------------------------

    \176\ See Rule 603(b) of Regulation NMS (``Every national 
securities exchange on which an NMS stock is traded and national 
securities association shall act jointly pursuant to one or more 
effective national market system plans to disseminate consolidated 
information, including a national best bid and national best offer, 
on quotations for and transactions in NMS stocks. Such plan or plans 
shall provide for the dissemination of all consolidated information 
for an individual NMS stock through a single plan processor.'')
    \177\ See notes 259-266 below and accompanying text.

---------------------------------------------------------------------------

[[Page 74780]]

    The requirements for distributing core data to the public were 
first established in the 1970s as part of the creation of the national 
market system for equity securities.\178\ Although Congress intended to 
rely on competitive forces to the greatest extent possible to shape the 
national market system, it also granted the Commission full rulemaking 
authority in the Exchange Act to achieve the goal of providing 
investors with a central source of consolidated market 
information.\179\
---------------------------------------------------------------------------

    \178\ These requirements are discussed in detail in section III 
of the Concept Release on Market Information, 64 FR at 70618-70623.
    \179\ H.R. Rep. No. 94-229, 94th Cong., 1st Sess. 92 (1975) 
(``Conference Report'').
---------------------------------------------------------------------------

    Pursuant to this Exchange Act authority, the Commission has 
required the SROs to participate in three joint-industry plans 
(``Plans'') pursuant to which core data is distributed to the 
public.\180\ The Plans establish three separate networks to disseminate 
core data for NMS stocks: (1) Network A for securities primarily listed 
on the NYSE; (2) Network C for securities primarily listed on Nasdaq; 
and (3) Network B for securities primarily listed on exchanges other 
than the NYSE and Nasdaq. For each security, the data includes: (1) A 
national best bid and offer (``NBBO'') with prices, sizes, and market 
center identifications; (2) the best bids and offers from each SRO that 
include prices, sizes, and market center identifications; and (3) last 
sale reports from each SRO. The three Networks establish fees for this 
core data, which must be filed for Commission approval.\181\ The 
Networks collect the applicable fees and, after deduction of Network 
expenses, distribute the remaining revenues to their individual SRO 
participants.
---------------------------------------------------------------------------

    \180\ The three joint-industry plans, approved by the 
Commission, are: (1) The CTA Plan, which is operated by the 
Consolidated Tape Association and disseminates transaction 
information for securities primarily listed on an exchange other 
than Nasdaq; (2) the CQ Plan, which disseminates consolidated 
quotation information for securities primarily listed on an exchange 
other than Nasdaq; and (3) the Nasdaq UTP Plan, which disseminates 
consolidated transaction and quotation information for securities 
primarily listed on Nasdaq. The CTA Plan and CQ Plan are available 
at http://www.nysedata.com. The Nasdaq UTP Plan is available at 
http://www.utpdata.com.
    \181\ Rule 608(b)(1) of Regulation NMS, 17 CFR 242.608(b)(1).
---------------------------------------------------------------------------

    The Plans promote the wide availability of core market data.\182\ 
For each of the more than 7000 NMS stocks, quotations and trades are 
continuously collected from many different trading centers and then 
disseminated to the public by the central processor for a Network in a 
consolidated stream of data. As a result, investors have access to a 
reliable source of information for the best prices in NMS stocks. 
Commission rules long have required broker-dealers and data vendors, if 
they provide any data to customers, to also provide core data to 
investors in certain contexts, such as trading and order-routing.\183\ 
In addition, compliance with the trade-through requirements of Rule 611 
of Regulation NMS \184\ necessitates obtaining core quotation data 
because it includes all the quotations that are entitled to protection 
against trade-throughs.\185\
---------------------------------------------------------------------------

    \182\ The Plan provisions for distributing quotation and 
transaction information are discussed in detail in section II of the 
Concept Release on Market Information, 64 FR at 70615-70618.
    \183\ Rule 603(c) of Regulation NMS, 17 CFR 242.603(c).
    \184\ 17 CFR 242.611.
    \185\ Rule 600(b)(57)(iii) of Regulation NMS, 17 CFR 
242.600(b)(57)(iii) (definition of ``protected bid'' and ``protected 
offer'' limited to the best bids and best offers of SROs). The 
Commission decided not to adopt a proposal which would have 
protected depth-of-book quotations against trade-throughs if the 
market displaying such quotations voluntarily disseminated them in 
the consolidated quotation stream. Regulation NMS Release, 70 FR at 
37529.
---------------------------------------------------------------------------

    For many years, the core data distributed through the Networks 
overwhelmingly dominated the field of equity market data in the U.S. 
With the initiation of decimal trading in 2001, however, the value to 
market participants of non-core data, particularly depth-of-book order 
data, increased.\186\ An exchange's depth-of-book order data includes 
displayed trading interest at prices inferior to the best-priced 
quotations that exchanges are required to provide for distribution in 
the core data feeds. Prior to decimal trading, significant size 
accumulated at the best-priced quotes because the minimum spread 
between the national best bid and the national best offer was \1/16\th, 
or 6.25 cents. When the minimum inside spread was reduced to one cent, 
the size displayed at the best quotes decreased substantially, while 
the size displayed at the various one-cent price points away from the 
inside quotes became a more useful tool to assess market depth.
---------------------------------------------------------------------------

    \186\ Commenters on the Draft Order cited statements by the 
Commission's Chairman in 2002 as indicating competitive forces do 
not apply to non-core market data. SIFMA IX at 4-5; SLCG Study at 
28-29; STA Letter at 3-4. Up to that time, however, nearly all 
market data revenues had been derived from core data. Accordingly, 
the characteristics of market data revenues in the 70 years prior to 
2002 shed no light on the current state of competition for non-core 
data.
---------------------------------------------------------------------------

    In 2005, the Commission adopted new rules that, among other things, 
addressed market data.\187\ Some commenters on the rule proposals 
recommended that the Commission eliminate or substantially modify the 
consolidation model for distributing core data. In addressing these 
comments, the Commission described both the strengths and weaknesses of 
the consolidation model. It emphasized the benefits of the model for 
retail investors, but noted the limited opportunity for market forces 
to determine the level and allocation of fees for core data and the 
negative effects on innovation by individual markets in the provision 
of their data.\188\
---------------------------------------------------------------------------

    \187\ Regulation NMS Release, 70 FR at 37557-37570.
    \188\ Id. at 37558.
---------------------------------------------------------------------------

    The Commission ultimately decided that the consolidation model 
should be retained for core data because of the benefit it afforded to 
investors, namely ``helping them to assess quoted prices at the time 
they place an order and to evaluate the best execution of their orders 
against such prices by obtaining data from a single source that is 
highly reliable and comprehensive.'' \189\
---------------------------------------------------------------------------

    \189\ Id. at 37504.
---------------------------------------------------------------------------

    With respect to the distribution of non-core data, however, the 
Commission decided to maintain a deconsolidation model that allows 
greater flexibility for market forces to determine data products and 
fees.\190\ In particular, the Commission both authorized the 
independent dissemination of an individual market's or broker-dealer's 
trade data, which previously had been prohibited by Commission rule, 
and streamlined the requirements for the consolidated display of core 
market data to customers of broker-dealers and vendors.\191\ Most 
commenters supported this approach.\192\ A few commenters, however, 
recommended that ``the Commission should expand the consolidated 
display requirement to include additional information on depth-of-book 
quotations, stating that the NBBO alone had become less informative 
since decimalization.'' \193\ Such an approach effectively would have 
treated an individual market's depth-of-book order data as consolidated 
core data and

[[Page 74781]]

thereby eliminated the operation of competitive forces on depth-of-book 
order data. The Commission did not adopt this recommendation, but 
instead decided to:
---------------------------------------------------------------------------

    \190\ When describing the deconsolidation model in the context 
of deciding whether to propose a new model for core data, the 
Commission noted that ``the strength of this model is the maximum 
flexibility it allows for competitive forces to determine data 
products, fees, and SRO revenues.'' Securities Exchange Act Release 
No. 49325 (February 26, 2004), 69 FR 11126, 11177 (March 9, 2004). 
As discussed in the text, the Commission decided to retain the 
consolidation model, rather than proposing a new deconsolidation 
model, for core data.
    \191\ See Regulation NMS Release, 70 FR at 37566-37567 
(addressing differences in distribution standards between core data 
and non-core data).
    \192\ Id.
    \193\ Id. at 37567 (citation omitted).

allow market forces, rather than regulatory requirements, to 
determine what, if any, additional quotations outside the NBBO are 
displayed to investors. Investors who need the BBOs of each SRO, as 
well as more comprehensive depth-of-book information, will be able 
to obtain such data from markets or third party vendors.\194\
---------------------------------------------------------------------------

    \194\ Id. (citations omitted) (emphasis added).

    Some commenters on the Proposal and the Petition recommended 
fundamental changes in the regulatory treatment of non-core data in 
general and depth-of-book quotations in particular.\195\ The 
Commission, however, considered this issue in 2005 and continues to 
hold the views just described. It does not believe that circumstances 
have changed significantly since 2005 and will continue to apply a 
primarily market-based approach for assessing whether exchange 
proposals to distribute non-core data meet the applicable statutory 
standards.
---------------------------------------------------------------------------

    \195\ See section III.A.4 above.
---------------------------------------------------------------------------

    The Exchange Act and its legislative history strongly support the 
Commission's reliance on competition, whenever possible, in meeting its 
regulatory responsibilities for overseeing the SROs and the national 
market system. Indeed, competition among multiple markets and market 
participants trading the same products is the hallmark of the national 
market system.\196\ A national market ``system'' can be contrasted with 
a single monopoly market that overwhelmingly dominates trading its 
listed products. Congress repeatedly emphasized the benefits of 
competition among markets in protecting investors and promoting the 
public interest. When directing the Commission to facilitate the 
establishment of a national market system, for example, Congress 
emphasized the importance of allowing competitive forces to work:
---------------------------------------------------------------------------

    \196\ See, e.g., Exchange Act Section 11A(a)(1)(C)(ii).

    In 1936, this Committee pointed out that a major responsibility 
of the SEC in the administration of the securities laws is to 
``create a fair field of competition.'' This responsibility 
continues today. The bill would more clearly identify this 
responsibility and clarify and strengthen the SEC's authority to 
carry it out. The objective would be to enhance competition and to 
allow economic forces, interacting within a fair regulatory field, 
to arrive at appropriate variations in practices and services.\197\
---------------------------------------------------------------------------

    \197\ S. Rep. No. 94-75, 94th Cong., 1st Sess. 8 (1975) 
(``Senate Report'').

    In addition, Congress explicitly noted the importance of relying on 
---------------------------------------------------------------------------
competition in overseeing the activities of the SROs:

    S. 249 would give the SEC broad authority not only to oversee 
the general development of a national market system but also to 
insure that the ancillary programs of the self-regulatory 
organizations and their affiliates are consistent with the best 
interests of the securities industry and the investing public * * *. 
This is not to suggest that under S. 249 the SEC would have either 
the responsibility or the power to operate as an `economic czar' for 
the development of a national market system. Quite the contrary, for 
a fundamental premise of the bill is that the initiative for the 
development of the facilities of a national market system must come 
from private interests and will depend on the vigor of competition 
within the securities industry as broadly defined.\198\
---------------------------------------------------------------------------

    \198\ Senate Report at 12.

    With respect to market information, Congress again expressed its 
preference for the Commission to rely on competition, but noted the 
possibility that competition might not be sufficient in the specific 
context of core data--the central facilities for the required 
---------------------------------------------------------------------------
distribution of consolidated data to the public:

    It is the intent of the conferees that the national market 
system evolve through the interplay of competitive forces as 
unnecessary regulatory restrictions are removed. The conferees 
expect, however, that in those situations where competition may not 
be sufficient, such as in the creation of a composite quotation 
system or a consolidated transactional reporting system, the 
Commission will use the powers granted to it in this bill to act 
promptly and effectively to insure that the essential mechanisms of 
an integrated secondary trading system are put into effect as 
rapidly as possible.\199\
---------------------------------------------------------------------------

    \199\ Conference Report at 92 (emphasis added).

    The Commission's approach to core data and non-core data follows 
this Congressional intent exactly. With respect to the systems for the 
required distribution of consolidated core data, the Commission 
retained a regulatory approach that uses joint-industry plans and a 
central processor designed to assure access to the best quotations and 
most recent last sale information that is so vital to investors. With 
respect to non-core data, in contrast, the Commission has maintained a 
market-based approach that leaves a much fuller opportunity for 
competitive forces to work.
    This market-based approach to non-core data has two parts. The 
first is to ask whether the exchange was subject to significant 
competitive forces in setting the terms of its proposal for non-core 
data, including the level of any fees. If an exchange was subject to 
significant competitive forces in setting the terms of a proposal, the 
Commission will approve the proposal unless it determines that there is 
a substantial countervailing basis to find that the terms nevertheless 
fail to meet an applicable requirement of the Exchange Act or the rules 
thereunder. If, however, the exchange was not subject to significant 
competitive forces in setting the terms of a proposal for non-core 
data, the Commission will require the exchange to provide a substantial 
basis, other than competitive forces, in its proposed rule change 
demonstrating that the terms of the proposal are equitable, fair, 
reasonable, and not unreasonably discriminatory.
    As discussed above, the Commission believes that, when possible, 
reliance on competitive forces is the most appropriate and effective 
means to assess whether terms for the distribution of non-core data are 
equitable, fair and reasonable, and not unreasonably discriminatory. If 
competitive forces are operative, the self-interest of the exchanges 
themselves will work powerfully to constrain unreasonable or unfair 
behavior. As discussed further below, when an exchange is subject to 
competitive forces in its distribution of non-core data, many market 
participants would be unlikely to purchase the exchange's data products 
if it sets fees that are inequitable, unfair, unreasonable, or 
unreasonably discriminatory. As a result, competitive forces generally 
will constrain an exchange in setting fees for non-core data because it 
should recognize that its own profits will suffer if it attempts to act 
unreasonably or unfairly. For example, an exchange's attempt to impose 
unreasonably or unfairly discriminatory fees on a certain category of 
customers would likely be counter-productive for the exchange because, 
in a competitive environment, such customers generally would be able to 
respond by using alternatives to the exchange's data.\200\ The 
Commission therefore believes that the existence of significant 
competition provides a substantial basis for finding that the

[[Page 74782]]

terms of an exchange's fee proposal are equitable, fair, reasonable, 
and not unreasonably or unfairly discriminatory.
---------------------------------------------------------------------------

    \200\ See, e.g., Richard Posner, Economic Analysis of Law Sec.  
9.1 (5th ed. 1998) (discussing the theory of monopolies and 
pricing). See also U.S. Dep't of Justice & Fed'l Trade Comm'n, 
Horizontal Merger Guidelines Sec.  1.11 (1992), as revised (1997) 
(``DOJ Merger Guidelines'') (explaining the importance of 
alternative products in evaluating the presence of competition and 
defining markets and market power). Courts frequently refer to the 
Department of Justice and Federal Trade Commission merger guidelines 
to define product markets and evaluate market power. See, e.g., FTC 
v. Whole Foods Market, Inc., 502 F. Supp. 2d 1 (D.D.C. 2007); FTC v. 
Arch Coal, Inc., 329 F. Supp. 2d 109 (D.D.C. 2004).
---------------------------------------------------------------------------

    Even when competitive forces are operative, however, the Commission 
will continue to review exchange proposals for distributing non-core 
data to assess whether there is a substantial countervailing basis for 
determining that a proposal is inconsistent with the Exchange Act.\201\ 
For example, an exchange proposal that seeks to penalize market 
participants for trading in markets other than the proposing exchange 
would present a substantial countervailing basis for finding 
unreasonable and unfair discrimination and likely would prevent the 
Commission from approving an exchange proposal.\202\ In the absence of 
such a substantial countervailing basis for finding that a proposal 
failed to meet the applicable statutory standards, the Commission would 
approve the exchange proposal as consistent with the Exchange Act and 
rules applicable to the exchange.
---------------------------------------------------------------------------

    \201\ See Exchange Act Section 19(b)(2) (``The Commission shall 
approve a proposed rule change of a self-regulatory organization if 
it finds that such proposed rule change is consistent with the 
requirements of this title and the rules and regulations thereunder 
applicable to such organization. The Commission shall disapprove a 
proposed rule change of a self-regulatory organization if it does 
not make such finding.'').
    \202\ Cf. Regulation NMS Release, 70 FR at 37540 (in discussion 
of market access fees under Rule 610 of Regulation NMS, the 
Commission noted that ``any attempt by an SRO to charge differential 
fees based on the non-member status of the person obtaining indirect 
access to quotations, such as whether it is a competing market 
maker, would violate the anti-discrimination standard of Rule 
610.'').
---------------------------------------------------------------------------

B. Review of Competitive Forces Applicable to NYSE Arca

    The terms of an exchange's proposed rule change to distribute 
market data for which it is an exclusive processor must, among other 
things, provide for an equitable allocation of reasonable fees under 
section 6(b)(4), not be designed to permit unfair discrimination under 
section 6(b)(5), be fair and reasonable under Rule 603(a)(1), and not 
be unreasonably discriminatory under Rule 603(a)(2). Because NYSE Arca 
is proposing to distribute non-core data, the Commission reviewed the 
terms of the Proposal under the market-based approach described above. 
The first question is whether NYSE Arca was subject to significant 
competitive forces in setting the terms of the Proposal.
    At least two broad types of significant competitive forces applied 
to NYSE Arca in setting the terms of its Proposal to distribute the 
ArcaBook data: (1) NYSE Arca's compelling need to attract order flow 
from market participants; and (2) the availability to market 
participants of alternatives to purchasing the ArcaBook data.
1. Competition for Order Flow
    Attracting order flow is the core competitive concern of any equity 
exchange--it is the ``without which, not'' of an exchange's competitive 
success. If an exchange cannot attract orders, it will not be able to 
execute transactions. If it cannot execute transactions, it will not 
generate transaction revenue. If an exchange cannot attract orders or 
execute transactions, it will not have market data to distribute, for a 
fee or otherwise, and will not earn market data revenue.\203\
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    \203\ See Exchange Market Data Coalition Letter at 3 (``The end 
product of these efforts--the listings, the members, the trading 
facilities, the regulation--is market data. Market data is the 
totality of the information assets that each Exchange creates by 
attracting order flow.'').
---------------------------------------------------------------------------

    In the U.S. national market system, buyers and sellers of 
securities, and the broker-dealers that act as their order-routing 
agents, have a wide range of choices of where to route orders for 
execution. They include, of course, any of the nine national securities 
exchanges that currently trade equities, but also include a wide 
variety of non-exchange trading venues: (1) Electronic communication 
networks (``ECNs'') that display their quotes directly in the core data 
stream by participating in FINRA's Alternative Display Facility 
(``ADF'') or displaying their quotations through an exchange; (2) 
alternative trading systems (``ATSs'') that offer a wide variety of 
order execution strategies, including block crossing services for 
institutions that wish to trade anonymously in large size and midpoint 
matching services for the execution of smaller orders; and (3) 
securities firms that primarily trade as principal with their customer 
order flow.
    NYSE Arca must compete with all of these different trading venues 
to attract order flow, and the competition is fierce. For example, in 
its response to the commenters, NYSE Arca notes that its share of 
trading in 2005 was 3.6% in Network A stocks, 23% in Network C stocks, 
and 30% in Network B stocks.\204\ More recently during June 2008, NYSE 
Arca share volume was 14.0% in Network A stocks, 16.1% in Network C 
stocks, and 26.7% in Network B stocks, adding up to 16.5% of total U.S. 
market volume.\205\
---------------------------------------------------------------------------

    \204\ NYSE Arca Response III at 18 n. 44. The NYSE and NYSE Arca 
are wholly-owned subsidiaries of NYSE Group, Inc. One commenter 
stated that the NYSE had ``combined Arca's liquidity pool with its 
own,'' and that ``the networking effect of the NYSE Group's combined 
pool of liquidity'' had resulted in ``greater market power over its 
pricing for market data.'' SIFMA IV at 8 (emphasis in original). In 
fact, the NYSE and NYSE Arca liquidity pools have not been combined. 
The two exchanges operate as separate trading centers with separate 
limit order books, and each distributes its depth-of-book order data 
separately for separate fees. In analyzing the competitive position 
of NYSE Arca for purposes of distributing such data, the Commission 
has considered NYSE Arca both as a trading center separate from the 
NYSE and as part of the same corporate group as NYSE. It finds that 
in both contexts NYSE Arca was subject to significant competitive 
forces in setting the terms for the ArcaBook data. See section VI.C 
below for a discussion of the regulatory requirements applicable to 
individual national securities exchanges operating separate 
liquidity pools.
    \205\ Source: ArcaVision (available at http://www.arcavision.com); see also NYSE Arca Response III at 18 (``NYSE 
Arca does not maintain a dominant share of the market in any of the 
three networks.'').
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    Given the competitive pressures that currently characterize the 
U.S. equity markets, no exchange can afford to take its market share 
percentages for granted--they can change significantly over time, 
either up or down.\206\ Even the most dominant exchanges are subject to 
severe pressure in the current competitive environment. For example, 
the NYSE's reported market share of trading in NYSE-listed stocks 
declined from 79.1% in January 2005 to 30.6% in June 2008.\207\ In 
addition, a non-exchange entrant to equity trading--the BATS ECN--has 
succeeded in capturing 7.4% of trading in NYSE-listed stocks and 10.3% 
of trading in Nasdaq-listed stocks.\208\ Another ECN--Direct Edge--has 
a matched market share of 3.7% in NYSE-listed stocks and 5.8% in 
Nasdaq-listed stocks.\209\ Moreover, nearly all venues now offer 
trading in all U.S.-listed equities, no matter the particular exchange 
on which a stock is listed or on which the most trading occurs. As a 
result, many trading venues stand ready to provide an immediately 
accessible order-routing alternative for broker-dealers and investors 
if an exchange

[[Page 74783]]

attempts to act unreasonably in setting the terms for its services.
---------------------------------------------------------------------------

    \206\ See Exchange Market Data Coalition Letter at 4 
(``Exchanges compete not only with one another, but also with broker 
dealers that match customer orders within their own systems and also 
with a proliferation of alternative trading systems (``ATSs'') and 
electronic communications networks (``ECNs'') that the Commission 
has also nurtured and authorized to execute trades in any listed 
issue. As a result, market share of trading fluctuates among 
execution facilities based upon their ability to service the end 
customer.'').
    \207\ Source: ArcaVision (available at http://www.arcavision.com).
    \208\ Lehman Brothers, Inc., Equity Research, ``Exchanges June 
Volume Analysis'' at 2 (July 2, 2008) (``Lehman Trading Volume 
Analysis'') at 2. The Commission recently granted an application by 
BATS Exchange, Inc. for registration as a national securities 
exchange. Securities Exchange Act Release No. 58375 (Aug. 18, 2008), 
73 FR 49498 (Aug. 21, 2008).
    \209\ Lehman Trading Volume Analysis at 2.
---------------------------------------------------------------------------

    Table 1 below provides a useful recent snapshot of the state of 
competition in the U.S. equity markets in the month of June 2008: \210\
---------------------------------------------------------------------------

    \210\ Source: ArcaVision (available at http://www.arcavision.com).

                     Table 1--Reported Share Volume in U.S.-Listed Equities During June 2008
                                                    [Percent]
----------------------------------------------------------------------------------------------------------------
                          Trading venue                             All stocks      NYSE-listed    Nasdaq-listed
----------------------------------------------------------------------------------------------------------------
All Non-Exchange................................................            31.9            28.9            38.0
Nasdaq..........................................................            30.4            23.0            42.7
NYSE............................................................            17.4            30.6             0.0
NYSE Arca.......................................................            16.5            14.0            16.1
National Stock Exchange.........................................             1.8             1.4             2.4
International Stock Exchange....................................             0.9             1.4             0.2
American Stock Exchange.........................................             0.5             0.0             0.0
Chicago Stock Exchange..........................................             0.4             0.5             0.3
CBOE Stock Exchange.............................................             0.1             0.1             0.2
Philadelphia Stock Exchange.....................................             0.1             0.1             0.1
----------------------------------------------------------------------------------------------------------------

    Perhaps the most notable item of information from Table 1 is that 
non-exchange trading venues collectively have a larger share of trading 
than any single exchange. Much of this volume is attributable to ECNs 
such as BATS and Direct Edge, noted above. In addition, the 
proliferation of non-exchange pools of liquidity has been a significant 
development in the U.S. equity markets.\211\ Broker-dealers often check 
the liquidity available in these pools as a first choice prior to 
routing orders to an exchange. In sum, no exchange possesses a 
monopoly, regulatory or otherwise, in the execution of order flow from 
broker-dealers.
---------------------------------------------------------------------------

    \211\ See, e.g., NYSE Arca Response III at 17 (``If the 
brokerage firm is unable to internalize the trade, typically, it 
next takes the order to dark pools, crossing networks, ECNs, 
alternative trading systems, or other non-traditional execution 
facilities to search for an execution.''); http://www.advancedtrading.com/directories/darkpool (directory of more than 
20 non-exchange pools of liquidity that are classified as 
``independent,'' ``broker-dealer-owned,'' and ``consortium-
owned.'').
---------------------------------------------------------------------------

    The market share percentages in Table 1 strongly indicate that NYSE 
Arca must compete vigorously for order flow to maintain its share of 
trading volume. As discussed below, this compelling need to attract 
order flow imposes significant pressure on NYSE Arca to act reasonably 
in setting its fees for depth-of-book order data, particularly given 
that the market participants that must pay such fees often will be the 
same market participants from whom NYSE Arca must attract order 
flow.\212\ These market participants particularly include the large 
broker-dealer firms that control the handling of a large volume of 
customer and proprietary order flow. Given the portability of order 
flow from one trading venue to another, any exchange that sought to 
charge unreasonably high data fees would risk alienating many of the 
same customers on whose orders it depends for competitive 
survival.\213\
---------------------------------------------------------------------------

    \212\ See, e.g., Exchange Market Data Coalition Letter at 4 
(``It is in the Exchange's best interest to provide proprietary 
information to investors to further their business objectives, and 
each Exchange chooses how best to do that.''); Nasdaq Letter at 9 
(``Like the market for electronic executions, the related market for 
proprietary data is also influenced by the equity investments of 
major financial institutions in one or more exchanges * * *. Equity 
investors control substantial order flow and transaction reports 
that are the essential ingredients of successful proprietary data 
products. Equity investors also can enable exchanges to develop 
competitive proprietary products * * *.'').
    \213\ See NYSE Arca Response III at 16 (``Markets compete with 
one another by seeking to maximize the amount of order flow that 
they attract. The markets base competition for order flow on such 
things as technology, customer service, transaction costs, ease of 
access, liquidity and transparency. In recent months, significant 
changes in market share, the rush to establish trade-reporting 
facilities for the reporting of off-exchange trades, frequent 
changes in transaction fees and new market data proposals have 
provided evidence of the intensity of the competition for order 
flow.'').
---------------------------------------------------------------------------

    Some commenters asserted that an exchange's distribution of depth-
of-book order data is not affected by its need to attract order 
flow.\214\ Attracting order flow and distributing market data, however, 
are in fact two sides of the same coin and cannot be separated.\215\ 
Moreover, the relation between attracting order flow and distributing 
market data operates in both directions. An exchange's ability to 
attract order flow determines whether it has market data to distribute, 
while the exchange's distribution of market data significantly affects 
its ability to attract order flow.\216\
---------------------------------------------------------------------------

    \214\ See section III.A.5 above.
    \215\ See, e.g., Larry Harris, Trading and Exchanges, Market 
Microstructure for Practitioners 99 (2003) (noting that it would be 
``very difficult for innovative trading systems to compete for order 
flow'' if the data from those trading venues were not distributed).
    \216\ See, e.g., NYSE Arca Response III at 13 (in setting level 
of fees, one factor was ``projected losses to NYSE Arca's business 
model and order flow that might result from marketplace resistance 
to Arca Book Fees''); Report of the Advisory Committee on Market 
Information: A Blueprint for Responsible Change (September 14, 
2001), Section VII.B.1 (available at www.sec.gov) (``[A] market's 
inability to widely disseminate its prices undoubtedly will 
adversely impact its ability to attract limit orders and, 
ultimately, all order flow. This barrier to intermarket competition, 
in turn, could decrease liquidity and innovation in the 
marketplace.'').
---------------------------------------------------------------------------

    For example, orders can be divided into two broad types--those that 
seek to offer liquidity to the market at a particular price (non-
marketable orders) and those that seek an immediate execution by taking 
the offered liquidity (marketable orders). The wide distribution of an 
exchange's market data, including depth-of-book order data, to many 
market participants is an important factor in attracting both types of 
orders. Depth-of-book order data consists of non-marketable orders that 
a prospective buyer or seller has chosen to display. The primary reason 
for a prospective buyer or seller to display its trading interest at a 
particular price, and thereby offer a free option to all market 
participants at that price, is to attract contra trading interest and a 
fast execution. The extent to which a displayed non-marketable order 
attracts contra interest will depend greatly on the wide distribution 
of the displayed order to many market participants. If only a limited 
number of market participants receive an exchange's depth-of-book order 
data, it reduces the chance of an execution for those who display non-
marketable orders on that exchange. Limited distribution of displayed 
orders thereby reduces the ability of the exchange to attract such 
orders. Moreover, by failing to secure wide distribution of its 
displayed orders, the exchange will reduce its ability to attract 
marketable orders seeking to take the displayed liquidity. In other 
words, limited distribution of depth-of-book order data will limit an

[[Page 74784]]

exchange's ability to attract both non-marketable and marketable 
orders. Consequently, an exchange generally will have strong 
competitive reasons to price its depth-of-book order data so that it 
will be distributed widely to those most likely to use it to 
trade.\217\
---------------------------------------------------------------------------

    \217\ See NYSE Arca Response III at 18 (``If too many market 
professionals reject Arca Book as too expensive, NYSE Arca would 
have to reassess the Arca Book Fees because Arca Book data provides 
transparency to NYSE Arca's market, transparency that plays an 
important role in the competition for order flow.''). This pressure 
on exchanges to distribute their order data widely is heightened for 
those exchanges that have converted from member-owned, not-for 
profit entities to shareholder-owned, for-profit companies. For-
profit exchanges are more likely to place greater importance on 
distributing market information widely than on limiting such 
information for the use of their members.
---------------------------------------------------------------------------

    A notable example of the close connection between a trading venue's 
distribution of order data and its ability to attract order flow was 
provided by the Island ECN in 2002. To avoid the application of certain 
regulatory requirements, Island ceased displaying its order book to the 
public in three very active exchange-traded funds (``ETFs'') in which 
it enjoyed a substantial market share. After going ``dark,'' Island's 
market share in the three ETFs dropped by 50%.\218\
---------------------------------------------------------------------------

    \218\ See Terrence Hendershott and Charles. M. Jones, ``Island 
Goes Dark: Transparency, Fragmentation, and Regulation,'' 18 The 
Review of Financial Studies (No. 3) 743, 756 (2005); see also Nasdaq 
Letter at 7 (``[T]he 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 
data products themselves.''). In contrast to the Island example, and 
as noted in the Nasdaq Letter at 9, an element of the BATS ECN's 
business strategy over the last two years in gaining order flow has 
been to provide its order data to customers free of charge. See BATS 
Trading, Newsletter (July 2007) (available at http://www.batstrading.com/newsletters/0707Newsletter.pdf) (``BATS has 
chosen not to charge for many of the things for which our 
competitors charge. * * * More importantly, our market data is free. 
Why would a market charge its participants for the data they send to 
that market? Feel free to pose this same question to our 
competitors.'').
---------------------------------------------------------------------------

    This competitive pressure to attract order flow is likely what led 
NYSE Arca, and its predecessor corporation, to distribute its depth-of-
book order data without charge in the past.\219\ It now has made a 
business decision to begin charging for that data, apparently believing 
that it has a sufficiently attractive data product that the benefit 
obtained from increased data revenues will outweigh the potential harm 
of reduced order flow if significant numbers of data users choose not 
to pay the fee.\220\ Commenters concede that NYSE Arca is entitled to 
charge a fee for its depth-of-book order data,\221\ but claim that the 
fee chosen by NYSE Arca is unaffected by its need to attract order 
flow.\222\ The Commission disagrees and notes that NYSE Arca, in 
setting the fee, acknowledged that it needed to balance its desire for 
market data revenues with the potential damage that a high fee would do 
to its ability to attract order flow.\223\
---------------------------------------------------------------------------

    \219\ Cf. NYSE Arca Response III at 4 (``Several years ago, 
certain [ECNs] began to make their real-time quotes available for 
free in order to gain visibility in the market place.'').
    \220\ NYSE Arca Response I at 4 (``[F]ees will enable the 
Exchange to further diversify its revenue to compete with its 
rivals. The Exchange believes that its business has reached the 
point where its customers are willing to pay for the value of the 
Exchange's information.'').
    \221\ See, e.g., Petition at 9; SIFMA I at 7.
    \222\ See notes 147-149 above and accompanying text.
    \223\ NYSE Arca Response III at 13 (in setting the level of fees 
for ArcaBook data, NYSE Arca considered ``projected losses to NYSE 
Arca's business model and order flow that might result from 
marketplace resistance to'' the fees).
---------------------------------------------------------------------------

2. Availability of Alternatives to ArcaBook Data
    In addition to the need to attract order flow, the availability of 
alternatives to an exchange's depth-of-book order data significantly 
affects the terms on which an exchange distributes such data.\224\ The 
primary use of depth-of-book order data is to assess the depth of the 
market for a stock beyond that which is shown by the best-priced 
quotations that are distributed in core data. Institutional investors 
that need to trade in large size typically seek to assess market depth 
beyond the best prices, in contrast to retail investors who generally 
can expect to receive the best price or better when they trade in 
smaller sizes.\225\
---------------------------------------------------------------------------

    \224\ See NYSE Arca Response III at 13 (in setting fees for 
ArcaBook data, NYSE Arca considered ``the fact that Arca Book is 
primarily a product for market professionals, who have access to 
other sources of market data and who will purchase Arca Book only if 
they determine that the perceived benefits outweigh the cost''); see 
also the authorities cited in note 200 above. In considering 
antitrust issues, courts have recognized the value of competition in 
producing lower prices. See, e.g., Leegin Creative Leather Products 
v. PSKS, Inc., 127 S. Ct. 2705 (2007); Atlanta Richfield Co. v. 
United States Petroleum Co., 495 U.S. 328 (1990); Matsushita Elec. 
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986); State Oil Co. 
v. Khan, 522 U.S. 3 (1997); Northern Pacific Railway Co. v. U.S., 
356 U.S. 1 (1958).
    \225\ The market information needs of retail investor are 
discussed at notes 229-336 below and accompanying text.
---------------------------------------------------------------------------

    In setting the fees for its depth-of-book order data, an exchange 
must consider the extent to which sophisticated traders would choose 
one or more alternatives instead of purchasing the exchange's 
data.\226\ Of course, the most basic source of information concerning 
the depth generally available at an exchange is the complete record of 
an exchange's transactions that is provided in the core data feeds. In 
this respect, the core data feeds that include an exchange's own 
transaction information are a significant alternative to the exchange's 
depth-of-book data product.
---------------------------------------------------------------------------

    \226\ See NYSE Arca Response III at 17 (``As a result of all of 
the choices and discretion that are available to brokers, the 
displayed depth-of-book data of one trading center does not provide 
a complete picture of the full market for a security * * *. A 
brokerage firm has potentially dozens of different information 
sources to choose from in determining if, where, and how to 
represent an order for execution.'').
---------------------------------------------------------------------------

    For more specific information concerning depth, market participants 
can choose among the depth-of-book order products offered by the 
various exchanges and ECNs.\227\ A market participant is likely to be 
more interested in other exchange and ECN products when the exchange 
selling its data has a small share of trading volume, because the 
depth-of-book order data provided by other exchanges and ECNs will be 
proportionally more important in assessing market depth. As a result, 
smaller exchanges may well be inclined to offer their data for no 
charge or low fees as a means to attract order flow. Even larger 
exchanges, however, must consider the lower fees of other exchanges in 
setting the fees for the larger exchanges' data. Significant fee 
differentials could lead to shifts in order flow that, over time, could 
harm a larger exchange's competitive position and the value of its non-
core data.
---------------------------------------------------------------------------

    \227\ See Nasdaq Letter at 7-8 (``The large number of SROs, 
TRFs, and ECNs that currently produce proprietary data or are 
currently capable of producing it provides further pricing 
discipline for proprietary data products. As shown on Exhibit A, 
each SRO, TRF, ECN and BD is currently permitted to produce 
proprietary data products, and many currently do or have announced 
plans to do so, including Nasdaq, NYSE, NYSEArca, and BATS.'').
---------------------------------------------------------------------------

    Market depth also can be assessed with tools other than depth-of-
book order data. For example, market participants can ``ping'' the 
various markets by routing oversized marketable limit orders to access 
an exchange's total liquidity available at an order's limit price or 
better.\228\ In contrast to depth-of-book order data, pinging orders 
have the important advantage of searching out both displayed and 
reserve (i.e., nondisplayed) size at all price points within an order's 
limit price. Reserve size can represent a substantial portion of the 
liquidity available at exchanges.\229\ It often will

[[Page 74785]]

be available at prices that are better than or equal to an exchange's 
best displayed prices, and none of this liquidity will be discernible 
from an exchange's depth-of-book order data. Pinging orders thereby 
give the sender an immediate and more complete indication of the total 
liquidity available at an exchange at a particular time. Moreover, 
sophisticated order routers are capable of maintaining historical 
records of an exchange's responses to pinging orders over time to gauge 
the extent of total liquidity that generally can be expected at an 
exchange. These records are a key element used to program smart order 
routing systems that implement the algorithmic trading strategies that 
have become so prevalent in recent years.\230\
---------------------------------------------------------------------------

    \228\ See Regulation NMS Release, 70 FR at 37514 (discussion of 
pinging orders noting that they ``could as aptly be labeled 
`liquidity search' orders'').
    \229\ See, e.g., NYSE Arca Response III at 17 (noting that 
brokers ``may elect to have NYSE Arca hold a portion of the order as 
hidden interest that NYSE Arca holds in reserve, which means that 
NYSE Arca will not include the undisplayed portion of the order as 
part of the Arca Book display''); Michael Scotti, ``The Dark Likes 
Nasdaq,'' Traders Magazine (May 1, 2007) (quoting statement of 
Nasdaq's executive vice president that 15 to 18 percent of Nasdaq's 
executed liquidity is non-displayed).
    \230\ See, e.g., http://www.advancedtrading.com/directories/dark-algorithms (descriptions of product offerings for ``dark 
algorithms'' that seek undisplayed liquidity at multiple trading 
venues); EdgeTrade, Inc., ``EdgeTrade issues white paper on market 
fragmentation and unprecedented liquidity opportunities through 
smart order execution'' (September 10, 2007) (available at http://www.edgetrade.com) (``EdgeTrade's smart order execution strategy * * 
* simultaneously sprays aggregated dark pools and public markets, 
and then continuously moves an order in line with shifting liquidity 
until best execution is fulfilled.'').
---------------------------------------------------------------------------

    Another alternative to depth-of-book order data products offered by 
exchanges is the threat of independent distribution of order data by 
securities firms and data vendors.\231\ As noted above, one of the 
principal market data reforms adopted in 2005 was to authorize the 
independent distribution of data by individual firms. To the extent 
that one or more securities firms conclude that the cost of exchange 
depth-of-book order products is too high and appreciably exceeds the 
cost of aggregating and distributing such data, they are entitled to 
act independently and distribute their own order data, with or without 
a fee. Indeed, a consortium of major securities firms in Europe has 
undertaken such a market data project as part of the implementation of 
the Markets in Financial Instruments Directive (``MiFID'') adopted by 
the European Union.\232\ No securities statute or regulation prevents 
U.S. firms from undertaking an analogous project in the U.S. for the 
display of depth-of-book order data. This data could encompass orders 
that are executed off of the exchanges, as well as orders that are 
submitted to exchanges for execution. If major U.S. firms handling 
significant order flow participated in the project, the project could 
collect and distribute data that covered a large proportion of 
liquidity in U.S. equities.
---------------------------------------------------------------------------

    \231\ See Nasdaq Letter at 3 (``Proprietary optional data may be 
offered by a single broker-dealer, a group of broker-dealers, a 
national securities exchange, or a combination of broker-dealers or 
exchanges, unlike consolidated data which is only available through 
a consortium of SROs.'').
    \232\ The project--currently named ``Markit BOAT''--distributes 
both quotes and trades and is described at http://www.markit.com/information/boat/boat-data.html. It currently charges fees of 120 
euros per month per user for its quote and trade data. See Nasdaq 
Letter at 9 (noting the potential for firms to export Project BOAT 
technology to the United States).
---------------------------------------------------------------------------

    The Commission recognizes that the depth-of-book order data for a 
particular exchange may offer advantages over the alternatives for 
assessing market depth. The relevant issue, however, is whether the 
availability of these alternatives imposes significant competitive 
restraints on an exchange in setting the terms, particularly the fees, 
for distributing its depth-of-book order data. For example, Nasdaq has 
a substantial trading share in Nasdaq-listed stocks, yet only 19,000 
professional users purchase Nasdaq's depth-of-book data product and 
420,000 professional users purchase core data in Nasdaq-listed 
stocks.\233\ A reasonable conclusion to draw from this disparity in the 
number of professional users of consolidated core data and Nasdaq's 
non-core data is that the great majority of professional users either 
believe they do not need Nasdaq's depth-of-book order data or simply do 
not think it is worth $76 per month to them (approximately $3.50 per 
trading day) compared to other sources of information on market depth 
in Nasdaq-listed stocks. The fact that 95% of the professional users of 
core data choose not to purchase the depth-of-book order data of a 
major exchange strongly suggests that no exchange has monopoly pricing 
power for its depth-of-book order data.\234\
---------------------------------------------------------------------------

    \233\ Nasdaq Letter at 6.
    \234\ See id. (``Empirical sales data for Nasdaq TotalView, 
Nasdaq's proprietary depth-of-book data, demonstrate that broker-
dealers do not consider TotalView to be required for compliance with 
Regulation NMS or any other regulation. * * * [O]f the 735 broker-
dealer members that trade Nasdaq securities, only 20 or 2.7 percent 
spend more than $7,000 per month on TotalView users. Nasdaq 
understands that firms with more than 100 TotalView professional 
users generally provide TotalView to only a small fraction of their 
total user populations.'').
---------------------------------------------------------------------------

    In sum, there are a variety of alternative sources of information 
that impose significant competitive pressures on an exchange in setting 
fees for its depth-of-book order data. The Commission believes that the 
availability of these alternatives, as well as NYSE Arca's compelling 
need to attract order flow, imposed significant competitive pressure on 
NYSE Arca to act equitably, fairly, and reasonably in setting the terms 
of the Proposal.
3. Response to Commenters on Competition Issues
    Some commenters suggested that exchanges are not constrained by 
competitive forces in distributing their order data because Exchange 
Act rules require broker-dealers to provide their orders to an 
exchange, and that exchanges therefore enjoy a regulatory 
monopoly.\235\ As discussed above, however, exchanges face fierce 
competition in their efforts to attract order flow. For the great 
majority of orders, Exchange Act rules do not require that they be 
routed to an exchange.\236\ These include all marketable orders and 
most non-marketable orders. With respect to certain types of non-
marketable orders, two Exchange Act rules can require broker-dealers to 
provide such orders to an exchange in certain circumstances, but only 
when the broker-dealer chooses to do business on the exchange. Rule 602 
of Regulation NMS \237\ requires certain broker-dealers, once they have 
chosen to communicate quotations on an exchange, to provide their best 
quotations to the exchange.\238\ Rule 604

[[Page 74786]]

of Regulation NMS \239\ requires market makers and specialists to 
reflect their displayable customer limit orders in their quotations in 
certain circumstances, but provides an exception if the order is 
delivered for display through an exchange or FINRA, or to a non-
exchange ECN that delivers the order for display through an exchange or 
FINRA. Most significantly, while these rules can require certain orders 
to be displayed through an exchange or FINRA, broker-dealers have a 
great deal of flexibility in deciding which exchange or FINRA. As 
discussed above, exchanges compete vigorously to display the non-
marketable orders handled by broker-dealers. No particular exchange has 
a regulatory monopoly to display these orders.\240\
---------------------------------------------------------------------------

    \235\ See, e.g., Bloomberg Letter at 4; Financial Services 
Roundtable Letter at 1; NetCoalition III at 6. Some commenters 
suggested that broker-dealers were required to provide their data to 
exchanges for free and then buy that data back from the exchanges. 
NSX Letter at 1; SIFMA III at 12. A broker-dealer, however, has no 
need to buy back its own data, with which it is already familiar. 
Rather, broker-dealers need to see data submitted by other broker-
dealers and market participants. This need is served by the core 
function of a securities exchange, which is to provide a central 
point for bringing buy and sell orders together, thereby enabling 
the resulting market data to be distributed to all market 
participants. See, e.g., Section 3(a)(1) of the Exchange Act, 15 
U.S.C. 78c(a)(1) (``exchange'' defined as, among other things, 
``facilities for bringing together purchasers and sellers of 
securities'').
    \236\ For example, a broker-dealer commenter asserted that 
exchanges enjoy a ``government-protected monopoly'' as exclusive 
processors of their market information. Schwab Letter at 6; see also 
SIFMA IV at 7 (``Normal market forces cannot be relied upon here 
because of the unique structure of the market for data that the 
exchanges compile from their captive broker-dealer customers and 
then sell back to them.''). As noted in Table 1 above, non-exchange 
trading venues now execute more volume in U.S.-listed equities than 
any single exchange.
    \237\ 17 CFR 242.602 (previously designated as Rule 11Ac1-1).
    \238\ Only broker-dealers that choose to participate on an 
exchange as ``responsible broker-dealers'' are required to provide 
their best bid and best offer to such exchange. Rule 602(b) and Rule 
600(b)(65)(i) of Regulation NMS. Broker-dealers that participate 
only in the over-the-counter (i.e., non-exchange) market as 
responsible broker-dealers are required to provide their quotations 
to FINRA, a not-for-profit membership organization of broker-
dealers. Rule 602(b) and Rule 600(b)(65)(ii) of Regulation NMS.
    \239\ 17 CFR 242.604 (previously designated as Rule 11Ac1-4).
    \240\ One commenter asserted that ``exchanges have government-
granted exclusive access to market data for securities listed in 
their respective markets.'' SIFMA I at 12. In fact, a listing 
exchange does not have any particular privileges over other 
exchanges in attracting quotation and trade data in its listed 
stocks. Rather, other exchanges are free to trade such stocks 
pursuant to unlisted trading privileges, and the listing exchange 
must compete with those exchanges for order flow. If the listing 
exchange is unable to attract order flow, it will not have 
quotations or trades to distribute.
---------------------------------------------------------------------------

    Some commenters asserted that exchanges act as monopolies in 
distributing depth-of-book order data because they are the exclusive 
processors of such data, as defined in section 3(a)(22)(B) of the 
Exchange Act. Many businesses, however, are the exclusive sources of 
their own products, but this exclusivity does not mean that a business 
has monopoly pricing power when selling its product and is impervious 
to competitive pressures. The particular circumstances of the business 
and its product must be examined. As discussed above, the U.S. 
exchanges are subject to significant competitive forces in setting the 
terms for their depth-of-book order products, including the need to 
attract order flow and the availability of alternatives to their depth-
of-book order products. Consequently, NYSE Arca does not have monopoly 
pricing power for ArcaBook data merely because it meets the statutory 
definition of an exclusive processor of the data.\241\
---------------------------------------------------------------------------

    \241\ A straightforward example may help illustrate this point. 
Table 1 shows that there are several exchanges with a very small 
share of trading volume. Such an exchange would meet the statutory 
definition of an exclusive processor, but clearly would be unable to 
exert monopoly pricing power if it attempted to sell its depth-of-
book order data at an unreasonably high price. Accordingly, the 
relevant issue is not whether an exchange falls within the statutory 
definition of an exclusive processor, but whether it is subject to 
significant competitive forces in setting the terms for distribution 
of its depth-of-book data.
---------------------------------------------------------------------------

    Commenters cited a decision of the U.K. competition authorities 
concerning proposed acquisitions of the London Stock Exchange plc 
(``LSE'') for the proposition that an exchange is a monopolist of its 
proprietary market information.\242\ Their reliance on this decision is 
misplaced for two important reasons. First, unlike the U.S. where the 
core data feeds provide an essential source of information for every 
exchange's most valuable data--its best quoted prices and last sale 
information--the LSE's proprietary data is the sole source of 
information for trading on the LSE. As a result, market participants 
have few, if any, useful alternatives for LSE proprietary data. In the 
U.S., in contrast, the availability of an exchange's essential trading 
information in the core data feeds, as well as other valuable 
alternatives, discussed above, for assessing market depth beyond the 
best quoted prices, precludes the U.S. exchanges from exerting monopoly 
power over the distribution of their non-core data. Second, there 
historically has been very little effective competition among markets 
for order flow in the U.K. The U.K. Competition Commission, for 
example, found that the most important competitive constraint on the 
LSE was not the existence of other trading venues with significant 
trading volume in LSE-listed stocks, but rather ``primarily, the threat 
that [other exchanges, including foreign exchanges such as the NYSE and 
Nasdaq] will expand their services and compete directly with LSE.'' 
\243\ In contrast, the U.S. has a national market system for trading 
equities in which competition is provided not merely by the threat of 
other markets attempting to trade an exchange's listed products, but by 
the on-the-ground existence of multiple markets with a significant 
share of trading in such products. These competitors also distribute 
depth-of-book order products with substantial liquidity in the same 
stocks included in an exchange's depth-of-book product. In sum, the 
competitive forces facing NYSE Arca in its distribution of ArcaBook 
data were entirely inapplicable to the LSE in its distribution of 
proprietary data in 2005.
---------------------------------------------------------------------------

    \242\ NetCoalition IV at 9; SIFMA V at 8.
    \243\ U.K. Competition Commission, A Report on the Proposed 
Acquisition of London Stock Exchange plc by Deutsche Borse AG or 
Euronext NV (November 2005), at 57 (emphasis added). The intensity 
of competition among markets trading the same products in Europe 
could increase substantially in the wake of the implementation of 
MiFID in November 2007.
---------------------------------------------------------------------------

    In addition, the existence of significant competitive forces 
applicable to NYSE Arca renders inapposite the citations of commenters 
to statements in Exchange Act legislative history and Commission 
releases regarding monopoly data distribution. Such statements were 
made in the context of the central processors of core data for the 
Networks, which in fact have monopoly pricing power for such mandated 
data. Central processors of core data therefore are in a very different 
economic and legal position than NYSE Arca as exclusive processor for 
its depth-of-book order data.\244\
---------------------------------------------------------------------------

    \244\ One commenter cited two papers for the claim that 
exchanges have government-conferred monopolies over the collection 
and distribution of trading data. NetCoalition IV at 9-10 (citing 
Wilkie Farr & Gallagher, counsel to Bloomberg L.P., ``Discussion 
Paper: Competition, Transparency, and Equal Access to Financial 
Market Data'' (September 24, 2002) (submitted by Bloomberg L.P. in 
consultation with George A. Hay and Erik R. Sirri); Erik R. Sirri, 
``What glory price? Institutional form and the changing nature of 
equity trading'' (Federal Reserve Bank of Atlanta 2000 Financial 
Markets Conference on e-Finance, October 15-17). Dr. Sirri currently 
is Director of the Commission's Division of Trading and Markets. The 
papers were prepared when he was not a member of the Commission's 
staff. As discussed at length above, the commenter's claim that 
exchanges have a monopoly over the collection and distribution of 
trading data confuses core data, which Commission rules require to 
be collected by a central processor pursuant to the joint-industry 
Plans, and non-core data, which the individual exchanges must 
compete to attract from market participants. Indeed, the major 
shifts in order flow among exchanges and other trading venues in the 
years since the papers were written in 2000 and 2002 amply 
demonstrate that no exchange has a monopoly over the collection of 
orders displayed in the exchanges' depth-of-book data feeds. As 
noted above (text accompanying note 207), for example, the NYSE's 
market share in its listed stocks has declined from 79.1% in January 
2005 to 30.6% in June 2008. For these reasons and those explained in 
the text, the two papers are outdated. Neither the NYSE, nor any 
other exchange, currently has a monopoly over the collection and 
distribution of depth-of-book order data in its listed stocks.
---------------------------------------------------------------------------

    For example, commenters cited a passage from the legislative 
history of the 1975 amendments to the Exchange Act for the proposition 
that any exclusive processor must be considered a monopoly, but this 
passage applies only to the central processors of consolidated core 
data that Rule 603(b) requires to be consolidated:

    Despite the diversity of views with respect to the practical 
details of a national market system, all current proposals appear to 
assume there will be an exclusive processor or service bureau to 
which the exchanges and the NASD will transmit data and which in 
turn will make transactions and quotation information available to 
vendors of such information. Under the composite tape ``plan'' 
declared effective by the Commission, SIAC would serve as this 
exclusive

[[Page 74787]]

processor. The Committee believes that if such a central facility is 
to be utilized, the importance of the manner of its regulation 
cannot be overestimated. * * * The Committee believes that if 
economics and sound regulation dictate the establishment of an 
exclusive central processor for the composite tape or any other 
element of the national market system, provision must be made to 
insure that this central processor is not under the control or 
domination of any particular market center. Any exclusive processor 
is, in effect, a public utility, and thus it must function in a 
manner which is absolutely neutral with respect to all market 
centers, all market makers, and all private firms. Although the 
existence of a monopolistic processing facility would not 
necessarily raise antitrust problems, serious antitrust questions 
would be posed if access to this facility and its services were not 
available on reasonable and nondiscriminatory terms to all in the 
trade or its charges were not reasonable.\245\
---------------------------------------------------------------------------

    \245\ Senate Report at 11-12 (emphasis added).

    These Congressional concerns apply to a central processor that has 
no competitors in the distribution of data that must be consolidated 
from all the markets. They do not apply to the independent distribution 
of non-core data by an individual exchange that is subject to 
significant competitive forces.
    Commenters on the Draft Order questioned whether its reliance on 
competitive forces is consistent with Exchange Act legal 
standards.\246\ Their discussion, however, appears to conflate: (1) The 
factual issue of whether competitive forces significantly constrain the 
exchanges in setting the terms for their non-core data; with (2) the 
legal issue of whether, if such competitive forces exist, the 
Commission is authorized to consider those forces in determining 
whether an exchange proposal meets the applicable Exchange Act 
standards. If an exchange could, in fact, exert monopoly power over its 
pricing of non-core data, it obviously would be inappropriate for the 
Commission to rely on non-existent competitive forces as a basis for 
approving an exchange proposal. If significant competitive forces do 
apply to an exchange, the Commission believes that considering them in 
its review is fully consistent with its regulatory responsibilities.
---------------------------------------------------------------------------

    \246\ NetCoalition V at 7-18; SIFMA IX at 8-20.
---------------------------------------------------------------------------

    For example, the Commission does not agree with commenters' 
argument that the phrase ``fair and reasonable'' in the Exchange Act 
requires the Commission always to undertake a cost-based review of 
proposed exchange fees because it uses such an approach when applying 
the fair and reasonable standard in other circumstances.\247\ Applying 
the abstract standard ``fair and reasonable'' to a specific proposal 
necessitates the use of factors that are appropriate to the 
circumstances. In assessing the fairness and reasonableness of a price, 
courts have emphasized that the existence of competitive forces is a 
particularly appropriate factor.\248\
---------------------------------------------------------------------------

    \247\ NetCoalition V at 15-18; SIFMA IX at 12-13.
    \248\ See, e.g., Morgan Stanley Capital Group, Inc. v. Public 
Utility Dist. No. 1, 554 U.S. ----, 128 S.Ct. 2733, 2738 (2008) 
(``The statutory requirement that rates be `just and reasonable' is 
obviously incapable of precise judicial definition, and we afford 
great deference to the Commission in its rate decisions. We have 
repeatedly emphasized that the Commission is not bound to any one 
ratemaking formula.'') (citations omitted); Elizabethtown Gas Co. v. 
FERC, 10 F.3d 866, 870 (D.C. Cir. 1993) (``[T]he Supreme Court `has 
repeatedly held that the just and reasonable standard does not 
compel the Commission to use any single pricing formula * * *,'' and 
we have indicated that when there is a competitive market FERC may 
rely upon market-based prices in lieu of cost-of-service regulation 
to assure a `just and reasonable' result.'') (citations omitted).
---------------------------------------------------------------------------

    In addition, commenters on the Draft Order asserted that it 
improperly relied on competition to the exclusion of all others 
factors.\249\ In fact, the Commission considered several factors. The 
first step of the market-based approach to non-core data proposals 
examines competitive factors to determine whether there is a 
substantial basis to believe that a proposed fee meets the applicable 
Exchange Act standards. In the second step, the Commission will 
evaluate whether there nevertheless is a substantial countervailing 
basis to find that a proposal is inconsistent with the Exchange Act, 
including the unfair discrimination concerns raised by a 
commenter.\250\
---------------------------------------------------------------------------

    \249\ NetCoalition V at 8-9; SIFMA IX at 10-11.
    \250\ SIFMA IX at 11.
---------------------------------------------------------------------------

    Commenters also cited a passage from the Commission's Market 
Information Concept Release for the proposition that an exchange must 
submit cost data to justify a proposed fee for the exchange's depth-of-
book order data.\251\ The Release stated that ``the total amount of 
market information revenues should remain reasonably related to the 
cost of market information.'' \252\ The Market Information Concept 
Release, however, was published in 1999, prior to the start of decimal 
trading and to the increased usefulness of non-core data distributed 
outside the Networks. The Market Information Concept Release in 
general, and the cited statement in particular, solely addressed a 
central exclusive processor that has no competitors in distributing 
consolidated core data to the public pursuant to the Plans.\253\
---------------------------------------------------------------------------

    \251\ See section III.A.2 above. As noted in section III.A.7 
above, commenters recommended a variety of market data regulatory 
solutions, in addition to a cost-based justification of fees. One 
was a regulatory mandate that exchanges place their market data 
operations in separate subsidiaries and provide their data to third 
parties on the same terms they make the data available to the 
subsidiary. Given its determination that NYSE Arca was subject to 
significant competitive forces in setting the terms of the Proposal, 
the Commission does not believe this regulatory mandate is necessary 
or appropriate. It also notes that the recommendation alone would 
not address the potential problem of an exchange's unreasonably high 
fees under the per device fee structure that is used throughout the 
exchange industry. For example, the proposed fees for ArcaBook data 
would be levied based on the number of professional and non-
professional subscribers who receive the data on their devices. 
Regardless of whether subscribers obtained their data from an 
exchange subsidiary or another competing vendor, the exchange would 
receive the same total amount of fees based on the total number of 
subscribers who chose to receive the data. From the standpoint of 
maximizing its revenues from per device fees, the exchange likely 
would be indifferent to whether subscribers purchased through its 
subsidiary or elsewhere. It therefore would be willing to make the 
data available to its subsidiary for the same per device fees that 
it made the data available to third parties. Moreover, to the extent 
that an exchange would want to benefit a subsidiary that it was 
required to create to act as a vendor of market data, that 
requirement need not cause the exchange to charge lower fees. 
Instead, it could create conflicts of interest under which the 
exchange would have incentives to favor the subsidiary over other 
vendors in ways that might be difficult to monitor effectively. 
Under its proposal, NYSE Arca will make the ArcaBook data available 
to vendors on a non-discriminatory basis. For the same reason that 
NYSE Arca's proposed fees for the ArcaBook data are not unreasonably 
high--the competitiveness of the market for that data--other 
potential problems cited by commenters as arising in a non-
competitive environment are not an obstacle to approval of the NYSE 
Arca proposal under the relevant Exchange Act provisions and rules.
    \252\ 64 FR at 70627.
    \253\ See, e.g., 64 FR at 70615 (``These [joint-SRO] plans 
govern all aspects of the arrangements for disseminating market 
information. * * * The plans also govern two of the most important 
rights of ownership of the information--the fees that can be charged 
and the distribution of revenues derived from those fees. As a 
consequence, no single market can be said to fully `own' the stream 
of consolidated information that is made available to the public. 
Although markets and others may assert a proprietary interest in the 
information that they contribute to the stream, the practical effect 
of comprehensive federal regulation of market information is that 
proprietary interests in this information are subordinated to the 
Exchange Act's objectives for a national market system.'')
---------------------------------------------------------------------------

    Moreover, the Commission did not propose, much less adopt, a 
``strictly cost-of-service (or `ratemaking') approach to its review of 
market information fees in every case,'' noting that ``[s]uch an 
inflexible standard, although unavoidable in some contexts, can entail 
severe practical difficulties.'' \254\ Rather, the Commission

[[Page 74788]]

concluded that ``Congress, consistent with its approach to the national 
market system in general, granted the Commission some flexibility in 
evaluating the fairness and reasonableness of market information 
fees.'' \255\
---------------------------------------------------------------------------

    \254\ 64 FR at 70619. In the Market Information Concept Release, 
the Commission discussed the one context in which it had previously 
adopted a strict cost-of-service standard for market data fees--a 
denial of access proceeding involving the NASD and Instinet. See 
supra, note 47. It emphasized, however, that the scope of its 
decision was limited to the ``particular competitive situation 
presented in the proceedings.'' 64 FR at 70622-70623. Specifically, 
the NASD essentially had sought to charge a retail rate for a 
wholesale product that would have severely curtailed the opportunity 
for a data vendor like Instinet to compete with the NASD in the 
retail market. The practical difficulties of implementing the strict 
cost-of-service approach were amply demonstrated by the long and 
difficult history of the attempt to determine the NASD's cost of 
producing the data. See 64 FR at 70623.
    \255\ Id. at 70619. Commenters also pointed to Commission and 
staff statements about costs in the context of the entry of an 
exchange as a new participant in one of the Plans. NetCoalition IV 
at 12-14; SIFMA V at 9-10. Again, competitive forces are not 
operative in this context because Rule 603(b) requires an exchange 
to join the Plans and disseminate its best quotations and trades 
through a central processor in the core data feeds. A cost-based 
analysis is necessary in this context, not because it is universally 
required by the Exchange Act to determine fair and reasonable fees, 
but because the absence of competitive forces impels the use of a 
regulatory alternative.
---------------------------------------------------------------------------

    Some commenters suggested that depth-of-book order data has become 
so important since the initiation of decimal trading that broker-
dealers now are effectively required to purchase the exchanges' depth-
of-book data products.\256\ No regulatory requirement, however, compels 
broker-dealers to purchase an exchange's depth-of-book order data. As 
discussed above, only core data is necessary for broker-dealers to 
comply with the consolidated display requirements of Rule 603(c) of 
Regulation NMS.\257\ In addition, only core data is necessary to comply 
with the trade-through requirements of Rule 611 of Regulation NMS.\258\
---------------------------------------------------------------------------

    \256\ See section III.A.4 above. Commenters cited a passage from 
the Regulation NMS Release for the proposition that exchanges could 
exert market power when distributing non-core data. NetCoalition III 
at 6; SIFMA V at 11-12. The concern mentioned in the Regulation NMS 
Release, however, explicitly applied only to the ``best quotations 
and trades'' of an SRO--i.e., an SRO's core data--and not to non-
core data.
    \257\ Note 183 above and accompanying text. Rule 603(c) requires 
broker-dealers and vendors, in certain trading and order-routing 
contexts, to provide a consolidated display of the national best bid 
and offer and the most recent last sale report. All of this 
information is included in the core data feeds.
    \258\ Note 185 above and accompanying text. When it adopted 
RegulationNMS, the Commission declined to adopt a proposal that 
would have extended trade-through protection to depth-of-book 
quotations if the market displaying such quotations voluntarily 
disseminated them in the consolidated core quotation stream. 
Regulation NMS Release, 70 FR at 37529.
---------------------------------------------------------------------------

    Commenters also asserted that an exchange's depth-of-book order 
data may be necessary for a broker-dealer to meet its duty of best 
execution to its customers.\259\ The Commission believes, however, that 
broker-dealers are not required to obtain depth-of-book order data, 
including the NYSE Arca data, to meet their duty of best execution. For 
example, a broker-dealer can satisfy this duty ``to seek the most 
favorable terms reasonably available under the circumstances for a 
customer's transaction'' \260\ by, among other things, reviewing 
executions obtained from routing orders to a market. Under established 
principles of best execution, a broker-dealer is entitled to consider 
the cost and difficulty of trading in a particular market, including 
the costs and difficulty of assessing the liquidity available in that 
market, in determining whether the prices or other benefits offered by 
that market are reasonably available.\261\ Although the Commission has 
urged broker-dealers to ``evaluate carefully'' the different options 
for execution, we have acknowledged that cost considerations are 
legitimate constraints on what a broker-dealer must do to obtain best 
execution.\262\ In order to ``evaluate carefully'' execution options, a 
broker-dealer need not purchase all available market data. The 
Commission does not view obtaining depth-of-book data as a necessary 
prerequisite to broker-dealers' satisfying the duty of best 
execution.\263\
---------------------------------------------------------------------------

    \259\ See note 60 above and accompanying text.
    \260\ See Securities Exchange Act Release No. 37619A (Sept. 6, 
1996), 61 FR 48290, 48322 (Sept. 12, 1996) (``Order Handling Rules 
Release'').
    \261\ See Order Handling Rules Release, 61 FR at 48323 
(acknowledging that, consistent with best execution, broker-dealers 
may take into account cost and feasibility of accessing markets and 
their price information); Regulation NMS Release, 70 FR at 37538 n. 
341 (noting that the ``cost and difficulty of executing an order in 
particular market'' is a relevant factor in making a best execution 
determination). NYSE Arca and Nasdaq also stated their view that 
depth-of-book order products are not required for best execution 
purposes. NYSE Arca Response III at 18; Nasdaq Letter at 5-6.
    \262\ Order Execution Obligations, Proposing Release, Securities 
ExchangeAct Release No. 36310 (Sept. 29, 1995), 60 FR 52792 at 52794 
(Oct. 10, 1995) (``While not all markets and trading systems are 
equally accessible to large and small broker-dealers, and not all 
order handling technologies are equally affordable to all broker-
dealers, when efficient and cost-effective systems are readily 
accessible, broker-dealers must evaluate carefully whether they can 
be used in fulfilling their duty of best execution.'').
    \263\ Some broker-dealers may conclude that, as a business 
matter to attractcustomers and generate commissions, they should 
obtain depth-of-book order data from one or more exchanges to inform 
their order-routing and pricing decisions. As with any other 
business decision, if the costs of obtaining the market data 
outweigh the benefits, broker-dealers will not buy it. This will put 
pressure on the exchange selling the data to lower the price that it 
charges. If, however, such firms believed that an exchange's depth-
of-book order product is overpriced for certain business purposes, 
they could limit their use of the product to other contexts, such as 
``black-box'' order routing systems and a block trading desk, where 
the depth-of-book data feed is most directly used to assess market 
depth. The firm would not display the data widely throughout the 
firm as a means to minimize the fees that must be paid for the data. 
This limited use of the data would drastically reduce the revenues 
that an exchange might have sought to obtain by charging a high fee 
and therefore be self-defeating for the exchange. In sum, exchanges 
will be subject to competitive pressures to price their depth-of-
book order data in a way that will promote wider distribution and 
greater total revenues.
---------------------------------------------------------------------------

    Commenters on the Draft Order questioned whether it lowered the 
standard of best execution and whether its reasoning would be accepted 
in other legal contexts,\264\ but the commenters cited no legal 
authority to support their concerns. Moreover, contrary to the claim 
that ``ascertaining the total price of an average retail trade requires 
depth of book data,'' \265\ the inferior prices in depth-of-book data 
provide a poor basis to assess the quality of execution of retail 
orders. As discussed below, the availability of substantial undisplayed 
liquidity enables such orders to be executed on average at prices 
better than even the best displayed quotes in core data.\266\ In sum, 
the Commission has not lowered the standard of best execution by 
recognizing that there are reasonable tools other than depth-of-book 
data to obtain high-quality executions of customer orders.
---------------------------------------------------------------------------

    \264\ NetCoalition V at 7; SIFMA IX at 19-20.
    \265\ NetCoalition V at 7 (emphasis in original).
    \266\ The execution quality of retail orders is discussed below 
at notes 306-308 and accompanying text.
---------------------------------------------------------------------------

4. Response to Economic Assessments of the Draft Order
    Three commenters submitted economic assessments (with supplements) 
of the Draft Order. The Ordover/Bamberger Statement agreed with the 
Draft Order's conclusion that NYSE Arca was subject to significant 
competitive forces that constrained its pricing of the ArcaBook data. 
It noted that ``if competition is effective, regulation is not only not 
needed, but can distort the operations of the market and lead to 
unforeseen and unintended consequences that can harm the trading 
public.'' \267\
---------------------------------------------------------------------------

    \267\ Ordover/Bamberger Statement at 2.
---------------------------------------------------------------------------

    In contrast, the SLCG Study and the Evans Report disputed the Draft 
Order's conclusion that NYSE Arca was subject to significant 
competitive forces. As discussed below, the Commission has reviewed 
their data and analysis and does not find them persuasive for three 
broad reasons:
    (1) Although the two assessments purport to accept that exchanges 
must compete to attract order flow, their theoretical attempts to wall 
off this order flow competition from data

[[Page 74789]]

competition are unconvincing--the two market forces are integrally 
linked in the real world of exchange competition;
    (2) In rejecting all potential substitutes for an exchange's depth-
of-book data, the two economic assessments focus narrowly on whether 
alternatives replicate the exchange's specific data and thereby miss 
the critically important bigger picture of whether such data is in fact 
necessary for traders effectively to assess the available liquidity in 
a stock; and
    (3) The two economic assessments fail to recognize the important 
ways in which the Exchange Act regulatory structure effectively 
promotes market data competition, yet suggest regulatory alternatives 
that would be costly and difficult to implement and still would offer 
less reason to expect an efficient outcome than relying primarily on 
the current level of competitive forces.
a. Order Flow and Market Data Competition
    Both economic assessments purport to accept the existence of 
competition for order flow among exchanges and other trading 
venues.\268\ They take different approaches, however, in attempting to 
explain why this competition for order flow does not impose significant 
constraints on the exchanges in setting the terms for their depth-of-
book data.
---------------------------------------------------------------------------

    \268\ SLCG Study at 2; Evans Report at 2.
---------------------------------------------------------------------------

    In its analysis of the ``supply-side conditions'' of market data, 
the SLCG Study says that it will explain ``why fierce competition among 
exchanges is not likely to result in competitively priced exclusive 
data when significant `network externalities'' are present in the 
market for order flow.'' \269\ Its analysis is unpersuasive for two 
primary reasons. First, if network externalities are truly operative in 
the market for order flow, they should impede competition for order 
flow. For example, the SLCG Study notes that ``[a]t the individual 
security level, the order flow externality makes it highly likely that 
a dominant liquidity-providing market center will emerge.'' \270\ The 
SLCG Study does not explain, however, how network externalities could 
operate in the market for order flow, impede competition for market 
data, but not impede fierce competition for order flow. If there is 
competition for order flow, there necessarily will be competition for 
the supply of market data because order flow creates the very data to 
be supplied, and vice versa. The defect of the SLCG analysis highlights 
the difficulty of separating two aspects of exchange competition that 
are integrally linked.
---------------------------------------------------------------------------

    \269\ SLCG Study at 2.
    \270\ SLCG Study at 3.
---------------------------------------------------------------------------

    Second, the SLCG Study attempts to show that NYSE Euronext and 
Nasdaq dominate trading in, respectively, NYSE-listed stocks and 
Nasdaq-listed stocks by offering Herfindahl Index statistics on market 
concentration. Based on these statistics, the SLCG Study concludes that 
``trading is highly concentrated and that the listing exchange is the 
dominant exchange.'' \271\
---------------------------------------------------------------------------

    \271\ SLCG Study at 10.
---------------------------------------------------------------------------

    This conclusion badly misuses the Herfindahl Index. In particular, 
a ``concentrated'' market as measured by the Herfindahl Index does not 
mean there is an absence of competition in the market. Rather, the U.S. 
Department of Justice (``DOJ'') uses the Index to assess whether the 
existing competition in a market would be substantially lessened by a 
proposed merger.\272\ In this case, the SLCG Study's misuse of the 
Herfindahl Index is quite apparent, given that the DOJ specifically 
found that the U.S. equity markets were competitive in November 2005 
when it investigated the merger of NYSE and Archipelago Holdings and 
the merger of Nasdaq and Instinet Group Inc.\273\ The DOJ concluded 
that neither merger would be ``likely to reduce competition 
substantially'' because the ``planned and likely entry of several firms 
* * * should result in additional viable alternatives to the two merged 
firms sufficient to ensure that the markets remain competitive.'' \274\
---------------------------------------------------------------------------

    \272\ DOJ Merger Guidelines Sec.  0.1 (``The Guidelines 
aredesigned primarily to articulate the analytical framework the 
Agency applies in determining whether a merger is likely 
substantially to lessen competition, not to describe how the Agency 
will conduct the litigation of cases that it decides to bring.'').
    \273\ U.S. Department of Justice, Press Release No. 05-616, 
``Department of Justice Antitrust Division Statement on the Closings 
of Its Two Stock Exchange Investigations'' (Nov. 16, 2005) 
(available at http://www.usdoj.gov/opa/pr/2005/November/05_at_616.html).
    \274\ See also Comments of the United States Department of 
Justice, Review of the Regulatory Structure Associated with 
Financial Institutions, Section III.C. (Jan. 31, 2008) (available at 
http://www.usdoj.gov/atr/public/comments/229911.htm) (``This 
structure [of the equity markets]--and its regulatory overlay--
permits multiple exchanges and electronic trading venues to offer 
the same or equivalent instruments. There is significant competition 
among multiple equity trading venues, with low execution fees, 
narrow spreads, and widespread system innovation--all to the benefit 
of consumers.''); Nasdaq III at 3.
---------------------------------------------------------------------------

    Level of concentration alone does not reliably indicate the level 
of competition in an industry. It is only one of a series of indicators 
that may be used when analyzing competition and is a more appropriate 
metric in some industries than others. In particular, industry 
concentration is a more relevant measure of competitiveness in markets 
where barriers to entry enable large firms to increase equilibrium 
prices by restricting the quantity supplied.\275\ As the last three 
years have shown, new competitors in the U.S. equity markets have 
captured significant trading volume and have imposed strong competitive 
pressure on the primary listing exchanges. Indeed, the NYSE--the 
exchange with the highest market share in its listed stocks in November 
2005--has seen its share of trading in those stocks drop from 79.1% to 
30.6%.\276\ This is hardly evidence of network externalities that ``are 
such powerful forces that listing exchanges are able to survive as 
natural monopolies.'' \277\
---------------------------------------------------------------------------

    \275\ See, e.g., Jean Tirole, The Theory of 
IndustrialOrganization 209-221 (1998).
    \276\ See note 207 above and accompanying text. The SLCG Study 
and Evans Report asserted that the Draft Order failed to consider 
the effect of competition at the individual stock level, noting, for 
example, that Nasdaq's market share in Nasdaq-listed stocks is 
higher than for other stocks. SLCG Study at 11; Evans Report at 7. 
The Draft Order did, in fact, consider the market share of NYSE Arca 
in various categories of stocks, as well as the NYSE in NYSE-listed 
stocks. See 73 FR at 32673. Moreover, as noted in Table 1 above, no 
exchange (or even NYSE and NYSE Arca combined) currently executes 
more than 45% of the volume in its listed stocks. The relatively 
small variations in market share across different stocks are 
consistent with the Commission's finding that the exchanges are 
subject to significant competitive forces, particularly given the 
ready portability of order flow from one exchange to another (as 
well evidenced by the decline in the NYSE's market share in its 
listed stocks). Any attempt by an exchange to capitalize on its 
market share in one stock or group of stocks by acting unreasonably 
with respect to its customers is likely to drive that order flow 
away and soon end whatever ``dominance'' the exchange once had.
    \277\ SLCG Study at 19. See Ordover/Bamberger Statement at 15 
(``HHI analysis can be unreliable when the shares of firms in the 
market can change rapidly (i.e., competition can be vigorous and 
intense even in markets in which measured HHI is high if firms can 
rapidly gain or lose share.'').
---------------------------------------------------------------------------

    The U.S. equity markets are characterized by other key features 
that contribute to a competitive outcome regardless of concentration 
levels. One is the ability of firms quickly to expand their order and 
trade processing capacity. As a result, capacity constraints play at 
best a minor role in the way that firms compete for order flow, and 
competition is driven primarily by pricing strategies rather than 
quantity choice. A well established principle of industrial 
organization literature is that industries in which price is the main 
strategic choice show more competitive outcomes.\278\ Another 
characteristic of the U.S. equity markets that promotes competition is 
low

[[Page 74790]]

switching costs.\279\ Market participants can easily switch their order 
flow from one market to another. Indeed, they can participate in many 
markets at the same time and simultaneously offer and take liquidity 
from multiple limit order books. Finally, promoting competition is an 
integral element of the regulatory structure of the U.S. equity 
markets. The Commission has adopted numerous regulations over the past 
decade, including Regulation ATS, the Order Handling Rules, and 
Regulation NMS, that have enabled smaller markets to compete with 
larger markets and made it much more difficult for large exchanges to 
retain market share should they attempt to exert market power. In sum, 
the U.S. equity markets have the hallmarks of an industry in which 
concentration is not a very informative measure of the level of 
competition.
---------------------------------------------------------------------------

    \278\ See, e.g., Tirole, note 275 above, at 307-314.
    \279\ See, e.g., Paul Klemperer, ``Markets withConsumer 
Switching Costs,'' Q.J. Econ. 375-394 (1987).
---------------------------------------------------------------------------

    The calculations in the SLCG Study also grossly overstate the level 
of concentration in the U.S. equity markets. First, for Nasdaq, the 
SLCG Study combines the volume of trades actually executed by Nasdaq--
its ``matched'' volume--with volume that is executed by non-exchange 
trading venues and merely reported to the joint FINRA/Nasdaq TRF. The 
non-exchange trades do not reflect liquidity in Nasdaq or in its depth-
of-book data. In June 2008, for example, Nasdaq reported 42.7% matched 
volume in Nasdaq-listed stocks, while the Nasdaq/FINRA TRF reported 
23.3% volume in Nasdaq-listed stocks.\280\ The SLCG Study thereby 
erroneously inflated Nasdaq's market share by more than 50%.
---------------------------------------------------------------------------

    \280\ Source: http://www.nasdaqtrader.com. See also Nasdaq III 
at 1-2. SLCG II notes that Nasdaq itself defines ``total market 
share'' to include TRF trades. SLCG II at 4. Nasdaq's Form 10-K, 
however, specifically distinguishes between ``matched market share'' 
and ``total market share'' and defines matched market share to 
include only transactions that are executed on Nasdaq's systems. See 
Nasdaq, Form 10-K for period ending December 31, 2007 (filed 
February 25, 2008), at 44-45. Transactions executed by entities 
other than Nasdaq and merely reported to the joint FINRA/Nasdaq TRF 
are irrelevant when assessing Nasdaq's share of liquidity.
---------------------------------------------------------------------------

    Second, the SLCG statistics combine volume for NYSE and NYSE Arca, 
even though they operate separate liquidity pools. As discussed 
below,\281\ the Exchange Act precludes anti-competitive tying of the 
liquidity pools of separately registered national securities exchanges 
even if they are under common control. Accordingly, their separate 
liquidity pools eliminate any network externalities between NYSE and 
NYSE Arca and undercut much of the SLCG analysis of market 
concentration. The SLCG Study does not address how network 
externalities could apply across separate, untied, liquidity pools.
---------------------------------------------------------------------------

    \281\ Note 309 below and accompanying text.
---------------------------------------------------------------------------

    Even if the reported market shares of NYSE and NYSE Arca are 
combined, however, it would not change the Commission's conclusion that 
NYSE Arca faced significant competitive forces in setting the terms for 
the ArcaBook data. The combined market share of NYSE and NYSE Arca in 
NYSE-listed stocks in June 2008 was 44.6%, down from 53.6% in December 
2007, and comparable to the 42.7% market share of Nasdaq in Nasdaq-
listed stocks in June 2008.\282\
---------------------------------------------------------------------------

    \282\ See Table 1, note 210 above and accompanying text.
---------------------------------------------------------------------------

    The third problem with the SLCG Study's calculation of market 
concentration is that it fails to examine the quotes of venues other 
than NYSE, NYSE Arca, and Nasdaq when measuring displayed liquidity--
particularly the quotes of BATS and Direct Edge, which are the fourth 
and fifth largest equity trading centers in the U.S. Both ECNs display 
their best quotes in the core data feeds through either the 
International Securities Exchange (``ISE'') or National Stock Exchange 
(``NSX'') and offer their depth-of-book data directly to customers 
without charge. BATS also makes depth-of-book data available to the 
public without charge on its Internet Web site.
    The displayed liquidity of venues other than the primary listing 
exchanges is quite substantial, resulting in displayed liquidity 
concentration that is much less than reported trading volume 
concentration. For example, on July 31, 2008, the best displayed 
quotations in the core data feeds for the six stocks analyzed in the 
SLCG Report were as follows: \283\
---------------------------------------------------------------------------

    \283\ Source: ArcaVision (available at http://www.arcavision.com). The data combines bids and offers to determine 
size and percentage of time at the NBBO. For example, if an exchange 
always quoted at both the national best bid and the national best 
offer for 500 shares, its size would be 1000 shares and its 
percentage would be 100.

                                Table 2--Exchange Quotation Comparison Share Size
                                            [Percent of time at NBBO]
----------------------------------------------------------------------------------------------------------------
                                         NYSE      NYSE Arca         Nasdaq           ISE             NSX
----------------------------------------------------------------------------------------------------------------
C..................................  2,199 (81%)  5,933 (89%)        8,069 (93%)  4,821 (88%)        3,948 (72%)
GE.................................  2,848 (87%)  5,728 (92%)        8,594 (95%)  4,829 (91%)        3,199 (85%)
XOM................................    883 (49%)    606 (77%)          941 (75%)    470 (63%)          576 (22%)
AAPL...............................           NA    250 (52%)          307 (57%)   473 (0.4%)          332 (63%)
GOOG...............................           NA    212 (46%)          194 (48%)   127 (0.1%)          202 (49%)
MSFT...............................           NA  8,149 (95%)       18,311 (97%)   3,848 (8%)       10,822 (95%)
----------------------------------------------------------------------------------------------------------------

    The liquidity offered by the ECNs also is substantial at their 
depth-of-book prices outside the best prices that are included in the 
core data feeds. For example, snapshots of BATS depth-of-book data on 
July 31, 2008 reflect the following liquidity available at its best 
prices and within four cents away from its best prices: \284\
---------------------------------------------------------------------------

    \284\ Source: BATS (snapshots taken from http://www.batstrading.com at approximately 11:53 a.m. on July 31, 2008).

            Table 3--BATS Order Book Liquidity, July 31, 2008
------------------------------------------------------------------------
                                                                Shares
                                                 Shares at   within four
                                                best prices     cents
------------------------------------------------------------------------
C.............................................       12,950       39,036
GE............................................        8,438       37,176
XOM...........................................          800        1,500
AAPL..........................................          400        2,100
GOOG..........................................          300            0
MSFT..........................................       16,200       60,876
------------------------------------------------------------------------

    The SLCG Study erroneously calculated the concentration of 
displayed liquidity by extrapolating from the reported trading volume 
of BATS and Direct Edge rather than directly examining their quoted 
liquidity.\285\ It thereby missed an

[[Page 74791]]

essential aspect of assessing liquidity in the current equity markets.
---------------------------------------------------------------------------

    \285\ SLCG Study at 46. The SLCG Study also measured all 
liquidity between the reported high and low price for the trading 
day (id. at 43), which at any particular time will include liquidity 
far away from the inside prices that is of little value to traders.
---------------------------------------------------------------------------

    For its part, the Evans Report recognizes the exceptionally strong 
competition for order flow that characterizes the U.S. equities 
markets. Indeed, it describes the ongoing price war in transaction fees 
and rebates among equity trading centers in their efforts to attract 
order flow. The Evans Report concludes, however, that exchanges are 
impervious to their compelling need to attract order flow when it comes 
to setting the terms for their depth-of-book order data. It finds that 
the relationship between order flow competition and depth-of-book data 
``is neither strong nor direct.'' \286\
---------------------------------------------------------------------------

    \286\ Evans Report at 13. One commenter asserted that exchanges 
do not have an incentive to keep market data fees low because they 
rebate market data fees to attract order flow. STA Letter at 3; see 
also Evans II at 12. Exchange rebates of market data fees, however, 
relate to core data fees, not to the non-core data fees that are the 
subject of this filing. Moreover, the exchange rebates of core data 
fees apply primarily to trades that are reported to one of the trade 
reporting facilities jointly operated by FINRA and different 
exchanges. These trades are executed in the OTC market, not on the 
exchanges. The exchanges compete to attract reports of these trades 
by rebating core market data revenues to the entity that actually 
executed the trade. Consequently, the market data fee rebates result 
in revenues flowing through the exchanges to the OTC entities that 
provided the price discovery.
---------------------------------------------------------------------------

    To support this conclusion, the Evans Report asserts that 
transaction fees and rebates are directly related to order flow 
competition, while data fees are not.\287\ As noted in the Draft Order, 
however, the Exchange Act precludes exchanges from adopting terms for 
data distribution that unfairly discriminate by favoring participants 
in an exchange's market or penalizing participants in other 
markets.\288\ Accordingly, the fact that exchanges do not directly link 
their data fees to order flow providers sheds no light on whether order 
flow and market data competition are related.
---------------------------------------------------------------------------

    \287\ Evans Report at 15-16.
    \288\ 73 FR at 32762, 32768. See also Ordover/Bamberger 
Statement at 17 (``The Commission's proscription of `discriminatory' 
fees for market data would constrain any attempt by NYSE Arca or 
Nasdaq to price discriminate between different types of customers 
(i.e., charge higher prices to customers with relatively inelastic 
demand for non-core data.'').
---------------------------------------------------------------------------

    The direct connection between order flow and data competition is 
based on ``but-for'' causation--if an exchange does not compete 
successfully for order flow from its customers (in part with market 
data), it will not generate transactions (or transaction fees) and will 
have no market data to sell. The two types of competition therefore are 
integrally connected in the dynamic process of operating a securities 
exchange. This connection pressures exchanges not to take any action 
with respect to market data that might jeopardize its position in the 
competition for order flow. To do otherwise would jeopardize the 
exchange's own lifeline.
    Charging unreasonably high fees for depth-of-book data would 
jeopardize an exchange's order flow in two respects. First, wide 
dissemination of an exchange's data is an important tool to attract 
order flow.\289\ The Draft Order cited the instructive real-world 
example when Island ECN stopped displaying its order book and promptly 
lost 50% of its market share.\290\ The Evans Report concedes that ``a 
viable trading venue must make some of its market data available,'' 
\291\ but nevertheless asserts that this competitive force does not 
affect the terms on which an exchange must make data available to its 
customers. An exchange competing to attract customers is unlikely to be 
as sanguine about the effects of an attempt to charge these customers 
unreasonably high fees for its data.\292\
---------------------------------------------------------------------------

    \289\ See Thomson Reuters Letter at 3 (``Given the competitive 
market for order flow and trade execution, we agree that `an 
exchange generally will have strong competitive reasons to price its 
depth-of-book order data so that it will be distributed widely to 
those most likely to use it to trade.' '') (quoting Draft Order).
    \290\ 73 FR at 32764.
    \291\ Evans Report at 19. Evans II also states that it ``does 
not assume that no relationship whatsoever exists between the 
pricing of depth-of-book data and the volume of order flow.'' Evans 
II at 11. n. 28. For the reasons discussed in this Order, the 
Commission agrees that there is such a relationship. The Evans 
analysis appears to disagree primarily about the strength of that 
relationship and the extent to which it significantly constrains the 
exchanges in pricing their depth-of-book data.
    \292\ See Ordover/Bamberger Statement at 9 (``large shifts in 
trading volume indicate that traders can, and do, quickly move their 
orders from one exchange to another'').
---------------------------------------------------------------------------

    Second, as noted in the Draft Order,\293\ the exchange must market 
its data products to many of the same customers to which it must appeal 
for order flow. This integral connection between order flow and data 
competition is strikingly highlighted by the language of the Evans 
Report itself: ``[A]n exchange with substantial liquidity maintains 
significant leverage over the consumers of its depth-of-book data. That 
dynamic--significant leverage over market data customers and little or 
no leverage over providers and takers of liquidity--results in prices 
for market data that reflect significant market power and prices for 
order flow that reflect competitive conditions.'' \294\ This is a 
purely theoretical distinction between customers that does not exist in 
the real world in which exchanges must compete. Exchanges must grapple 
with the competitive pressures of marketing their data services to many 
of the same customers to whom they are marketing their transaction 
services.
---------------------------------------------------------------------------

    \293\ 73 FR at 32764.
    \294\ Evans Report at 17-18.
---------------------------------------------------------------------------

b. Substitutes for Depth-of-Book Data
    The two economic assessments conclude that none of the alternatives 
for an exchange's depth-of-book data noted in the Draft Order--core 
data, depth-of-book data from other trading centers, pinging for 
liquidity, and the threat of independent distribution of non-core data 
by broker-dealers--significantly constrain the pricing of the 
exchange's depth-of-book data. The Evans Report, for example, focuses 
on the unique nature of a particular exchange's data and asks whether 
there are any substitutes that replicate the exchange's ``unique'' 
data.\295\ This focus is too narrow, however, and fails capture the 
bigger picture of what traders need when they assess liquidity in a 
stock and of where an exchange's depth-of-book data fits into this 
picture.\296\
---------------------------------------------------------------------------

    \295\ Evans Report at 6-7. Evans II repeats this analysis. Evans 
II at 6. The relevant issue, however, is not whether the content of 
one exchange's data is a perfect substitute for another exchange's 
data. The issue is whether, given all of the available sources of 
information for assessing liquidity and trading in today's highly 
automated and competitive market structure (which includes both 
quoting markets and many dark pools), an exchange's depth-of-book 
data is so critically important that the exchange is not 
significantly constrained by competitive forces in pricing that 
data. For the reasons discussed in this Order, the Commission finds 
that NYSE Arca was significantly constrained by competitive forces 
when it priced its depth-of-book data at approximately $1.50 per 
trading day for market professionals.
    \296\ See Ordover/Bamberger Statement at 7 (``[T]he amount of 
available liquidity in depth-of-book data at prices different from 
the current [NBBO] is only a fraction of the liquidity that would be 
available at any particular price if the market-clearing price 
changed. For this reason, the percentage of trading in one or more 
stocks accounted for by any particular exchange overstates the 
relative importance of depth-of-book market data from that exchange 
for identifying liquidity that would be available at prices other 
than the current NBBO.'').
---------------------------------------------------------------------------

    The starting point in assessing the value of liquidity information 
is to recognize that price matters a great deal to traders. The more 
aggressive the price of a bid or offer at a particular size, the more 
valuable the information is to traders. Conversely, the less aggressive 
the price of a bid or offer, the less valuable the information is to 
traders. An exchange's depth-of-book data reflects displayed liquidity 
at prices inferior to the quoted NBBO. The value

[[Page 74792]]

of the exchange's depth-of-book data therefore does not include: (1) 
Undisplayed liquidity at prices better than the NBBO (available at 
exchanges, ECNs, non-exchange liquidity pools, and OTC market makers), 
which can be accessed by pinging orders and can be tracked (and thereby 
usefully predicted) by comparing an exchange's trade reports with its 
best quotes, both of which are found in core data; (2) displayed 
liquidity at the NBBO, which is provided by the best quotes in core 
data; (3) undisplayed liquidity at the NBBO, which, as with undisplayed 
liquidity inside the NBBO, can be accessed by pinging orders and 
usefully predicted with core data.
    The reason why these alternative sources of liquidity information 
are so valuable is that traders in today's markets almost always prefer 
to trade at the current NBBO or better, rather than accepting the 
inferior prices reflected in an exchange's depth-of-book data. Because 
traders naturally prefer to trade at these better prices, an 
overwhelming majority of trades on an exchange are executed at prices 
superior to the prices available in the exchange's depth-of-book data. 
For example, the exchanges' public reports on order execution quality 
under Rule 605 show that the following percentages of executed share 
volume of marketable orders were at prices equal to or better than the 
NBBO in May 2008: Nasdaq--97%, NYSE Arca--92%, and NYSE--90%.\297\ 
Notably, these percentages remain steady even as order sizes increase 
from 100 shares to 9999 shares. Stated another way, more than 90% of 
the time, traders do not access the liquidity displayed in an 
exchange's depth-of-book order data, even for large orders.
---------------------------------------------------------------------------

    \297\ Source: Rule 605 reports for May 2008 of NYSE and NYSE 
Arca (available at http://www.nyse.com) and Nasdaq (available at 
http://www.nasdaqtrader.com). Rule 605 reports cover orders with 
sizes up to 9999 shares. The average trade size for U.S-listed 
stocks currently is less than 300 shares.
---------------------------------------------------------------------------

    Given the inferiority of depth-of-book prices, the competitive 
constraints faced by an exchange in marketing its depth-of-book data to 
professional traders becomes more understandable. The data is useful 
primarily as background information on liquidity outside the best 
prices, but professional traders are able to use core data and pinging 
orders to assess liquidity and trade effectively at better prices. 
Moreover, an exchange that attempted to charge unreasonably high fees 
for its depth-of-book data also would have to consider the actions that 
many data users might take to avoid paying the exchange's high fees. 
One potential alternative would be for firms to ``piggyback'' on the 
services of another firm that had purchased the data, rather than 
paying the data fee themselves. For example, buy-side institutions 
could use the algorithmic order routing services of a broker that had 
purchased an exchange's depth-of-book data, rather than buying the 
exchange's data and routing orders themselves. The availability of such 
alternatives increases the elasticity of demand for an exchange's 
depth-of-book data.
    The information preferences of securities professionals are 
strongly evidenced by the data they currently choose to purchase. As 
noted in the Draft Order, Nasdaq offers its depth-of-book data product 
for all U.S.-listed stocks for $76 per month, or approximately $3.50 
per trading day. Of the 420,000 professional users who purchase core 
data in Nasdaq-listed stocks, only 19,000 professional users purchase 
Nasdaq's depth-of-book data product. The Evans Report attempts to 
dismiss this fact by claiming that Nasdaq is a ``monopolist'' that has 
``set prices above competitive levels so that only those that value its 
product highly will purchase the product.'' \298\ Yet Nasdaq has priced 
its depth-of-book product at a level that is not much more than the 
price of a cup of coffee per trading day. Nasdaq's pricing decision is 
much more consistent with the view that Nasdaq faces significant 
competitive pressures in attempting to market its depth-of-book data 
product to the approximately 400,000 securities professionals that 
currently purchase only core data, than the Evans Report view that 
Nasdaq is a monopolist coercing the 19,000 securities professionals who 
are willing to pay $3.50 for Nasdaq's ``unique'' data.\299\
---------------------------------------------------------------------------

    \298\ Evans Report at 8 n. 24. The Evans Report also incorrectly 
cites revenue figures from Nasdaq's 2007 Form 10-K for the 
proposition that Nasdaq ``was able to extract more than 50% of its 
2007 market data revenue from its sale of unconsolidated data.'' Id. 
at 17. This analysis overlooks that Nasdaq separately reports its 
consolidated data revenues from non-Nasdaq-listed stocks (known as 
Network A and Network B stocks) under a heading called ``Execution 
and trade reporting revenues.'' Nasdaq did not disclose the specific 
amount of its consolidated data revenues from Network A and Network 
B stocks in 2007, but they were substantial. For example, the total 
core data revenues allocated to SROs in 2004 were $155 million for 
Network A stocks and $100 million in Network B stocks (Regulation 
NMS Release, 70 FR at 37558). As shown in Table 1 above, Nasdaq 
currently has a 23.9% share of trading in Network A stocks, and its 
share of trading in Network B stocks is higher.
    \299\ Nasdaq has priced its depth-of-book data for NYSE-listed 
stocks at $6 per month, or approximately 27 cents per trading day. 
The SLCG uses this exceptionally low fee as a basis to assert that 
Nasdaq's $3.50 fee for Nasdaq-listed stocks is ``1,100 higher'' and 
evidence of pricing power for Nasdaq-listed stocks. SLCG Study at 
31. Yet Nasdaq's share of trading in NYSE-listed stocks is a very 
substantial 23%. Rather than directly reflecting the value of the 
data, Nasdaq's extremely low fee for NYSE-listed stocks more likely 
evidences Nasdaq's intense efforts to compete for order flow in 
NYSE-listed stocks.
---------------------------------------------------------------------------

    In sum, depth-of-book data is most accurately characterized as 
useful, but not essential, for professional traders. NYSE Arca has 
priced the ArcaBook data for all U.S.-listed stocks at approximately 
$1.50 per trading day for professional users. The Commission believes 
that this pricing decision cannot reasonably be interpreted as that of 
a monopolist able to take advantage of its market power over a small 
group of professionals who value the data highly, but rather that of an 
exchange facing significant competitive pressures in attempting to sell 
its data to a large number of professionals.
    The Draft Order also noted the opportunity for new entrants to the 
market for non-core data, specifically noting a comparable initiative 
in Europe by a number of major securities firms.\300\ The Evans Report 
asserts a myriad of theoretical obstacles to securities firms 
sponsoring a non-core data initiative in the U.S.\301\ As noted above, 
however, securities firms already have sponsored new equity trading 
entrants in the U.S., and DOJ--one of the U.S. antitrust authorities--
cited the existence of these new entrants as support for its finding 
that the equity exchange markets are competitive.\302\ If securities 
firms truly believe that exchanges are attempting to charge 
unreasonably high prices for

[[Page 74793]]

their depth-of-book data, participating in an initiative to offer a 
competing source of data is a live option. Indeed, Thomson Reuters 
noted in its comment on the Draft Order that the ability of broker-
dealers to distribute their own data ``is an undeveloped but important 
potential source of market data'' and that it is ``prepared to work 
with the broker-dealer community to explore opportunities in the 
area.'' \303\
---------------------------------------------------------------------------

    \300\ 73 FR at 32765. SIFMA X repeatedly claims that the 
proposed NYSE Arca fees are ``excessive,'' yet also notes that the 
London Stock Exchange fee for depth-of-book data is [pound]157.5 per 
month for non-members. SIFMA X at 9. This fee is many times higher 
than the proposed NYSE Arca fees that would total $30 per month for 
both members and non-members (based on a pound/dollar conversion 
ratio of 1.502 on November 25, 2008, the London Stock Exchange fee 
converts to $236.74 per month). Indeed, the London Stock Exchange 
fee is much higher than the fee for any exchange depth-of-book data 
product in the U.S., despite the much greater trading volume and 
market capitalization of U.S.-listed stocks. The lower data fees 
charged by U.S. exchanges is yet one more fact evidencing the 
significant competitive forces faced by U.S. exchanges in setting 
fees for their depth-of-book data products.
    \301\ Evans Study at 10-12. SIFMA asserted that the European 
example is not applicable in the U.S. because European firms are not 
required to give their data to exchanges for free. SIFMA IX at 21 n. 
69. As discussed in the Draft Order (73 FR at 32766), however, U.S. 
firms are not required to provide the great majority of their orders 
to any exchange and, for the balance, have a choice among exchanges 
and FINRA. Moreover, if U.S. firms provided their non-core data 
without charge to a new data enterprise, it is not clear why the new 
enterprise would operate at a competitive disadvantage to the 
exchanges in distributing an alternative data product.
    \302\ See note 274 above and accompanying text.
    \303\ Thomson Reuters Letter at 3. SIFMA X asserts that broker-
dealers would be unable to create a competitive depth-of-book data 
product in the U.S. because, it claims, they are required to provide 
their data to the exchanges. SIFMA X at 9. As discussed above (text 
accompanying notes 236-240), the great majority of a broker-dealer's 
orders need not be provided to any SRO (whether an exchange or 
FINRA), and the small subset of a broker-dealer's displayable 
customer orders that must be provided to an SRO can be provided to 
FINRA, rather than an exchange.
---------------------------------------------------------------------------

    Finally, with respect to retail investors, the SLCG Study asserts 
that almost 40% of their orders are for sizes greater than the 
displayed size at the NBBO when presented.\304\ It then presumes, 
without discussion, that these orders are executed at prices inferior 
to the NBBO and that retail investors need depth-of-book data to ``see 
the price they are likely to receive for almost 40% of their orders.'' 
\305\ This analysis evidences a profound misunderstanding of how retail 
orders are handled in today's equity markets. In particular, the SLCG 
Study fails to consider the very substantial availability of 
undisplayed liquidity for executing retail orders at non-exchange 
venues, particularly OTC market makers and liquidity pools sponsored by 
broker-dealers. This undisplayed liquidity enables retail investors to 
receive executions for most of their orders at prices equal to or 
better than the NBBO, regardless of the displayed size at the 
NBBO.\306\
---------------------------------------------------------------------------

    \304\ SLCG Study at 20-21.
    \305\ SLCG Study at 21.
    \306\ 73 FR at 32770.
---------------------------------------------------------------------------

    For example, Schwab's public disclosures concerning its order 
routing practices and order execution quality provide an instructive 
picture of how a broker-dealer with a substantial number of retail 
customers handles their orders in today's equity markets.\307\ Schwab's 
Rule 606 report on order routing for the quarter ending June 30, 2008 
reveals that 93% of its customer orders in U.S.-listed equities were 
``non-directed''--that is, the customer relied on Schwab to determine 
where to route the order. Schwab routed 94% of these customer orders to 
non-exchange trading venues, rendering it unlikely that either Schwab 
or its customers relied on any exchange's depth-of-book data in making 
the routing determination for these orders.\308\ In addition, Schwab 
represents that 57.2% of shares in listed stocks and 61.3% of shares in 
Nasdaq stocks receive price improvement (an execution price better than 
the NBBO), and that the ratio of effective spreads to quoted spreads 
for customer orders is 96.5% in listed stocks and 94.7% in Nasdaq 
stocks (that is, customers receive prices on average that are better 
than the NBBO). In sum, undisplayed liquidity at non-exchange trading 
centers enabled Schwab customers to receive executions for their orders 
at much superior prices than would be indicated by any exchange's 
depth-of-book data. The inferior prices reflected in such data would 
provide a very poor basis indeed to assess whether these retail orders 
received best execution.
---------------------------------------------------------------------------

    \307\ Schwab's disclosures are available at http://www.schwab.com.
    \308\ See Nasdaq III at 4 (``Rule 606 data from the second 
quarter of 2008 shows that a sample of major broker-dealers routed 
just 15% of retail orders in NASDAQ-listed stocks to an 
exchange.'').
---------------------------------------------------------------------------

c. Efficacy of Regulatory Alternatives
    A third weakness in the SLCG Study and the Evans Report is their 
failure to acknowledge the extent to which the current Exchange Act 
regulatory structure effectively promotes competition among the U.S. 
equity markets. They nevertheless suggest regulatory approaches that 
would be extraordinarily costly and difficult to implement and that 
would offer little chance of achieving a more efficient outcome than 
the market-based approach set forth in the Draft Order.
    For example, both the SLCG Study and the Evans Report assert that 
the market shares of NYSE and NYSE Arca should be combined for purposes 
of analyzing market power over depth-of-book data, even though they are 
separately registered as national securities exchanges and operate 
separate liquidity pools with separate data products and fees. The two 
economic assessments note that, because NYSE and NYSE Arca are under 
common control, they will have an incentive to coordinate their pricing 
and not compete with one another.
    Exchanges under common control clearly have incentives to avoid 
competing with each other. Each national securities exchange, however, 
is subject to a comprehensive regulatory structure that is designed to 
address anti-competitive practices. This regulatory structure limits 
the potential for related exchanges to act jointly in ways that would 
inappropriately inhibit competition by other exchanges and trading 
centers with each related exchange. Section 6 of the Exchange Act 
requires that the rules of a national securities exchange be designed 
to promote a free and open market. Moreover, it prohibits a national 
securities exchange from adopting rules that are designed to permit 
unfair discrimination among its customers or that would impose an 
unnecessary or inappropriate burden on competition. All of these 
requirements are applied at the level of the individual registered 
securities exchange, not at the group level of exchanges that are under 
common control. In particular, a proposed exchange rule must stand or 
fall based, among other things, on the interests of customers, issuers, 
broker-dealers, and other persons using the facilities of that 
exchange. In sum, an economic analysis of jointly-controlled corporate 
behavior that might apply to other less regulated industries is 
inapplicable to equity exchanges that are subject to the pro-
competitive Exchange Act regulatory structure.
    For example, section 6 and Exchange Act Rule 603(a) require NYSE 
Arca to distribute the ArcaBook data on terms that are not tied to 
other products in a way that is unfairly discriminatory or 
anticompetitive. Apparently unaware of these regulatory requirements, 
the SLCG Study claims that the Commission ``does not consider the 
prospect of the NYSE exercising monopoly pricing power through tying 
arrangements'' and notes that ``the NYSE has the clear incentive to 
force users of a product in which an exchange has monopoly pricing 
power to also pay for a product in which the exchange does not have 
monopoly pricing power.'' \309\ The SLCG concerns may be applicable to 
firms that operate in unregulated markets, but are inapplicable to U.S. 
equity exchanges.
---------------------------------------------------------------------------

    \309\ SLCG Study at 32.
---------------------------------------------------------------------------

    The effect of the U.S. regulatory structure is apparent when 
examining the respective fees for ArcaBook data and NYSE OpenBook data 
for NYSE-listed stocks. The Evans Report asserts that these products 
should not be considered as alternatives for one another, but does not 
address why this conclusion is valid from the standpoint of individual 
users of data when their use of the two products is not tied in any 
way. Customers are free to purchase both, either, or neither. Each 
product must stand or fall on its own merits. The Evans Report asserts 
that the revenues of both products will be retained by the same 
corporate entity, yet this point is irrelevant from the standpoint of 
customers who might be looking for data alternatives. Indeed, if 
customers decide that ArcaBook is a better bargain

[[Page 74794]]

than OpenBook, a shift between the two products would lead to a $45 per 
month per customer reduction in revenues for NYSE Euronext. If 
customers believe that ArcaBook data is overpriced at $15, they can 
purchase OpenBook alone and NYSE Euronext will have foregone an 
opportunity to earn greater revenues by setting a lower fee for 
ArcaBook data.
    Although the SLCG Study and Evans Report fail to acknowledge the 
pro-competitive aspects of the Exchange Act regulatory structure, they 
nevertheless suggest alternative regulatory approaches that would be 
extraordinarily intrusive on competitive forces, as well as quite 
costly and difficult to apply in practice. For example, the Evans 
Report criticizes the Draft Order for not addressing whether an 
exchange could profitably increase the price of its depth-of-book data 
by 5-10 percent above a ``competitive'' level,\310\ but offers no 
practical guidance for determining this hypothetical competitive level. 
Elsewhere, its author has noted that ``it seems obvious that the 
ability of competition authorities and courts (or indeed of any 
economist) to distinguish between efficient (fair) and inefficient 
(unfair) prices in practice is very low.'' \311\
---------------------------------------------------------------------------

    \310\ Evans Report at 4.
    \311\ David S. Evans & A. Jorge Padilla, ``Excessive Prices: 
Using Economics to Define Administrable Legal Rules, 1 J. 
Competition L. & Econ. 97, 118 (March 2005) (``Evans Article''); see 
also id. at 99 (``no pricing rule or benchmark can be used to 
distinguish effectively (i.e., without error) between competitive 
and excessive prices in practice'').
---------------------------------------------------------------------------

    For its part, the SLCG Study notes that ``obtaining accurate and 
precise data on the marginal costs of producing a particular good or 
service (e.g., securities market data) is extremely difficult,'' but 
nevertheless asserts that ``there are reasonable alternatives for 
assessing levels and trends of marginal costs.'' \312\ This statement 
ignores a whole host of difficulties in calculating the direct costs 
and common costs of market data--an endeavor that the Commission 
discussed at length in 1999 and will not repeat here.\313\ Moreover, 
the SLCG Study assumes, without discussion, that marginal costs would 
be the efficiency-enhancing standard to assess fees for depth-of-book 
data. Elsewhere, however, the author of the Evans Report has noted that 
in ``dynamic industries, where typically fixed costs are high and 
incremental costs are low, the `competitive' price is not given by 
marginal costs'' and that ``it is impossible to define `competitive' 
prices using only information costs.'' \314\ The exchange industry is 
highly dynamic, and exchanges are dependent on their ability to deploy 
cutting edge technologies. Moreover, the marginal costs of expanding 
the capacity of trading systems are extraordinarily low--for the most 
part, a trading center need only add servers and communications lines 
to its existing hardware and software systems.\315\
---------------------------------------------------------------------------

    \312\ SLCG Study at 26. SIFMA X asserts that there are numerous 
choices for reviewing market data fees other than a strict cost-
based analysis, but then outlines an approach that would require 
specialized teams of staff members and administrative hearings to 
adjudicate an unspecified ``relationship'' of a proposed fee to 
exchange costs. SIFMA X at 11.
    \313\ Market Data Release, 64 FR at 70627-70630. See Ordover/
Bamberger Statement at 3 n. 4 (``It is widely accepted that there is 
no meaningful way to allocate `common costs' across different joint 
products. For this reason, `cost-based' regulation of the price of 
market data would require inherently arbitrary cost allocations.'').
    \314\ Evans Article at 101; see also id. at 99 (``Unfortunately, 
it is unclear what the appropriate competitive benchmark is in most 
real-life circumstances and, particularly, in dynamic industries 
where investment and innovation play a paramount role. Moreover, 
even if an appropriate benchmark could be defined, it would still 
remain unclear how one could, on the basis of the information 
typically available to policy makers and industry analysts, 
determine with precision whether prices are above, at, or below the 
competitive benchmark in practice.'').
    \315\ See Nasdaq III at 4 (``The business of operating a market 
is typified by low marginal cost for additional volume and markets 
operating with significant excess capacity'').
---------------------------------------------------------------------------

    In fulfilling its Exchange Act regulatory responsibilities, the 
Commission is faced with the pragmatic challenge of determining whether 
non-core market data fees are fair and reasonable. It strongly believes 
that the current level of competition in the U.S. equity markets 
provides a much more useful basis to make this determination than a 
regulatory attempt to measure market data costs. Although the market 
for distributing depth-of-book data may not meet all of the conditions 
for theoretically perfect competition, there clearly are significant 
competitive forces operating in the real world that constrain the 
exchanges in setting the terms for their data. The Commission therefore 
has concluded that the market-based approach outlined in the Draft 
Order is the most appropriate means to meet its regulatory mandate when 
reviewing non-core data fees.

C. Review of Terms of the Proposal

    As discussed in the preceding section, NYSE Arca was subject to 
significant competitive forces in setting the terms of the Proposal. 
The Commission therefore will approve the Proposal in the absence of a 
substantial countervailing basis to find that its terms nevertheless 
fail to meet an applicable requirement of the Exchange Act or the rules 
thereunder.\316\ An analysis of the Proposal and of the views of 
commenters does not provide such a basis.
---------------------------------------------------------------------------

    \316\ The Exchange Act requirements are addressed in the text 
accompanying notes 171-175 above.
---------------------------------------------------------------------------

    First, the proposed fees for ArcaBook data will apply equally to 
all professional subscribers and equally to all non-professional 
subscribers (subject only to the maximum monthly payment for device 
fees paid by any broker-dealer for non-professional subscribers). The 
fees therefore do not unreasonably discriminate among types of 
subscribers, such as by favoring participants in the NYSE Arca market 
or penalizing participants in other markets.
    Second, the proposed fees for the ArcaBook data are substantially 
less than those charged by other exchanges for depth-of-book order 
data. For example, the NYSE charges a $60 per month terminal fee for 
depth-of-book order data in NYSE-listed stocks. Similarly, Nasdaq 
charges a $76 per month device fee for professional subscribers to 
depth-of-book order data on all NMS stocks. By comparison, the NYSE 
Arca fee is 75% less than the NYSE fee for data in NYSE-listed stocks, 
and more than 60% less than the Nasdaq fee for data in all NMS stocks. 
It is reasonable to conclude that competitive pressures led NYSE Arca 
to set a substantially lower fee for its depth-of-book order data than 
the fees charged by other markets. If, in contrast, NYSE Arca were a 
monopoly data provider impervious to competitive pressures, there would 
be little reason for it to set significantly lower fees than other 
exchanges.\317\
---------------------------------------------------------------------------

    \317\ See Table 1, note 210 above and accompanying text.
---------------------------------------------------------------------------

    Third, NYSE Arca projects that the total revenues generated by the 
fee for ArcaBook data initially will amount to less than $8 million per 
year,\318\ and that its market data revenue as a percentage of total 
revenue is likely to remain close to the 2005 figure, which was 
approximately 17%.\319\ Viewed in

[[Page 74795]]

the context of NYSE Arca's overall funding, therefore, the fees for 
ArcaBook data are projected to represent a small portion of NYSE Arca's 
market data revenues and an even smaller portion of NYSE Arca's total 
revenues (using NYSE Arca's $8 million estimate, the fees will amount 
to less than 12.9% of NYSE Arca's 2005 market data revenues and less 
than 1.6% of NYSE Arca's 2005 total revenues). In addition, NYSE Arca 
generated approximately $415.4 million in revenue from equity 
securities transaction fees in 2005.\320\ These transaction fees are 
paid by those who voluntarily choose to submit orders to NYSE Arca for 
execution. The fees therefore are subject to intense competitive 
pressure because of NYSE Arca's need to attract order flow. In 
comparison, the $8 million in projected annual fees for ArcaBook data 
do not appear to be inequitable, unfair, or unreasonable.
---------------------------------------------------------------------------

    \318\ NYSE Arca Response III at 12 n. 28. The reasonableness of 
this projection is supported by referring to the number of data 
users that have subscribed to Nasdaq's proprietary depth-of-book 
product for Nasdaq-listed stocks. Nasdaq reports 19,000 professional 
users and 12,000 non-professional users as of April 30, 2007. Nasdaq 
Letter at 6. If the same number of users purchased ArcaBook data for 
all stocks, the total revenue for NYSE Arca would be $8,280,000 per 
year. As noted in Table 1, NYSE Arca has a smaller market share than 
Nasdaq and therefore may not attract as many subscribers to its 
depth-of-book product. On the other hand, NYSE Arca is charging 
substantially less for its data and may attract more users. In the 
final analysis, market forces will determine the actual revenues 
generated by NYSE Arca's pricing decision.
    \319\ NYSE Arca Response III at 12 nn. 28-29. One commenter 
noted that the market data revenues of the NYSE Group, which 
includes both NYSE and NYSE Arca, had grown by 33.7% from the third 
quarter of 2005 to the third quarter of 2006. See section III.A.6 
above. Although correct, this figure does not demonstrate any growth 
in market data revenues because the 2005 figure only included the 
market data revenues of NYSE, while the 2006 figure included the 
market data revenues of both the NYSE and NYSE Arca. Using an 
``apples-to-apples'' comparison that includes both exchanges for 
both time periods, their combined market data revenues declined 
slightly from 2005 to 2006. NYSE Arca Response III at 20.
    \320\ NYSE Group, Inc., Form 10-K for period ending December 31, 
2005 (filed March 31, 2006), at 19.
---------------------------------------------------------------------------

    One commenter, although agreeing that exchange transaction fees are 
subject to intense competitive pressure, asserted that such 
``intermarket competition does not constrain the exchanges' pricing of 
market data, but it actually creates an incentive for the exchanges to 
increase their prices for data.'' \321\ If, however, NYSE Arca were 
truly able to exercise monopoly power in pricing its non-core data, it 
likely would not choose a fee that generates only a small fraction of 
the transaction fees that admittedly are subject to fierce competitive 
forces. As discussed above, NYSE Arca was indeed subject to significant 
competitive forces in pricing the ArcaBook data.
---------------------------------------------------------------------------

    \321\ SIFMA V at 14-15.
---------------------------------------------------------------------------

    Several commenters expressed concern that the Proposal would 
adversely affect market transparency.\322\ They noted that NYSE Arca 
previously had distributed the ArcaBook data without charge and 
asserted that the new fees could substantially limit the availability 
of the data. The Petition, for example, stated that ``the cumulative 
impact of [the Proposal] and other pending and recently approved market 
data proposals threaten to place critical data, which should be 
available to the general public, altogether beyond the reach of the 
average retail investor.'' \323\
---------------------------------------------------------------------------

    \322\ Financial Services Roundtable Letter at 3; Schwab Letter 
at 5.
    \323\ Petition at 3.
---------------------------------------------------------------------------

    Assuring the wide availability of quotation and trade information 
is a primary objective of the national market system.\324\ With respect 
to non-professional users, and particularly individual retail 
investors, the Commission long has sought to assure that retail 
investors have ready access to the data they need to participate 
effectively in the equity markets. Indeed, the Commission's 1999 review 
of market information was prompted by a concern that retail investors 
should have ready access to affordable market data through their on-
line accounts with broker-dealers. The Concept Release on Market 
Information noted that, in the course of the 1999 review, the Networks 
had reduced by up to 80% the fees for non-professional subscribers to 
obtain core data with the best-priced quotations and most recent last 
sale prices.\325\ It also emphasized the importance of such affordable 
data for retail investors:
---------------------------------------------------------------------------

    \324\ Section 11A(a)(1)(C)(iii) of the Exchange Act.
    \325\ Market Information Concept Release, 64 FR at 70614. Since 
1999, the Network data fees applicable to retail investors have 
either remained the same or been further reduced. Currently, 
nonprofessional investors can obtain unlimited amounts of core data 
for no more than $1 per month each for Network A, B, and C stocks. 
See SIFMA III, Appendix A.

    One of the most important functions that the Commission can 
perform for retail investors is to ensure that they have access to 
the information they need to protect and further their own 
interests. Communications technology now has progressed to the point 
that broad access to real-time market information should be an 
affordable option for most retail investors, as it long has been for 
professional investors. This information could greatly expand the 
ability of retail investors to monitor and control their own 
securities transactions, including the quality of execution of their 
transactions by broker-dealers. The Commission intends to assure 
that market information fees applicable to retail investors do not 
restrict their access to market information, in terms of both number 
of subscribers and quality of service. In addition, such fees must 
not be unreasonably discriminatory when compared with the fees 
charged to professional users of market information.\326\
---------------------------------------------------------------------------

    \326\ Market Information Concept Release, 64 FR at 70614.

    The Commission appreciates the efforts of the Petitioner and other 
commenters in advocating the particular needs of users of advertiser-
supported Internet Web sites, a great many of whom are likely to be 
individual retail investors. The Commission believes that the exchanges 
and other entities that distribute securities market information will 
find business-justified ways to attend to the needs of individual 
investors and, as markets evolve, develop innovative products that meet 
the needs of these users and are affordable in light of the users' 
economic circumstances. In this respect, it recognizes the exchange 
initiatives to distribute new types of data products specifically 
designed to meet the needs of Internet users for reference data on 
equity prices.\327\
---------------------------------------------------------------------------

    \327\ See note 19 above (NYSE Real-Time Reference Prices and 
Nasdaq Last Sale Data Feeds).
---------------------------------------------------------------------------

    The Commission does not believe, however, that the Proposal will 
significantly detract from transparency in the equity markets. Of 
course, any increase in fees can lower the marginal demand for a 
product. To assess an effect on transparency, however, the relevant 
question is whether the fees for a particular product deter a 
significant number of market participants from obtaining the market 
data they need because the fees are not affordable given their economic 
circumstances.\328\ Market transparency does not require that the same 
products be made available to all users on the same terms and 
conditions. Such a one-size-fits-all approach would ignore the 
important differences among data users in terms of both their needs and 
their economic circumstances. Most importantly, such an approach would 
fail to address the particular needs of individual retail investors.
---------------------------------------------------------------------------

    \328\ See Market Information Concept Release, 64 FR at 70630 
(``[T]he relevant Exchange Act question is whether the fees for 
particular classes of subscribers, given their economic 
circumstances and their need for and use of real-time information, 
are at a sufficiently high level that a significant number of users 
are deterred from obtaining the information or that the quality of 
their information services is reduced.'')
---------------------------------------------------------------------------

    With respect to professional data users (i.e., those who earn their 
living through the markets), the Commission believes that competitive 
forces, combined with the heightened ability of professional users to 
advance their own interests, will produce an appropriate level of 
availability of non-core data. With respect to non-professional users, 
as well, the Commission believes that the ArcaBook fees will not 
materially affect their access to the information they need to 
participate effectively in the equity markets.\329\ The ArcaBook data 
likely is both too narrow and too broad to meet the needs of most 
retail

[[Page 74796]]

investors. It likely is too narrow for most retail investors when they 
make their trading and order-routing decisions. The best prices quoted 
for a stock in the ArcaBook data reflect only the NYSE Arca market. 
Other markets may be offering substantially better prices. It is for 
this reason that Rule 603(c) of Regulation NMS requires broker-dealers 
and vendors to provide their customers with a consolidated display of 
core data in the context of trading and order-routing decisions. A 
consolidated display includes the national best bid and offer for a 
stock, as well as the most recent last sale for such stock reported at 
any market. This consolidated display thereby gives retail investors a 
valuable tool for ascertaining the best prices for a stock.
---------------------------------------------------------------------------

    \329\ See NYSE Arca Response III at 18 (``The overwhelming 
majority of retail investors are unaffected by the inter-market 
competition over proprietary depth-of-book products. For them, the 
consolidated top-of-book data that the markets make available under 
the NMS Plans provides adequate information on which they can base 
trading decisions.'').
---------------------------------------------------------------------------

    Two commenters stated that the average retail order is 1000 or more 
shares and is larger than the size typically reflected in the 
consolidated quotation in core data.\330\ This issue was raised, 
however, when the Commission was formulating its approach to non-core 
data in 2005. It noted that the average execution price for small 
market orders (the order type typically used by retail investors) is 
very close to, if not better than, the NBBO.\331\ In addition, a study 
by the Commission's Office of Economic Analysis of quoting in 2003 in 
3,429 Nasdaq stocks found that the average displayed depth of 
quotations at the NBBO was 1,833 shares--greater than the size of the 
average order cited by commenters.\332\
---------------------------------------------------------------------------

    \330\ Schwab Letter at 1-2; SIFMA IV at 14.
    \331\ Regulation NMS Release, 70 FR at 37567. Most retail 
investors receive order executions at prices equal to or better than 
the NBBO that is disseminated in core data. See also Dissent of 
Commissioners Cynthia A. Glassman and Paul S. Atkins to the Adoption 
of Regulation NMS, 70 FR 37636 (estimating that between 98% and 99% 
of all trades did not trade through better-priced bids or offers).
    \332\ 70 FR at 37511 n. 108.
---------------------------------------------------------------------------

    Some commenters suggested that the core data provided by the 
Networks disadvantaged retail investors because it was not distributed 
as fast as the depth-of-book order data obtained directly from an 
exchange.\333\ The central processors of core data must first obtain 
data from each SRO and then consolidate it into a single data feed for 
distribution to the public. While exchanges are prohibited from 
providing their data to direct recipients any sooner than they provide 
it to the Network central processor,\334\ the additional step of 
transmitting data to the central processor inevitably means that a 
direct data feed can be distributed faster to users than the Network 
data feed. The size of this time latency, however, is extremely small 
in absolute terms. For example, a technology upgrade by the central 
processor for Network A and Network B has reduced the latency of the 
core data feed to approximately \3/100\ths of a second.\335\ The 
Commission does not believe that such a small latency under current 
market conditions disadvantages retail investors in their use of core 
data, but rather would be most likely relevant only to the most 
sophisticated and active professional traders with state-of-the-art 
systems.
---------------------------------------------------------------------------

    \333\ Schwab Letter at 4; SIFMA III at 6 n. 11.
    \334\ Regulation NMS Release, 70 FR at 37567.
    \335\ NYSE Arca Response III at 21. The upgrade was completed in 
April 2007. See Securities Industry Automation Corporation, Notice 
to CTA Recipients, ``Reminder Notice--CQS Unix Activation--New 
Source IP Addresses'' (April 27, 2007) (available at http://www.nysedata.com). This major upgrade of the CTA data feed runs 
contrary to the concern of one commenter on the Draft Order that 
exchanges would have little incentive to maintain the quality of 
core data. NSX II at 5-6.
---------------------------------------------------------------------------

    Moreover, outside of trading contexts, the ArcaBook data will be 
far broader than individual investors typically need. The ArcaBook data 
encompasses all quotations for a stock at many prices that are well 
away from the current best prices. For retail investors that are not 
trading but simply need a useful reference price to track the value of 
their portfolio and monitor the market, the enormous volume of data 
regarding trading interest outside the best prices is not needed.\336\
---------------------------------------------------------------------------

    \336\ See NYSE Arca Response II at 2 (``during the first ten 
months of 2005 the number of messages processed by the Exchange 
greatly increased from approximately 9,800 MPS [messages per second] 
to 14,100 MPS'').
---------------------------------------------------------------------------

    Some commenters asserted that the Proposal failed to satisfy the 
requirements of Exchange Act Rule 19b-4 and Form 19b-4.\337\ Form 19b-4 
requires, among other things, that SROs provide a statement of the 
purpose of the proposed rule change and its basis under the Exchange 
Act. The statement must be sufficiently detailed and specific to 
support a finding that the proposed rule change meets the requirements 
of the Exchange Act, including that the proposed rule change does not 
unduly burden competition or efficiency, does not conflict with the 
securities laws, and is not inconsistent with the public interest or 
the protection of investors. The NYSE Arca Proposal met these 
requirements. Among other things, the Proposal noted that the proposed 
fees compared favorably to the fees that other competing markets charge 
for similar products, including those of other exchanges that 
previously had been approved by the Commission.\338\
---------------------------------------------------------------------------

    \337\ See section III.A.3 above. In their comments on the Draft 
Order, commenters claimed that it in effect would amend Rule 19b-4 
without following required agency rulemaking procedures. 
NetCoalition V at 7; SIFMA IX at 20. Rule 19b-4, however, merely 
sets forth requirements for SROs to follow in preparing their 
proposed rule changes. It does not address the substantive nature of 
Commission review of proposed rule changes, which necessarily will 
vary widely depending on the particular issues raised by the SRO 
proposal.
    \338\ See Proposal, 71 FR at 33499.
---------------------------------------------------------------------------

    One commenter argued that NYSE Arca should have addressed a number 
of specific points that it raised in opposition to the Proposal, such 
as including a statement of costs to produce the ArcaBook data.\339\ 
The purpose of Form 19b-4, however, is to elicit information necessary 
for the public to provide meaningful comment on the proposed rule 
change and for the Commission to determine whether the proposed rule 
change is consistent with the requirements of the Exchange Act and the 
rules thereunder.\340\ The Proposal met these objectives. Although Form 
19b-4 requires that a proposed rule change be accurate, consistent, and 
complete, including the information necessary for the Commission's 
review, the Form does not require SROs to anticipate and respond in 
advance to each of the points that commenters may raise in opposition 
to a proposed rule change. With this Order, the Commission has 
determined that the points raised by the commenter do not provide a 
basis to decline to approve the Proposal.
---------------------------------------------------------------------------

    \339\ SIFMA III at 11-12.
    \340\ Section B of the General Instructions for Form 19b-4.
---------------------------------------------------------------------------

    Finally, commenters raised concerns regarding the contract terms 
that will govern the distribution of ArcaBook data.\341\ In particular, 
one notes that NYSE Arca has not filed its vendor distribution 
agreement with the Commission for public notice and comment and 
Commission approval.\342\
---------------------------------------------------------------------------

    \341\ See section III.A.7 above.
    \342\ SIFMA I at 7. In this regard, the commenter states that, 
procedurally, the Exchange ``is amending and adding to the CTA 
vendor agreement without first submitting its contractual changes 
through the CTA's processes, which are subject to industry input 
through the new Advisory Committee mandated by Regulation NMS.'' 
SIFMA I at 8.
---------------------------------------------------------------------------

    NYSE Arca has stated, however, that it plans to use the vendor and 
subscriber agreements used by CTA and CQ Plan Participants (the ``CTA/
CQ Vendor and Subscriber Agreements'') to govern the distribution of 
NYSE Arca Data. According to the Exchange, the CTA/CQ Vendor and 
Subscriber Agreements ``are drafted as generic one-size-fits-all 
agreements and explicitly apply to the receipt and use of certain 
market data that individual exchanges make available in the same way 
that they apply to data made available under the

[[Page 74797]]

CTA and CQ Plans,'' and the contracts need not be amended to cause them 
to govern the receipt and use of the Exchange's data.\343\ The Exchange 
maintains that because ``the terms and conditions of the CTA/CQ 
contracts do not change in any way with the addition of the Exchange's 
market data * * * there are no changes for the industry or Commission 
to review.'' \344\
---------------------------------------------------------------------------

    \343\ NYSE Arca Response I at 3.
    \344\ NYSE Arca Response I at 3 (emphasis in original).
---------------------------------------------------------------------------

    The Commission believes that the Exchange may use the CTA/CQ Vendor 
and Subscriber Agreements to govern the distribution of NYSE Arca 
Data.\345\ It notes that the NYSE used the CTA Vendor Agreement to 
govern the distribution of its OpenBook and Liquidity Quote market data 
products.\346\ Moreover, the Exchange represents that, following 
consultations with vendors and end-users, and in response to client 
demand:
---------------------------------------------------------------------------

    \345\ The Commission is not approving the CTA/CQ Vendor and 
Subscriber Agreements, which the CTA and CQ Plan Participants filed 
with the Commission as amendments to the CTA and CQ Plans that were 
effective on filing with the Commission pursuant to Rule 
608(b)(3)(iii) of Regulation NMS (previously designated as Exchange 
Act Rule 11Aa3-2(c)(3)(iii)). See, e.g., Securities Exchange Act 
Release No. 28407 (September 6, 1990), 55 FR 37276 (September 10, 
1990) (File No. 4-2811) (notice of filing and immediate 
effectiveness of amendments to the CTA Plan and the CQ Plan). Rule 
608(b)(3)(iii) of Regulation NMS (previously designated as Exchange 
Act Rule 11Aa3-2(c)(3)(iii)) allows a proposed amendment to a 
national market system plan to be put into effect upon filing with 
the Commission if the plan sponsors designate the proposed amendment 
as involving solely technical or ministerial matters.
    \346\ Securities Exchange Act Release Nos. 53585 (March 31, 
2006), 71 FR 17934 (April 7, 2006) (order approving File Nos. SR-
NYSE-2004-43 and NYSE-2005-32) (relating to OpenBook); and 51438 
(March 28, 2005), 70 FR 17137 (April 4, 2005) (order approving File 
No. SR-NYSE-2004-32) (relating to Liquidity Quote). For the both the 
OpenBook and Liquidity Quote products, the NYSE attached to the CTA 
Vendor Agreement an Exhibit C containing additional terms governing 
the distribution of those products, which the Commission 
specifically approved. NYSE Arca is not including additional 
contract terms in the Proposal.

    [The Exchange] chose to fold itself into an existing contract 
and administration system rather than to burden clients with another 
set of market data agreements and another market data reporting 
system, both of which would require clients to commit additional 
legal and technical resources to support the Exchange's data 
products.\347\
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    \347\ NYSE Arca Response I at 4.

    In addition, the Exchange has represented that it is ``not imposing 
restrictions on the use or display of its data beyond those set forth'' 
in the existing CTA/CQ Vendor and Subscriber Agreements.\348\ The 
Commission therefore does not believe that the Exchange is amending or 
adding to such agreements.
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    \348\ NYSE Arca Response I at 3.
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    A commenter also stated that the Exchange has not recognized the 
rights of a broker or dealer, established in Regulation NMS, to 
distribute its order information, subject to the condition that it does 
so on terms that are fair and reasonable and not unreasonably 
discriminatory.\349\ In response, the Exchange states that the CTA/CQ 
Vendor and Subscriber Agreements do not prohibit a broker-dealer member 
of an SRO participant in a Plan from making available to the public 
information relating to the orders and transaction reports that it 
provides to the SRO participant.\350\ Accordingly, the Commission 
believes that the Exchange has acknowledged the rights of a broker or 
dealer to distribute its market information, subject to the 
requirements of Rule 603(a) of Regulation NMS.
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    \349\ SIFMA I at 7.
    \350\ NYSE Arca Response I at 4.
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    A commenter also stated that the Exchange has failed to consider 
the administrative burdens that the proposal would impose, including 
the need for broker-dealers to develop system controls to track 
ArcaBook access and usage.\351\ In response, the Exchange represents 
that it has communicated with its customers to ensure system readiness 
and is using ``a long-standing, well-known, broadly-used administrative 
system'' to minimize the amount of development effort required to meet 
the administrative requirements associated with the proposal.\352\ 
Accordingly, the Commission believes that NYSE Arca has reasonably 
addressed the administrative requirements associated with the Proposal.
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    \351\ SIFMA I at 8.
    \352\ NYSE Arca Response I at 4-5.
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VII. Conclusion

    It is therefore ordered that the earlier action taken by delegated 
authority, Securities Exchange Act Release No. 54597 (October 12, 2006) 
71 FR 62029 (October 20, 2006), is set aside and, pursuant to section 
19(b)(2) of the Exchange Act, the Proposal (SR-NYSEArca-2006-21) is 
approved.

    By the Commission.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-28908 Filed 12-8-08; 8:45 am]
BILLING CODE 8011-01-P