[Federal Register Volume 74, Number 101 (Thursday, May 28, 2009)]
[Notices]
[Pages 25593-25595]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-12357]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59949; File No. SR-ISE-2007-97]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Order Approving Proposed Rule Change, as Modified by Amendment No. 
1, Relating to Market Data Fees

May 20, 2009.

I. Introduction

    On October 5, 2007, International Securities Exchange, LLC (the 
``Exchange'' or ``ISE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to establish fees for a real-time 
depth of market data offering. On March 9, 2009, the Exchange filed 
Amendment No. 1 to the proposed rule change. The proposed rule change, 
as modified by Amendment No. 1, was published for comment in the 
Federal Register on April 7, 2009.\3\ The Commission received no 
comments on the proposal. This order approves the proposed rule change, 
as modified by Amendment No. 1.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 59679 (April 1, 
2009), 74 FR 15795 (``Notice'').
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II. Description of the Proposal

    The Exchange currently produces and provides free of charge a data 
feed that contains the aggregate bid and offer size available at the 
first five price levels on ISE's limit order book, the ISE Depth of 
Market Data Feed (``Depth of Market''). The Depth of Market feed 
includes non-marketable orders and quotes that are displayed, and is 
distributed in real time.
    ISE has proposed to establish fees for its Depth of Market product. 
ISE will make this product available to members and non-members, and to 
professional and non-professional subscribers. Specifically, the 
Exchange proposes to charge distributors of Depth of Market $5,000 per 
month.\4\ In addition, the Exchange proposes to charge each distributor 
a monthly fee per controlled device \5\ of $50 per controlled device 
for Professionals (for internal use or external redistribution through 
a controlled device) and $5 per controlled device for Non-Professionals 
who receive the data from a distributor through a controlled device.\6\ 
ISE proposes to cap the monthly maximum amount of fees payable by a 
distributor at $7,500 for Professionals where the data is for internal 
use only; $12,500 for Professionals where the data is redistributed 
externally; and $10,000 for Non-Professionals who receive the data from 
a distributor. The Exchange proposes to charge distributors a flat fee 
of $1,000 for the first month after connectivity has been established 
between ISE and the distributor. Further, the Exchange proposes to 
waive all user fees during this one month period.
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    \4\ A ``distributor'' will be defined as any firm that receives 
an ISE data feed directly from ISE or indirectly through a 
``redistributor'' and then distributes it either internally or 
externally. ISE proposes that all distributors execute an ISE 
distributor agreement. ``Redistributors'' will include market data 
vendors and connectivity providers such as extranets and private 
network providers.
    \5\ A ``controlled device'' is defined as any device that a 
distributor of the ISE Depth of Market permits to access the 
information in the Depth of Market offering.
    \6\ In differentiating between a ``Non-Professional Subscriber'' 
and a ``Professional Subscriber,'' ISE will apply the same criteria 
for qualification as in the Consolidated Tape Association Plan 
(``CTA Plan'') and the Consolidated Quotation Plan (``CQ Plan'').
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\7\ In 
particular, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(4) of the Act,\8\ 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 Act,\9\ which requires, among other things, that the 
rules of an 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. The Commission also finds that the proposed rule 
change is consistent with Section 6(b)(8) of the Act \10\ in that it 
does not impose any burden on competition not necessary or appropriate 
in furtherance of the purposes of the Act.
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    \7\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(4).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ U.S.C. 78f(b)(8).
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    The Commission has reviewed the proposal using the approach set 
forth in the NYSE Arca Order for non-core market data fees.\11\ In the 
NYSE Arca Order, the Commission stated that ``when possible, reliance 
on competitive forces is the most appropriate and effective means to 
assess whether the terms for the distribution of non-core data are 
equitable, fair and reasonable, and not unreasonably discriminatory.'' 
\12\ It noted that the ``existence of significant competition provides 
a substantial basis for finding that the terms of an exchange's fee 
proposal are equitable, fair, reasonable, and not unreasonably or 
unfairly discriminatory.'' \13\ If an exchange ``was subject to 
significant competitive forces in setting the terms of a proposal,'' 
the Commission will approve a 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.'' \14\
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    \11\ See Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770 (December 9, 2008) (SR-NYSEArca-2006-21) (``NYSE 
Arca Order'').
    \12\ Id. at 74771.
    \13\ Id. at 74782.
    \14\ Id. at 74781.

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[[Page 25594]]

    As noted in the NYSE Arca Order, the standards in Section 6 of the 
Act do not differentiate between types of data and therefore apply to 
exchange proposals to distribute both core data and non-core data.\15\ 
All U.S. options exchanges are required pursuant to the OPRA Plan to 
provide ``core data''--the best-priced quotations and comprehensive 
last sale reports--to OPRA, which data is then distributed to the 
public pursuant to the OPRA Plan.\16\ In contrast, individual exchanges 
and other market participants distribute non-core data voluntarily.\17\ 
The mandatory nature of the core data disclosure regime leaves little 
room for competitive forces to determine products and fees.\18\ Non-
core data products and their fees are, by contrast, much more sensitive 
to competitive forces. The Commission therefore is able to rely on 
competitive forces in its determination of whether an exchange's 
proposal to distribute non-core data meets the standards of Section 
6.\19\
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    \15\ Id. at 74779.
    \16\ See Plan for Reporting of Consolidated Options Last Sale 
Reports and Quotation Information (``OPRA Plan''), Sections V(a)-
(c).
    \17\ See NYSE Arca Order, supra, note 11, at 74779.
    \18\ Id.
    \19\ Id.
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    Because ISE's instant proposal relates to the distribution of non-
core data, the Commission will apply the market-based approach set 
forth in the NYSE Arca Order. Pursuant to this approach, the first step 
is to determine whether ISE was subject to significant competitive 
forces in setting the terms of its non-core market data proposal, 
including the level of any fees. As in the Commission's NYSE Arca 
Order, in determining whether ISE was subject to significant 
competitive forces in setting the terms of its proposal, the Commission 
has analyzed ISE's compelling need to attract order flow from market 
participants, and the availability to market participants of 
alternatives to purchasing ISE's non-core market data.
    The Commission believes that the options industry currently is 
subject to significant competitive forces. It is generally accepted 
that the start of wide-spread multiple listing of options across 
exchanges in August 1999 greatly enhanced competition among the 
exchanges.\20\ The launch of three new options exchanges since that 
time, numerous market structure innovations, and the start of the 
options penny pilot \21\ have all further intensified intermarket 
competition for order flow.
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    \20\ See generally Concept Release: Competitive Developments in 
the Options Markets, Securities Exchange Act Release No. 49175 
(February 3, 2004), 69 FR 6124 (February 9, 2004); see also 
Battalio, Robert, Hatch, Brian, and Jennings, Robert, Toward a 
National Market System for U.S. Exchange-listed Equity Options, The 
Journal of Finance 59 (933-961); De Fontnouvelle, Patrick, Fishe, 
Raymond P., and Harris, Jeffrey H., The Behavior of Bid-Ask Spreads 
and Volume in Options Markets During the Competition for Listings in 
1999, The Journal of Finance 58 (2437-2463); and Mayhew, Stewart, 
Competition, Market Structure, and Bid-Ask Spreads in Stock Option 
Markets, The Journal of Finance 57 (931-958).
    \21\ See, e.g. , Securities Exchange Act Release Nos. 55162 
(January 24, 2007), 72 FR 4738 (February 1, 2007) (SR-Amex-2006-
106); 55073 (January 9, 2007), 72 FR 4741 (February 1, 2007) (SR-
BSE-2006-48); 55154 (January 23, 2007), 72 FR 4743 (February 1, 
2007) (SR-CBOE-2006-92); 55161 (January 24, 2007), 72 FR 4754 
(February 1, 2007) (SR-ISE-2006-62); 55156 (January 23, 2007), 72 FR 
4759 (February 1, 2007) (SR-NYSEArca-2006-73); and 55153 (January 
23, 2007), 72 FR 4553 (January 31, 2007) (SR-Phlx-2006-74).
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    ISE currently competes with six other options exchanges for order 
flow.\22\ Attracting order flow is an essential part of ISE's 
competitive success.\23\ If ISE cannot attract order flow to its 
market, it will not be able to execute transactions. If ISE cannot 
execute transactions on its market, it will not generate transaction 
revenue. If ISE cannot attract orders or execute transactions on its 
market, it will not have market data to distribute, for a fee or 
otherwise, and will not earn market data revenue and thus not be 
competitive with other exchanges that have this ability. In its filing, 
ISE provided market share data for the seven options exchanges over a 
two year period from 2006 through 2008:\24\
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    \22\ In its filing, ISE states that ``the options exchanges 
compete vigorously for order flow,'' and that ``ISE currently 
competes with six other options exchanges for order flow and `the 
competition is fierce'.'' See Notice, supra note 3, at 15797.
    \23\ ISE states in its filing that ``[i]n order for ISE to 
maintain its market share, it must compete vigorously for order 
flow.'' Id.
    \24\ See id.
    [GRAPHIC] [TIFF OMITTED] TN28MY09.024
    
    The market share percentages in this chart strongly indicate that 
ISE must compete vigorously for order flow to maintain its share of 
trading volume. This compelling need to attract order flow imposes 
significant pressure on ISE to act reasonably in setting its fees for 
ISE market data, particularly given that the market participants that 
will pay such fees often will be the same market participants from whom 
ISE must attract order flow. These market participants include broker-
dealers that control the handling of a large volume of customer and 
proprietary order flow. Given the portability of order flow from one 
exchange 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.\25\
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    \25\ In its filing, ISE notes that despite frequent variations 
in market share, no single exchange has more than approximately one-
third market share. It further states that, given the current 
competitive pressures in the option industry, no exchange can take 
any of its share of trading for granted. ISE states that, in order 
for it to maintain its market share, it must compete vigorously for 
order flow, and that given the portability of order flow from one 
exchange to another, a pricing misstep can easily result in loss of 
order flow, customers and, ultimately, revenue. See id.

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[[Page 25595]]

    ISE currently trades options on 16 proprietary index products that 
are not traded on any other exchange. ISE represents that these 16 
options currently represent less than 0.02% of ISE's total contract 
volume.\26\ The Commission believes that, given the small percentage of 
ISE's total contract volume represented by these 16 products, the 
inclusion of data on these products in ISE's Depth of Market product 
will not confer market power on ISE to compel market participants to 
purchase the entire ISE data feed. The Commission therefore believes 
that the inclusion of depth-of-book data for these products in ISE's 
Depth of Market product does not undermine the finding that ISE was 
subject to significant competitive forces in setting the terms of its 
proposal.
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    \26\ See id. ISE represents that as of March 9, 2009, of the 
more than 2,000 underlying securities whose options are traded on 
ISE, 41 products are singly listed on ISE, which collectively 
represent less than .02 percent of ISE's total contract volume. Of 
those 41 products, 16 are proprietary ISE index options, all of 
which are available for licensing by ISE to any other exchange, four 
are index options that ISE has non-exclusively licensed from index 
providers and that are available to other exchanges to license, 10 
are options on Exchange Traded Funds that other exchanges have 
chosen not to list, and the remaining 11 products are equity options 
that either the other exchanges have chosen not to list or are in 
the process of being de-listed and thus are available for closing 
only transactions on ISE.
    ISE further notes that when another exchange has shown an 
interest in trading a proprietary ISE product, the Exchange has 
licensed the trading in that product to the other exchange. For 
example, ISE represents that NYSE Arca recently signed a license 
agreement with ISE to list and trade ISE's foreign currency options, 
and that this ISE proprietary product is now multiply listed. ISE 
states that it is ready, willing, and able to license its 
proprietary index products for trading on other exchanges on 
commercially reasonable terms. See id. at 15797 to 15798.
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    In addition to the need to attract order flow, the availability of 
alternatives to ISE's Depth of Market product significantly affect the 
terms on which ISE can distribute this market data.\27\ In setting the 
fees for its Depth of Market product, ISE must consider the extent to 
which market participants would choose one or more alternatives instead 
of purchasing its data.\28\ 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.\29\ In this respect, the core data feeds that include an 
exchange's own transaction information are a significant alternative to 
the exchange's market data product.\30\ Further, other options 
exchanges can produce their own depth of market data products, and thus 
are sources of potential competition for ISE. In addition, one or more 
securities firms could act independently and distribute their own order 
data, with or without a fee.
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    \27\ See NYSE Arca Order, supra note 11, at 74784.
    \28\ See id. at 74783.
    \29\ Id.
    \30\ Id. Information on transactions executed on ISE is 
available through OPRA.
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    ISE states in it is filings that of the nearly 200 firms that are 
members of the Exchange, less than 15 percent currently access the 
Depth of Market product, which the Exchange has been offering at no 
cost.\31\ The fact that many of ISE's own members did not choose to 
access the Depth of Market product even when there was no cost for 
doing so strongly suggests that ISE does not have monopoly pricing 
power for its Depth of Market product.\32\
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    \31\ See Notice, supra note 3, at 15798.
    \32\ In reaching its conclusion in the NYSE Arca Order, the 
Commission noted that the fact that 95% of the professional users of 
Nasdaq core data (where Nasdaq has a substantial market share in 
Nasdaq-listed stocks) choose not to purchase Nasdaq's depth-of-book 
market data strongly suggests that no exchange has monopoly pricing 
for its depth-of-book order data. See NYSE Arca Order, supra note 
11, at 74785.
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    The Commission believes that there are a number of alternative 
sources of information that impose significant competitive pressures on 
ISE in setting the terms for distributing its Depth of Market product. 
The Commission believes that the availability of those alternatives, as 
well as ISE's compelling need to attract order flow, imposed 
significant competitive pressure on ISE to act equitably, fairly, and 
reasonably in setting the terms of its proposal.\33\
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    \33\ The Commission stated in the NYSE Arca Order that broker-
dealers are not required to obtain depth-of-book order data to meet 
their duty of best execution. See id. at 74788 for a more detailed 
discussion. Likewise, the Commission does not view obtaining depth-
of-book data as a necessary prerequisite to broker-dealers 
satisfying the duty of best execution with respect to the trading of 
standardized options.
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    Because ISE was subject to significant competitive forces in 
setting the terms of the proposal, the Commission will approve the 
proposal in the absence of a substantial countervailing basis to find 
that the terms of the proposal fail to meet the applicable requirements 
of the Act or the rules thereunder. The Commission did not receive any 
comments on the terms of the proposal. Further, an analysis of the 
proposal does not provide such a basis. The Commission notes that the 
per controlled device fees as proposed will be the same for all 
Professional subscribers ($50) and the same for all Non-Professional 
subscribers ($5). The fees therefore do not unreasonably discriminate 
among types of subscribers, such as by favoring participants in the ISE 
market or penalizing participants in other markets.\34\
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    \34\ The Commission notes that the CTA participants' fees have 
long provided for a lower fee for non-professional subscribers, and 
that the fees approved by the Commission in the NYSE Arca Order also 
provided for lower fees for non-professional subscribers. See NYSE 
Arca Order, supra note 11, at 74772.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\35\ that the proposed rule change, as amended (SR-ISE-2007-97), 
be, and hereby is, approved.
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    \35\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-12357 Filed 5-27-09; 8:45 am]
BILLING CODE 8010-01-P