[Federal Register Volume 81, Number 20 (Monday, February 1, 2016)]
[Notices]
[Pages 5143-5148]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01712]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-76972; File No. SR-NYSE-2016-08]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
Amending the Fees for NYSE Order Imbalances and NYSE Alerts
January 26, 2016.
Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that, on January 13, 2016, New York Stock Exchange LLC (``NYSE''
or the ``Exchange'') filed with the Securities and Exchange Commission
(the ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a.
\3\ 17 CFR 240.19b-4.
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[[Page 5144]]
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend the fees for NYSE Order Imbalances
and NYSE Alerts to establish a multiple data feed fee. The Exchange
also proposes to amend the fees for the NYSE Order Imbalances to
discontinue fees relating to managed non-display. The proposed rule
change is available on the Exchange's Web site at www.nyse.com, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to amend the fees for NYSE Order Imbalances
\4\ and for NYSE Alerts,\5\ as set forth on the NYSE Proprietary Market
Data Fee Schedule (``Fee Schedule''). The Exchange proposes to make the
following fee changes:
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\4\ See Securities Exchange Act Release Nos. 59543 (March 9,
2009), 74 FR 11159 (March 16, 2009) (SR-NYSE-2008-132), 72923 (Aug.
26, 2014), 79 FR 52079 (Sept. 2, 2014) (SR-NYSE-2014-43) (``2014
Non-Display Filing'') and 73994 (Jan. 6, 2015), 80 FR 1554 (Jan. 12,
2015) (SR-NYSE-2014-77).
\5\ See Securities Exchange Act Release No. 50844 (Dec. 13,
2004), 69 FR 76806 (Dec. 22, 2004) (SR-NYSE-2004-53).
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Establish a multiple data feed fee for NYSE Order
Imbalances and for NYSE Alerts; and
Discontinue fees relating to managed non-display for NYSE
Order Imbalances.
Multiple Data Feed Fee for NYSE Order Imbalances and NYSE Alerts \6\
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\6\ The text of footnote 6 in Exhibit 5 of this proposed rule
change was previously filed under a separate filing. See SR-NYSE-
2016-02 (Proposed Rule Change to Amend the Fees for NYSE OpenBook).
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The Exchange proposes to establish a new monthly fee, the
``Multiple Data Feed Fee,'' that would apply to data recipients that
take a data feed for a market data product in more than two locations.
Data recipients taking NYSE Order Imbalances and NYSE Alerts in more
than two locations would be charged $200 per product per additional
location per month. No new reporting would be required.\7\
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\7\ Data vendors currently report a unique Vendor Account Number
for each location at which they provide a data feed to a data
recipient. The Exchange considers each Vendor Account Number a
location. For example, if a data recipient has five Vendor Account
Numbers, representing five locations, for the receipt of the Order
Imbalance Data Feed product, that data recipient will pay the
Multiple Data Feed fee with respect to three of the five locations.
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Managed Non-Display Fees for NYSE Order Imbalances
Non-Display Use of NYSE market data means accessing, processing, or
consuming NYSE market data delivered via direct and/or Redistributor
\8\ data feeds for a purpose other than in support of a data
recipient's display usage or further internal or external
redistribution.\9\ Managed Non-Display Services fees apply when a data
recipient's non-display applications are hosted by a Redistributor that
has been approved for Managed Non-Display Services.\10\ A Redistributor
approved for Managed Non-Display Services manages and controls the
access to NYSE Order Imbalances and does not allow for further internal
distribution or external redistribution of NYSE Order Imbalances by the
data recipients. A Redistributor approved for Managed Non-Display
Services is required to report to NYSE on a monthly basis the data
recipients that are receiving NYSE market data through the
Redistributor's managed non-display service and the real-time NYSE
market data products that such data recipients are receiving through
such service. Recipients of data through Managed Non-Display Service
have no additional reporting requirements. Data recipients that receive
NYSE Order Imbalances from an approved Redistributor of Managed Non-
Display Services are charged an access fee of $250 per month and a
Managed Non-Display Services Fee of $200 per month, for a total fee of
$450 per month.
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\8\ ``Redistributor'' means a vendor or any other person that
provides an NYSE data product to a data recipient or to any system
that a data recipient uses, irrespective of the means of
transmission or access.
\9\ See Securities Exchange Act Release No. 59544 (Mar. 9,
2009), 74 FR 11162 (March 16, 2009) (SR-NYSE-2008-131).
\10\ To be approved for Managed Non-Display Services, a
Redistributor must manage and control the access to NYSE Order
Imbalances for data recipients' non-display applications and not
allow for further internal distribution or external redistribution
of the information by data recipients. In addition, the
Redistributor is required to (a) host the data recipients' non-
display applications in equipment located in the Redistributor's
data center and/or hosted space/cage and (b) offer NYSE Order
Imbalances in the Redistributor's own messaging formats (rather than
using raw NYSE message formats) by reformatting and/or altering NYSE
Order Imbalances prior to retransmission without affecting the
integrity of NYSE Order Imbalances and without rendering NYSE Order
Imbalances inaccurate, unfair, uninformative, fictitious, misleading
or discriminatory.
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The Exchange proposes to discontinue the fees related to Managed
Non-Display Services because of the limited number of Redistributors
that have qualified for Managed Non-Display Services and the
administrative burdens associated with the program in light of the
limited number of Redistributors that have qualified for Managed Non-
Display Services. As proposed, all data recipients currently using NYSE
Order Imbalances on a managed non-display basis would continue to be
subject to an access fee of $500 per month, and the same non-display
services fees,\11\ as other data recipients.\12\
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\11\ See Fee Schedule.
\12\ In order to harmonize its approach to fees for its market
data products, the Exchange is simultaneously proposing to remove
fees related to Managed Non-Display Services for NYSE BBO, NYSE
Trades, and NYSE OpenBook. See SR-NYSE-2016-03 and SR-NYSE-2016-02.
The fees applicable to NYSE Integrated market data product effective
as of January 4, 2016 do not include Managed Non-Display Services
fees.
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Modification of the Application of the Access Fee for NYSE Order
Imbalances
Data recipients that subscribe to NYSE Order Imbalances are
currently charged an access fee of $500 per month. The Exchange
currently charges an access fee of $5,000 per month to each NYSE
OpenBook data feed recipient. The access fee for NYSE OpenBook allows
recipients of NYSE OpenBook to also receive NYSE Order Imbalances and
NYSE BBO without separately paying additional access fees for these
products.\13\ The Exchange is not proposing any change to the access
fee currently payable for NYSE Order Imbalances. The Exchange notes,
however, that pursuant to a proposed rule change filed separately,
recipients of NYSE OpenBook will no longer receive NYSE Order
Imbalances or NYSE BBO without paying a separate access fee for each of
these products.\14\
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\13\ See Securities Exchange Act Release No. 59544 (Mar. 9,
2009), 74 FR 11162 (March 16, 2009) (SR-NYSE-2008-131), at 11163.
\14\ See SR-NYSE-2016-02.
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2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with
[[Page 5145]]
the provisions of section 6 of the Act,\15\ in general, and sections
6(b)(4) and 6(b)(5) of the Act,\16\ in particular, in that it provides
an equitable allocation of reasonable fees among users and recipients
of the data and is not designed to permit unfair discrimination among
customers, issuers, and brokers.
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\15\ 15 U.S.C. 78f(b).
\16\ 15 U.S.C. 78f(b)(4), (5).
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The fees are also equitable and not unfairly discriminatory because
they will apply to all data recipients that choose to subscribe to NYSE
Order Imbalances and NYSE Alerts.
Multiple Data Feed Fee for NYSE Order Imbalances and NYSE Alerts
The Exchange believes that it is reasonable to require data
recipients to pay a modest additional fee taking a data feed for a
market data product in more than two locations, because such data
recipients can derive substantial value from being able to consume the
product in as many locations as they want. In addition, there are
administrative burdens associated with tracking each location at which
a data recipient receives the product. The Multiple Data Feed Fee is
designed to encourage data recipients to better manage their requests
for additional data feeds and to monitor their usage of data feeds. The
proposed fee is designed to apply to data feeds received in more than
two locations so that each data recipient can have one primary and one
backup data location before having to pay a multiple data feed fee. The
Exchange notes that this pricing is consistent with similar pricing
adopted in 2013 by the Consolidated Tape Association (``CTA'').\17\ The
Exchange also notes that the OPRA Plan imposes a similar charge of $100
per connection for circuit connections in addition to the primary and
backup connections.\18\
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\17\ See Securities Exchange Act Release No. 70010 (July 19,
2013), 78 FR 44984 (July 25, 2013) (SR-CTA/CQ-2013-04).
\18\ See ``Direct Access Fee,'' Options Price Reporting
Authority Fee Schedule Fee Schedule PRA Plan [sic] at http://www.opradata.com/pdf/fee_schedule.pdf.
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Managed Non-Display Fees for NYSE Order Imbalances
The Exchange believes that it is reasonable to discontinue Managed
Non-Display Fees. The Exchange determined in 2013 that its fee
structure, which was then based primarily on counting both display and
non-display devices, was no longer appropriate in light of market and
technology developments.\19\ Since then, the Exchange also modified its
approach to display and non-display fees with changes to the fees as
reflected in a 2014 filing.\20\ Discontinuing the fees applicable to
Managed Non-Display as proposed reflects the Exchange's continuing
review and consideration of the application of non-display fees, and
would harmonize and simplify the application of Non-Display Use fees by
applying them consistently to all users. In particular, after further
experience with the application of non-display use fees, the Exchange
believes that it is more equitable and less discriminatory to
discontinue the distinction for Managed Non-Display services because
all data recipients using data on a non-display basis are using it in a
comparable way and should be subject to similar fees regardless of
whether or not they receive the data directly from the Exchange. The
Exchange believes that applying the same non-display fees to all data
recipients on the same basis better reflects the significant value of
non-display data to data recipients and eliminates what is effectively
a discount for certain data recipients, and as such is not unfairly
discriminatory. The Exchange believes that the non-display fees
directly and appropriately reflect the significant value of using non-
display data in a wide range of computer-automated functions relating
to both trading and non-trading activities and that the number and
range of these functions continue to grow through innovation and
technology developments.
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\19\ See Securities Exchange Act Release No. 69278 (April 2,
2013), 78 FR 20973 (April 8, 2013) (SR-NYSE-2013-25).
\20\ See Securities Exchange Act Release No .72923 (Aug. 26,
2014), 79 FR 52079 (Sept. 2, 2014) (SR-NYSE-2014-43).
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Modifications to Access Fees for NYSE Order Imbalances
The Exchange believes that it is reasonable to make the changes
proposed to the application of access fees for NYSE Order Imbalances.
Specifically, data recipients that take the NYSE Order Imbalances, or
any other data feed, receive value from each product they choose to
take. A data recipient that chooses to take multiple products (no
recipient is required to take any of products [sic], or any specific
combination of them) uses each product in a different way and therefore
obtains different value from each. Applying an access fee to each
product would bring consistency to the Exchange's application of access
fees to each product. The Exchange believes that each product has a
separate and distinct value that is appropriate to reflect in a
separate access fee. Finally, the requirement to pay separate access
fees for each market data product is equitable and not unfairly
discriminatory because it would apply to all data recipients and
appropriately reflects the value of each product to those who choose to
use them.
The Exchange notes that NYSE Order Imbalances and NYSE Alerts are
entirely optional. The Exchange is not required to make NYSE Order
Imbalances or NYSE Alerts available or to offer any specific pricing
alternatives to any customers, nor is any firm required to purchase
NYSE Order Imbalances or NYSE Alerts. Firms that do purchase these
products do so for the primary goals of using them to increase
revenues, reduce expenses, and in some instances compete directly with
the Exchange (including for order flow); those firms are able to
determine for themselves whether these products or any other similar
products are attractively priced or not.\21\
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\21\ See, e.g., Proposing Release on Regulation of NMS Stock
Alternative Trading Systems, Securities Exchange Act Release No.
76474 (Nov. 18, 2015) (File No. S7-23-15). See also, ``Brokers
Warned Not to Steer Clients' Stock Trades Into Slow Lane,''
Bloomberg Business, December 14, 2015 (Sigma X dark pool to use
direct exchange feeds as the primary source of price data).
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The decision of the United States Court of Appeals for the District
of Columbia Circuit in NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir.
2010), upheld reliance by the Securities and Exchange Commission
(``Commission'') upon the existence of competitive market mechanisms to
set reasonable and equitably allocated fees for proprietary market
data:
In fact, the legislative history indicates that the Congress
intended that the market system `evolve through the interplay of
competitive forces as unnecessary regulatory restrictions are
removed' and that the SEC wield its regulatory power `in those
situations where competition may not be sufficient,' such as in the
creation of a `consolidated transactional reporting system.'
Id. at 535 (quoting H.R. Rep. No. 94-229 at 92 (1975), as reprinted
in 1975 U.S.C.C.A.N. 323). The court agreed with the Commission's
conclusion that ``Congress intended that `competitive forces should
dictate the services and practices that constitute the U.S. national
market system for trading equity securities.' '' \22\
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\22\ NetCoalition, 615 F.3d at 535.
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As explained below in the Exchange's Statement on Burden on
Competition, the Exchange believes that there is substantial evidence
of competition in the marketplace for proprietary market
[[Page 5146]]
data and that the Commission can rely upon such evidence in concluding
that the fees established in this filing are the product of competition
and therefore satisfy the relevant statutory standards. In addition,
the existence of alternatives to these data products, such as
consolidated data and proprietary data from other sources, as described
below, further ensures that the Exchange cannot set unreasonable fees,
or fees that are unreasonably discriminatory, when vendors and
subscribers can select such alternatives.
As the NetCoalition decision noted, the Commission is not required
to undertake a cost-of-service or ratemaking approach. The Exchange
believes that, even if it were possible as a matter of economic theory,
cost-based pricing for proprietary market data would be so complicated
that it could not be done practically or offer any significant
benefits.\23\
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\23\ The Exchange believes that cost-based pricing would be
impractical because it would create enormous administrative burdens
for all parties and the Commission to cost-regulate a large number
of participants and standardize and analyze extraordinary amounts of
information, accounts, and reports. In addition, and as described
below, it is impossible to regulate market data prices in isolation
from prices charged by markets for other services that are joint
products. Cost-based rate regulation would also lead to litigation
and may distort incentives, including those to minimize costs and to
innovate, leading to further waste. Under cost-based pricing, the
Commission would be burdened with determining a fair rate of return,
and the industry could experience frequent rate increases based on
escalating expense levels. Even in industries historically subject
to utility regulation, cost-based ratemaking has been discredited.
As such, the Exchange believes that cost-based ratemaking would be
inappropriate for proprietary market data and inconsistent with
Congress's direction that the Commission use its authority to foster
the development of the national market system, and that market
forces will continue to provide appropriate pricing discipline. See
Appendix C to NYSE's comments to the Commission's 2000 Concept
Release on the Regulation of Market Information Fees and Revenues,
which can be found on the Commission's Web site at http://www.sec.gov/rules/concept/s72899/buck1.htm.
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For these reasons, the Exchange believes that the proposed fees are
reasonable, equitable, and not unfairly discriminatory.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. An exchange's ability to
price its proprietary market data feed products is constrained by
actual competition for the sale of proprietary market data products,
the joint product nature of exchange platforms, and the existence of
alternatives to the Exchange's proprietary data.
The Existence of Actual Competition
The market for proprietary data products is currently competitive
and inherently contestable because there is fierce competition for the
inputs necessary for the creation of proprietary data and strict
pricing discipline for the proprietary products themselves. Numerous
exchanges compete with one another for listings and order flow and
sales of market data itself, providing ample opportunities for
entrepreneurs who wish to compete in any or all of those areas,
including producing and distributing their own market data. Proprietary
data products are produced and distributed by each individual exchange,
as well as other entities, in a vigorously competitive market. Indeed,
the U.S. Department of Justice (``DOJ'') (the primary antitrust
regulator) has expressly acknowledged the aggressive actual competition
among exchanges, including for the sale of proprietary market data. In
2011, the DOJ stated that exchanges ``compete head to head to offer
real-time equity data products. These data products include the best
bid and offer of every exchange and information on each equity trade,
including the last sale.'' \24\
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\24\ Press Release, U.S. Department of Justice, Assistant
Attorney General Christine Varney Holds Conference Call Regarding
NASDAQ OMX Group Inc. and IntercontinentalExchange Inc. Abandoning
Their Bid for NYSE Euronext (May 16, 2011), available at http://www.justice.gov/iso/opa/atr/speeches/2011/at-speech-110516.html; see
also Complaint in U.S. v. Deutsche Borse AG and NYSE Euronext, Case
No. 11-cv-2280 (D.C. Dist.) ] 24 (``NYSE and Direct Edge compete
head-to-head . . . in the provision of real-time proprietary equity
data products.'').
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Moreover, competitive markets for listings, order flow, executions,
and transaction reports provide pricing discipline for the inputs of
proprietary data products and therefore constrain markets from
overpricing proprietary market data. Broker-dealers send their order
flow and transaction reports to multiple venues, rather than providing
them all to a single venue, which in turn reinforces this competitive
constraint. As a 2010 Commission Concept Release noted, the ``current
market structure can be described as dispersed and complex'' with
``trading volume . . . dispersed among many highly automated trading
centers that compete for order flow in the same stocks'' and ``trading
centers offer[ing] a wide range of services that are designed to
attract different types of market participants with varying trading
needs.'' \25\ More recently, SEC Chair Mary Jo White has noted that
competition for order flow in exchange-listed equities is ``intense''
and divided among many trading venues, including exchanges, more than
40 alternative trading systems, and more than 250 broker-dealers.\26\
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\25\ Concept Release on Equity Market Structure, Securities
Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594 (Jan. 21,
2010) (File No. S7-02-10). This Concept Release included data from
the third quarter of 2009 showing that no market center traded more
than 20% of the volume of listed stocks, further evidencing the
dispersal of and competition for trading activity. Id. at 3598. Data
available on ArcaVision show that from June 30, 2013 to June 30,
2014, no exchange traded more than 12% of the volume of listed
stocks by either trade or dollar volume, further evidencing the
continued dispersal of and fierce competition for trading activity.
See https://www.arcavision.com/Arcavision/arcalogin.jsp.
\26\ Mary Jo White, Enhancing Our Equity Market Structure,
Sandler O'Neill & Partners, L.P. Global Exchange and Brokerage
Conference (June 5, 2014) (available on the Commission Web site),
citing Tuttle, Laura, 2014, ``OTC Trading: Description of Non-ATS
OTC Trading in National Market System Stocks,'' at 7-8.
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If an exchange succeeds in competing for quotations, order flow,
and trade executions, then it earns trading revenues and increases the
value of its proprietary market data products because they will contain
greater quote and trade information. Conversely, if an exchange is less
successful in attracting quotes, order flow, and trade executions, then
its market data products may be less desirable to customers in light of
the diminished content and data products offered by competing venues
may become more attractive. Thus, competition for quotations, order
flow, and trade executions puts significant pressure on an exchange to
maintain both execution and data fees at reasonable levels.
In addition, in the case of products that are also redistributed
through market data vendors, such as Bloomberg and Thompson Reuters,
the vendors themselves provide additional price discipline for
proprietary data products because they control the primary means of
access to certain end users. These vendors impose price discipline
based upon their business models. For example, vendors that assess a
surcharge on data they sell are able to refuse to offer proprietary
products that their end users do not or will not purchase in sufficient
numbers. Vendors will not elect to make available NYSE Order Imbalances
and NYSE Alerts unless their customers request them, and customers will
not elect to pay the proposed fees unless these products can provide
value by sufficiently increasing revenues or reducing costs in the
customer's business in a manner that will offset the fees. All of these
factors operate as constraints on pricing proprietary data products.
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Joint Product Nature of Exchange Platform
Transaction execution and proprietary data products are
complementary in that market data is both an input and a byproduct of
the execution service. In fact, proprietary market data and trade
executions are a paradigmatic example of joint products with joint
costs. The decision of whether and on which platform to post an order
will depend on the attributes of the platforms where the order can be
posted, including the execution fees, data availability and quality,
and price and distribution of data products. Without a platform to post
quotations, receive orders, and execute trades, exchange data products
would not exist.
The costs of producing market data include not only the costs of
the data distribution infrastructure, but also the costs of designing,
maintaining, and operating the exchange's platform for posting quotes,
accepting orders, and executing transactions and the cost of regulating
the exchange to ensure its fair operation and maintain investor
confidence. The total return that a trading platform earns reflects the
revenues it receives from both products and the joint costs it incurs.
Moreover, an exchange's broker-dealer customers generally view the
costs of transaction executions and market data as a unified cost of
doing business with the exchange. A broker-dealer will only choose to
direct orders to an exchange if the revenue from the transaction
exceeds its cost, including the cost of any market data that the
broker-dealer chooses to buy in support of its order routing and
trading decisions. If the costs of the transaction are not offset by
its value, then the broker-dealer may choose instead not to purchase
the product and trade away from that exchange. There is substantial
evidence of the strong correlation between order flow and market data
purchases. For example, in September 2015, more than 80% of the
transaction volume on each of NYSE and NYSE's affiliates NYSE Arca and
NYSE MKT was executed by market participants that purchased one or more
proprietary market data products (the 20 firms were not the same for
each market). A supra-competitive increase in the fees for either
executions or market data would create a risk of reducing an exchange's
revenues from both products.
Other market participants have noted that proprietary market data
and trade executions are joint products of a joint platform and have
common costs.\27\ The Exchange agrees with and adopts those discussions
and the arguments therein. The Exchange also notes that the economics
literature confirms that there is no way to allocate common costs
between joint products that would shed any light on competitive or
efficient pricing.\28\
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\27\ See Securities Exchange Act Release No. 72153 (May 12,
2014), 79 FR 28575, 28578 n.15 (May 16, 2014) (SR-NASDAQ-2014-045)
(``[A]ll of the exchange's costs are incurred for the unified
purposes of attracting order flow, executing and/or routing orders,
and generating and selling data about market activity. The total
return that an exchange earns reflects the revenues it receives from
the joint products and the total costs of the joint products.'').
See also Securities Exchange Act Release No. 62907 (Sept. 14, 2010),
75 FR 57314, 57317 (Sept. 20, 2010) (SR-NASDAQ-2010-110), and
Securities Exchange Act Release No. 62908 (Sept. 14, 2010), 75 FR
57321, 57324 (Sept. 20, 2010) (SR-NASDAQ-2010-111).
\28\ See generally Mark Hirschey, Fundamentals of Managerial
Economics, at 600 (2009) (``It is important to note, however, that
although it is possible to determine the separate marginal costs of
goods produced in variable proportions, it is impossible to
determine their individual average costs. This is because common
costs are expenses necessary for manufacture of a joint product.
Common costs of production--raw material and equipment costs,
management expenses, and other overhead--cannot be allocated to each
individual by-product on any economically sound basis. . . . Any
allocation of common costs is wrong and arbitrary.''). This is not
new economic theory. See, e.g., F.W. Taussig, ``A Contribution to
the Theory of Railway Rates,'' Quarterly Journal of Economics V(4)
438, 465 (July 1891) (``Yet, surely, the division is purely
arbitrary. These items of cost, in fact, are jointly incurred for
both sorts of traffic; and I cannot share the hope entertained by
the statistician of the Commission, Professor Henry C. Adams, that
we shall ever reach a mode of apportionment that will lead to
trustworthy results.'').
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Analyzing the cost of market data product production and
distribution in isolation from the cost of all of the inputs supporting
the creation of market data and market data products will inevitably
underestimate the cost of the data and data products because it is
impossible to obtain the data inputs to create market data products
without a fast, technologically robust, and well-regulated execution
system, and system and regulatory costs affect the price of both
obtaining the market data itself and creating and distributing market
data products. It would be equally misleading, however, to attribute
all of an exchange's costs to the market data portion of an exchange's
joint products. Rather, all of an exchange's costs are incurred for the
unified purposes of attracting order flow, executing and/or routing
orders, and generating and selling data about market activity. The
total return that an exchange earns reflects the revenues it receives
from the joint products and the total costs of the joint products.
As noted above, the level of competition and contestability in the
market is evident in the numerous alternative venues that compete for
order flow, including 11 equities self-regulatory organization
(``SRO'') markets, as well as various forms of alternative trading
systems (``ATSs''), including dark pools and electronic communication
networks (``ECNs''), and internalizing broker-dealers. SRO markets
compete to attract order flow and produce transaction reports via trade
executions, and two FINRA-regulated Trade Reporting Facilities compete
to attract transaction reports from the non-SRO venues.
Competition among trading platforms can be expected to constrain
the aggregate return that each platform earns from the sale of its
joint products, but different trading platforms may choose from a range
of possible, and equally reasonable, pricing strategies as the means of
recovering total costs. For example, some platforms may choose to pay
rebates to attract orders, charge relatively low prices for market data
products (or provide market data products free of charge), and charge
relatively high prices for accessing posted liquidity. Other platforms
may choose a strategy of paying lower rebates (or no rebates) to
attract orders, setting relatively high prices for market data
products, and setting relatively low prices for accessing posted
liquidity. For example, BATS Global Markets (``BATS'') and Direct Edge,
which previously operated as ATSs and obtained exchange status in 2008
and 2010, respectively, provided certain market data at no charge on
their Web sites in order to attract more order flow, and used revenue
rebates from resulting additional executions to maintain low execution
charges for their users.\29\ In this environment, there is no economic
basis for regulating maximum prices for one of the joint products in an
industry in which suppliers face competitive constraints with regard to
the joint offering.
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\29\ This is simply a securities market-specific example of the
well-established principle that in certain circumstances more sales
at lower margins can be more profitable than fewer sales at higher
margins; this example is additional evidence that market data is an
inherent part of a market's joint platform.
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Existence of Alternatives
The large number of SROs, ATSs, and internalizing broker-dealers
that currently produce proprietary data or are currently capable of
producing it provides further pricing discipline for proprietary data
products. Each SRO, ATS, and broker-dealer is currently permitted to
produce and sell proprietary data products, and many currently do,
including but not limited to the Exchange, NYSE MKT, NYSE
[[Page 5148]]
Arca, NASDAQ OMX, BATS, and Direct Edge.
The fact that proprietary data from ATSs, internalizing broker-
dealers, and vendors can bypass SROs is significant in two respects.
First, non-SROs can compete directly with SROs for the production and
sale of proprietary data products. By way of example, BATS and NYSE
Arca both published proprietary data on the Internet before registering
as exchanges. Second, because a single order or transaction report can
appear in an SRO proprietary product, a non-SRO proprietary product, or
both, the amount of data available via proprietary products is greater
in size than the actual number of orders and transaction reports that
exist in the marketplace. Because market data users can find suitable
substitutes for most proprietary market data products, a market that
overprices its market data products stands a high risk that users may
substitute another source of market data information for its own.
Those competitive pressures imposed by available alternatives are
evident in the Exchange's proposed pricing.
In addition to the competition and price discipline described
above, the market for proprietary data products is also highly
contestable because market entry is rapid and inexpensive. The history
of electronic trading is replete with examples of entrants that swiftly
grew into some of the largest electronic trading platforms and
proprietary data producers: Archipelago, Bloomberg Tradebook, Island,
RediBook, Attain, TrackECN, BATS Trading and Direct Edge. As noted
above, BATS launched as an ATS in 2006 and became an exchange in 2008,
while Direct Edge began operations in 2007 and obtained exchange status
in 2010.
In determining the proposed change to the fees for NYSE Order
Imbalances and NYSE Alerts, the Exchange considered the competitiveness
of the market for proprietary data and all of the implications of that
competition. The Exchange believes that it has considered all relevant
factors and has not considered irrelevant factors in order to establish
fair, reasonable, and not unreasonably discriminatory fees and an
equitable allocation of fees among all users. The existence of numerous
alternatives to the Exchange's products, including proprietary data
from other sources, ensures that the Exchange cannot set unreasonable
fees, or fees that are unreasonably discriminatory, when vendors and
subscribers can elect these alternatives or choose not to purchase a
specific proprietary data product if the attendant fees are not
justified by the returns that any particular vendor or data recipient
would achieve through the purchase.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change is effective upon filing pursuant to
section 19(b)(3)(A) \30\ of the Act and subparagraph (f)(2) of Rule
19b-4 \31\ thereunder, because it establishes a due, fee, or other
charge imposed by the Exchange.
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\30\ 15 U.S.C. 78s(b)(3)(A).
\31\ 17 CFR 240.19b-4(f)(2).
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At any time within 60 days of the filing of such proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings under
section 19(b)(2)(B) \32\ of the Act to determine whether the proposed
rule change should be approved or disapproved.
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\32\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NYSE-2016-08 on the subject line.
Paper Comments
Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2016-08. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549 on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSE-2016-08 and should be
submitted on or before February 22, 2016.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-01712 Filed 1-29-16; 8:45 am]
BILLING CODE 8011-01-P