[Federal Register Volume 81, Number 46 (Wednesday, March 9, 2016)]
[Notices]
[Pages 12535-12540]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-05184]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77289; File No. SR-NYSEArca-2016-31]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Establishing Fees 
for the NYSE Arca Order Imbalances Data Feed

March 3, 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 February 22, 2016, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to establish fees for the NYSE Arca Order 
Imbalances data feed (``Order Imbalances Data Feed''). The proposed 
rule change is available on the Exchange's Web site at www.nyse.com, at 
the principal office of the Exchange, and at the Commission's Public 
Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the self-regulatory organization 
included statements concerning the purpose of, and basis for, the 
proposed rule change and discussed any comments it received on the 
proposed rule change. The text of those statements may be examined at 
the places specified in Item IV below. The Exchange has prepared 
summaries, set forth in sections A, B, and C below, of the most 
significant parts of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to establish the fees for the Order 
Imbalances Data Feed in the NYSE Arca Equities Proprietary Market Data 
Fee Schedule (``Fee Schedule'').\4\ The Exchange proposes to establish 
the following fees for the Order Imbalances Data Feed:
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    \4\ The proposed rule change establishing the Order Imbalances 
Data Feed was immediately effective on January 13, 2016. See 
Securities Exchange Act Release No. 76968 (January 22, 2016), 81 FR 
4689 (January 27, 2016) (SR-NYSEArca-2016-10).
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    1. Access Fee. For the receipt of access to the Order Imbalances 
Data Feed, the Exchange proposes to charge $500 per month. Although the 
Exchange charges professional and non-professional user fees for other 
proprietary market data products, the Exchange does not intend to 
charge such fees for the Order Imbalances Data Feed.
    2. Non-Display Fees. The Exchange proposes to establish non-display 
fees for the Order Imbalances Data Feed using the same non-display use 
fee structure established for the Exchange's other market data 
products.\5\ Non-display use would mean accessing, processing, or 
consuming the Order Imbalances Data Feed delivered via direct and/or 
Redistributor \6\ data feeds for a purpose other than in support of a 
data recipient's display or further internal or external redistribution 
(``Non-Display Use''). Non-Display Use would include any trading use, 
such as high frequency or algorithmic trading, and would also include 
any trading in any asset class, automated order or quote generation 
and/or order pegging, price referencing for algorithmic trading or 
smart order routing, operations control programs, investment analysis, 
order verification, surveillance programs, risk management, compliance, 
and portfolio management.
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    \5\ See Securities Exchange Act Release Nos. 73011 (September 5, 
2014), 79 FR 54315 (September 11, 2014) (SR-NYSEArca-2014-93) and 
73619 (November 18, 2014), 79 FR 69902 (November 24, 2014) (SR-
NYSEArca-2014-132).
    \6\ ``Redistributor'' means a vendor or any person that provides 
a real-time NYSE Arca data product to a data recipient or to any 
system that a data recipient uses, irrespective of the means of 
transmission or access.
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    Under the proposal, for Non-Display Use of the Order Imbalances 
Data Feed, there would be three categories of, and fees applicable to, 
data recipients. One, two or three categories of Non-Display Use may 
apply to a data recipient.
     Under the proposal, the Category 1 Fee would be $500 per 
month and

[[Page 12536]]

would apply when a data recipient's Non-Display Use of the Order 
Imbalances Data Feed is on its own behalf, not on behalf of its 
clients.
     Under the proposal, Category 2 Fees would be $500 per 
month and would apply to a data recipient's Non-Display Use of the 
Order Imbalances Data Feed on behalf of its clients.
     Under the proposal, Category 3 Fees would be $500 per 
month and would apply to a data recipient's Non-Display Use of the 
Order Imbalances Data Feed for the purpose of internally matching buy 
and sell orders within an organization, including matching customer 
orders for data recipient's own behalf and/or on behalf of its clients. 
This category would apply to Non-Display Use in trading platforms, such 
as, but not restricted to, alternative trading systems (``ATSs''), 
broker crossing networks, broker crossing systems not filed as ATSs, 
dark pools, multilateral trading facilities, exchanges and systematic 
internalization systems. Category 3 Fees would be capped at $1,500 per 
month for each data recipient for the Order Imbalances Data Feed.
    The description of the three non-display use categories is set 
forth in the Fee Schedule in endnote 1 and that endnote would be 
referenced in the Order Imbalances Data Feed fees on the Fee Schedule.
    Data recipients that receive the Order Imbalances Data Feed for 
Non-Display Use would be required to complete and submit a Non-Display 
Use Declaration before they would be authorized to receive the feed.\7\ 
A firm subject to Category 3 Fees would be required to identify each 
platform that uses the Order Imbalances Data Feed on a Non-Display Use 
basis, such as ATSs and broker crossing systems not registered as ATSs, 
as part of the Non-Display Use Declaration.
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    \7\ Data recipients are required to complete and submit the Non-
Display Declaration with respect to each market data product on the 
Fee Schedule that includes Non-Display Fees. See Securities Exchange 
Act Release Nos. 74865 (May 4, 2015), 80 FR 26593 (May 8, 2015) (SR-
NYSEArca-2015-34) (NYSE Arca Integrated Feed) and 74901 (May 7, 
2015), 80 FR 27371 (May 13, 2015) (SR-NYSEArca-2015-36) (NYSE Arca 
BBO and NYSE Arca Trades).
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    3. Non-Display Declaration Late Fee. Data recipients that receive 
the Order Imbalances Data Feed for Non-Display Use would be required to 
complete and submit a Non-Display Use Declaration before they would be 
authorized to receive the feed. Beginning in 2017, the Order Imbalances 
Data Feed data recipients would be required to submit, by January 31st 
of each year, the Non-Display Use Declaration that applies to all real-
time NYSE Arca market data products that include Non-Display Use 
fees.\8\ The Exchange proposes to charge a Non-Display Declaration Late 
Fee of $1,000 per month to any data recipient that pays an Access Fee 
for the Order Imbalances Data Feed that has failed to complete and 
submit a Non-Display Use Declaration. Specifically, with respect to the 
Non-Display Use Declaration due by January 31st of each year beginning 
in 2017, the Non-Display Declaration Late Fee would apply to data 
recipients that fail to complete and submit the Non-Display Use 
Declaration by the January 31st due date, and would apply beginning 
February 1st and for each month thereafter until the data recipient has 
completed and submitted the annual Non-Display Use Declaration. The 
Exchange also proposes to apply current endnote 2 on the Fee Schedule 
to the Non-Display Declaration Late Fee for the Order Imbalances Data 
Feed. Endnote 2 to the Fee Schedule also makes it clear that the Non-
Display Declaration Late Fee applies to the Order Imbalances Data Feed 
beginning February 1st of 2017 and each year with respect to the Non-
Display Use Declaration due by January 31st each year.\9\
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    \8\ Id.
    \9\ The second sentence of endnote 2 to the Fee Schedule refers 
to a late fee for the Non-Display Use Declarations due September 1, 
2014 that have not been submitted by June 30, 2015. This sentence is 
not applicable to the Order Imbalances Data Feed because the Order 
Imbalances Data Feed was not available as of the September 1, 2014 
due date and because data recipients of the Order Imbalances Data 
Feed will have to complete and submit a Non-Display Declaration 
before they can receive the feed. The Exchange proposes to modify 
the second sentence so that it applies only to NYSE ArcaBook, NYSE 
Arca BBO, NYSE Arca Trades and NYSE Arca Integrated Feed and not to 
the Order Imbalances Data Feed. The Exchange proposes to add a 
fourth sentence so that it is clear that it applies to all market 
data products, including the Order Imbalances Data Feed, to which 
Non-Display Use fees apply.
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    In addition, if a data recipient's use of the Order Imbalances Data 
Feed changes at any time after the data recipient submits a Non-Display 
Use Declaration, the data recipient must inform the Exchange of the 
change by completing and submitting at the time of the change an 
updated declaration reflecting the change of use.
    4. Multiple Data Feed Fee. The Exchange proposes to establish a 
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 the Order Imbalance Data Feed in 
more than two locations would be charged $200 per additional location 
per month. No new reporting would be required.\10\
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    \10\ 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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Other Changes to the Fee Schedule
    Non-Display Use fees for NYSE ArcaBook include the Non-Display Use 
of NYSE Arca BBO and NYSE Arca Order Imbalances for customers paying 
NYSE ArcaBook non-display fees that also pay access fees for NYSE Arca 
BBO and NYSE Arca Order Imbalances. The Exchange proposes to describe 
this application of the Non-Display Use fees in note 1 to the Fee 
Schedule.\11\ Additionally, Non-Display Use fees for NYSE Arca 
Integrated Feed include the Non-Display Use of NYSE ArcaBook, NYSE Arca 
BBO, NYSE Arca Trades and NYSE Arca Order Imbalances for customer 
paying NYSE Arca Integrated Feed non-display fees that also pay access 
fees for NYSE ArcaBook, NYSE Arca BBO, NYSE Arca Trades and NYSE Arca 
Order Imbalances. The Exchange proposes to describe this application of 
the Non-Display Use fees with an amendment to note 1 to the Fee 
Schedule.
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    \11\ The Exchange added a similar note, Note 1(b), to the Fee 
Schedule in connection with the addition of fees for the NYSE Arca 
Integrated Feed. See Securities Exchange Act Release No. 76914 
(January 14, 2016), 81 FR 3484 (January 21, 2016) (SR-NYSEArca-2016-
03).
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    The Exchange notes that the proposed fees are otherwise consistent 
with the fee structures for other market data products offered by the 
Exchange,\12\ as well as the fees for similar market data products 
offered by the Exchange's affiliates.\13\ Other than the Exchange's 
affiliates, the Exchange has not identified any other exchanges that 
offer

[[Page 12537]]

a standalone order imbalance market data product.\14\ The proposed fees 
reflect the value of this proprietary data to investors in making 
informed trading and order routing decisions.
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    \12\ For example, for NYSE ArcaBook, which includes depth of 
book, the Order Imbalances Data Feed, and other data, the Exchange 
charges an access fee of $2,000 per month, a professional user fee 
of $40 per month, and a non-professional user fee that ranges 
between $3 and $10 per month (capped at $40,000 per month). NYSE 
ArcaBook will continue to include the Order Imbalances Data Feed at 
no additional charge to NYSE ArcaBook customers.
    \13\ NYSE MKT LLC (``NYSE MKT'') also currently charges a $500 
per month non-display fee for categories 1, 2 and 3. See Securities 
Exchange Act Release No. 72020 (September 9, 2014), 79 FR 55040 
(September 15, 2014) (SR-NYSEMKT-2014-72); NYSE MKT also currently 
charges a $1,000 per month non-display late fee and $200 per month 
multiple data feed fee. See Securities Exchange Act Release Nos. 
74884 (May 6, 2015), 80 FR 27212 (May 12, 2015) (SR-NYSEMKT-2015-35) 
and 76911 (January 14, 2016), 81 FR 3496 (January 21, 2016) (SR-
NYSEMKT-2016-05), respectively.
    \14\ The NASDAQ Stock Market LLC (``NASDAQ'') offers Net Order 
Imbalance Indicator data through its NASDAQ Workstation and NASDAQ 
TotalView datafeed. See http://www.nasdaqtrader.com/trader.aspx?id=openclose.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the 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 its members, 
issuers, and other persons using its facilities and is not designed to 
permit unfair discrimination among customers, issuers, brokers, or 
dealers. The Exchange also believes that the proposed rule change is 
consistent with Section 11(A) of the Act \17\ in that it is consistent 
with (i) fair competition among brokers and dealers, among exchange 
markets, and between exchange markets and markets other than exchange 
markets; and (ii) the availability to brokers, dealers, and investors 
of information with respect to quotations for and transactions in 
securities. Furthermore, the proposed rule change is consistent with 
Rule 603 of Regulation NMS,\18\ which provides that any national 
securities exchange that distributes information with respect to 
quotations for or transactions in an NMS stock do so on terms that are 
not unreasonably discriminatory.
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    \15\ 15 U.S.C. 78f(b).
    \16\ 15 U.S.C. 78f(b)(4), (5).
    \17\ 15 U.S.C. 78k-1.
    \18\ See 17 CFR 242.603.
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    The Exchange further believes that the proposed rule change is 
consistent with the market-based approach of the Commission. 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 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.' '' \19\
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    \19\ 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 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.\20\ In addition, the 
existence of alternatives to the Order Imbalances Data Feed, including 
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 elect 
such alternatives.
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    \20\ Section 916 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 (the ``Dodd-Frank Act'') amended 
paragraph (A) of Section 19(b)(3) of the Act, 15 U.S.C. 78s(b)(3), 
to make clear that all exchange fees for market data may be filed by 
exchanges on an immediately effective basis.
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    As the NetCoalition decision noted, the Commission is not required 
to undertake a cost-of-service or ratemaking approach.\21\ The Exchange 
believes that, even if it were possible as a matter of economic theory, 
cost-based pricing for non-core market data would be so complicated 
that it could not be done practically.\22\
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    \21\ NetCoalition, 615 F.3d at 536.
    \22\ The Exchange believes that cost-based pricing would be 
impractical because it would create enormous administrative burdens 
for all parties, including 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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    The Exchange believes that the proposed fees are reasonable because 
they replicate the fee structure of other market data products offered 
by the Exchange by including not only an access fee but also non-
display, late declaration, and multiple data feed fees.\23\ The 
Exchange believes that these fees are relatively low in light of the 
high value of this proprietary data to users in making informed order 
routing and trading decisions for all securities traded on the 
Exchange, particularly in the Exchange's opening and closing auctions 
where a high percentage of daily trading volume occurs.\24\
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    \23\ See supra note 12.
    \24\ See 17 CFR 242.603(c).
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    The proposed fees are equitable and not unfairly discriminatory 
because they are consistent with the structure of other market data 
fees that charge for access, non-display use and receipt of data in 
multiple locations.\25\
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    \25\ See supra note 12.
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    The existence of alternatives to the Order Imbalances Data Feed, 
including proprietary data from other sources, reasonably ensures that 
the Exchange cannot set unreasonable fees, or fees that are 
unreasonably discriminatory, when vendors and subscribers can elect 
such alternatives.
    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

[[Page 12538]]

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.'' \26\
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    \26\ 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.'' \27\ 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.\28\
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    \27\ 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.
    \28\ 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 the Order Imbalances 
Data Feed unless their customers request it, and customers will not 
elect to pay the proposed fees unless the Order Imbalances Data Feed 
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.
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 January 2016, more than 80% of the 
transaction volume on each of NYSE Arca and NYSE Arca's affiliates New 
York Stock Exchange LLC (``NYSE'') and NYSE MKT was executed by market 
participants that purchased one or more proprietary market data 
products. 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.\29\ The Exchange agrees with and adopts those discussions 
and the arguments therein. The Exchange also notes that the

[[Page 12539]]

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.\30\
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    \29\ 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).
    \30\ 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 12 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.\31\ 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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    \31\ 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, NYSE MKT, 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 fees for the Order Imbalances Data 
Feed, 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.

[[Page 12540]]

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) \32\ of the Act and subparagraph (f)(2) of Rule 
19b-4 \33\ thereunder, because it establishes a due, fee, or other 
charge imposed by the Exchange.
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    \32\ 15 U.S.C. 78s(b)(3)(A).
    \33\ 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) \34\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \34\ 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-NYSEArca-2016-31 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-NYSEArca-2016-31. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2016-31, and should 
be submitted on or before March 30, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\35\
Robert W. Errett,
Deputy Secretary.
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    \35\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-05184 Filed 3-8-16; 8:45 am]
 BILLING CODE 8011-01-P