[Federal Register Volume 82, Number 191 (Wednesday, October 4, 2017)]
[Notices]
[Pages 46319-46323]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-21279]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-81754; File No. SR-Phlx-2017-74]


Self-Regulatory Organizations; NASDAQ PHLX LLC; Notice of Filing 
of Proposed Rule Change To Introduce the Intellicator Analytic Tool

September 28, 2017.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 20, 2017, NASDAQ PHLX LLC (``Phlx'' or ``Exchange'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II, and III, below, 
which Items have been prepared by the Exchange. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to introduce the Intellicator Analytic Tool.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqphlx.cchwallstreet.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 Exchange 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 these 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 aspects of such 
statements.

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

1. Purpose
    The purpose of the proposed rule change is to introduce the 
Intellicator Analytic Tool, a new, optional market data product 
available for a corresponding fee \3\ that is designed to analyze 
options market transactions and synthesize that analysis to assist 
investors in assessing the equities underlying those transactions.\4\
---------------------------------------------------------------------------

    \3\ A separate filing will address the pricing for the 
Intellicator Analytic Tool, which will also be implemented on 
October 27, 2017, if approved by the Commission.
    \4\ The Exchange initially filed the proposed changes on August 
2, 2017 (SR-Phlx 2017-62). On August 11, 2017, the Exchange withdrew 
that filing.
---------------------------------------------------------------------------

    Options market transactions can be complex; the purpose of the 
Intellicator Analytic Tool is to distill options data into a form that 
will help investors understand options market movements and provide 
them with actionable insight in changing market conditions. The 
Intellicator Analytic Tool will offer three increasingly sophisticated 
levels of analysis. The first level, the Single-Factor Analytic Bundle, 
calculates fundamental measures, or ``factors,'' of options market 
activity--Put/Call Ratio, Moneyness Ratio, Volume-Weighted Average 
Delta, and Weighted Average Strike Price--and applies those factors to 
certain segments of activity on the Exchange. The second level, the 
Single-Factor Intellicator, uses machine learning--an analytical 
technique that employs algorithms that iteratively ``learn'' from data 
to find hidden insights without explicit programming--to summarize in a 
single numeral the information contained within a Single-Factor 
Analytic Bundle. The third level, the Multi-Factor Intellicator, uses 
machine learning to summarize in a single numeral all of the 
information contained within all of the five [sic] Single-Factor 
Analytic Bundles offered with this product.
    The Exchange will propose, in a forthcoming fee filing, separate 
fees for the Single-Factor Analytic Bundle, the Single-Factor 
Intellicator, and the Multi-Factor Intellicator, as well as special 
rates for the purchase of any combination of these, to allow investors 
to choose the tool that best fits their needs. The Single-Factor 
Analytic Bundles are designed to be used by sophisticated investors to 
supplement, test and inform their own analytic models. The Single- and 
Multi-Factor Intellicators are designed for the use of investors who 
seek to understand market sentiment without undertaking complex 
calculations. Although tailored for different audiences, the Analytic 
Bundles and Single- and Multi-Factor Intellicators are all designed to 
increase visibility into options transactions and democratize 
information to provide the benefits of sophisticated analytical 
techniques to firms without the technology, staff or wherewithal to 
conduct a comparable analysis on their own.
    The Analytic Bundles and Single- and Multi-Factor Intellicators are 
described in further detail below.
Single-Factor Analytic Bundle
    A Single-Factor Analytic Bundle is a set of calculations of 
``factors,'' or standard measures of options market activity, often 
used as indicia of market sentiment. The Intellicator Analytic Tool 
will calculate four factors--Put/Call Ratio, Moneyness Ratio, Volume-
Weighted Average Delta, and Weighted Average Stock Price--defined as 
follows: \5\
---------------------------------------------------------------------------

    \5\ The Exchange may introduce new factors that are found to 
have value in assessing market sentiment, but will submit a new 
filing for approval if other factors are added.
---------------------------------------------------------------------------

    (i) Put/Call Ratio: The total number of put contracts traded 
divided by the total number of put and call contracts traded within the 
prior 60 seconds for each underlying symbol.
    (ii) Moneyness Ratio: The natural log of the ratio of the price of 
the underlying equity to the strike price of the options contract 
traded within the prior 60 seconds.\6\
---------------------------------------------------------------------------

    \6\ The ratios for calls are multiplied by 1, while ratios for 
puts are multiplied by -1.
---------------------------------------------------------------------------

    (iii) Volume-Weighted Average Delta: A calculation of the projected 
change to an option price given a $1 change in the equity price, 
weighted by the number of contracts traded within the prior 60 seconds.
    (iv) Weighted Average Strike Price: A calculation of the strike 
price of the options contracts traded within the prior 60 seconds, 
weighted by the number of days to expiration.\7\
---------------------------------------------------------------------------

    \7\ A higher weighting is given to contracts near expiration.
---------------------------------------------------------------------------

    Each of these Single-Factor Analytic Bundles will provide separate 
calculations of a specific factor for between five and fifty different 
segments, or subsets, of the options market.\8\ Segments may be simple 
or complex. A simple segment may be all transactions with a certain 
range of expiration dates. Examples of complex

[[Page 46320]]

segments include: ``Customers \9\ who buy to open a new position,'' 
``Non-Customers \10\ who sell to close an existing position,'' or 
``Market Makers \11\ engaging in complex orders.'' Segments will be 
segregated using the following nine fields of information, either alone 
or in combination: (i) Put vs. call; (ii) expiration date; (iii) 
customer type; (iv) ``moneyness''; (v) open vs. close; (vi) buy vs. 
sell; (vii) order type; (viii) add vs. remove liquidity; and (ix) 
electronic vs. manual transaction.\12\ These fields are defined as 
follows:
---------------------------------------------------------------------------

    \8\ Factor calculations for specific segments of the market will 
not be sold by the Exchange separately from the Analytic Bundles.
    \9\ The term ``Customer'' applies to any transaction that is 
identified by a member or member organization for clearing in the 
Customer range at The Options Clearing Corporation (``OCC'') which 
is not for the account of a broker or dealer or for the account of a 
``Professional'' (as that term is defined in Rule 1000(b)(14)).
    \10\ A ``Non-Customer'' is any market participant other than a 
Customer or a Market Maker, such as Professional Customer, Firm, 
Broker-Dealer, or Joint Back Office (see notes 11-15 [sic]).
    \11\ ``Market Makers'' includes Specialists (see Exchange Rule 
1020(a)), Registered Option Traders (see Exchange Rule 1014(b)), 
Streaming Quote Traders (see Exchange Rule 1014(b)(ii)(A)), and 
Remote Streaming Quote Traders (see Exchange Rule in 
1014(b)(ii)(B)).
    \12\ The Exchange may introduce new fields at a later date, but 
will submit a new filing for approval if additional fields are 
added.
---------------------------------------------------------------------------

    (i) Put vs. Call: whether the instrument is a put (an option to 
sell assets at an agreed upon price on or before a particular date) or 
a call (an option to buy assets at an agreed-upon price on or before a 
particular date).
    (ii) Expiration date: the number of days to contract expiration. 
Transactions are assigned to one of five ranges: One week (less than or 
equal to 7 days prior to expiration); one month (greater than 7 days 
but less than or equal to 30 days); three months (greater than 30 days 
but less than or equal to 90 days to expiration); six months (greater 
than 90 days but less than or equal to 180 days to expiration date; and 
over six months (greater than 180 days to expiration date).
    (iii) Customer type: Customer, Professional Customer,\13\ Firm,\14\ 
Broker-Dealer,\15\ Market Maker, Joint Back Office (``JBO''),\16\ off-
floor broker-dealer), or Non-Customer.
---------------------------------------------------------------------------

    \13\ The term ``Professional Customer'' applies to transactions 
for the accounts of Professionals, as defined in Exchange Rule 
1000(b)(14).
    \14\ The term ``Firm'' applies to any transaction that is 
identified by a member or member organization for clearing in the 
Firm range at the OCC.
    \15\ The term ``Broker-Dealer'' applies to any transaction which 
is not subject to any of the other transaction fees applicable 
within a particular category.
    \16\ The term ``Joint Back Office'' or ``JBO'' applies to any 
transaction that is identified by a member or member organization 
for clearing in the Firm range at OCC and is identified with an 
origin code as a JBO. A JBO participant is a member, member 
organization or non-member organization that maintains a JBO 
arrangement with a clearing broker-dealer (``JBO Broker'') subject 
to the requirements of Regulation T, Section 220.7 of the Federal 
Reserve System as discussed at Exchange Rule 703.
---------------------------------------------------------------------------

    (iv) ``Moneyness'': In-the-money,\17\ out-the-money \18\ or at-the-
money.\19\
---------------------------------------------------------------------------

    \17\ An options contract is in-the-money when the strike price 
is below 2.5% of the price of the underlying security for a call 
contract, or above 2.5% of the underlying security for a put 
contract.
    \18\ An options contract is out-the-money when the strike price 
is above 2.5% of the price of the underlying security for a call 
contract, or below 2.5% of the underlying security for a put 
contract.
    \19\ An options contract is at-the-money when the strike price 
is within 2.5% of the price of the underlying security, either above 
or below, for either a call or a put contract.
---------------------------------------------------------------------------

    (v) Open vs. Close: Whether the transaction is opening a new 
position or closing an existing position.
    (vi) Buy vs. Sell.
    (vii) Execution type: Simple order,\20\ complex order,\21\ price 
improvement (``PIXL'') Order,\22\ qualified contingent cross 
(``QCC''),\23\ Sweep,\24\ responder to an auction, or quote from a 
Market Maker).
---------------------------------------------------------------------------

    \20\ A single-leg option order.
    \21\ A multi-legged option order.
    \22\ A two-sided order that is entered into a price improvement 
auction.
    \23\ A stock-tied option order consisting of a minimum of 1,000 
options contracts bundled together for the purpose of crossing the 
order.
    \24\ An order type used to accumulate a position quickly by 
simultaneously sending the order to multiple exchanges.
---------------------------------------------------------------------------

    (viii) Add vs. remove liquidity: Whether the transaction adds or 
removes liquidity, or has no effect on liquidity.
    (ix) Electronic vs. manual: Whether the transaction takes place on 
the floor of the Exchange or through the electronic order system.
    Seven of these nine data fields--put vs. call; expiration date; 
customer type; ``moneyness''; open vs. close; buy vs. sell; and order 
type--are currently available in real time for purchasers of the PHLX 
Orders data feed, although that feed does not include order information 
on Immediate or Cancel Orders (``IOCs'') or orders that are fully 
executable upon receipt. IOCs and orders that are fully executable upon 
receipt will, however, be used to segregate data for factor 
calculations in Single-Factor Analytic Bundles. The last two data 
fields listed above--add vs. remove liquidity and electronic vs. manual 
transactions--are not available on any of the Exchange's data feeds, 
but, like data from IOCs and fully executable orders upon receipt, will 
be used to segregate data into segments for Single-Factor Analytic 
Bundles.
    A purchaser of Single-Factor Analytic Bundles may, under certain 
circumstances, be able to reverse-engineer factor calculations to 
obtain transaction-specific information not otherwise available on the 
Exchange's data feeds.\25\ For example, an investor observing a thinly-
traded stock may be able to use the Single-Factor Analytic Bundle 
calculations to determine the type of customer (Customer, Professional 
Customer, Firm, Broker-Dealer, etc.) adding or removing liquidity--
information not otherwise available on the Exchange's data feeds, as 
noted above.\26\ Such information may be useful in identifying the 
investment strategies of particular customer categories.
---------------------------------------------------------------------------

    \25\ Similar reverse-engineering would be impossible for 
customers who purchase Intellicators alone, because such segment-
specific information will not be provided to customers who only 
purchase Intellicators.
    \26\ There may be other examples in which Single-Feed Analytic 
Bundles may be used to adduce transaction-specific information not 
provided in data feeds. For instance, it may also be possible to 
determine whether a thinly-traded stock were traded through an 
electronic or manual trade.
---------------------------------------------------------------------------

    While this type of reverse-engineering is not the primary purpose 
of the Intellicator Analytic Tool--and of limited usefulness given that 
implementation would only be practical for thinly-traded stocks--it is 
consistent with the purpose of the Intellicator Analytic Tool to make 
data about market sentiment available to investors. Identifying the 
investment strategies of particular customer categories can provide an 
investor with useful insight into market activity, which this Tool may 
render more broadly available to investors. Such dissemination of 
market information promotes transparency and increases market 
efficiency, and, as stated in the Statutory Basis discussion below, 
protects protect investors and the public interest.
    The data fields identified above will be used to segregate the 
market into segments by calculating factors only for transactions that 
meet specific criteria. Each segment will be defined by between one and 
five fields; data from other fields will not be used. By way of 
illustration, the three complex segments set forth above--``Customers 
who buy to open a new position,'' ``Non-Customers who sell to close an 
existing position,'' and ``Market Makers engaging in complex orders''--
will be constructed using only three segments, as shown in the 
following chart:

[[Page 46321]]



----------------------------------------------------------------------------------------------------------------
                                                                 Non-customers who sell
                                         Customers who buy to     to close an existing    Market makers engaging
                                           open a position              position            in complex orders
----------------------------------------------------------------------------------------------------------------
Put vs. Call \27\....................  N/A....................  N/A....................  N/A
Expiration Date......................  N/A....................  N/A....................  N/A
Customer type........................  Customer...............  Non-Customer...........  Market Maker
Moneyness............................  N/A....................  N/A....................  N/A
Open vs. Close.......................  Open...................  Close..................  N/A
Buy vs. Sell.........................  Buy....................  Sell...................  N/A
Execution type.......................  N/A....................  N/A....................  Complex order
Add vs. remove liquidity \28\........  N/A....................  N/A....................  N/A
Electronic vs. manual................  N/A....................  N/A....................  N/A
----------------------------------------------------------------------------------------------------------------

    Purchasers of this product will be provided the results of factor 
calculations for segments of the market to be identified by the 
Exchange as indicative of market sentiment. All of the output of the 
Intellicator Analytic Tool consists solely of calculations, not raw 
data. The Tool is intended to provide insight into market sentiment 
through aggregated calculations, not to provide real-time transaction- 
and order-related information similar to a data feed.
---------------------------------------------------------------------------

    \27\ As noted above, the first seven fields listed in this chart 
(from ``Put vs. Call'' through ``Execution type'') are available in 
real time for purchasers of the PHLX Orders data feed, but that data 
feed does not include data from IOCs or orders that are fully 
executable upon receipt.
    \28\ As noted above, the ``add vs. remove liquidity'' and 
``electronic vs. manual'' fields are not available on any of the 
Exchange's proprietary data feeds.
---------------------------------------------------------------------------

    The Exchange expects that segments will change over time. The first 
iteration of the Intellicator Analytic Tool will utilize a set of 
segments determined to be indicative of market sentiment based on 
experience and economic theory, but then will use machine learning--
algorithms that test theory against market experience--to improve 
calculations by identifying additional segments with a strong 
relationship with the underlying equity and adding them to the Analytic 
Bundles to create the most robust set of calculations possible. 
Identifying relevant segments is a feature of this product, and the 
intellectual property of the Exchange.
    Segments will be selected for their ability to provide a robust 
view of market sentiment. While any single segment may be of limited 
usefulness on its own, making the same calculations repeatedly for an 
array of different segments will provide a more reliable and consistent 
indicia of market sentiment. Providing customers with calculations of 
the same factor for multiple segments allows them to evaluate market 
sentiment by comparing calculations across segments. For example, 
market sentiment related to simple orders may be compared to that of 
complex orders; calculations for options contracts with less than 7 
days to expiration may be compared to those with less than 30 days to 
expiration; or calculations for options contracts that are in-the-money 
may be compared to those that are out-the-money or at-the-money. The 
goal of all of these comparisons is to glean information from 
differences in market activity that may provide useful information 
about market sentiment regarding the associated underlying equity.
    Calculations will be based on ``rolling aggregates'' of trading 
data, updated every 60 seconds over the course of the day.
Single-Factor Intellicators
    A Single-Factor Intellicator uses machine learning to summarize in 
a single numeral the information contained within a Single-Factor 
Analytic Bundle. The number will be within a set range--possibly 
between one and one hundred, although the precise range may change over 
time--and will be designed to value market sentiment: Specifically, the 
upward or downward pressure on the price of an equity instrument as 
reflected in options trading activity. The numeral will be a sort of 
``barometer'' of trading activity that, in conjunction with other 
market information, will help investors make informed decisions.
    The Single-Factor Intellicator will serve a different purpose than 
the Analytic Bundles. Whereas the Analytic Bundles are designed to 
provide raw calculations, the Intellicators are designed to provide an 
analytical overlay to those calculations to help investors interpret 
market sentiment. As was the case with the Analytic Bundles, nothing in 
the Single-Factor Intellicator can be used to glean transaction-
specific information.
    The calculation for the Single-Factor Intellicator will change over 
time, as machine learning algorithms use data to learn about the 
relationship between options and equities, and modify the calculation 
accordingly. Specifically, the Exchange will use calculated values from 
the Analytic Bundle to improve mathematical models of the relationship 
between certain options trades and the equities underlying those 
trades. Over time, the algorithm will optimize these equations for both 
the types of data used to analyze equities and the weight of such data. 
The result will be a better mathematical model.
    Calculations for Single-Factor Intellicators, like calculations for 
each factor, will be updated every 60 seconds over the course of the 
day.
Multi-Factor Intellicator
    The Multi-Factor Intellicator uses machine learning to summarize in 
a single numeral all of the calculations contained in all of the five 
[sic] Single-Factor Analytic Bundles. As was the case with Single-
Factor Intellicators, the Multi-Factor Intellicator is designed to act 
as a ``barometer'' of options trading activity, which the customer will 
be able to incorporate into its market analysis. The Multi-Factor 
Intellicator will improve over time through machine learning.
    The Multi-Factor Intellicator will also be updated every 60 seconds 
over the course of the day.
Proposed Pricing Structure
    As previously noted, the fee schedule for the Intellicator Analytic 
Tool will be included in a future filing. Because the Single-Factor 
Analytic Bundles, Single-Factor Intellicators, and Multi-Factor 
Intellicators may prove useful for different audiences, these 
components of the Intellicator Analytic Tool will be priced separately.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\29\ in general, and furthers the objectives of Section 
6(b)(5) \30\ of the Act in particular. The proposal is 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 by

[[Page 46322]]

prompting transparency and increasing visibility into options 
transactions and democratizing information to provide the benefits of 
sophisticated analytical techniques to firms without the technology, 
staff or wherewithal to conduct a comparable analysis on their own. 
Specifically, the Single- and Multi-Factor Intellicators will provide 
all investors with insight into market sentiment otherwise available 
only to those investors with the technology, staff and wherewithal to 
conduct such an analysis. To the extent that the Intellicator Analytic 
Tool uses information not otherwise available on the Exchange's market 
data feeds, the effect of using such information as an input for the 
Tool is to make information more widely available to investors. To the 
degree that investors use Single-Factor Analytic Bundles to reverse-
engineer certain factor calculations to obtain transaction-specific 
information not otherwise provided on the Exchange's data feeds, the 
availability of such information promotes transparency and increases 
market efficiency, thereby protecting investors and the public 
interest. The net effect is to make information on market sentiment 
more readily available to more investors, thereby removing impediments 
to a free and open market and promoting just and equitable principles 
of trade.
---------------------------------------------------------------------------

    \29\ 15 U.S.C. 78f(b).
    \30\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    In adopting Regulation NMS,\31\ the Commission granted SROs and 
broker-dealers increased authority and flexibility to offer new and 
unique market data to the public. It was believed that this authority 
would expand the amount of data available to consumers, and also spur 
innovation and competition for the provision of market data. The 
Intellicator Analytic Tool--a new market data product designed to 
analyze options market transactions and synthesize that analysis to 
help investors assess the equities underlying those transactions--is 
the type of market data product that the Commission envisioned when it 
adopted regulation NMS. The Commission concluded that Regulation NMS--
deregulating the market in proprietary data--would further the Act's 
goals of facilitating efficiency and competition:
---------------------------------------------------------------------------

    \31\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (``Regulation NMS Adopting 
Release'').

    [E]fficiency is promoted when broker-dealers who do not need the 
data beyond the prices, sizes, market center identifications of the 
NBBO and consolidated last sale information are not required to 
receive (and pay for) such data. The Commission also believes that 
efficiency is promoted when broker-dealers may choose to receive 
(and pay for) additional market data based on their own internal 
analysis of the need for such data.\32\
---------------------------------------------------------------------------

    \32\ Id.

    By removing unnecessary regulatory restrictions on the ability of 
exchanges to sell their own data, Regulation NMS advanced the goals of 
the Act and the principles reflected in its legislative history.
    In NetCoalition v. Securities and Exchange Commission \33\ 
(``NetCoalition'') the D.C. Circuit upheld the Commission's use of a 
market-based approach in evaluating the fairness of market data fees 
against a challenge claiming that Congress mandated a cost-based 
approach.\34\ As the court emphasized, the Commission ``intended in 
Regulation NMS that `market forces, rather than regulatory 
requirements' play a role in determining the market data . . . to be 
made available to investors and at what cost.'' \35\ ``No one disputes 
that competition for order flow is `fierce.' . . . As the SEC 
explained, `[i]n the U.S. national market system, buyers and sellers of 
securities, and the broker-dealers that act as their order-routing 
agents, have a wide range of choices of where to route orders for 
execution'; [and] `no exchange can afford to take its market share 
percentages for granted' because `no exchange possesses a monopoly, 
regulatory or otherwise, in the execution of order flow from broker 
dealers'. . . .'' \36\
---------------------------------------------------------------------------

    \33\ See NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \34\ Id. at 534-535.
    \35\ Id. at 537.
    \36\ Id. at 539 (quoting Securities Exchange Act Release No. 
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008) 
(SR-NYSEArca-2006-21)).
---------------------------------------------------------------------------

    Data products such as the Intellicator Analytic Tool are a means by 
which exchanges compete to attract order flow. To the extent that 
exchanges are successful in such competition, they earn trading 
revenues and also enhance the value of their data products by 
increasing the amount of data they provide. The need to compete for 
order flow places substantial pressure upon exchanges to keep their 
fees for both executions and data reasonable.\37\
---------------------------------------------------------------------------

    \37\ See Sec. Indus. Fin. Mkts. Ass'n (SIFMA), Initial Decision 
Release No. 1015, 2016 SEC LEXIS 2278 (ALJ June 1, 2016) (finding 
the existence of vigorous competition with respect to non-core 
market data).
---------------------------------------------------------------------------

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 not necessary or appropriate in 
furtherance of the purposes of the Act. Indeed, the Exchange believes 
that the Intellicator Analytic Tool enhances competition by increasing 
transparency into options transactions and democratizing information to 
provide the benefits of sophisticated analytical techniques to firms 
without the technology, staff or wherewithal to conduct a comparable 
analysis on their own. Many firms produce internal analytic models to 
assess market sentiment similar to the Intellicator Analytic Tool; the 
introduction of this Tool will increase competition by making such 
models available to more investors.
    The market for data products is extremely competitive and firms may 
freely choose alternative venues and data vendors based on the 
aggregate fees assessed, the data offered, and the value provided. 
Numerous exchanges compete with each other for listings, trades, and 
market data itself, providing virtually limitless opportunities for 
entrepreneurs who wish to produce and distribute their own market data. 
Transaction execution and proprietary data products are complementary 
in that market data is both an input and a byproduct of the execution 
service. In fact, market data and trade execution are a paradigmatic 
example of joint products with joint costs. The decision whether and on 
which platform to post an order will depend on the attributes of the 
platform where the order can be posted, including the execution fees, 
data quality and price. Without trade executions, exchange data 
products cannot exist. Moreover, data products, including the 
Intellicator Analytic Tool, are valuable to many end users only insofar 
as they provide information that end users expect will assist them or 
their customers in making trading decisions.
    The costs of producing market data include not only the costs of 
the data distribution infrastructure, but also the costs of designing, 
maintaining, and operating the exchange's transaction execution 
platform and the cost of regulating the exchange to ensure its fair 
operation and maintain investor confidence. The total return that a 
trading platform earns reflects the revenues it receives from both 
products and the joint costs it incurs. Moreover, the operation of the 
exchange is characterized by high fixed costs and low marginal costs. 
This cost structure is common in content distribution industries such 
as software, where developing new software typically requires a large 
initial investment (and continuing large investments to upgrade

[[Page 46323]]

the software), but once the software is developed, the incremental cost 
of providing that software to an additional user is typically small, or 
even zero (e.g., if the software can be downloaded over the internet 
after being purchased).\38\ It is costly to build and maintain a 
trading platform, but the incremental cost of trading each additional 
share on an existing platform, or of distributing an additional 
instance of data, is very low. Market information and executions are 
each produced jointly (in the sense that the activities of trading and 
placing orders are the source of the information that is distributed) 
and are each subject to significant scale economies.
---------------------------------------------------------------------------

    \38\ See William J. Baumol and Daniel G. Swanson, ``The New 
Economy and Ubiquitous Competitive Price Discrimination: Identifying 
Defensible Criteria of Market Power,'' Antitrust Law Journal, Vol. 
70, No. 3 (2003).
---------------------------------------------------------------------------

    Competition among trading platforms can be expected to constrain 
the aggregate return each platform earns from the sale of its joint 
products. The level of competition and contestability in the market is 
evident in the numerous alternative venues that compete for order flow, 
including SRO markets, as well as internalizing BDs and various forms 
of alternative trading systems (``ATSs''), including dark pools and 
electronic communication networks (``ECNs''). Each SRO market competes 
to produce transaction reports via trade executions, and two FINRA-
regulated TRFs compete to attract internalized transaction reports. It 
is common for BDs to further and exploit this competition by sending 
their order flow and transaction reports to multiple markets, rather 
than providing them all to a single market. Competitive markets for 
order flow, executions, and transaction reports provide pricing 
discipline for the inputs of proprietary data products. The large 
number of SROs, TRFs, BDs, and ATSs that currently produce proprietary 
data or are currently capable of producing it provides further pricing 
discipline for proprietary data products. Each SRO, TRF, ATS, and BD is 
currently permitted to produce proprietary data products, and many 
currently do or have announced plans to do so, including Nasdaq, NYSE, 
NYSE MKT, NYSE Arca, and the BATS exchanges.
    In this case, the proposed rule change enhances competition by 
introducing a new product that increases transparency into options 
transactions and democratizes information by providing the benefits of 
sophisticated analytical techniques to firms without the technology, 
staff or wherewithal to conduct a comparable analysis on their own. If 
the price were to become unattractive, those firms would opt not to 
purchase the product. The net effect of introducing this product into 
the market is to make market sentiment information more widely 
available to a broader array of investors, and lower the cost of 
accessing such information, thereby increasing market efficiency. For 
all of these reasons, the Exchange does not believe that the proposed 
changes will impair competition in the financial markets.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission shall: (a) by order approve 
or disapprove such proposed rule change, or (b) institute proceedings 
to determine whether the proposed rule change should be disapproved.

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-Phlx-2017-74 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-Phlx-2017-74. 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-Phlx-2017-74 and should be 
submitted on or before October 25, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\39\
---------------------------------------------------------------------------

    \39\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2017-21279 Filed 10-3-17; 8:45 am]
 BILLING CODE 8011-01-P