United States Court of Appeals

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued February 16, 2010 Decided August 6, 2010

No. 09-1042

NETCOALITION,

PETITIONER

v.

SECURITIES AND EXCHANGE COMMISSION,

RESPONDENT

NYSE ARCA, INC. AND 

THE NASDAQ STOCK MARKET, LLC,

INTERVENORS

Consolidated with 09-1045

On Petitions for Review of an Order 

of the Securities & Exchange Commission

Carter G. Phillips argued the cause for the petitioners.

Dennis C. Hensley, Kevin J. Campion, Richard D. Bernstein,

and Roger D. Blanc were on brief.

Mark R. Pennington, Assistant General Counsel, Securities

and Exchange Commission, argued the cause for the respondent.

Michael A. Conley, Deputy Solicitor, and Luis de la Torre,

Senior Litigation Counsel, were on brief.
2

Douglas W. Henkin argued the cause for intervenors NYSE

Arca, Inc. et al. in support of the respondent. David S. Cohen,

Eugene Scalia and Amir C. Tayrani were on brief.

Before: HENDERSON and GARLAND, Circuit Judges, and

EDWARDS, Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge HENDERSON.

KAREN LECRAFT HENDERSON, Circuit Judge: In 2006,

NYSE Arca, one of the largest securities exchanges in the

United States, proposed to begin charging a fee to investors for

access to its proprietary “depth-of-book” product, ArcaBook.

ArcaBook lists pending orders placed on NYSE

Arca—specifically, bids to buy at prices lower than, and offers

to sell at prices higher than, the prevailing market price. The

Securities and Exchange Commission (SEC or Commission)

approved NYSE Arca’s proposal, finding the proposed fees for

ArcaBook were “fair and reasonable” and “not unreasonably

discriminatory.” Petitioners NetCoalition, a public policy

corporation representing approximately 20 internet companies

(including Google and Yahoo!), and the Securities Industry and

Financial Markets Association (SIFMA), a trade association

representing more than 600 securities firms and banks, challenge

the SEC order, arguing that it violates the Securities Exchange

Act of 1934, 15 U.S.C. §§ 78a et seq. (Exchange Act), and the

Administrative Procedure Act, 5 U.S.C. §§ 551 et seq. (APA).

For the reasons set forth below, we conclude that the SEC did

not adequately explain the basis of its approval nor, on this

record, support its conclusion with substantial evidence and,

accordingly, we remand to the SEC.

I. Background

The Exchange Act provides the framework by which the

SEC regulates the transactions and the classes of participants in

the major securities markets in the United States. See Bradford

Nat’l Clearing Corp. v. SEC, 590 F.2d 1085, 1090 (D.C. Cir.
3

1978). NYSE Arca is registered with the SEC as a national

securities exchange, see 15 U.S.C. § 78f, and as such is a

securities industry “self-regulatory organization,” or SRO, see

id. § 78c(a)(26) (defining “self-regulatory organization”).

Although self-regulatory, NYSE Arca remains subject to

comprehensive SEC oversight and control. See Karsner v.

Lothian, 532 F.3d 876, 880 (D.C. Cir. 2008) (citing 15 U.S.C.

§ 78s(b)). For example, an exchange is required to file its

governing rules with the SEC and comply with them. See 15

U.S.C. § 78o-3(a)-(b). An exchange’s rules must, among other

things, “provide for the equitable allocation of reasonable dues,

fees, and other charges among its members and issuers and other

persons using its facilities,” id. § 78f(b)(4); “promote just and

equitable principles of trade” and not “permit unfair

discrimination between customers, issuers, brokers, or dealers,”1

id. § 78f(b)(5); and “not impose any burden on competition not

necessary or appropriate in furtherance of the purposes of” the

Exchange Act, id. § 78f(b)(8). As an SRO, an exchange must

also file any proposed rule change (including a fee change) with

the SEC for approval. See id. § 78s(b)(1)-(2). The SEC notices

a rule change proposal for public comment and either approves

it if it is consistent with the requirements of the Exchange Act

or disapproves it. See id. The SEC has delegated the initial

consideration of a rule change to its Division of Trading and

Markets (which until 2007 was known as the Division of Market

Regulation). See 17 C.F.R. § 200.30-3(a)(12). 

In 1975, the Congress expanded the authority of the SEC

through a major overhaul of the Exchange Act. See Bradford,

590 F.2d at 1091. Among other things, the 1975 Amendment

directed the SEC to facilitate the establishment of a “national

1

A broker trades on behalf of investors while a dealer trades on

his own account. 15 U.S.C. § 78c(a)(4)-(5). Most securities firms do

both and are referred to as “broker-dealers.”
4

market system for securities,” or NMS, to link securities markets

nation-wide in order to distribute market data economically and

equally and to promote fair competition among all market

participants. Id. at 1094 (citing 15 U.S.C. § 78k-1); see

Regulation NMS, Release No. 51808, 70 Fed. Reg. 37,496 (June

29, 2005). The Congress specified five factors to guide the SEC

in establishing the NMS: the Commission is to assure (1)

efficiency, (2) fair competition, (3) availability of market data,

(4) practicability of order execution in the best market and (5)

the opportunity for an investor’s order to be executed directly,

that is, without the participation of a dealer. 15 U.S.C. § 78k1(a)(1)(C). Under SEC oversight during the next three decades,

the NMS grew to encompass the securities of over 5,000

companies with a collective U.S. market capitalization of more

than $14 trillion. Today NMS stocks are traded simultaneously

on one or more of the nine national exchanges that participate in

the system, including the New York Stock Exchange (NYSE),

the NASDAQ Stock Market (NASDAQ) and NYSE Arca, as

well as at non-exchange trading sites like (1) alternative trading

systems; (2) electronic communication networks (ECNs),

including the BATS Exchange (BATS ECN); and (3)

market-making securities dealers.

Because NMS stocks are traded so many places at once, one

of the important innovations of the NMS system is to make

available to investors a stream of “core” market data

consolidated from all of the exchanges. Regulation NMS, 70

Fed. Reg. at 37,503 (consolidated data stream “form[s] the heart

of the national market system” (quoting H.R. Rep. No. 94–229,

at 93 (1975), as reprinted in 1975 U.S.C.C.A.N. 321, 324 

(Conference Report))). Core data for each NMS security

consists of three things: (1) last sale reports, which include the

price at which the latest sale of the security occurred, the size of

the sale and the exchange where it took place; (2) the current

highest bid and lowest offer for the security, along with the

number of shares available at those prices, at each exchange;
5

and (3) the “national best bid and offer,” or NBBO, which are

the highest bid and lowest offer currently available in the

country and the exchange(s) where those prices are available. 

To ensure that an investor can obtain core data for each

NMS security, the SEC requires each exchange, including

NYSE Arca, to report last sales (i.e., the price and size of the

most recent trade on NYSE Arca) and the current best bid and

offer to one of several central data processors for consolidation.

See 17 C.F.R. §§ 242.601, 242.602. Each central data processor

then disseminates the consolidated information, including the

NBBO, to broker-dealers and data vendors. See id.

§ 242.603(a)-(b). The SEC must approve the fees charged for

core data, see 17 C.F.R. § 242.608(b)(1), and a broker-dealer is

required to purchase the consolidated core data and make it

available to an investor seeking to place a trade,2 see id.

§ 242.603(c). In this way, today’s core market data system

provides investors in the U.S. equity markets with realtime access to the best quotations and most recent

trades in the thousands of NMS stocks throughout the

trading day. For each stock, quotations and trades are

continuously collected from many different trading

centers and then disseminated to the public in a

consolidated stream of data. As a result, investors of all

2

The SEC has determined that because of the mandatory nature

of this regime, core data fees should bear some relationship to cost.

See Regulation of Market Information Fees and Revenues, Release

No. 34-42208, 64 Fed. Reg. 70,613, 70,627 (Dec. 17, 1999). To date,

however, the SEC has instead approved fees based on agreement

among market participants. See Concept Release Concerning

Self-Regulation, Release No. 34-50700, 69 Fed. Reg. 71256, 71272

(Dec. 8, 2004).
6

types have access to a reliable source of information

for the best prices in NMS stocks. 

Regulation NMS, 70 Fed. Reg. at 37,503. 

All other market data is “non-core” data.3 This case

involves non-core data referred to as “depth-of-book” data.

Depth-of-book data consists of outstanding limit orders4

 to buy

stock at prices lower than, or to sell stocks at prices higher than,

the best prices on each exchange.5

 Because depth-of-book data

is non-core data, the SEC does not require that it be included in

the consolidated data stream or made available to an investor at

the time of trade execution.6

3

The terms “core” and “non-core” are SEC creations; the

Exchange Act makes no such distinction. See Order Setting Aside

Action by Delegated Authority and Approving Proposed Rule Change

Relating to NYSE Arca Data, Release No. 34-59039, 73 Fed. Reg.

74,770, 74,779 (Dec. 9, 2008) (Exchange Act and regulations “do not

differentiate between types of data and therefore apply to exchange

proposals to distribute both core data and non-core data”).

4

Generally speaking, a national securities exchange handles two

types of orders: a “market” order, which is an offer to immediately

trade at the prevailing market price on that exchange, and a “limit”

order, which is an offer to trade a certain amount of a security at a

specific price. A limit order that is not at a price that can be executed

is added to the exchange’s “order book” at the quoted price level. 

5

If the current best bid or offer for a security in an exchange’s

order book is better than or equal to the best price available nationally,

it is necessarily reflected in the core data as the NBBO.

6

In fact, the SEC specifically rejected such a proposal in 2005 in

order to “allow market forces, rather than regulatory requirements, to

determine what, if any, additional quotations outside the NBBO are

displayed to investors.” Regulation NMS, 70 Fed. Reg. at 37,567

(“Investors who need . . . more comprehensive depth-of-book
7

Depth-of-book data matters because of a concept called

“depth,” which refers to the number of shares of a security

available to trade at any given price point. If a trader wants to

buy a certain number of shares that exceeds the depth (volume

of shares available) at the best price, depth-of-book data will tell

him the number of shares available at prices inferior to the best

price.7

 In this way, depth-of-book data allows a trader to gain

background information about the “liquidity” of a security on a

particular exchange, i.e., the degree to which his total sale or

purchase price will differ from what he would receive if the

entire trade were made at the prevailing best prices. For

instance, even a very large buy order for a security with high

liquidity on a certain exchange will trade at or close to the best

price while a similarly large order for a security with lower

liquidity on that exchange will cost more in toto due to the fewer

number of shares available at or near the best price. 

A simplified example may help illustrate the concept of

liquidity and the utility of depth-of-book data. Assume an

investor wants to make an offer to sell 3,000 shares of company

information[] will be able to obtain such data from [securities] markets

or third party vendors.”). Nor does a broker-dealer need to purchase

depth-of-book data in order to meet its duty of best execution (which

requires it to exercise reasonable diligence to obtain favorable order

execution terms for customers) or any other statutory or regulatory

requirement.

7

In 2001, stock prices began to be measured in one-cent

increments instead of “sixteenths,” i.e., 1/16 of a dollar. Before 2001,

significant depth accumulated at the NBBO price because the

difference between the best price and the next inferior price was

1/16th, or 6.25 cents. With the initiation of decimalized trading,

however, the difference between those prices was reduced to only one

cent, which substantially decreased the depth at the best prices and

substantially increased the depth at the various one-cent price points

inferior to the best prices.
8

XYZ. The best bid price reflected in the core data at NYSE

Arca for XYZ is 1,000 shares at $10. The investor knows he can

sell up to 1,000 shares at $10 but he does not know at what price

his remaining 2,000 shares will sell until after his order is

placed. This is where depth-of-book data comes in. Assume

further that NYSE Arca’s depth-of-book data tells the investor

that, apart from the best bid price from the core data, an

additional 1,000 shares of XYZ are available at the next price

level of $9.99 and yet another 1,000 shares at $9.98. Before he

places his order, then, he knows that his 3,000-share sale will

fetch $29,970 (the sum of 3,000 shares sold in three 1,000-share

blocks at $10, $9.99, or $9.98 each). Lower liquidity—i.e.,

fewer shares of XYZ available at or near $10—will result in a

lower total sale price. It is in this sense that depth-of-book data

“is useful primarily as background information on liquidity

outside the best prices.” See Order Setting Aside Action by

Delegated Authority and Approving Proposed Rule Change

Relating to NYSE Arca Data, Release No. 34-59039, 73 Fed.

Reg. 74,770, 74,792 (Dec. 9, 2008) (Order).8

8

This example is simplified because depth-of-book data reflects

only displayed orders; some brokers, however, request that a portion

of their orders be kept in reserve (i.e., not be displayed) in the

exchange’s order book. In addition, and due in part to the reserve

liquidity, most trades are made at the NBBO price or better, including

orders approaching 10,000 shares. See Order, 73 Fed. Reg. at 74,792

(at least 90% of NYSE Arca’s, NYSE’s and NASDAQ’s “executed

share volume of marketable orders were at prices equal to or better

than the NBBO in May 2008”). Non-professional (or retail) investors’

trades tend to be smaller and thus are especially likely to execute at the

NBBO price or better. See id. at 74,793 (“This undisplayed liquidity

enables retail investors to receive executions for most of their orders

at prices equal to or better than the NBBO, regardless of the displayed

size at the NBBO.”).
9

In May 2006 NYSE Arca filed a proposed rule change with

the SEC pursuant to SEC Rule 19b-4. NYSE Arca proposed to

charge a fee for its depth-of-book data (which data it had

formerly made available at no cost)—in particular, ArcaBook,

“a compilation of all limit orders resident in the NYSE Arca

limit order book.” NYSE Arca Application at 7. It proposed to

charge a broker-dealer a $750 monthly fee for access to the

ArcaBook data feed. It also proposed to charge an additional

user fee of up to $30 for a professional subscriber and up to $10

for a non-professional subscriber per device displaying the

ArcaBook data.9

 Finally, it proposed to cap the monthly fee

charged to a broker-dealer at $20,000 for 2006 with an

escalation provision for future years. 

As noted earlier, NYSE Arca is required to show that a rule

change is consistent with the Exchange Act—that it provides

for, among other things, an equitable allocation of reasonable

fees among users and does not unnecessarily burden

competition. See 15 U.S.C. § 78f(b). NYSE Arca is also an

“exclusive processor” of securities information under the

Exchange Act because it distributes on its own behalf 

information regarding its quotations and transactions. See

Order, 73 Fed. Reg. at 74,779 n.175; 15 U.S.C. § 78c(a)(22)(B)

(defining “exclusive processor”). This means that its

distribution of non-core market data also has to be done on “fair

9

A “non-professional subscriber” is an end user who is a natural

person and who is neither (1) registered or qualified with the SEC, the

Commodities Futures Trading Commission, a state securities agency

or a securities exchange or association, (2) engaged as an “investment

adviser” under the Investment Advisers Act of 1940, 15 U.S.C.

§§ 80b-1 et seq. nor (3) exempt from a securities association

registration requirement by virtue of being employed by a bank or

other exempt organization. See NYSE Arca Application at 22. All

others, including end users that are not natural persons, are

“professional subscriber[s].” See id.
10

and reasonable” and “not unreasonably discriminatory” terms.

Id. § 78k-1(c)(1)(C)-(D); see 17 C.F.R. § 242.603(a) (same). 

NYSE Arca sought to establish that its ArcaBook fees

conform to Exchange Act and regulatory requirements in two

ways. First, it “believe[d] that the proposed market data fees

would reflect an equitable allocation of its overall costs to users

of its facilities.” See NYSE Arca Application at 6-7. Second,

it suggested that its fees “are fair and reasonable because they

compare favorably to fees that other markets charge for similar

products.” Id. at 7. On the latter point, NYSE Arca noted that

at that time the NYSE charged professional subscribers $60 for

monthly access to its depth-of-book product, OpenBook, while

NASDAQ charged up to $76 for combined monthly access to its

two depth-of-book products, TotalView and OpenView (which

provide real-time depth-of-book data related to (1) NASDAQand (2) NYSE- and American Stock Exchange-listed securities,

respectively). See id. 

The SEC published the proposal for public comment in the

Federal Register on June 9, 2006. The SEC, through delegated

authority (at that time, its Division of Market Regulation),

approved the proposal on October 12, 2006. NetCoalition

petitioned the SEC for review of that order one month later. The

SEC granted review on December 27, 2006 and invited parties

or persons to file statements supporting or opposing the October

12 Order. After receiving twenty-five comments, the SEC

published a notice of a proposed “Draft Order” on June 4, 2008,

after which it received sixteen additional comments.
11

Although the SEC set aside the October 12 order,10 it

approved the proposal in its own 114-page order dated

December 2, 2008 and published in the Federal Register seven

days later. See Order, 73 Fed. Reg. 74,770. Briefly, the Order

evaluates the NYSE Arca’s proposal under a “market-based

approach.” That approach has two parts. The SEC first asks

“whether the exchange was subject to significant competitive

forces in setting the terms of its proposal for non-core data,

including the level of any fees.” Order, 73 Fed. Reg. at 74,781.

If so, the SEC approves the proposal “unless it determines that

there is a substantial countervailing basis to find that the terms”

violate the Exchange Act or SEC rules. Id. If not, the exchange

must “provide a substantial basis, other than competitive forces,

in its proposed rule change demonstrating that the terms of the

proposal are equitable, fair, reasonable, and not unreasonably

discriminatory.” Id. The SEC approved NYSE Arca’s fees for

ArcaBook data on the grounds that (1) NYSE Arca is subject to

“[a]t least two broad types of significant competitive forces,” id.

at 74,782, and (2) there is no countervailing basis under the

Exchange Act to disapprove the proposal, see id. at 74,794.

Petitioners NetCoalition and SIFMA both timely petitioned for

review on January 30, 2009 and we subsequently consolidated

the petitions for review. See Order Granting Resp’t’s Mot. to

Consolidate, No. 09-1042 (D.C. Cir. Mar. 30, 2009). NYSE

Arca and NASDAQ intervened in support of the SEC. 

II. Analysis

Our jurisdiction arises under 15 U.S.C. § 78y(a)(1) (“A

person aggrieved by a final order of the Commission . . . may

10The Order does not specify why the SEC set aside its Division

of Market Regulation’s October 12, 2006 order other than to say that

“[t]he Petitioner and commenters raised a number of important issues

that the Commission believes it should address directly at this time.” 

Order, 73 Fed. Reg. at 74,771.
12

obtain review of the order in the United States Court of Appeals

. . . for the District of Columbia Circuit . . . .”). We review the

Order under the APA’s arbitrary and capricious standard, i.e.,

we “hold unlawful and set aside agency action” that is

“arbitrary, capricious, an abuse of discretion, or otherwise not in

accordance with law” or “unsupported by substantial evidence.”

5 U.S.C. § 706(2)(A), (E). Under the APA, the SEC is required

to “examine the relevant data and articulate a satisfactory

explanation for its action including a ‘rational connection

between the facts found and the choice made.’” Motor Vehicle

Mfrs. Ass’n of U.S., Inc. v. State Farm Mut. Auto. Ins. Co., 463

U.S. 29, 43 (1983) (quoting Burlington Truck Lines v. United

States, 371 U.S. 156, 168 (1962)). The SEC’s factual findings

are conclusive if supported by substantial evidence. See 15

U.S.C. § 78y(a)(4). 

The petitioners challenge the Order on three grounds: first,

the SEC violated the Exchange Act by failing to engage in costbased ratemaking; second, the SEC arbitrarily rejected its earlier

cost-based approach to determine whether market data fees are

“fair and reasonable”; and third, the SEC’s conclusion that

NYSE Arca was subject to significant competitive forces that

constrained its ability to set fees for market data is not supported

by substantial evidence. 

A. SEC’s “Market-Based” Approach Does Not

Contravene Exchange Act

The petitioners assert, first, that the SEC’s “market-based”

approach to evaluating the fairness and reasonableness of NYSE

Arca’s ArcaBook fees conflicts with the Exchange Act. As

noted earlier, the Congress has expressly delegated to the

Commission the power to determine, after notice and comment,

whether a proposed rule change is consistent with the Exchange

Act. 15 U.S.C. § 78s(b)(2); see supra at 3. Accordingly, we

review the agency’s interpretation of the Exchange Act under the

familiar two-step analysis set forth in Chevron, U.S.A. Inc. v.
13

Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984).

See Fin. Planning Ass’n v. SEC, 482 F.3d 481, 487 (D.C. Cir.

2007); cf. United States v. Mead Corp., 533 U.S. 218, 226-27

(2001) (“Chevron deference [appropriate] when it appears that

Congress delegated authority to the agency generally to make 

rules carrying the force of law, and that the agency interpretation

claiming deference was promulgated in the exercise of that

authority.”).

Chevron step one applies if the “Congress has directly

spoken to the precise question at issue . . . [because] that is the

end of the matter; for the court, as well as the agency, must give

effect to the unambiguously expressed intent of Congress.”

Chevron, 467 U.S. at 842-43. If the statute is “silent or

ambiguous with respect to the specific issue,” we proceed to step

two, at which step we accept the agency’s interpretation of the

statute as long as it is reasonable. Id. at 843. We bear in mind

that “[i]t is irrelevant that this court might have reached a

different—or better—conclusion than the SEC.” Am. Equity Inv.

Life Ins. Co. v. SEC, — F.3d —, 2010 WL 2757499, at *7 (D.C.

Cir. July 12, 2010) (citing Nat’l Cable & Telecomm. Ass'n v.

Brand X Internet Servs., 545 U.S. 967, 980 (2005)). In

considering the permissibility of an agency’s construction of a

statute, we determine not only whether the agency’s

interpretation is reasonable but also whether the agency has acted

within its authority under the statute. See Goldstein v. SEC, 451

F.3d 873 (D.C. Cir. 2006) (“As always, the ‘words of the statute

should be read in context, the statute’s place in the overall

statutory scheme should be considered, and the problem

Congress sought to solve should be taken into account’ to

determine whether Congress has foreclosed the agency’s

interpretation.” (quoting PDK Labs. Inc. v. DEA, 362 F.3d 786,

796 (D.C. Cir. 2004)); see also Am. Bar Ass’n v. FTC, 430 F.3d

457, 468 (D.C. Cir. 2005) (rejecting agency suggestion “that

Chevron step two is implicated any time a statute does not

expressly negate the existence of a claimed administrative
14

power”). Finally, a statute’s “general declaration of policy” does

not protect agency action that is otherwise inconsistent with the

congressional delegation of authority for “[a]gencies are . . .

‘bound, not only by the ultimate purposes Congress has selected,

but by the means it has deemed appropriate, and prescribed, for

the pursuit of those purposes.’” Colo. River Indian Tribes v.

Nat’l Indian Gaming Comm’n, 466 F.3d 134, 139 (D.C. Cir.

2006) (quoting MCI Telecomms. Corp. v. AT&T, 512 U.S. 218,

231 n. 4 (1994)).

Under the Exchange Act, the SEC has a duty to ensure that

NYSE Arca’s proposed fees for market data are, among other

things, “fair and reasonable.” 15 U.S.C. § 78k-1(c)(1)(C) (fees

must be “fair and reasonable” and not “unreasonably

discriminatory”); see 17 C.F.R. § 242.603(a) (same); 15 U.S.C.

§ 78(f)(b)(4) (exchange must also “provide for the equitable

allocation of reasonable dues, fees, and other charges among

. . . persons using its facilities”). The petitioners believe that the

SEC’s market-based approach is prohibited under the Exchange

Act because the Congress intended “fair and reasonable” to be

determined using a cost-based approach. The SEC counters that,

because it has statutorily-granted flexibility in evaluating market

data fees, its market-based approach is fully consistent with the

Exchange Act. 

We agree with the SEC. None of the statutory language

answers the “precise question” whether the SEC is required to

evaluate non-core data fees under a cost-based approach.11

11In contrast, another Exchange Act provision also enacted as part

of the 1975 Amendment requires that the fees charged as commissions

be “reasonable in relation to the costs of providing the service for

which such fees are charged.” See 15 U.S.C. § 78f(e)(1)(B) (emphasis

added). In other words, the Congress knew how to tie a fee’s

reasonableness to its underlying cost but declined to do so for noncore data fees. See Catawba County, N.C. v. EPA, 571 F.3d 20, 36
15

Chevron, 467 U.S. at 842-43. Because the Congress delegated

authority to the Commission to determine whether an SRO’s rule

change is consistent with the Exchange Act and because the

statute is silent as to whether a market-based approach is

consistent with the same, under Chevron step two we uphold the

SEC’s action if it is based on a “permissible construction of the

statute.” Id. at 843; see Sea-Land Serv., Inc. v. Dep’t of Transp.,

137 F.3d 640, 645 (D.C. Cir. 1998) (“[Chevron] deference comes

into play . . . only as a consequence of statutory ambiguity, and

then only if the reviewing court finds an implicit delegation of

authority to the agency”); cf. Michigan v. EPA, 268 F.3d 1075,

1082 (D.C. Cir. 2002) (“Mere ambiguity in a statute is not

evidence of congressional delegation of authority.”). 

The petitioners rely on portions of the legislative history

suggesting the Commission was supposed to “assume a special

oversight and regulatory role” over exclusive processors by

treating them as public utilities, a role inconsistent with allowing

market forces to determine market data prices. S. Rep. No.

94–75, at 12 (1975), as reprinted in 1975 U.S.C.C.A.N. 179, 190

(Senate Report); see id. at 11, 1975 U.S.C.C.A.N. at 189 (“Any

exclusive processor is, in effect, a public utility, and thus it must

function in a manner which is absolutely neutral . . . .”);

Conference Report at 93, 1975 U.S.C.C.A.N. at 324 (“[W]here

a self-regulatory organization or organizations utilize an

exclusive processor, that processor takes on certain of the

characteristics of a public utility and should be regulated

accordingly.”). These statements, however, refer to an

“exclusive central processor for the composite [i.e., consolidated

(D.C. Cir. 2009) (“When interpreting statutes that govern agency

action, we have consistently recognized that a congressional mandate

in one section and silence in another often ‘suggests not a prohibition

but simply a decision not to mandate any solution in the second

context, i.e., to leave the question to agency discretion.’” (quoting

Cheney R.R. Co. v. ICC, 902 F.2d 66, 69 (D.C. Cir. 1990))).
16

core data] tape or any other element of the national market

system,” not to an exchange acting as the processor of its

proprietary non-core data. Senate Report at 11, 1975

U.S.C.C.A.N. at 189 (emphases added); see also Conference

Report at 93, 1975 U.S.C.C.A.N. at 324. 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.” Conference

Report at 92, 1975 U.S.C.C.A.N. at 323; see Senate Report at 12,

1975 U.S.C.C.A.N. at 190 (“[I]n situations in which natural

competitive forces cannot, for whatever reason, be relied upon,

the SEC must assume a special oversight and regulatory role.”).

This reading is consistent with the notion that the Congress did

not intend to take away the SEC’s authority to rely, at least in

some circumstances, on the market. See id. (“[A] fundamental

premise of the bill is that the initiative for the development of the

facilities of a national market system must come from private

interests and will depend upon the vigor of competition within

the securities industry as broadly defined.”).

Moreover, while “competition” is only one of five objectives

included in the 1975 Amendment, 15 U.S.C. § 78k-1(a)(1)(C),

the SEC’s market-based approach does not impermissibly

elevate competition above the other objectives. In its Order, the

SEC responded to the congressional desire that it rely “on

competition, whenever possible, in meeting its regulatory

responsibilities for overseeing the SROs and the national market

system.” 73 Fed. Reg. at 74,781; see id. at 74,771 (Congress

intended that “competitive forces should dictate the services and

practices that constitute the U.S. national market system for

trading equity securities”). Accordingly, the SEC took a more

traditional “regulatory approach,” id. at 74,781, to core data

(“where competition may not be sufficient,” Conference Report
17

at 92, 1975 U.S.C.C.A.N. at 323) and a “market-based

approach,” with a greater reliance on competition, to non-core

data, see Order, 73 Fed. Reg. at 74,780-81 (SEC prefers

consolidation for core data but deconsolidation for non-core data

to “allow[] greater flexibility for market forces to determine data

products and fees”). We conclude the SEC’s interpretation—that

a market-based approach to evaluating whether NYSE Arca’s

non-core data fees are “fair and reasonable”—is a permissible

one.12

B. SEC Did Not Arbitrarily Reject Prior Cost-Based

Approach to Calculating Market Data Fees

The petitioners next contend that, in approving NYSE

Arca’s proposed fees, the SEC arbitrarily “rejected” its prior

cost-based approach. Under APA review, an agency may not

“depart from a prior policy sub silentio or simply disregard rules

that are still on the books.” FCC v. Fox Television Stations, Inc.,

129 S. Ct. 1800, 1811 (2009). An agency acts arbitrarily by

“fail[ing] adequately to justify departing from its own prior

interpretation” of a statute. Goldstein v. SEC, 451 F.3d 873, 883

(D.C. Cir. 2006). 

The petitioners cite two examples of the cost-based

approach from which the SEC allegedly departed without

explanation but neither example—each of which is distinguished

12We have similarly held that a “just and reasonable” standard did

not “preclude[] the FERC from relying upon market-based pricing.”

Elizabethtown Gas Co. v. FERC, 10 F.3d 866, 870 (D.C. Cir. 1993)

As long as “there is a competitive market the FERC may rely upon

market-based prices in lieu of cost-of-service regulation to assure a

‘just and reasonable’ result.” Id. (quoting Tejas Power Corp. v.

FERC, 908 F.2d 998, 1004 (D.C. Cir. 1990)); see also EarthLink, Inc.

v. FCC, 462 F.3d 1, 13 (D.C. Cir. 2006) (contrasting “cost-based”

pricing required under 47 U.S.C. § 271 with “the more relaxed ‘just

and reasonable’ standard of 47 U.S.C. §§ 201 and 202”). 
18

in the Order—fits the petitioners’ characterization. They first

cite several statements contained in a 1999 SEC “Market

Information Concept Release” proposing changes to, among

other things, the SEC’s then-regulation of market data fees. See

Regulation of Market Information Fees and Revenues, Release

No. 34-42208, 64 Fed. Reg. 70,613 (Dec. 17, 1999). The

Concept Release noted that “the fees charged by a monopolistic

provider of a service (such as the exclusive processors of market

information) need to be tied to some type of cost-based standard

in order to preclude excessive profits if fees are too high or

underfunding or subsidization if fees are too low” and therefore

“the total amount of market information revenues should remain

reasonably related to the cost of market information.” Id. at

70,627. But this statement (and the Concept Release in general)

addressed market data fees charged by a central exclusive

processor of consolidated core data. See 64 Fed. Reg. at 70,615

(discussing dissemination of “consolidated market information”

pursuant to plans that “govern all aspects of the arrangements for

disseminating market information,” including “fees that can be

charged”) (emphasis in original). The SEC did not intend by this

statement to require that fees for an exchange’s proprietary noncore data must also be cost-based. While costs are “[o]ne

standard commonly used to evaluate the fairness and

reasonableness of fees, particularly those of a monopolistic

provider of a service,” the Congress “did not require the

Commission to undertake a . . . strictly cost-of-service (or

‘ratemaking’) approach to its review of market information fees

in every case.” 64 Fed. Reg. at 70,619; see id. (“Such an

inflexible standard, although unavoidable in some contexts, can

entail severe practical difficulties.”) (footnote omitted). Instead,

as the SEC recognized, the Congress gave it flexibility in

evaluating “fair and reasonable” market data fees.13 Id.

13Moreover, the Concept Release merely stated the SEC’s

“belie[f] . . . that it may be possible to develop a more flexible, cost-
19

The petitioners’ second example is no more persuasive. In

1984, the SEC stated that an “exclusive processor’s fees should

be based strictly on the expenses it incurs in providing the

information to vendors.” Order Announcing Commission

Findings, Modifying Interim Relief, and Instituting Proceedings,

Release No. 20874, 49 Fed. Reg. 17,640, 17,647 (Apr. 24, 1984)

(Instinet Order). The issue arose when the SEC rejected a

proposed fee to access market information because the SRO that

proposed the fee was not only charging market data vendors (like

Instinet) but was also directly competing with the vendors by

“providing enhanced information products to its own direct

subscribers.” Concept Release, 64 Fed. Reg. at 70,623. The

SEC emphasized that the cost-based approach was used due to

“the particular facts of the present case.” Instinet Order, 49 Fed.

Reg. at 17,646; see Order, 73 Fed. Reg. 74,787 n.254 (citing

Concept Release, 64 Fed. Reg. at 70,622 (“The Commission

repeatedly emphasized . . . that the scope of its decision was

limited to the particular competitive situation presented in the

proceedings.”)). Nor is the SEC’s interpretation of the Instinet

order a novel one, given that it had already distinguished the

order on its “peculiar competitive context” in the 1999 Market

Information Concept Release. 64 Fed. Reg. at 70,623. 

In any event, more recent examples illustrate that the SEC’s

“market-based” approach is not an unexplained shift from its

based approach” that avoided cost-calculating difficulties and at the

same time maintained “a reasonable connection between the cost of

market information and the total amount of revenues derived from

market information fees.” 64 Fed. Reg. at 70,628. The Release, which

identified itself as a “request for comments,” did not purport to

suggest the “belief” as a rule. Id. at 70,613-14 (“[T]he Commission

has decided to invite public comment before taking further action.

This release is intended to assist the public . . . by identifying a variety

of specific issues . . . on which the Commission is particularly

interested in receiving comments.”). 
20

earlier cost-based pronouncements. In 2001, the SEC’s Advisory

Committee on Market Information made clear that “the extent

and manner of dissemination of deeper market information can

be determined by market forces—i.e., by the business decisions

of individual market participants—rather than by regulation.”

Report of the Advisory Committee on Market Information: A

Blueprint for Responsible Change, § B.2,

http://www.sec.gov/divisions/marketreg/marketinfo/finalreport

.htm (Sept. 14, 2001) (last visited July 22, 2010) (Advisory

Committee Report). Likewise, the SEC itself intended in

Regulation NMS that “market forces, rather than regulatory

requirements” play a role in determining the market data (other

than the NBBO) to be made available to investors and at what

cost. 70 Fed. Reg. at 37,567. In fact, in 2002 the SEC approved

NASDAQ’s proposed fees for its own depth-of-book product

without analyzing costs. See Order Approving Proposed Rule

Change, Release No. 34-46843, 2002 WL 31554080 (Nov. 18,

2002). We conclude that the SEC’s “market-based” approach

does not arbitrarily depart from prior practice.

C. SEC Failed to Show that NYSE Arca is Subject to

Significant Competitive Forces in Pricing ArcaBook

Although we uphold the SEC’s market-based approach

against the petitioners’ cost-based challenges, we do not mean to

say that a cost analysis is irrelevant. On the contrary, in a

competitive market, the price of a product is supposed to

approach its marginal cost, i.e., the seller’s cost of producing one

additional unit. See Tejas Power Corp., 908 F.2d at 1004 (“In a

competitive market, where neither buyer nor seller has

significant market power, it is rational . . . to infer that price is

close to marginal cost, such that the seller makes only a normal

return on its investment.”). Supracompetitive pricing may be

evidence of “monopoly,” or “market,” power. See United States

v. Microsoft Corp., 253 F.3d 34, 51 (D.C. Cir. 2001) (“Where

evidence indicates that a firm has in fact profitably [raised prices
21

substantially above the competitive level], the existence of

monopoly power is clear.”). Thus, the costs of collecting and

distributing market data can indicate whether an exchange is

taking “excessive profits” or subsidizing its service with another

source of revenue, as the SEC has recognized. Concept Release,

64 Fed. Reg. at 70,627 (cost-based standard “preclude[s]

excessive profits if fees are too high or underfunding or

subsidization if fees are too low”); cf. MCI Telecomms. Corp. v.

FCC, 675 F.2d 408, 410 (D.C. Cir. 1982) (“A basic principle

used to ensure that rates are ‘just and reasonable’ is that rates are

determined on the basis of cost.”) (footnote omitted). Even

NYSE Arca’s proposal acknowledges that costs are relevant in

assessing the reasonableness of its fees. See NYSE Arca

Application at 6-7 (“NYSE Arca believes that the proposed

market data fees would reflect an equitable allocation of its

overall costs to users of its facilities.”); see also Comment Letter

of Mary Yeager, Corporate Secretary, NYSE Arca, Inc. at 13, 16

(Feb. 6, 2007) (in setting fee levels NYSE Arca considered “the

contribution that revenues accruing from Arca Book Fees would

make toward meeting the overall costs of NYSE Arca’s

operations” and noted “market data revenues compare favorably

to the markets’ cost of producing the data”). 

Moreover, the risk that NYSE Arca could exercise market

power appears to be elevated in the pricing of its proprietary

non-core data. There is no dispute that NYSE Arca is the

“exclusive” provider of this data. While many exchanges sell

Google stock, only NYSE Arca offers access to the Google limit

orders included in its depth-of-book product, ArcaBook. As of

June 2008, NYSE Arca was one of the largest exchanges in the

nation in terms of shares traded. See Order, 73 Fed. Reg. at

74,783 tbl. 1 (NYSE Arca had third-highest share of volume in

U.S.-listed equities among national exchanges). Although the

SEC is correct that “[m]any businesses . . . are the exclusive

sources of their own products” without also having market

power, id. at 74,786, as recently as 2005 the SEC was
22

“concerned that an SRO with a significant share of trading in

NMS stocks could exercise market power in setting fees for its

data,” including data “beyond the NBBO.” Regulation NMS, 70

Fed. Reg. at 37,559. The Order thus recognized that if an

“exchange could, in fact, exert monopoly power over its pricing

of non-core data, it obviously would be inappropriate for the

Commission to rely on non-existent competitive forces as a

basis for approving an exchange proposal.” 73 Fed. Reg. at

74,787. 

The SEC concluded, however, that NYSE Arca could not

exercise market pricing power as to ArcaBook. But the

Commission did not require NYSE Arca to substantiate its

market data costs—not at the time of NYSE Arca’s fee

application, not before the SEC published the draft proposal and

not before the Order issued. Instead, the Commission noted

more than once the difficulty of cost calculation in determining

whether a fee is fair and reasonable, often by referring to earlier

orders. See, e.g., Order, 73 Fed. Reg. 74,794 (cost-based

approach entails “whole host of difficulties in calculating the

direct costs and common costs of market data—an endeavor that

the Commission discussed at length in 1999 and will not repeat

here”); id. (cost-based regulatory approach “would be

extraordinarily intrusive on competitive forces, as well as quite

costly and difficult to apply in practice”). At one point the SEC

seemed to suggest that it might allow NYSE Arca’s fees to be set

by competition simply because of the difficulty of costcalculating. See id. (“faced with the pragmatic challenge of

determining whether non-core market data fees are fair and

reasonable,” SEC “strongly believes that the current level of

competition in the U.S. equity markets provides a much more

useful basis to make this determination than a regulatory attempt

to measure market data costs”). 

The petitioners maintain that the SEC’s failure to consider

NYSE Arca’s costs make its determination that NYSE Arca is
23

subject to significant competitive forces arbitrary and capricious

because cost-collecting is in fact not difficult. The APA

“establishes a scheme of ‘reasoned decisionmaking.’ . . . Not

only must an agency’s decreed result be within the scope of its

lawful authority, but the process by which it reaches that result

must be logical and rational.” Allentown Mack Sales & Service,

Inc. v. NLRB, 522 U.S. 359, 374 (1998) (quoting State Farm, 463

U.S. at 52); see also United Techs. Corp. v. U.S. Dep't of Def.,

601 F.3d 557, 565 (D.C. Cir. 2010) (agency failed to provide

reasoned basis for conclusion because “[a] naked conclusion

. . . is not enough”). While “we have long held that agency

determinations based upon highly complex and technical matters

are entitled to great deference,” Domestic Sec., Inc. v. SEC, 333

F.3d 239, 248 (D.C. Cir. 2003) (internal quotation omitted), “we

do not defer to the agency’s conclusory or unsupported

suppositions.” McDonnell Douglas Corp. v. U.S. Dep’t of the

Air Force, 375 F.3d 1182, 1187 (D.C. Cir. 2004). In addition, an

agency may not shirk a statutory responsibility simply because

it may be difficult. See Chamber of Commerce of U.S. v. SEC,

412 F.3d 133, 143 (D.C. Cir. 2005) (difficulty in formulating

cost estimate does not relieve SEC of “statutory obligation to

determine as best it can the economic implications of the rule it

has proposed” because even “in face of uncertainty, agency must

exercise its expertise to make tough choices . . . and to hazard a

guess as to which is correct, even if . . . the estimate will be

imprecise”) (internal quotation and citation omitted).

But the SEC did not approve NYSE Arca’s proposed fees

based primarily on “difficulties in calculating the direct costs and

common costs of market data,.” Order, 73 Fed. Reg. at 74,794.

It did so instead based on its determination that consideration of

costs was unnecessary because of an alternative indicator of

competitiveness: NYSE Arca is subject, the SEC said, to “[a]t

least two broad types of significant competitive forces” in

pricing ArcaBook—namely, “(1) [its] compelling need to attract

order flow from market participants[] and (2) the availability to
24

market participants of alternatives to purchasing the ArcaBook

data.” Id. at 74,782. That determination fails the APA’s

reasoned decisionmaking standard for another reason advanced

by the petitioners, as we now explain.

1. Order Flow Competition

We begin with the points on which the SEC and the

petitioners agree. No one disputes that competition for order

flow is “fierce.” Order, 73 Fed. Reg. at 74,782 (“Attracting

order flow is the core competitive concern of any equity

exchange—it is the ‘without which, not’ of an exchange’s

competitive success.”). 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”; “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”; and therefore “NYSE Arca must compete

vigorously for order flow to maintain its share of trading

volume.” Id. at 74,782-83. The parties also agree that there is a

connection between order flow and market data, i.e., that “[a]n

exchange’s ability to attract order flow determines whether it has

market data to distribute.” Id. at 74,783. 

The dispute centers on whether the connection works both

ways: not only that increased order flow makes market data more

valuable but that more modestly priced market data drives

increased order flow. The SEC concluded that it does: an

“exchange’s distribution of market data significantly affects its

ability to attract order flow.” Id. (“The wide distribution of . . .

depth-of-book order data[] to many market participants is an

important factor in attracting . . . orders.”); id. at 74,791 (“wide

dissemination” of market data is “important tool” to attract order

flow). The SEC contends that order flow competition constrains

NYSE Arca’s pricing of its depth-of-book data for two reasons.
25

First, the wide dissemination of ArcaBook will attract interest in

the prices listed therein of those traders who wish to buy or sell

more shares than the number of shares shown in the core data.

See id. at 74,783 (“The extent to which a displayed [limit] order

attracts . . . interest will depend greatly on the wide distribution

of the displayed order to many market participants.”). Second,

because many traders who buy depth-of-book data from NYSE

Arca also select on which exchanges to trade—in particular, “the

large broker-dealer firms that control the handling of a large

volume of customer and proprietary order flow”—NYSE Arca

can risk its order flow share by overpricing market data. Id.

(“Given the portability of order flow from one trading venue to

another, any exchange that sought to charge unreasonably high

data fees would risk alienating many of the same customers on

whose orders it depends for competitive survival.”). For these

reasons, the SEC concluded, NYSE Arca’s proposal “cannot

reasonably be interpreted as that of a monopolist able to take

advantage of its market power over a small group of

professionals who value the data highly, but rather that of an

exchange facing significant competitive pressures in attempting

to sell its data to a large number of professionals.” Id. at 74,792.

The conclusion is not objectionable in theory. The problem

is that is it at odds with the SEC’s repeated statements

throughout the Order and in its briefs that depth-of-book data is

simply not very important to most traders, even professionals.

See, e.g., 73 Fed. Reg. at 74,791 n.295 (rejecting the notion that

“an exchange’s depth-of-book data is so critically important that

the exchange is not significantly constrained by competitive

forces in pricing that data”). This data, it appears, “is useful

primarily as background information on liquidity outside the best

prices” because “more than 90% of the time, traders do not

access the liquidity displayed in an exchange’s depth-of-book

order data, even for large orders.” Id. at 74,792 (92% of NYSE

Arca’s May 2008 “executed share volume of marketable orders

were at prices equal to or better than the NBBO” for orders
26

ranging from 100 shares to 9,999). According to the

Commission, depth-of-book data is “most accurately

characterized as useful, but not essential, for professional

traders.” Id.; see Resp’t’s Br. 48 (“The availability of core data

makes resort to depth-of-book unnecessary for most investors

. . .”); id. at 50 (“The limited appeal of depth-of-book data is

reflected by the fact that of the 420,000 professional users who

purchase core data in NASDAQ-listed stocks, only 19,000

professional users purchase NASDAQ’s depth-of-book data

product.”); see also Intervenors’ Br. 7 (“Use of depth-of-book

data is uncommon even among professional investors . . . .”). 

But if the SEC is correct that depth-of-book data is

“unnecessary” and of “limited appeal” to most investors, it is not

clear why “wide distribution” of the data “to many market

participants” is critical in attracting order flow. Order, 73 Fed.

Reg. at 74,783. If anything, the SEC’s order seems to suggest

that the depth-of-book tail is wagging the order flow dog—but

without a consistent explanation of how or why this is so. 

This is not to say that wide dissemination of market data

cannot increase order flow but rather that it is not necessarily

so.14 More problematic is the lack of support in the record for

14Perhaps one way to resolve the apparent contradiction between

asserting both the critical role of market data and at the same time its

limited appeal to most investors is to say that the data is important but

only to those “[i]nstitutional investors that need to trade in large size

[and] typically seek to assess market depth beyond the best prices,”

Order, 73 Fed. Reg. at 74,784, or to “algorithmic order routing

services” that use computer algorithms to determine the most

profitable trading sites, id. at 74,792. In other words, perhaps only a

minority of professional traders is interested in NYSE Arca’s depthof-book data but those few execute an outsized share of the total

trading volume so that unreasonable fees would cause them to place

their orders elsewhere and ultimately affect order flow. But if this is

the SEC’s theory, it is not supported by evidence of the traders using
27

the SEC’s conclusion that order flow competition constrains

market data prices. Granted, the record includes statements from

NYSE Arca and other exchanges to support the conclusion. E.g.,

Order, 73 Fed. Reg. at 74,784 (“NYSE Arca, in setting the fee,

acknowledged that it needed to balance its desire for market data

revenues with the potential damage that a high fee would do to

its ability to attract order flow.”). The self-serving views of the

regulated entities, however, provide little support to establish

that significant competitive forces affect their pricing decisions.

Nor does the remaining evidence provide substantial support. 

For example, the SEC quoted the 2001 Advisory Committee

Report’s statement that “a market’s inability to widely

disseminate its prices undoubtedly will adversely impact its

ability to attract limit orders and, ultimately, all order flow.” Id.

at 74,783 n.216 (quoting Advisory Committee Report

§ B.1). But this was a conclusion, not evidence. Moreover, it

was made in the context of “whether basic market information

should continue to be required to be provided in a consolidated

format to market participants,” see Advisory Committee Report

§ B—thus supporting the unremarkable proposition that failure

to disseminate core data could adversely affect order flow.15

NYSE Arca’s depth-of-book data or of the percentage of total trading

volume those traders may generate. 

15In fact, the Advisory Committee disagreed over whether

competitive forces would ensure that market data fees remain “fair and

reasonable.” While some Committee members were “concern[ed] that

the rise of publicly-held for-profit exchanges, and their obligation to

maximize shareholder value, will put upward pressure on market data

fees,” others argued that the exchanges’ inclination to increase data

fees “will be checked by the need to make data available to generate

order flow and attract listings.” Advisory Committee Report § D.3.d.

The Report did not resolve the disagreement but rather cautioned that

“the Commission may want to be more vigilant in assuring that a
28

The SEC also cited two anecdotes to support its

determination that competition for order flow constrains noncore market data fees. The SEC first described how Island ECN

“ceased displaying its order book to the public in three very

active exchange-traded funds” in order to avoid certain

regulatory strictures—and promptly lost fifty per cent of its

substantial market share in the three funds. Order, 73 Fed. Reg.

at 74,784. The SEC also cited the fact that BATS ECN and

International Stock Exchange (ISE) provided their depth-of-book

data to customers free of charge, ostensibly as a way to generate

order flow. Together, these examples show that depth-of-book

market data is apparently important enough to at least some

traders that it must be made available; they say nothing about

whether an exchange like NYSE Arca is constrained to price its

depth-of-book data competitively.16

2. Alternatives to Depth-of-Book Data

The SEC also asserts that an exchange must consider the

extent to which institutional and other “sophisticated traders

would choose one or more alternatives instead of purchasing the

for-profit SRO’s market data fees meet the statutory ‘fair and

reasonable’ standard.” Id.

16The SEC points to a NASDAQ-commissioned economic study

described in the Order which employs the “total platform” theory

whereby market data and trade executions are “joint products” with

“joint costs” at each trading “platform,” or exchange. Resp’t’s Br. 43-

44; see Order, 73 Fed. Reg. at 74,779. Although an exchange may

price its trade execution fees higher and its market data fees lower (or

vice versa), because of “platform” competition the exchange

nonetheless receives the same return from the two “joint products” in

the aggregate. But this is not the theory of competition the SEC relied

on below and it may not press it for the first time on appeal. See

BNSF Ry. Co. v. Surface Transp. Bd., 604 F.3d 602, 613 (D.C. Cir.

2010) (citing SEC v. Chenery Corp., 332 U.S. 194, 196 (1947)).
29

exchange’s data.” Order, 73 Fed. Reg. at 74,784. According to

the SEC, given the other sources (and potential sources) of

market data available to sophisticated investors—specifically, (1)

core data, (2) depth-of-book data from other exchanges, (3)

“pinging”orders and (4) the threat of independent distribution of

depth-of-book data by data vendors or securities firms acting in

concert—NYSE Arca must price ArcaBook reasonably or it will

lose these subscribers. Id. at 74,784-85; see id. at 74,791 n.295.

But the existence of a substitute does not necessarily

preclude market power. See 2B Phillip E. Areeda, Herbert

Hovenkamp & John L. Solow, Antitrust Law § 506(a) (3d ed.

2007) (Areeda); see also Ariz. Pub. Serv. Co. v. United States,

742 F.2d 644, 651 (D.C. Cir. 1984) (“[T]he mere existence of

some alternative does not in itself constrain the railroads from

charging rates far in excess of the just and reasonable rates that

Congress thought the existence of competitive pressures would

ensure.”). Rather, whether a market is competitive

notwithstanding potential alternatives depends on factors such as

the number of buyers who consider other products

interchangeable and at what prices. See Areeda § 506c. We

evaluate market competitiveness in antitrust cases, for example,

by asking whether there exists a “reasonably interchangeable”

substitute in the same market, which “depends not only on the

ease and speed with which customers can substitute it and the

desirability of doing so, . . . but also on the cost of substitution,

which depends most sensitively on the price of the products.”

FTC v. Whole Foods Mkt., Inc., 548 F.3d 1028, 1037 (D.C. Cir.

2008) (en banc) (citing United States v. Microsoft Corp., 253

F.3d 34, 53-54 (D.C. Cir. 2001) (per curiam)); see id. at 1037-38

(describing “small but significant non-transitory increase in

price,” or “SSNIP,” technique developed by the Department of

Justice and Federal Trade Commission to analyze reasonable

substitutability). The inquiry into whether a market for a product

is competitive, therefore, focuses on the customer and, in

particular, his price sensitivity—in economic terms, the
30

product’s “elasticity of demand.” Areeda § 503 (“‘Elasticity’

here refers to the rate at which customers will turn away from the

firm’s product in response to a price increase or toward it in

response to a price decrease.”); see Order, 73 Fed. Reg. at 74,792

(“The availability of such alternatives increases the elasticity of

demand for an exchange’s depth-of-book data.”).

The SEC’s analysis of alternatives does not reveal the

number of potential users of the data or how they might react to

a change in price. We do not know, for example, how many

traders accessed NYSE Arca’s depth-of-book data during the

period it was offered without charge—and thus how many

traders might be interested in paying for ArcaBook. See Arg.

Tr. 32 (SEC: “[W]e don’t have numbers.”). Nor do we know

whether the traders who want depth-of-book data would decline

to purchase it if met with a supracompetitive price. The Order

does provide some idea of how many traders buy depth-of-book

data (albeit on a different exchange): of 420,000 professional

traders who subscribed to NASDAQ’s core data product as of

April 30, 2007, only 19,000 (less than 5%) purchased its depthof-book product.17 See Order, 73 Fed. Reg. at 74,785 (“[T]hat

95% of the professional users of core data choose not to purchase

the depth-of-book order data of a major exchange strongly

17We also know that as of July 2008, about 15% of ISE

members—20 of 140— subscribe to its depth-of-book product even

though it is free. See Order, 73 Fed. Reg. at 74,779; Comment Letter

of Michael J. Simon, Secretary, International Stock Exchange, at 2

(July 10, 2008). Given that ISE’s share volume in U.S. listed stocks

is significantly smaller than that of NYSE Arca (.9% compared to

16.5% during June 2008), it is no surprise that its market data is less

in demand. See 73 Fed. Reg. at 74,784 (depth-of-book data provided

by exchanges and ECNs with greater trading volume “will be

proportionally more important in assessing market depth” and thus

“smaller exchanges may well be inclined to offer their data for no

charge or low fees as a means to attract order flow”).
31

suggests that no exchange has monopoly pricing power for its

depth-of-book order data.”). But the fact that there are few

buyers does not by itself demonstrate a lack of market

power—which, after all, is “the ability to raise price profitably

by restricting output.” Areeda § 501(emphasis added). 

Stated differently, evidence that few people buy the data

tells us little about whether the data is “critically important” to

those traders who do. And without additional evidence of trader

behavior, the SEC has not adequately supported its determination

that the alternatives it identifies in fact constrain NYSE Arca’s

depth-of-book fees. Order, 73 Fed. Reg. at 74,784-85. Core

data, for example, reveals only the best prices available; it is not

a “substitute” for depth-of-book data, which measures the

number of shares available at prices inferior to the best prices.

Depth-of-book data from other exchanges could be an alternative

for individual securities but that determination cannot be made

without knowing how actively the security is trade on those

exchanges. See id. at 74,785 (depth-of-book data provided by

exchanges and ECNs with greater trading volume “will be

proportionally more important in assessing market depth”).

Likewise, a “pinging” order, which involves placing a limit order

for a number of shares larger than that included in the core data,

reveals the number of shares available at the order price or better

and therefore does provide “background information on

liquidity.” Id. at 74,792. But a pinging order also executes a

trade for both displayed and undisplayed orders at (and superior

to) the “pinging” price, meaning that it is not an obvious

alternative, at least without evidence that traders in fact use it in

lieu of depth-of-book data. Finally, even if we assume that the

“threat of independent distribution of order data by securities

firms and data vendors” is not unduly speculative, id. at 74,785,

the SEC’s duty is to ensure that fees are “fair and

reasonable”—not to predict that, with the entry of a competitor,

they might someday get there. Cf. Microsoft Corp., 253 F.3d at

53–54 (“The test of reasonable interchangeability . . . consider[s]
32

only substitutes that constrain pricing in the reasonably

foreseeable future, and only products that can enter the market

in a relatively short time can perform this function.”). In sum, the

SEC had insufficient evidence before it to conclude that a trader

interested in depth-of-book data would substitute any of the four

alternatives (or simply do without) instead of paying a

supracompetitive price. 

* * *

For the foregoing reasons, the petitions for review are

granted—we are unable to perform our APA review on the

record before us in order to affirm the SEC’s determination that

NYSE Arca’s ArcaBook fees are “fair and reasonable” and

otherwise compliant with the Exchange Act. In addition, the

SEC has failed to “disclose a reasoned basis,” see Am. Equity

Inv. Life Ins. Co., 2010 WL 2757499, at *10, for concluding that

NYSE Arca is subject to significant competitive forces in pricing

ArcaBook. The Commission’s Order Setting Aside Action by

Delegated Authority and Approving Proposed Rule Change

Relating to NYSE Arca Data, Release No. 34-59039, 73 Fed.

Reg. 74,770 (Dec. 9, 2008), is therefore vacated and remanded

to the Commission for further proceedings consistent with this

opinion. See Am. Equity Inv. Life Ins. Co., 2010 WL 2757499,

at *12 (decision to vacate depends on seriousness of order’s

deficiencies and disruptiveness of vacatur (citing Allied-Signal,

Inc. v. U.S. Nuclear Regulatory Comm’n, 988 F.2d 146, 150–51

(1993))).

So ordered.