[Federal Register Volume 80, Number 7 (Monday, January 12, 2015)]
[Notices]
[Pages 1554-1559]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-00213]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73994; File No. SR-NYSE-2014-77]


Self-Regulatory Organizations; New York Stock Exchange LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Amending the Fees for NYSE Order Imbalances

January 6, 2015.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on December 23, 2014, the New York Stock Exchange LLC (``NYSE'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II 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 amend the fees for NYSE Order Imbalances 
to: (1)

[[Page 1555]]

Establish eligibility requirements for redistribution on a managed non-
display basis and an access fee for managed non-display data 
recipients, and (2) make a non-substantive correction to the NYSE 
Proprietary Market Data Fee Schedule (``Fee Schedule''), operative on 
January 1, 2015. The text of the proposed rule change is available on 
the Exchange's Web site at www.nyse.com, at the principal office of the 
Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to (1) amend the fees for NYSE Order 
Imbalances to establish eligibility requirements for redistribution on 
a managed non-display basis and to establish an access fee for managed 
non-display data recipients of NYSE Order Imbalances, and (2) make a 
non-substantive correction to the Fee Schedule, operative on January 1, 
2015.
    Non-Display Use of NYSE market data means accessing, processing, or 
consuming NYSE market data delivered via direct and/or Redistributor 
\3\ data feeds for a purpose other than in support of a data 
recipient's display or further internal or external redistribution. A 
Redistributor approved for Managed Non-Display Services manages and 
controls the access to NYSE Order Imbalances and does not allow for 
further internal distribution or external redistribution of NYSE Order 
Imbalances by the data recipients. Managed Non-Display Services Fees 
apply when a data recipient's non-display applications are hosted by a 
Redistributor that has been approved for Managed Non-Display Services.
---------------------------------------------------------------------------

    \3\ ``Redistributor'' means a vendor or any other person that 
provides an NYSE data product to a data recipient or to any system 
that a data recipient uses, irrespective of the means of 
transmission or access.
---------------------------------------------------------------------------

    A Redistributor approved for Managed Non-Display Services is 
required to report to the Exchange on a monthly basis the data 
recipients that are receiving NYSE Order Imbalances through the 
Redistributor's Managed Non-Display Service. A data recipient receiving 
NYSE Order Imbalances through a Redistributor's Managed Non-Display 
Service does not have any reporting requirements.
    Currently, to be approved for Managed Non-Display Services, a 
Redistributor of the Managed Non-Display Services must be approved 
under the Exchange's Unit-of-Count policy.\4\ The Exchange is proposing 
to retire the Unit-of-Count Policy,\5\ and as a result, eligibility for 
Managed Non-Display Services of NYSE Order Imbalances would no longer 
be based on eligibility under the Unit-of-Count Policy. The Exchange 
proposes instead to establish eligibility requirements specifically for 
the redistribution of market data for Managed Non-Display Services. The 
Exchange also proposes to add an access fee that would apply to a data 
recipient that receives NYSE Order Imbalances from an approved 
Redistributor of Managed Non-Display Services.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release Nos. 59544 (Mar. 9, 
2009), 74 FR 11162 (Mar. 16, 2009) (SR-NYSE-2008-131) and 62038 (May 
5, 2010), 75 FR 26825 (May 12, 2010) (SR-NYSE-2010-22) (``Unit-of-
Count Policy filings''). See also Securities Exchange Act Release 
No. 2014-43 (Aug. 26, 2014), 79 FR 52079 (Sept. 2, 2014) (NYSE 2014-
43) (establishing fees for non-display use of NYSE Order 
Imbalances). The Unit-of-Count Policy currently applies to NYSE 
OpenBook, NYSE Trades and NYSE BBO as a method for counting Users. 
For NYSE Order Imbalances, the Policy sets the criteria for 
eligibility for Managed Non-Display Services.
    \5\ The Exchange has separately proposed to retire the Unit-of-
Count Policy and modify the eligibility requirements for Managed 
Non-Display Services for all of its proprietary market data 
products, including NYSE Order Imbalances, and thereby harmonize the 
eligibility requirements for all NYSE data products that have 
Managed Non-Display fees. See SR-NYSE-2014-76 (amending fees for 
NYSE OpenBook) and SR-NYSE-2014-75 (amending fees for NYSE BBO and 
Trades) (collectively, ``NYSE 2014 Filings'').
---------------------------------------------------------------------------

    The proposed eligibility requirements for the provision of Managed 
Non-Display Services would be similar to the eligibility requirements 
for the Unit-of-Count Policy in that they would require the 
Redistributor to manage and control the access to NYSE Order Imbalances 
for data recipients' non-display applications and not allow for further 
internal distribution or external redistribution of the information by 
data recipients. In addition, to be eligible to provide Managed Non-
Display Services, the Redistributor would be required to (a) host the 
data recipients' non-display applications in equipment located in the 
Redistributor's data center and/or hosted space/cage and (b) offer NYSE 
Order Imbalances in the Redistributor's own messaging formats (rather 
than using raw NYSE message formats) by reformatting and/or altering 
NYSE Order Imbalances prior to retransmission without affecting the 
integrity of NYSE Order Imbalances and without rendering NYSE Order 
Imbalances inaccurate, unfair, uninformative, fictitious, misleading or 
discriminatory. The proposed eligibility requirements are similar to 
data distribution models currently in use and align the Exchange with 
other markets.\6\
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release Nos. 70748 (Oct. 23, 
2013), 70748 (Oct. 23, 2013), 78 FR 64569 (Oct. 29, 2013) (SR-Phlx-
2013-105) (notice of filing and immediate effectiveness of proposed 
rule change to establish non-display Managed Data Solution for 
NASDAQ OMX PHLX (``Phlx'')); 70269 (Aug. 27, 2013), 78 FR 54336 
(Sept. 3, 2013) (SR-NASDAQ-2013-106) (notice of filing and immediate 
effectiveness of proposed rule change to establish non-display 
Managed Data Solution for the NASDAQ Stock Market (``NASDAQ'')); and 
69182 (Mar. 19, 2013), 78 FR 18378 (Mar. 26, 2013) (SR-Phlx-2013-28) 
(notice of filing and immediate effectiveness of proposed rule 
change to establish non-display Managed Data Solution for Phlx 
equities market PSX).
---------------------------------------------------------------------------

    The reporting requirements associated with the Managed Non-Display 
Service would not change. A Redistributor approved for Managed Non-
Display Service would be required to report to NYSE on a monthly basis 
the data recipients that are receiving NYSE Order Imbalances through 
the Redistributor's Managed Non-Display Service. A data recipient 
receiving NYSE Order Imbalances through a Redistributor's Managed Non-
Display Service would continue not to have any reporting requirements.
    In addition, the Exchange proposes to adopt an Access Fee of $250/
month applicable only to data recipients that receive NYSE Order 
Imbalances from an approved Redistributor of Managed Non-Display 
Services, operative January 1, 2015. Currently, all data recipients, 
including recipients of Managed Non-Display Services, are required to 
pay an Access Fee of $500/month to receive NYSE Order Imbalances. 
Because the purpose of an access fee is to charge data recipients for 
access to the Exchange's proprietary market data, the Exchange believes 
it is appropriate to charge an access fee to all data recipients.\7\ In 
recognition that data

[[Page 1556]]

recipients of Managed Non-Display Services receive NYSE Order 
Imbalances in a controlled format, the Exchange proposes to reduce the 
Access Fee by half for those data recipients that only receive Managed 
Non-Display Services for NYSE Order Imbalances. In connection with this 
change, the Exchange also proposes to amend the Fee Schedule to specify 
that the current Access Fee of $500/month is charged to data recipients 
other than those receiving data through Managed Non-Display Services. 
The proposed Managed Non-Display Access Fee would be in addition to the 
current Managed Non-Display Services Fee of $200/month by each data 
recipient.
---------------------------------------------------------------------------

    \7\ In order to harmonize its approach to fees for its market 
data products, the Exchange is proposing to establish access fees 
for Managed Non-Display Services for NYSE OpenBook, NYSE BBO, and 
NYSE Trades that is also half of the existing access fee for each 
respective data feed. See NYSE 2014 Filings, supra note 5.
---------------------------------------------------------------------------

    The Exchange also proposes to make a non-substantive amendment to 
the Fee Schedule to add the word ``month'' to the Category 3 Non-
Display Fee, consistent with the other fees in the Fee Schedule.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\8\ in general, and 
Sections 6(b)(4) and 6(b)(5) of the Act,\9\ in particular, in that it 
provides an equitable allocation of reasonable fees among users and 
recipients of the data and is not designed to permit unfair 
discrimination among customers, issuers, and brokers.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(4), (5).
---------------------------------------------------------------------------

    The Exchange believes that revising the eligibility requirements 
for Managed Non-Display Services so that the requirements are more 
closely aligned with the nature of the services being provided is 
reasonable. The proposed additional requirements for hosting in the 
Redistributor's data center and for reformatting and/or altering the 
market data prior to retransmission are also consistent with similar 
requirements of other markets for the provision of managed data.\10\
---------------------------------------------------------------------------

    \10\ See supra note 6.
---------------------------------------------------------------------------

    The Exchange believes that the proposed Access Fee for Managed Non-
Display Services is reasonable, because the data is of value to 
recipients, and it is reasonable to charge them a lower access fee 
because they are receiving the data through a Redistributor in a 
controlled form rather than from the Exchange in raw form. The Exchange 
believes that the proposed fee directly and appropriately reflects the 
significant value of using non-display data in a wide range of 
computer-automated functions relating to both trading and non-trading 
activities and that the number and range of these functions continue to 
grow through innovation and technology developments. The NASDAQ and 
Phlx also both offer managed non-display data solutions and charge 
access fees for such services.\11\ The fee is also equitable and not 
unfairly discriminatory because it would apply to all data recipients 
that choose to subscribe to Managed Non-Display Services for NYSE Order 
Imbalances.
---------------------------------------------------------------------------

    \11\ See supra note 6. NASDAQ offers a Managed Data Solution 
that assesses a monthly Managed Data Solution Administration fee of 
$1,500 and monthly Subscriber fees of $60 for non-professionals to 
$300 for professionals. See NASDAQ Rule 7026(b). Phlx charges a 
monthly Managed Data Solution Administration fee of $2,000 and a 
monthly Subscriber fee of $500. The monthly License fee is in 
addition to the monthly Distributor fee of $3,500 (for external 
usage), and the $500 monthly Subscriber fee is assessed for each 
Subscriber of a Managed Data Solution. See Securities Exchange Act 
Release No. 70748 (Oct. 23, 2013), 78 FR 64569 (Oct. 29, 2013) (SR-
Phlx-2013-105).
---------------------------------------------------------------------------

    The fees are also equitable and not unfairly discriminatory because 
they will apply to all data recipients that choose to subscribe to the 
feeds.
    The Exchange notes that NYSE Order Imbalances is entirely optional. 
The Exchange is not required to make NYSE Order Imbalances available or 
to offer any specific pricing alternatives to any customers, nor is any 
firm required to purchase NYSE Order Imbalances. Firms that do purchase 
NYSE Order Imbalances do so for the primary goals of using it to 
increase revenues, reduce expenses, and in some instances compete 
directly with the Exchange (including for order flow); those firms are 
able to determine for themselves whether NYSE Order Imbalances or any 
other similar products are attractively priced or not.
    The Exchange notes that broker-dealers are not required to purchase 
proprietary market data to comply with their best execution 
obligations.\12\ Similarly, there is no requirement in Regulation NMS 
or any other rule that proprietary data be utilized for order routing 
decisions, and some broker-dealers and alternative trading systems 
(``ATSs'') have chosen not to do so.\13\ Firms that do not wish to 
purchase NYSE Order Imbalances at the new price can choose similar 
alternative products \14\ or can choose to conduct their business 
operations in ways that do not use NYSE Order Imbalances data.
---------------------------------------------------------------------------

    \12\ See In the Matter of the Application of Securities Industry 
And Financial Markets Association For Review of Actions Taken by 
Self-Regulatory Organizations, Release Nos. 34-72182; AP-3-15350; 
AP-3-15351 (May 16, 2014).
    \13\ For example, Goldman Sachs Execution and Clearing, L.P. has 
disclosed that it does not use proprietary market data in connection 
with Sigma X, its ATS. See response to Question E3, available at 
http://www.goldmansachs.com/media-relations/in-the-news/current/pdf-media/gsec-order-handling-practices-ats-specific.pdf. By way of 
comparison, IEX has disclosed that it uses proprietary market data 
feeds from all registered stock exchanges and the LavaFlow ECN. See 
http://www.iextrading.com/about/.
    \14\ See NASDAQ Rule 7023 (Nasdaq Totalview and OpenView).
---------------------------------------------------------------------------

    The decision of the United States Court of Appeals for the District 
of Columbia Circuit in NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 
2010), upheld reliance by the Securities and Exchange Commission 
(``Commission'') upon the existence of competitive market mechanisms to 
set reasonable and equitably allocated fees for proprietary market 
data:

    In fact, the legislative history indicates that the Congress 
intended that the market system `evolve through the interplay of 
competitive forces as unnecessary regulatory restrictions are 
removed' and that the SEC wield its regulatory power `in those 
situations where competition may not be sufficient,' such as in the 
creation of a `consolidated transactional reporting system.'

Id. at 535 (quoting H.R. Rep. No. 94-229 at 92 (1975), as reprinted in 
1975 U.S.C.C.A.N. 323). The court agreed with the Commission's 
conclusion that ``Congress intended that `competitive forces should 
dictate the services and practices that constitute the U.S. national 
market system for trading equity securities.' '' \15\
---------------------------------------------------------------------------

    \15\ NetCoalition, 615 F.3d at 535.
---------------------------------------------------------------------------

    As explained below in the Exchange's Statement on Burden on 
Competition, the Exchange believes that there is substantial evidence 
of competition in the marketplace for proprietary market data and that 
the Commission can rely upon such evidence in concluding that the fees 
established in this filing are the product of competition and therefore 
satisfy the relevant statutory standards.
    As the NetCoalition decision noted, the Commission is not required 
to undertake a cost-of-service or ratemaking approach. The Exchange 
believes that, even if it were possible as a matter of economic theory, 
cost-based pricing for non-core market data would be so complicated 
that it could not be done practically or offer any significant 
benefits.\16\
---------------------------------------------------------------------------

    \16\ The Exchange believes that cost-based pricing would be 
impractical because it would create enormous administrative burdens 
for all parties, including the Commission, to cost-regulate a large 
number of participants and standardize and analyze extraordinary 
amounts of information, accounts, and reports. In addition, and as 
described below, it is impossible to regulate market data prices in 
isolation from prices charged by markets for other services that are 
joint products. Cost-based rate regulation would also lead to 
litigation and may distort incentives, including those to minimize 
costs and to innovate, leading to further waste. Under cost-based 
pricing, the Commission would be burdened with determining a fair 
rate of return, and the industry could experience frequent rate 
increases based on escalating expense levels. Even in industries 
historically subject to utility regulation, cost-based ratemaking 
has been discredited. As such, the Exchange believes that cost-based 
ratemaking would be inappropriate for proprietary market data and 
inconsistent with Congress's direction that the Commission use its 
authority to foster the development of the national market system, 
and that market forces will continue to provide appropriate pricing 
discipline. See Appendix C to NYSE's comments to the Commission's 
2000 Concept Release on the Regulation of Market Information Fees 
and Revenues, which can be found on the Commission's Web site at 
http://www.sec.gov/rules/concept/s72899/buck1.htm.

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

[[Page 1557]]

    For these reasons, the Exchange believes that the proposed fees are 
reasonable, equitable, and not unfairly discriminatory.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. An exchange's ability to 
price its proprietary market data feed products is constrained by 
actual competition for the sale of proprietary market data products, 
the joint product nature of exchange platforms, and the existence of 
alternatives to the Exchange's proprietary data.
The Existence of Actual Competition
    The market for proprietary data products is currently competitive 
and inherently contestable because there is fierce competition for the 
inputs necessary for the creation of proprietary data and strict 
pricing discipline for the proprietary products themselves. Numerous 
exchanges compete with one another for listings and order flow and 
sales of market data itself, providing ample opportunities for 
entrepreneurs who wish to compete in any or all of those areas, 
including producing and distributing their own market data. Proprietary 
data products are produced and distributed by each individual exchange, 
as well as other entities, in a vigorously competitive market. Indeed, 
the U.S. Department of Justice (``DOJ'') (the primary antitrust 
regulator) has expressly acknowledged the aggressive actual competition 
among exchanges, including for the sale of proprietary market data. In 
2011, the DOJ stated that exchanges ``compete head to head to offer 
real-time equity data products. These data products include the best 
bid and offer of every exchange and information on each equity trade, 
including the last sale.'' \17\
---------------------------------------------------------------------------

    \17\ Press Release, U.S. Department of Justice, Assistant 
Attorney General Christine Varney Holds Conference Call Regarding 
NASDAQ OMX Group Inc. and IntercontinentalExchange Inc. Abandoning 
Their Bid for NYSE Euronext (May 16, 2011), available at http://www.justice.gov/iso/opa/atr/speeches/2011/at-speech-110516.html; see 
also Complaint in U.S. v. Deutsche Borse AG and NYSE Euronext, Case 
No. 11-cv-2280 (D.C. Dist.) ] 24 (``NYSE and Direct Edge compete 
head-to-head . . . in the provision of real-time proprietary equity 
data products.'').
---------------------------------------------------------------------------

    Moreover, competitive markets for listings, order flow, executions, 
and transaction reports provide pricing discipline for the inputs of 
proprietary data products and therefore constrain markets from 
overpricing proprietary market data. Broker-dealers send their order 
flow and transaction reports to multiple venues, rather than providing 
them all to a single venue, which in turn reinforces this competitive 
constraint. As a 2010 Commission Concept Release noted, the ``current 
market structure can be described as dispersed and complex'' with 
``trading volume . . . dispersed among many highly automated trading 
centers that compete for order flow in the same stocks'' and ``trading 
centers offer[ing] a wide range of services that are designed to 
attract different types of market participants with varying trading 
needs.'' \18\ More recently, SEC Chair Mary Jo White has noted that 
competition for order flow in exchange-listed equities is ``intense'' 
and divided among many trading venues, including exchanges, more than 
40 alternative trading systems, and more than 250 broker-dealers.\19\
---------------------------------------------------------------------------

    \18\ Concept Release on Equity Market Structure, Securities 
Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594 (Jan. 21, 
2010) (File No. S7-02-10). This Concept Release included data from 
the third quarter of 2009 showing that no market center traded more 
than 20% of the volume of listed stocks, further evidencing the 
dispersal of and competition for trading activity. Id. at 3598. Data 
available on ArcaVision show that from June 30, 2013 to June 30, 
2014, no exchange traded more than 12% of the volume of listed 
stocks by either trade or dollar volume, further evidencing the 
continued dispersal of and fierce competition for trading activity. 
See https://www.arcavision.com/Arcavision/arcalogin.jsp.
    \19\ Mary Jo White, Enhancing Our Equity Market Structure, 
Sandler O'Neill & Partners, L.P. Global Exchange and Brokerage 
Conference (June 5, 2014) (available on the Commission Web site), 
citing Tuttle, Laura, 2014, ``OTC Trading: Description of Non-ATS 
OTC Trading in National Market System Stocks,'' at 7-8.
---------------------------------------------------------------------------

    If an exchange succeeds in its competition for quotations, order 
flow, and trade executions, then it earns trading revenues and 
increases the value of its proprietary market data products because 
they will contain greater quote and trade information. Conversely, if 
an exchange is less successful in attracting quotes, order flow, and 
trade executions, then its market data products may be less desirable 
to customers using them in support of order routing and trading 
decisions in light of the diminished content; data products offered by 
competing venues may become correspondingly more attractive. Thus, 
competition for quotations, order flow, and trade executions puts 
significant pressure on an exchange to maintain both execution and data 
fees at reasonable levels.
    In addition, in the case of products that are distributed through 
market data vendors, such as Bloomberg and Thompson Reuters, the 
vendors themselves provide additional price discipline for proprietary 
data products because they control the primary means of access to 
certain end users. These vendors impose price discipline based upon 
their business models. For example, vendors that assess a surcharge on 
data they sell are able to refuse to offer proprietary products that 
their end users do not or will not purchase in sufficient numbers. 
Vendors will not elect to make available NYSE Order Imbalances unless 
their customers request it, and customers will not elect to pay the 
proposed fees unless NYSE Order Imbalances can provide value by 
sufficiently increasing revenues or reducing costs in the customer's 
business in a manner that will offset the fees. All of these factors 
operate as constraints on pricing proprietary data products.
Joint Product Nature of Exchange Platform
    Transaction execution and proprietary data products are 
complementary in that market data is both an input and a byproduct of 
the execution service. In fact, proprietary market data and trade 
executions are a paradigmatic example of joint products with joint 
costs. The decision of whether and on which platform to post an order 
will depend on the attributes of the platforms where the order can be 
posted, including the execution fees, data availability and quality, 
and price and distribution of their data products. Without a platform 
to post quotations, receive orders, and execute trades, exchange data 
products would not exist.
    The costs of producing market data include not only the costs of 
the data distribution infrastructure, but also the costs of designing, 
maintaining, and operating the exchange's platform for posting quotes, 
accepting orders, and executing transactions and the cost of regulating 
the exchange to ensure its fair operation and maintain investor 
confidence. The total return that a trading platform earns reflects the

[[Page 1558]]

revenues it receives from both products and the joint costs it incurs.
    Moreover, an exchange's broker-dealer customers generally view the 
costs of transaction executions and market data as a unified cost of 
doing business with the exchange. A broker-dealer will only choose to 
direct orders to an exchange if the revenue from the transaction 
exceeds its cost, including the cost of any market data that the 
broker-dealer chooses to buy in support of its order routing and 
trading decisions. If the costs of the transaction are not offset by 
its value, then the broker-dealer may choose instead not to purchase 
the product and trade away from that exchange. There is substantial 
evidence of the strong correlation between order flow and market data 
purchases. For example, in November 2014 more than 80% of the 
transaction volume on each of NYSE, and the NYSE's affiliates, NYSE 
Arca, Inc. (``NYSE Arca'') and NYSE MKT LLC (``NYSE MKT''), was 
executed by market participants that purchased one or more proprietary 
market data products (the 20 firms were not the same for each market). 
A supra-competitive increase in the fees for either executions or 
market data would create a risk of reducing an exchange's revenues from 
both products.
    Other market participants have noted that proprietary market data 
and trade executions are joint products of a joint platform and have 
common costs.\20\ The Exchange agrees with and adopts those discussions 
and the arguments therein. The Exchange also notes that the economics 
literature confirms that there is no way to allocate common costs 
between joint products that would shed any light on competitive or 
efficient pricing.\21\
---------------------------------------------------------------------------

    \20\ See Securities Exchange Act Release No. 72153 (May 12, 
2014), 79 FR 28575, 28578 n.15 (May 16, 2014) (SR-NASDAQ-2014-045) 
(``[A]ll of the exchange's costs are incurred for the unified 
purposes of attracting order flow, executing and/or routing orders, 
and generating and selling data about market activity. The total 
return that an exchange earns reflects the revenues it receives from 
the joint products and the total costs of the joint products.''). 
See also Securities Exchange Act Release No. 62907 (Sept. 14, 2010), 
75 FR 57314, 57317 (Sept. 20, 2010) (SR-NASDAQ-2010-110), and 
Securities Exchange Act Release No. 62908 (Sept. 14, 2010), 75 FR 
57321, 57324 (Sept. 20, 2010) (SR-NASDAQ-2010-111).
    \21\ See generally Mark Hirschey, Fundamentals of Managerial 
Economics, at 600 (2009) (``It is important to note, however, that 
although it is possible to determine the separate marginal costs of 
goods produced in variable proportions, it is impossible to 
determine their individual average costs. This is because common 
costs are expenses necessary for manufacture of a joint product. 
Common costs of production--raw material and equipment costs, 
management expenses, and other overhead--cannot be allocated to each 
individual by-product on any economically sound basis. . . . Any 
allocation of common costs is wrong and arbitrary.''). This is not 
new economic theory. See, e.g., F. W. Taussig, ``A Contribution to 
the Theory of Railway Rates,'' Quarterly Journal of Economics V(4) 
438, 465 (July 1891) (``Yet, surely, the division is purely 
arbitrary. These items of cost, in fact, are jointly incurred for 
both sorts of traffic; and I cannot share the hope entertained by 
the statistician of the Commission, Professor Henry C. Adams, that 
we shall ever reach a mode of apportionment that will lead to 
trustworthy results.'').
---------------------------------------------------------------------------

    Analyzing the cost of market data product production and 
distribution in isolation from the cost of all of the inputs supporting 
the creation of market data and market data products will inevitably 
underestimate the cost of the data and data products because it is 
impossible to obtain the data inputs to create market data products 
without a fast, technologically robust, and well-regulated execution 
system, and system and regulatory costs affect the price of both 
obtaining the market data itself and creating and distributing market 
data products. It would be equally misleading, however, to attribute 
all of an exchange's costs to the market data portion of an exchange's 
joint products. Rather, all of an exchange's costs are incurred for the 
unified purposes of attracting order flow, executing and/or routing 
orders, and generating and selling data about market activity. The 
total return that an exchange earns reflects the revenues it receives 
from the joint products and the total costs of the joint products.
    As noted above, the level of competition and contestability in the 
market is evident in the numerous alternative venues that compete for 
order flow, including 12 equities self-regulatory organization 
(``SRO'') markets, as well as various forms of ATSs, including dark 
pools and electronic communication networks (``ECNs''), and 
internalizing broker-dealers. SRO markets compete to attract order flow 
and produce transaction reports via trade executions, and two FINRA-
regulated Trade Reporting Facilities compete to attract transaction 
reports from the non-SRO venues.\22\
---------------------------------------------------------------------------

    \22\ FINRA's Alternative Display Facility also receives over-
the-counter trade reports that it sends to CTA.
---------------------------------------------------------------------------

    Competition among trading platforms can be expected to constrain 
the aggregate return that each platform earns from the sale of its 
joint products, but different trading platforms may choose from a range 
of possible, and equally reasonable, pricing strategies as the means of 
recovering total costs. For example, some platforms may choose to pay 
rebates to attract orders, charge relatively low prices for market data 
products (or provide market data products free of charge), and charge 
relatively high prices for accessing posted liquidity. Other platforms 
may choose a strategy of paying lower rebates (or no rebates) to 
attract orders, setting relatively high prices for market data 
products, and setting relatively low prices for accessing posted 
liquidity. For example, BATS and Direct Edge, which previously operated 
as ATSs and obtained exchange status in 2008 and 2010, respectively, 
have provided certain market data at no charge on their Web sites in 
order to attract more order flow, and use revenue rebates from 
resulting additional executions to maintain low execution charges for 
their users.\23\ Similarly, LavaFlow ECN provides market data to its 
subscribers at no charge.\24\ In this environment, there is no economic 
basis for regulating maximum prices for one of the joint products in an 
industry in which suppliers face competitive constraints with regard to 
the joint offering.
---------------------------------------------------------------------------

    \23\ This is simply a securities market-specific example of the 
well-established principle that in certain circumstances more sales 
at lower margins can be more profitable than fewer sales at higher 
margins; this example is additional evidence that market data is an 
inherent part of a market's joint platform.
    \24\ See ``LavaFlow--ADF Migration,'' available at https://www.lavatrading.com/news/pdf/LavaFlow_ADF_Migration.pdf.
---------------------------------------------------------------------------

Existence of Alternatives
    The large number of SROs, ATSs, and internalizing broker-dealers 
that currently produce proprietary data or are currently capable of 
producing it provides further pricing discipline for proprietary data 
products. Each SRO, ATS, and broker-dealer is currently permitted to 
produce and sell proprietary data products, and many currently do or 
have announced plans to do so, including but not limited to the 
Exchange, NYSE MKT, NYSE Arca, NASDAQ OMX, BATS, and Direct Edge.
    The fact that proprietary data from ATSs, internalizing broker-
dealers, and vendors can bypass SROs is significant in two respects. 
First, non-SROs can compete directly with SROs for the production and 
sale of proprietary data products. By way of example, BATS and NYSE 
Arca both published proprietary data on the Internet before registering 
as exchanges. Second, because a single order or transaction report can 
appear in an SRO proprietary product, a non-SRO proprietary product, or 
both, the amount of data available via proprietary products is greater 
in size than the actual number of orders and transaction reports that 
exist in the marketplace. With respect to NYSE Order Imbalances, 
similar products are available from competitors.\25\ Because market 
data

[[Page 1559]]

users can find suitable substitutes for most proprietary market data 
products, a market that overprices its market data products stands a 
high risk that users may substitute another source of market data 
information for its own.
---------------------------------------------------------------------------

    \25\ See supra note 14.
---------------------------------------------------------------------------

    Those competitive pressures imposed by available alternatives are 
evident in the Exchange's proposed pricing, and indeed in the fact that 
the changes here have the effect of lowering the price for NYSE Order 
Imbalances.
    In addition to the competition and price discipline described 
above, the market for proprietary data products is also highly 
contestable because market entry is rapid and inexpensive. The history 
of electronic trading is replete with examples of entrants that swiftly 
grew into some of the largest electronic trading platforms and 
proprietary data producers: Archipelago, Bloomberg Tradebook, Island, 
RediBook, Attain, TrackECN, BATS Trading and Direct Edge. As noted 
above, BATS launched as an ATS in 2006 and became an exchange in 2008, 
while Direct Edge began operations in 2007 and obtained exchange status 
in 2010. As noted above, LavaFlow ECN provides market data to its 
subscribers at no charge.\26\
---------------------------------------------------------------------------

    \26\ See supra note 24.
---------------------------------------------------------------------------

    In setting the proposed fees, the Exchange considered the 
competitiveness of the market for proprietary data and all of the 
implications of that competition. The Exchange believes that it has 
considered all relevant factors and has not considered irrelevant 
factors in order to establish fair, reasonable, and not unreasonably 
discriminatory fees and an equitable allocation of fees among all 
users. The existence of numerous alternatives to the Exchange's 
products, including proprietary data from other sources, ensures that 
the Exchange cannot set unreasonable fees, or fees that are 
unreasonably discriminatory, when vendors and subscribers can elect 
these alternatives or choose not to purchase a specific proprietary 
data product if the attendant fees are not justified by the returns 
that any particular vendor or data recipient would achieve through the 
purchase.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act \27\ and paragraph (f)(2) of Rule 19b-4 
thereunder.\28\ At any time within 60 days of the filing of the 
proposed rule change, the Commission summarily may temporarily suspend 
such rule change if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \28\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

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

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#f183849d94dc929e9c9c949f8582b1829492df969e87"><span class="__cf_email__" data-cfemail="5d2f283138703e3230303833292e1d2e383e733a322b">[email protected]</span></a>. Please include 
File Number SR-NYSE-2014-77 on the subject line.

Paper Comments

    <bullet> 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-NYSE-2014-77. 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 NYSE. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSE-2014-77 and should be 
submitted on or before February 2, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
---------------------------------------------------------------------------

    \29\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Brent J. Fields,
Secretary.
[FR Doc. 2015-00213 Filed 1-9-15; 8:45 am]
BILLING CODE 8011-01-P


</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>