Document ID: SEC-2013-1154-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ OMX BX, Inc.
Posted Date: 2013-06-27T04:00Z

[Federal Register Volume 78, Number 124 (Thursday, June 27, 2013)]
[Notices]
[Pages 38757-38762]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-15373]

[[Page 38757]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69821; File No. SR-BX-2013-040]

Self-Regulatory Organizations; NASDAQ OMX BX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change To Amend 
Section 4 of Chapter XV of the BX Options Rules

June 21, 2013.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\, and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on June 11, 2013, NASDAQ OMX BX, Inc. (``BX'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``SEC'' or 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend Section 4 of Chapter XV of the BX 
Options Rules setting forth the fees for options market data known as 
BX Top of Market Options (``BX Top'') and BX Depth of Market Options 
(``BX Depth''). The text of the proposed rule change is also available 
on the Exchange's Web site at http://nasdaqomxbx.cchwallstreet.com, at 
the principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to amend Section 4 of Chapter XV to set forth 
the fees for options market data already distributed as BX Top and BX 
Depth. The Exchange has been offering the BX Top and BX Depth options 
market data free of charge for almost a year since the launch of the BX 
Options Market. The Exchange now proposes to institute fees for 
recipients of BX Top and BX Depth data, with a free trial offer for 
certain data recipients.
    BX Depth is currently described in the Exchange's option rules at 
subsection (a)(3)(A) of Chapter VI, Section 1 as a data package that 
includes quotation information for individual orders on the BX book, 
last sale information for trades executed on BX, and Order Imbalance 
Information as set forth in BX Rules Chapter VI, Section 8. Members use 
BX Depth to ``build'' their view of the BX book by adding individual 
orders that appear in the data, and subtracting individual orders that 
are executed.
    BX Top is currently described in subsection (a)(3)(B) of Chapter 
VI, Section 1 as a data package that includes the BX Best Bid and Offer 
(``BX BBO'') and last sale information for trades executed on BX. The 
BX BBO and last sale information are identical to the information that 
BX sends the Options Price Regulatory Authority (``OPRA'') and which 
OPRA disseminates via the consolidated data feed for options.
    BX proposes to set fees for BX Top and BX Depth data that use 
elements of the current fee structure for recipients of BX TotalView 
and BX BBO,\3\ which are equities market data products similar to BX 
Top and BX Depth. First, the Exchange proposes to charge monthly fees 
for firms that are Distributors of BX Top and BX Depth data. Proposed 
Section 4(b) of Chapter XV states that a ``Distributor'' of BX options 
market data is any entity that receives a feed or data file of BX data 
directly from BX or indirectly through another entity and then 
distributes the data either internally (within that entity) or 
externally (outside that entity). Proposed subsection 4(b) also states 
that all Distributors would be required to execute a Distributor 
agreement with the Exchange. The amount of the monthly fees would 
depend on whether a Distributor is an ``Internal Distributor'' or 
``External Distributor.'' \4\
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    \3\ See BX Rules 7023 and 7047.
    \4\ Thus, a Distributor may pay either ``Internal Distributor'' 
or ``External Distributor'' fees.
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    An Internal Distributor is a firm that is permitted by agreement 
with the Exchange to provide BX Top and BX Depth data to internal 
Subscribers (i.e., users within their own organization). Under the 
proposal, Distributors that only use the BX data internally would be 
charged monthly fee of $1,500 per firm.
    An External Distributor is a firm that is permitted by agreement 
with the Exchange to provide BX Top and BX Depth data to both internal 
Subscribers and to external Subscribers (i.e., users outside of their 
own organization). Distributors provide BX data externally would be 
charged a monthly fee of $2,000 per firm. The fee paid by an External 
Distributor includes the Internal Distributor Fee. The fee paid by an 
Internal Distributor or an External Distributor would allow access to 
both the BX Top and BX Depth data feeds.
    The Exchange also proposes to assess Subscriber fees for BX Top and 
BX Depth data on a Per Subscriber basis.\5\ These fees would vary based 
on whether they are for Professional Subscribers or Non-Professional 
Subscribers. Proposed Section 4(f) states that the term ``Non-
Professional'' shall have the same meaning as in BX Rule 7023(b)(2). 
Rule 7023(b)(2) defines a ``Non-Professional'' as a natural person who 
is neither: (A) Registered or qualified in any capacity with the 
Commission, the Commodities Futures Trading Commission, any state 
securities agency, any securities exchange or association, or any 
commodities or futures contract market or association; (B) engaged as 
an ``investment adviser'' as that term is defined in Section 201(11) of 
the Investment Advisors Act of 1940 (whether or not registered or 
qualified under that Act); nor (C) employed by a bank or other 
organization exempt from registration under federal or state securities 
laws to perform functions that would require registration or 
qualification if such functions were performed for an organization not 
so exempt.\6\ A Professional Subscriber is any recipient that is not a 
Non-Professional.
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    \5\ While the Subscriber fees would be paid by firms (Internal 
Distributors and External Distributors), some portion of the fees 
may be passed through to Subscribers inside or outside the firms 
(that is, to internal or external Subscribers).
    \6\ The Exchange believes that Non-Professional Subscribers of 
market data, in contrast to Professional data Subscribers and 
Distributors, often tend to be individual consumers, smaller retail 
investors, and public customers.

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[[Page 38758]]

    For BX Top data, the proposed Subscriber fees are $5 per 
Professional Subscriber; and $1 per Non-Professional Subscriber. For BX 
Depth data, the proposed fees are $10 per Professional Subscriber; and 
$1 per Non-Professional Subscriber.
    The Exchange notes that for many years, exchanges have engaged in 
and the Commission has accepted the practice of price differentiation, 
both in the context of market data as well as in the context of 
executions. With respect to market data, NASDAQ and NYSE Euronext 
(``NYSE'') in their capacities as network processors and exchanges have 
differentiated in pricing between Professional and Non-Professional 
market data Subscriber, often charging Professionals many times more 
than Non-Professionals for using the same data. For example, NASDAQ 
currently charges Non-Professionals $15 per terminal for its NASDAQ 
Depth Data via a standalone terminal, while Professional Subscribers 
pay roughly five times the Non-Professional rate.\7\ This reflects the 
value of the service to various constituencies (i.e., lower prices are 
charged to consumers with more elastic demand) and allows both types of 
investors to contribute to the high fixed costs of operating an 
exchange platform. The Exchange believes that this differentiation for 
Professional and Non-Professional data usage, as the differentiation 
for Professional and Non-Professional Subscribers proposed in this 
filing, is completely consistent with past Commission precedent and 
economic theory.\8\
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    \7\ See BX [sic] Rule 7023.
    \8\ In economic terms, charging lower fees to non-professional 
consumers increases overall economic welfare by increasing output--
in this case, providing more data to more investors--and avoids two 
equally undesirable alternatives: (i) Requiring the firm to charge 
uniformly high prices that constrict demand, or (ii) insisting on 
uniformly low prices at marginal cost (potentially zero or close to 
zero) that do not allow the firm to cover its fixed costs and 
thereby lead to bankruptcy.
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    The Exchange also proposes to assess a monthly non-display 
enterprise license fee. Proposed Section 4(c) of Chapter XV states that 
an ``Enterprise License'' entitles a Distributor to provide BX Top and 
BX Depth market data pursuant to this rule to an unlimited number of 
non-display devices \9\ internally (within the firm) without any 
additional Subscriber fees associated with these non-display devices. 
Under the proposal, Distributors of BX Top and BX Depth data, if they 
choose to subscribe to a non-display enterprise license, would be 
charged a monthly enterprise license fee or $2,500.
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    \9\ Non-display devices do not graphically show (display) BX Top 
and BX Depth market data but instead use the data for performance of 
analytic or calculative functions (e.g. algorithms).
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    The non-display enterprise license is in addition to the Internal 
or External Distributor fees. Thus, a firm that has a non-display 
enterprise license could pay an Internal Distributor fee and the 
Enterprise License fee and distribute data to limitless number of non-
display devices (devices within the firm) pursuant to the license 
without incurring further fees for each internal device. However, the 
enterprise license does not allow external distribution without 
incurring an External Distributor fee and external Subscriber fees, if 
applicable under the circumstances.
    Finally, the Exchange proposes a 30-Day Free Trial Offer in 
proposed subsection (g) of Section 4.\10\ In particular, the 30-day 
waiver of the Subscriber fees for BX options market data pursuant to 
the rule extends to all new individual (non-firm) Subscribers. This fee 
waiver period will be applied on a rolling basis, determined by the 
date on which a new individual (non-distributor or firm) is first 
entitled by a Distributor to receive access to BX options market data. 
Subsection (g) provides that a Distributor may only provide this waiver 
to a specific Subscriber at one time.
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    \10\ The Exchange also offers a 30-day free trial for BX 
TotalView. See BX Rule 7023.
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    The Exchange notes that the categories of BX Top and BX Depth 
market data and fees compare favorably with similar products offered by 
other markets such as International Stock Exchange (``ISE''), NYSE, 
NASDAQ OMX PHLX (``Phlx''), and Chicago Board Options Exchange 
(``CBOE''). For example, ISE offers market data products that are 
similar to BX Top: a data feed that shows the top of the market 
entitled TOP Quote Feed,\11\ and a data feed that shows the top five 
price levels entitled Depth of Market.\12\ NYSE offers a market data 
product for Arca and Amex that is similar to BX Top and BX Depth: a 
feed that shows top of book, last sale, and depth of quote and is 
entitled NYSE Arca Book for Options.\13\ Phlx offers a market data feed 
entitled TOPO that is similar to BX Top and shows orders and quotes at 
the top of the market, as well as trades; and a Phlx Depth feed that is 
similar to BX Depth and shows the data in the TOPO data feed as well as 
the depth of orders. \14\ A subsidiary of CBOE for which CBOE charges 
fees offers a market data feed that is similar to BX Top and shows BBO, 
last sale, and top of book data.\15\ And BATS offers Multicast PITCH, 
which is their depth of market and last sale feed similar to BX 
Depth.\16\
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    \11\ The ISE TOP Quote Feed has a monthly base access fee of 
$3,000 applicable to professionals and non-professionals plus a $20 
variable device fee for professionals and a no device fee for 
internal use professionals; or a flat fixed enterprise fee of $5,000 
for unlimited internal/external use and a $4,000 fee for unlimited 
internal use. The Exchange notes that the monthly fees for the ISE 
TOP Quote Feed are higher than those proposed in this filing.
    \12\ The ISE Depth of Market Feed has a monthly base access fee 
of $5,000 applicable to professionals and non-professionals plus a 
$50 variable device fee for professionals and a $5 per device fee 
for external distribution non-professionals; or a flat fixed 
enterprise fee of $7,500 for unlimited internal use, and $10,000 for 
unlimited internal/external use. The Exchange notes that the monthly 
fees for ISE Depth of Market are higher than those proposed in this 
filing for a more robust product.
    \13\ The fee for NYSE Arca Book for Options is $3,000 per month 
for direct or indirect access, $2,000 for external redistribution; 
and a $50 per user professional user fee and $1 per user Non-
professional user fee.
    \14\ TOPO Plus Orders has a monthly fee of $4,000 for internal 
distributors or $5,000 for external distributors plus a monthly fee 
of $1 per Non-Professional Subscribers and $20 for Professional 
Subscribers. The Exchange notes that the monthly fees for TOPO Plus 
Orders are higher than those proposed in this filing. See Securities 
Exchange Act Release No. 62194 (May 28, 2010), 75 FR 31830 (June 4, 
2010) (SR-Phlx-2010-48) (order approving proposal related to TOPO 
Plus Orders market data fees).
    \15\ The subsidiary is identified as Market Data Express, LLC 
(``MDX'') by CBOE, which indicates that the feed will also provide 
data regarding contingency orders and complex strategies. The 
monthly fee charged by CBOE for the data is $3,500 plus a $25 per 
user or device fee. See Securities Exchange Act Release No. 63997 
(March 1, 2011), 76 FR 12388 (March 7, 2011) (SR-CBOE-2011-014) 
(notice of filing and immediate effectiveness). In the filing, CBOE 
specifically references as similar products the Phlx TOPO Plus 
Orders feed and the ISE Depth of Market Feed.
    \16\ BATS offers Multicast PITCH without charge ostensibly to 
attract order flow to that exchange.
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    The Exchange believes that the continued availability of BX Top and 
BX Depth data feeds enhances transparency, fosters competition among 
orders and markets, and enables buyers and sellers to obtain better 
prices.
2. Statutory Basis
    BX believes that the proposed rule change is consistent with the 
provisions of Section 6 of the Act,\17\ in general, and with Section 
6(b)(4) of the Act,\18\ in particular, in that it provides an equitable 
allocation of reasonable fees among recipients of BX data. In adopting 
Regulation NMS, the Commission granted self-regulatory organizations 
and broker-dealers increased authority and flexibility to offer new and 
unique market data to the public. It was believed that this authority 
would expand the amount of data available to consumers, and also

[[Page 38759]]

spur innovation and competition for the provision of market data.
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    \17\ 15 U.S.C. 78f.
    \18\ 15 U.S.C. 78f(b)(4).
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    The Commission concluded that Regulation NMS--by deregulating the 
market in proprietary data--would itself further the Act's goals of 
facilitating efficiency and competition:

    [E]fficiency is promoted when broker-dealers who do not need the 
data beyond the prices, sizes, market center identifications of the 
NBBO and consolidated last sale information are not required to 
receive (and pay for) such data. The Commission also believes that 
efficiency is promoted when broker-dealers may choose to receive 
(and pay for) additional market data based on their own internal 
analysis of the need for such data.\19\
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    \19\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496 (June 29, 2005).

By removing ``unnecessary regulatory restrictions'' on the ability of 
exchanges to sell their own data, Regulation NMS advanced the goals of 
the Act and the principles reflected in its legislative history. If the 
free market should determine whether proprietary data is sold to 
broker-dealers at all, it follows that the price at which such data is 
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sold should be set by the market as well.

    On July 21, 2010, President Barack Obama signed into law H.R. 4173, 
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 
(``Dodd-Frank Act''), which amended Section 19 of the Act. Among other 
things, Section 916 of the Dodd-Frank Act amended paragraph (A) of 
Section 19(b)(3) of the Act by inserting the phrase ``on any person, 
whether or not the person is a member of the self-regulatory 
organization'' after ``due, fee or other charge imposed by the self-
regulatory organization.'' As a result, all SRO rule proposals 
establishing or changing dues, fees, or other charges are immediately 
effective upon filing regardless of whether such dues, fees, or other 
charges are imposed on members of the SRO, non-members, or both. 
Section 916 further amended paragraph (C) of Section 19(b)(3) of the 
Exchange Act to read, in pertinent part, ``At any time within the 60-
day period beginning on the date of filing of such a proposed rule 
change in accordance with the provisions of paragraph (1) [of Section 
19(b)], the Commission summarily may temporarily suspend the change in 
the rules of the self-regulatory organization made thereby, 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 this title. If the Commission takes 
such action, the Commission shall institute proceedings under paragraph 
(2)(B) [of Section 19(b)] to determine whether the proposed rule should 
be approved or disapproved.''
    The decision of the United States Court of Appeals for the District 
of Columbia Circuit in NetCoalition v. SEC, No. 09-1042 (D.C. Cir. 
2010), although reviewing a Commission decision made prior to the 
effective date of the Dodd-Frank Act, upheld the Commission's reliance 
upon competitive markets to set reasonable and equitably allocated fees 
for 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.' '' 
NetCoalition, at 15 (quoting H.R. Rep. No. 94-229, at 92 (1975), as 
reprinted in 1975 U.S.C.C.A.N. 321, 323).
    BX believes that the proposed fees are fair and equitable, and not 
unreasonably discriminatory. The proposed fees are based on pricing 
conventions and distinctions that currently exist in the fee schedules 
of other exchanges, including NASDAQ and PHLX. These distinctions (e.g. 
Distributor versus Subscriber, Professional versus Non-Professional, 
internal versus external distribution, controlled versus uncontrolled 
datafeed) are each based on principles of fairness and equity that have 
helped for many years to maintain fair, equitable, and not unreasonably 
discriminatory fees, and that apply with equal or greater force to the 
current proposal. BX believes that the BX Top and BX Depth offerings is 
equitable in that it provides an opportunity for all Distributors and 
Subscribers, Professional and Non-Professional, to identical data 
without unfairly discriminating against any.
    Thus, if BX has calculated improperly and the market deems the 
proposed fees to be unfair, inequitable, or unreasonably 
discriminatory, firms can diminish or discontinue the use of their data 
because the proposed fees are entirely optional to all parties. Firms 
are not required to choose to purchase BX Top or BX Depth or to utilize 
any specific pricing alternative. BX is not required to make BX Top or 
BX Depth available or to offer specific pricing alternatives for 
potential purchases. BX can discontinue offering a pricing alternative 
(as it has in the past) and firms can discontinue their use at any time 
and for any reason (as they often do), including due to their 
assessment of the reasonableness of fees charged. BX continues to 
establish and revise pricing policies aimed at increasing fairness and 
equitable allocation of fees among Subscribers.
    Competitive products similar to BX Top or BX Depth are, as 
previously discussed, offered by other exchanges, albeit sometimes at 
higher prices. ISE offers two data products similar to BX Top that are 
called TOP Quote Feed and Depth of Market and have fees higher than 
those proposed in this filing.\20\ NYSE offers a market data product 
similar to BX Top or BX Depth called NYSE Arca Book of Options that has 
market data for NYSE Arca and NYSE Amex. Phlx offers a market data 
product that is similar to ITTO.\21\ CBOE offers a market data product 
that is similar to BX Top.\22\ BATS offers a market data product 
similar to BX Depth. Moreover, the Exchange notes that, as a substitute 
for exchange data, consolidated market data (e.g. last sale, NBBO, 
current quotes) are also available from securities information 
processors such as OPRA.
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    \20\ For the fees related to ISE TOP Quote Feed and Depth of 
Market, see supra notes 11 and 12.
    \21\ For the fees related to NYSE Arca Book of Options and Phlx 
TOPO Plus Orders, see supra notes 13 and 14.
    \22\ For the fees related to the CBOE market data product, see 
supra note 15.
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 B. Self-Regulatory Organization's Statement on Burden on Competition

    BX does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. Notwithstanding its 
determination that the Commission may rely upon competition to 
establish fair and equitably allocated fees for market data, the 
NetCoalition court found that the Commission had not, in that case, 
compiled a record that adequately supported its conclusion that the 
market for the data at issue in the case was competitive. BX believes 
that a record may readily be established to demonstrate the competitive 
nature of the market in question.
    The proposal is, as described below, pro-competitive. There is 
intense competition between trading platforms that provide transaction 
execution and routing services and proprietary data products. 
Transaction execution and proprietary data products are complementary 
in that market data is both an input and a byproduct of the execution 
service. In fact, market data and trade execution are a paradigmatic 
example of joint products with joint costs. The decision whether and on 
which platform to post an order will

[[Page 38760]]

depend on the attributes of the platform where the order can be posted, 
including the execution fees, data quality and price and distribution 
of its data products. Without the prospect of a taking order seeing and 
reacting to a posted order on a particular platform, the posting of the 
order would accomplish little. Without orders entered and trades 
executed, exchange data products cannot exist. Data products are 
valuable to many end Subscribers insofar as they provide information 
that end Subscribers expect will assist them in making trading 
decisions.
    The costs of producing market data include not only the costs of 
the data distribution infrastructure, but also the costs of designing, 
maintaining, and operating an exchange's transaction execution platform 
and the cost of regulating the exchange to ensure its fair operation 
and maintain investor confidence. The total return that a trading 
platform earns reflects the revenues it receives from both products and 
the joint costs it incurs. Moreover, an exchange's customers view the 
costs of transaction executions and of data as a unified cost of doing 
business with the exchange. A broker-dealer will direct orders to a 
particular exchange only if the expected revenues from executing trades 
on the exchange exceed net transaction execution costs and the cost of 
data that the broker-dealer chooses to buy to support its trading 
decisions (or those of its customers). The choice of data products is, 
in turn, a product of the value of the products in making profitable 
trading decisions. If the cost of the product exceeds its expected 
value, the broker-dealer will choose not to buy it. Moreover, as a 
broker-dealer chooses to direct fewer orders to a particular exchange, 
the value of the product to that broker-dealer decreases, for two 
reasons. First, the product will contain less information, because 
executions of the broker-dealer's orders will not be reflected in it. 
Second, and perhaps more important, the product will be less valuable 
to that broker-dealer because it does not provide information about the 
venue to which it is directing its orders. Data from the competing 
venue to which the broker-dealer is directing orders will become 
correspondingly more valuable.
    ``No one disputes that competition for order flow is fierce.'' 
NetCoalition at 24. However, the existence of fierce competition for 
order flow implies a high degree of price sensitivity on the part of 
broker-dealers with order flow, since they may readily reduce costs by 
directing orders toward the lowest-cost trading venues. A broker-dealer 
that shifted its order flow from one platform to another in response to 
order execution price differentials would both reduce the value of that 
platform's market data and reduce its own need to consume data from the 
disfavored platform. Similarly, if a platform increases its market data 
fees, the change will affect the overall cost of doing business with 
the platform, and affected broker-dealers will assess whether they can 
lower their trading costs by directing orders elsewhere and thereby 
lessening the need for the more expensive data.
    Analyzing the cost of market data distribution in isolation from 
the cost of all of the inputs supporting the creation of market data 
will inevitably underestimate the cost of the data. Thus, because it is 
impossible to create data without a fast, technologically robust, and 
well-regulated execution system, system costs and regulatory costs 
affect the price of market data. It would be equally misleading, 
however, to attribute all of the exchange's costs to the market data 
portion of an exchange's joint product. Rather, all 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.
    Competition among trading platforms can be expected to constrain 
the aggregate return each platform earns from the sale of its joint 
products, but different platforms may choose from a range of possible, 
and equally reasonable, pricing strategies as the means of recovering 
total costs. For example, some platform may choose to pay rebates to 
attract orders, charge relatively low prices for market information (or 
provide information 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 information, and setting relatively 
low prices for accessing posted liquidity. 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. This would be akin to strictly 
regulating the price that an automobile manufacturer can charge for car 
sound systems despite the existence of a highly competitive market for 
cars and the availability of after-market alternatives to the 
manufacturer-supplied system.
    The market for market data products is competitive and inherently 
contestable because there is fierce competition for the inputs 
necessary to the creation of proprietary data and strict pricing 
discipline for the proprietary products themselves. Numerous exchanges 
compete with each other for listings, trades, and market data itself, 
providing virtually limitless opportunities for entrepreneurs who wish 
to produce and distribute their own market data. This proprietary data 
is produced by each individual exchange, as well as other entities, in 
a vigorously competitive market.
    Broker-dealers currently have numerous alternative venues for their 
order flow, including more than ten SRO markets, as well as 
internalizing broker-dealers and various forms of alternative trading 
systems (``ATSs''), including dark pools and electronic communication 
networks (``ECNs''). Each SRO market competes to produce transaction 
reports via trade executions, and two Financial Industry Regulatory 
Authority, Inc. (``FINRA'') regulated Trade Reporting Facilities 
(``TRFs'') compete to attract internalized transaction reports. 
Competitive markets for order flow, executions, and transaction reports 
provide pricing discipline for the inputs of proprietary data products.
    The large number of SROs, TRFs, broker-dealers, and ATSs that 
currently produce proprietary data or are currently capable of 
producing it provides further pricing discipline for proprietary data 
products. Each SRO, TRF, ATS, and broker-dealer is currently permitted 
to produce proprietary data products, and many currently do or have 
announced plans to do so, including NASDAQ, NYSE, NYSE Amex (now NYSE 
MKT), NYSEArca, DirectEdge and BATS.
    Any ATS or BD can combine with any other ATS, broker-dealer, or 
multiple ATSs or broker-dealers to produce joint proprietary data 
products. Additionally, order routers and market data vendors can 
facilitate single or multiple broker-dealers' production of proprietary 
data products. The potential sources of proprietary products are 
virtually limitless.
    The fact that proprietary data from ATSs, broker-dealers, and 
vendors can by-pass SROs is significant in two respects. First, non-
SROs can compete directly with SROs for the production and sale of 
proprietary data products as, for example, BATS and Arca did before 
registering as exchanges by publishing Depth-of-Book data on the 
Internet. Second, because a single order or transaction report can 
appear in an SRO

[[Page 38761]]

proprietary product, a non-SRO proprietary product, or both, the data 
available in proprietary products is exponentially greater than the 
actual number of orders and transaction reports that exist in the 
marketplace.
    Market data vendors provide another form of price discipline for 
proprietary data products because they control the primary means of 
access to end Subscribers. Vendors impose price restraints based upon 
their business models. For example, vendors such as Bloomberg and 
Thomson Reuters that assess a surcharge on data they sell may refuse to 
offer proprietary products that end Subscribers will not purchase in 
sufficient numbers. Internet portals, such as Google, impose a 
discipline by providing only data that will enable them to attract 
``eyeballs'' that contribute to their advertising revenue. Retail 
broker-dealers, such as Schwab and Fidelity, offer their customers 
proprietary data only if it promotes trading and generates sufficient 
commission revenue. Although the business models may differ, these 
vendors' pricing discipline is the same: they can simply refuse to 
purchase any proprietary data product that fails to provide sufficient 
value. BX and other producers of proprietary data products must 
understand and respond to these varying business models and pricing 
disciplines in order to market proprietary data products successfully.
    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, inexpensive, and profitable. 
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, TracECN, BATS and Direct Edge. A 
proliferation of dark pools and other ATSs operate profitably with 
fragmentary shares of consolidated market volume.
    Regulation NMS, by deregulating the market for proprietary data, 
has increased the contestability of that market. While broker-dealers 
have previously published their proprietary data individually, 
Regulation NMS encourages market data vendors and broker-dealers to 
produce proprietary products cooperatively in a manner never before 
possible. Multiple market data vendors already have the capability to 
aggregate data and disseminate it on a profitable scale, including 
Bloomberg, and Thomson Reuters.
    Competition among platforms has driven BX continually to improve 
its platform data offerings and to cater to customers' data needs. For 
example, BX has developed and maintained multiple delivery mechanisms 
(IP, multi-cast, and compression) that enable customers to receive data 
in the form and manner they prefer and at the lowest cost to them. BX 
has created new products like BX Depth, because offering data in 
multiple formatting allows BX to better fit customer needs. BX offers 
data via multiple extranet and telecommunication providers such as 
Verizon, BT Radianz, and Savvis, among others, thereby helping to 
reduce network and total cost for its data products. BX has an online 
administrative system to provide customers transparency into their 
datafeed requests and streamline data usage reporting. BX is also 
implementing an Enterprise License option to reduce the administrative 
burden and costs to firms that purchase market data.
    Despite these enhancements and ever increasing message traffic, 
BX's fees for market data have remained flat. The same holds true for 
execution services; despite numerous enhancements to BX's trading 
platform, absolute and relative trading costs have declined. Platform 
competition has intensified as new entrants have emerged, constraining 
prices for both executions and for data.
    The vigor of competition for options data is significant and the 
Exchange believes that this proposal itself clearly evidences such 
competition. The Exchange has witnessed competitors creating new 
products and innovative pricing in this space over the course of the 
past year. BX continues to see firms challenge its pricing on the basis 
of the Exchange's explicit fees being higher than the zero-priced fees 
from other competitors such as BATS. In all cases, firms make decisions 
on how much and what types of data to consume on the basis of the total 
cost of interacting with BX or other exchanges. Of course, the explicit 
data fees are but one factor in a total platform analysis. Some 
competitors have lower transactions fees and higher data fees, and 
others are vice versa. The market for the proposed data is highly 
competitive and continually evolves as products develop and change.

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

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \23\ and paragraph (f) of Rule 19b-4 
thereunder.\24\
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    \23\ 15 U.S.C. 78s(b)(3)(A).
    \24\ 17 CFR 240.19b-4(f).
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    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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-BX-2013-040 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-BX-2013-040. 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

[[Page 38762]]

business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of 
such filing also will be available for inspection and copying at the 
principal offices of BX. 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-SR-BX-2013-040, and should be submitted on or before July 18, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2013-15373 Filed 6-26-13; 8:45 am]
BILLING CODE 8011-01-P