Document ID: SEC-2014-1531-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NYSE Arca, Inc.
Posted Date: 2014-09-11T04:00Z

[Federal Register Volume 79, Number 176 (Thursday, September 11, 2014)]
[Notices]
[Pages 54307-54313]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-21649]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73010; File No. SR-NYSEARCA-2014-94]

Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Amending Its Fees 
for Non-Display Use of NYSE Arca Options Market Data

September 5, 2014.
    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 August 25, 2014, NYSE Arca, Inc. (``Exchange'' or ``NYSE 
Arca'') filed with the

[[Page 54308]]

Securities and Exchange Commission (``Commission'' or ``SEC'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the self-regulatory organization. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 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 its fees for non-display use of NYSE 
Arca Options market data, operative on September 1, 2014. 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend its fees for non-display use of NYSE 
Arca Options market data, operative on September 1, 2014.\3\
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    \3\ The Exchange's affiliates have submitted or will be 
submitting similar proposals. See, e.g., SR-NYSE-2014-43.
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    The Exchange established the current non-display fees for ArcaBook 
for Arca Options--Trades, ArcaBook for Arca Options--Top of Book, 
ArcaBook for Arca Options--Depth of Book, ArcaBook for Arca Options--
Complex, ArcaBook for Arca Options--Series Status, and ArcaBook for 
Arca Options--Order Imbalance (collectively, ``Arca Options Products'') 
in May 2013.\4\ Fees cover all six products.\5\
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    \4\ See Securities Exchange Act Release No. 69554 (May 10, 
2013), 78 FR 28917 (May 16, 2013) (SR-NYSEArca-2013-47) (``2013 
Release'').
    \5\ The Exchange began offering ArcaBook for Arca Options--
Complex separately at no charge on May 1, 2014. See Securities 
Exchange Act Release No. 72074 (May 1, 2014), 79 FR 26277 (May 7, 
2014) (SR-NYSEArca-2014-51).
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    Under the proposal, non-display use would continue to mean 
accessing, processing, or consuming an Exchange data product delivered 
via direct and/or Redistributor \6\ data feeds for a purpose other than 
in support of a data recipient's display or further internal or 
external redistribution (``Non-Display Use''). As is the case today, 
non-display fees would apply to the Non-Display Use of the data product 
as part of automated calculations or algorithms to support trading 
decision-making processes or the operation of trading platforms.
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    \6\ ``Redistributor'' means a vendor or any person that provides 
a real-time NYSE data product to a data recipient or to any system 
that a data recipient uses, irrespective of the means of 
transmission or access.
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    The Exchange is proposing to expand the types of uses considered 
Non-Display Use to also include non-trading uses. In addition, the 
proposal would specify that Non-Display Use would include any trading 
use, rather than only certain types of trading, such as high frequency 
or algorithmic trading, as under the current fee structure. Under the 
proposal, examples of Non-Display Use would include any trading in any 
asset class, automated order or quote generation and/or order pegging, 
price referencing for algorithmic trading or smart order routing, 
operations control programs, investment analysis, order verification, 
surveillance programs, risk management, compliance, and portfolio 
management. The Exchange believes that non-trading uses benefit data 
recipients by allowing users to automate functions, achieving greater 
speed and accuracy, and in turn, for example, reducing costs of labor 
to perform the functions manually. This approach would address the 
difficulties of monitoring and auditing different types of trading 
versus non-trading uses of the data and the burden of counting devices 
used for non-trading purposes under the current fees.
    Proposed Changes to Non-Display Fees
    The Exchange proposes to amend the fee structure applicable to Non-
Display Use of Arca Options Products. Specifically, the Exchange 
proposes certain changes to the three categories of, and fees 
applicable to, data recipients. The Exchange also proposes 
corresponding changes to the Fee Schedule text to remove references to 
the current category descriptions.
    Under the proposal, Category 1 Fees would apply when a data 
recipient's Non-Display Use of real-time market data is on its own 
behalf as opposed to on behalf of its clients. This proposal represents 
an expansion of the application of Category 1 Fees, which currently 
apply solely to the Non-Display Use of real time market data for the 
purpose of principal trading, to usage of such data for non-trading 
purposes.
    Under the proposal, Category 2 Fees would apply to a data 
recipient's Non-Display Use of real-time market data on behalf of its 
clients as opposed to on its own behalf. This proposal also represents 
an expansion of the application of Category 2 Fees, which currently 
apply solely to trading activities to facilitate a customer business, 
to usage of such data for non-trading purposes. In contrast to the 
current fee structure, data recipients will not be liable for Category 
2 Non-Display fees for which they are also paying Category 1 Non-
Display fees.\7\
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    \7\ See 2013 Release, supra note 4, at 28919.
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    The Exchange believes its proposal to apply Category 1 Fees and 
Category 2 Fees to Non-Display Use of market data for non-trading 
purposes would address the difficulties of monitoring and auditing 
trading versus non-trading uses of the data and the burden of counting 
devices used for purposes of applying the per-device fees. As discussed 
in more detail in the 2013 Release,\8\ the ability to accurately count 
devices and audit such counts creates administrative challenges for 
vendors, data recipients, and the Exchange.
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    \8\ See id. at 28920.
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    Under the proposal, Category 3 Fees would apply to data recipients' 
Non-Display Use of real-time market data for the purpose of internally 
matching buy and sell orders within an organization, including matching 
customer orders on a data recipient's own behalf and/or on behalf of 
its clients. This category would apply to Non-Display Use in trading 
platform(s), such as, but not restricted to, alternative trading 
systems (``ATSs''), broker crossing networks, broker crossing systems 
not filed as ATSs, dark pools, multilateral trading facilities, 
exchanges and systematic internalization systems. Currently, Category 3 
Fees apply where a data recipient's non-display use of market data is, 
in whole or in part, for the purpose of providing reference prices in 
the operation of one or more trading platforms. The Exchange believes 
its proposed revision to its description of the data recipients to whom 
Category 3 Fees apply is more precise because it focuses on the 
functions of internally matching orders.
    In addition, the Exchange is proposing to change the application of

[[Page 54309]]

Category 3 Fees to data recipients that also use data for purposes that 
give rise to Category 1 and/or Category 2 Fees. Currently, a data 
recipient is not liable for Category 3 Fees for those Arca Options 
Products for which it is also paying Category 1 and/or Category 2 
Fees.\9\ Under the proposal, a data recipient's Non-Display Use of 
real-time market data for Category 3 purposes would require such data 
recipient to pay Category 3 Fees in addition to any Category 1 Fees or 
Category 2 Fees it is required to pay for Non-Display Use of market 
data.
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    \9\ See id.
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    There will continue to be no monthly or other reporting 
requirements for data recipients' Non-Display Use. However, the 
Exchange continues to reserve the right to audit data recipients' Non-
Display Use of Exchange market data products in accordance with the 
Exchange's vendor and subscriber agreements.
    A data recipient that receives real-time Exchange market data for 
Non-Display Use would be required to complete and submit a Non-Display 
Use Declaration before September 1, 2014. The Non-Display Use 
Declaration would replace the current declaration on the NYSE Euronext 
Non-Display Usage Declaration.\10\ A firm subject to Category 3 Fees 
would be required to identify each platform that uses data on a Non-
Display Use basis, such as ATSs and broker crossing systems not 
registered as ATSs, as part of the Non-Display Use Declaration. 
Beginning in 2016, data recipients would be required to submit, by 
January 31 of each year, a Non-Display Use Declaration. In addition, if 
a data recipient's use of real-time Exchange market data changes at any 
time after the data recipient submits a Non-Display Use Declaration, 
the data recipient would be required to update it at the time of the 
change to reflect the change of use.
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    \10\ As described in more detail in the Statutory Basis section, 
in order to modulate the overall fee increase that could apply, if a 
firm subject to Category 3 Fees has more than three platforms, it 
would only be required to declare three platforms.
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Comparison of Current Fees to Proposed Fees
    The chart below compares the proposed changes to current monthly 
fees:

------------------------------------------------------------------------
            Data feed                 Current fee        Proposed fee
------------------------------------------------------------------------
Arca Options Products Non-        $1,000............  $5,000.*
 Display Category 1.
Arca Options Products Non-        $1,000............  $5,000.*
 Display Category 2.
Arca Options Products Non-        $1,000, or $0 if    $5,000, capped at
 Display Category 3.               Category 1 or 2     $15,000.
                                   fees paid.
------------------------------------------------------------------------
* Data recipients will not be liable for Category 2 Non-Display fees for
  which they are also paying Category 1 Non-Display fees.

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\11\ in general, and 
Sections 6(b)(4) and 6(b)(5) of the Act,\12\ 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.
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(4), (5).
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    The Exchange believes that charging for non-trading uses is 
reasonable because data recipients can derive substantial value from 
such uses, for example, by automating tasks so that they can be 
performed more quickly and accurately and less expensively than if they 
were performed manually. The Exchange also notes that The NASDAQ Stock 
Market (``NASDAQ'') and NASDAQ OMX PHLX (``Phlx'') do not make any 
distinction in their non-display use fees between trading or non-
trading uses, and as such, the proposed change will harmonize the 
Exchange's approach with those exchanges. Finally, the Exchange notes 
that eliminating the trading versus non-trading distinction would 
substantially simplify fee calculations and ease administrative burdens 
for the Exchange.
    After further experience, the Exchange also believes that it is 
more equitable and not unfairly discriminatory to eliminate the 
distinction for non-trading versus trading uses in light of the 
significant value of both types of uses. The Exchange notes that 
because non-display fees are flat fees, the expansion to cover non-
trading uses could only result in a fee increase for a data recipient 
that is using the data solely for non-trading purposes and is only 
subject to per-device fees; at this time, the Exchange has not 
identified such a data recipient. Based on data available to the 
Exchange, all data recipients use the data for at least one trading 
purpose, and therefore the changes to the fees that they will pay under 
the proposal would not be due to the elimination of the distinction 
between trading and non-trading uses. The Exchange further notes that 
based on Non-Display Use Declarations submitted to date, some users 
have declared no Non-Display Use, and as such the proposed changes 
would have no impact on them.
    The Exchange believes that it is reasonable to require annual 
submissions of the Non-Display Use Declaration so that the Exchange 
will have current and accurate information about the use of its market 
data products and can correctly assess fees for the uses of those 
products. The annual submission requirement is equitable and not 
unfairly discriminatory because it will apply to all users.
    The Exchange believes that the proposed fee increases of $4,000 per 
month for each of Categories 1, 2, and 3 is reasonable. In establishing 
the non-display fees in May 2013, the Exchange set its fees below 
comparable fees charged by certain of its competitors.\13\ After 
gaining further experience with its new display/non-display fee 
structure, the Exchange believes that the proposed fees better reflect 
the significant value of the non-display data to data recipients, which 
purchase such data on an entirely voluntary basis. Non-display data can 
be used by data recipients for a wide variety of profit-generating 
purposes, including proprietary and agency trading and smart order 
routing, as well as by data recipients that operate order matching and 
execution platforms that compete directly with the Exchange for order 
flow. The data also can be used for a variety of non-trading purposes 
that indirectly support trading, such as risk management and 
compliance. While some of these non-trading uses do not directly 
generate revenues, they can nonetheless substantially reduce the 
recipient's costs by automating such functions so that they can be 
carried out in a more efficient and accurate manner and reduce errors 
and labor costs, thereby benefiting end users. The Exchange believes 
that the proposed fees directly and appropriately reflect the 
significant value of using non-

[[Page 54310]]

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.\14\
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    \13\ See 2013 Release, supra note 4, at 28920.
    \14\ See also Exchange Act Release No. 69157, March 18, 2013, 78 
FR 17946, 17949 (March 25, 2013) (SR-CTA/CQ-2013-01) (``[D]ata feeds 
have become more valuable, as recipients now use them to perform a 
far larger array of non-display functions. Some firms even base 
their business models on the incorporation of data feeds into black 
boxes and application programming interfaces that apply trading 
algorithms to the data, but that do not require widespread data 
access by the firm's employees. As a result, these firms pay little 
for data usage beyond access fees, yet their data access and usage 
is critical to their businesses.'').
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    The fee increases are also reasonable in that they support the 
Exchange's efforts to regularly upgrade systems to support more modern 
data distribution formats and protocols as technology evolves. For 
example, the Exchange will begin to make its proprietary data products 
available over an upgraded distribution channel and protocol ``XDP'' 
early next year.
    Charging a separate fee for Category 3 data recipients that already 
pay a fee under Category 1 or 2 is reasonable because it eliminates 
what is effectively a discount for such data recipients under the 
current Fee Schedule and results in a more equitable allocation of fees 
to users that derive a benefit from a Category 3 use, and as such is 
not unfairly discriminatory. The current fee can be viewed as having an 
effective non-display fee cap of $2,000 while the proposed fee would 
have an effective non-display fee cap of $20,000. The Exchange believes 
that the proposed fees (and their associated caps) more closely 
correspond to the value that Category 3 recipients derive from the 
various uses of the data, some of which are operating various types of 
alternative trading venues that directly compete for order flow with 
the Exchange. Limiting the fees in Category 3 to no more than three 
trading platforms and charging only one fee for users that fall under 
both Category 1 and 2 is reasonable because it modulates the size of 
the fee increase for certain recipients as compared to what they pay 
under the current fee structure, in much the same manner as the current 
fee does by limiting the non-display fees to a maximum of two 
categories. The Exchange does not believe that it will be burdensome 
for Category 3 recipients to determine, or the Exchange to audit, 
whether a recipient has one, two, three or more separate platforms.
    The fees are also competitive with offerings by other exchanges, 
which structure and set their fees in a variety of ways. For example, 
NASDAQ Options Market (``NOM'') offers a $2,500 per month ``Non-Display 
Enterprise License'' fee that permits distribution of Best of NASDAQ 
Options (``BONO'') or NASDAQ ITCH-to-Trade Options (``ITTO'') to an 
unlimited number of non-display devices within a firm without any per 
user charge.\15\ In addition, Phlx offers an alternative $10,000 per 
month ``Non-Display Enterprise License'' fee that permits distribution 
to an unlimited number of internal non-display subscribers without 
incurring additional fees for each internal subscriber.\16\ The Non-
Display Enterprise License covers non-display subscriber fees for all 
Phlx proprietary direct data feed products (Top of Phlx Options 
(``TOPO''), TOPO Plus Orders, PHLX Orders and PHLX Depth Data feeds) 
and is in addition to any other associated distributor fees for Phlx 
proprietary direct data feed products.\17\ The Exchange further notes 
that its proposed fees are less than the non-display fees charged by 
the Options Price Reporting Authority (``OPRA'').\18\
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    \15\ See NASDAQ Options Rules Chapter XV, Section 4. 
Alternatively, NOM charges each professional subscriber $5 per month 
for BONO and $10 per month for ITTO.
    \16\ See Section IX of the NASDAQ OMX PHLX LLC Pricing Schedule 
and Securities Exchange Act Release No. 68576 (January 3, 2013), 78 
FR 1886 (January 9, 2013) (SR-Phlx-2012-145). Alternatively, Phlx 
charges each professional subscriber $40 per month.
    \17\ See id.
    \18\ See Securities Exchange Act Release No. 67648 (August 14, 
2012), 77 FR (August 17, 2012) (SR-OPRA-2012-04) (establishing 
effective October 1, 2012 a non-display application fee of $500/
installation/month, with an enterprise fee alternative of $7,500/
month that would permit a professional subscriber to receive access 
to OPRA data for use in an unlimited number of non-display 
application installations).
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    The Exchange also notes that all of the products described herein 
are entirely optional. The Exchange is not required to make these 
proprietary data products available or to offer any specific pricing 
alternatives to any customers, nor is any firm required to purchase any 
of the products. Firms that do purchase non-display products do so with 
the primary goals of using them to increase revenues, reduce expenses, 
and in some instances compete directly with the Exchange for order 
flow; those firms are able to determine for themselves whether any 
specific product such as these are attractively priced or not.
    Firms that do not wish to purchase the data at the new prices have 
a wide variety of alternative market data products from which to 
choose,\19\ or if the non-display data products do not provide 
sufficient value to firms as offered based on the uses those firms have 
or planned to make of them, such firms may simply choose to conduct 
their business operations in ways that do not require those data 
products. The Exchange notes that broker-dealers are not required to 
purchase proprietary market data to comply with their best execution 
obligations.\20\ Similarly, there is no requirement in Regulation NMS 
or any other rule that proprietary data be utilized for order routing 
decisions.
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    \19\ See supra notes 15-18. Because ArcaBook for Arca Options--
Trades and ArcaBook for Arca Options--Top of Book are subsets of the 
consolidated core data offered by OPRA, customers may choose to 
purchase those consolidated data products instead.
    \20\ 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).
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    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.''

    635 F.3d 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.' '' \21\
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    \21\ NetCoalition, 615 F.3d at 535.
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    As explained below in the Exchange's Statement on Burden on 
Competition, the Exchange believes that there is substantial evidence 
of competition in the marketplace for proprietary market data and that 
the Commission can rely upon such evidence in concluding that the fees 
established in this filing are the product of competition and therefore 
satisfy the relevant statutory standards. In addition, the existence of 
alternatives to these data products, such as consolidated data and 
proprietary data from other sources, as described below, further 
ensures that the Exchange cannot set unreasonable fees, or fees that 
are unreasonably discriminatory,

[[Page 54311]]

when vendors and subscribers can select such alternatives.
    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.\22\
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    \22\ The Exchange believes that cost-based pricing would be 
impractical because it would create enormous administrative burdens 
for all parties, including the Commission, to cost-regulate a large 
number of participants and standardize and analyze extraordinary 
amounts of information, accounts, and reports. In addition, and as 
described below, it is impossible to regulate market data prices in 
isolation from prices charged by markets for other services that are 
joint products. Cost-based rate regulation would also lead to 
litigation and may distort incentives, including those to minimize 
costs and to innovate, leading to further waste. Under cost-based 
pricing, the Commission would be burdened with determining a fair 
rate of return, and the industry could experience frequent rate 
increases based on escalating expense levels. Even in industries 
historically subject to utility regulation, cost-based ratemaking 
has been discredited. As such, the Exchange believes that cost-based 
ratemaking would be inappropriate for proprietary market data and 
inconsistent with Congress's direction that the Commission use its 
authority to foster the development of the national market system, 
and that market forces will continue to provide appropriate pricing 
discipline. See Appendix C to NYSE's comments to the Commission's 
2000 Concept Release on the Regulation of Market Information Fees 
and Revenues, which can be found on the Commission's Web site at 
http://www.sec.gov/rules/concept/s72899/buck1.htm.
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    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 
options 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 options trades and sales of options 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 options market data. Proprietary options 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.'' \23\ Similarly, the options markets vigorously compete 
with respect to options data products.\24\
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    \23\ 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.
    \24\ See, e.g., Securities Exchange Act Release No. 67466 (July 
19, 2012), 77 FR 43629 (July 25, 2012) (SR-Phlx-2012-93), which 
describes a variety of options market data products and their 
pricing.
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    Moreover, competitive markets for order flow, executions, and 
transaction reports provide pricing discipline for the inputs of 
proprietary options data products and therefore constrain markets from 
overpricing proprietary options market data. Broker-dealers send their 
order flow to multiple venues, rather than providing them all to a 
single venue, which in turn reinforces this competitive constraint. 
Options markets, similar to the equities markets, are highly 
fragmented.\25\
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    \25\ See, e.g., Press Release, TABB Says US Equity Options 
Market Makers Need Scalable Technology to Compete in Today's Complex 
Market Structure (February 25, 2013), available at http://www.tabbgroup.com/PageDetail.aspx?PageID=16&ItemID=1231; 
Fragmentation Vexes Options Markets (April 21, 2014), available at 
http://marketsmedia.com/fragmentation-vexes-options-market/.
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    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 options 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 options 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 Arca Options Products 
described herein unless their customers request them, and customers 
will not elect to pay the proposed increased fees for non-display uses 
unless the non-display uses of these data products 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 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 
revenues it receives from both products and the joint costs it incurs.
    Moreover, an exchange's broker-dealer customers generally view the

[[Page 54312]]

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 July 2014 more than 80% of the options 
transaction volume on each of NYSE Arca and NYSE MKT was executed by 
market participants that purchased one or more proprietary market data 
products. A super-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.\26\ 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.\27\
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    \26\ 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 (September 14, 
2010), 75 FR 57314, 57317 (September 20, 2010) (SR-NASDAQ-2010-110), 
and Securities Exchange Act Release No. 62908 (September 14, 2010), 
75 FR 57321, 57324 (September 20, 2010) (SR-NASDAQ-2010-111).
    \27\ See generally Mark Hirschey, Fundamentals of Managerial 
Economics, at 600 (2009) (``It is important to note, however, that 
although it is possible to determine the separate marginal costs of 
goods produced in variable proportions, it is impossible to 
determine their individual average costs. This is because common 
costs are expenses necessary for manufacture of a joint product. 
Common costs of production--raw material and equipment costs, 
management expenses, and other overhead--cannot be allocated to each 
individual by-product on any economically sound basis. . . . Any 
allocation of common costs is wrong and arbitrary.''). This is not 
new economic theory. See, e.g., F.W. Taussig, ``A Contribution to 
the Theory of Railway Rates,'' Quarterly Journal of Economics V(4) 
438, 465 (July 1891) (``Yet, surely, the division is purely 
arbitrary. These items of cost, in fact, are jointly incurred for 
both sorts of traffic; and I cannot share the hope entertained by 
the statistician of the Commission, Professor Henry C. Adams, that 
we shall ever reach a mode of apportionment that will lead to 
trustworthy results.'').
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    Analyzing the cost of market data product production and 
distribution in isolation from the cost of all of the inputs supporting 
the creation of market data and market data products will inevitably 
underestimate the cost of the data and data products because it is 
impossible to obtain the data inputs to create market data products 
without a fast, technologically robust, and well-regulated execution 
system, and system and regulatory costs affect the price of both 
obtaining the market data itself and creating and distributing market 
data products. It would be equally misleading, however, to attribute 
all of an exchange's costs to the market data portion of an exchange's 
joint products. Rather, all of an exchange's costs are incurred for the 
unified purposes of attracting order flow, executing and/or routing 
orders, and generating and selling data about market activity. The 
total return that an exchange earns reflects the revenues it receives 
from the joint products and the total costs of the joint products.
    As noted above, the level of competition and contestability in the 
market is evident in the numerous alternative venues that compete for 
order flow, including 12 self-regulatory organization (``SRO'') options 
markets. Two of the 12 have launched operations since December 
2012.\28\ The Exchange believes that these new entrants demonstrate 
that competition is robust.
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    \28\ See Securities Exchange Act Release Nos. 70050 (July 26, 
2013), 78 FR (August 1, 2013) (approving exchange registration for 
Topaz Exchange, LLC) (known as ISE Gemini); and 68341 (December 3, 
2012), 77 FR 73065 (December 7, 2012) (approving exchange 
registration for Miami International Securities Exchange LLC 
(``Miami Exchange'')).
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    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 Exchange, Inc. (``BATS''), which 
previously operated as an ATS and obtained exchange status in 2008, has 
provided certain market data at no charge on its Web site in order to 
attract more order flow, and uses revenue rebates from resulting 
additional executions to maintain low execution charges for its 
users.\29\ The Exchange currently offers ArcaBook for Arca Options--
Complex for free. 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.\30\
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    \29\ See description of free market data from BATS Options, 
available at http://www.batsoptions.com/marketdata/
products/. 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.
    \30\ The Exchange notes that a small number of Category 3 non-
display data recipients could be using the market data strictly for 
competitive purposes (e.g., other exchanges) or for business 
purposes unrelated to trading or investment (e.g., Internet portals 
that wish to attract ``eyeballs'' to their pages primarily generate 
advertising revenue for themselves). The Exchange does not believe 
that the proposed fees will impose any unnecessary burden on these 
competitors or other businesses.
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    Existence of Alternatives. The large number of SROs that currently 
produce proprietary data or are currently capable of producing it 
provides further pricing discipline for proprietary data products. Each 
SRO 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 LLC; Chicago Board 
Options Exchange, Incorporated; C2 Options Exchange, Incorporated; 
International Securities Exchange, LLC; ISE Gemini; NASDAQ; Phlx; BX; 
BATS; and Miami Exchange.
    The fact that proprietary data from 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. For 
example, with respect to ArcaBook for Arca Options--Trades and ArcaBook 
for Arca Options--Top of Book, the data appears in the real-time core 
data

[[Page 54313]]

offered by OPRA for a fee. Close substitute products also are offered 
by several competitors.\31\ Because market data users can find suitable 
substitutes for most proprietary market data products, a market that 
overprices its market data products stands a high risk that users may 
substitute one or more other sources of market data information for its 
own.
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    \31\ See supra notes 15-18.
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    Those competitive pressures imposed by available alternatives are 
evident in the Exchange's proposed pricing. As noted above, the 
proposed non-display fees are generally lower than the maximum non-
display fees charged by other exchanges such as NASDAQ and Phlx, for 
comparable products.\32\
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    \32\ Id.
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    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, and BATS. As noted above, BATS launched as 
an ATS in 2006 and became an exchange in 2008. Two new options 
exchanges have launched operations since December 2012.\33\
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    \33\ See supra note 28.
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    In establishing the proposed fees, the Exchange considered the 
competitiveness of the market for proprietary options market 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 is effective upon filing pursuant to 
Section 19(b)(3)(A) \34\ of the Act and subparagraph (f)(2) of Rule 
19b-4 \35\ thereunder, because it establishes a due, fee, or other 
charge imposed by the Exchange.
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    \34\ 15 U.S.C. 78s(b)(3)(A).
    \35\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B)\36\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \36\ 15 U.S.C. 78s(b)(2)(B).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEArca-2014-94 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NYSEArca-2014-94. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEArca-2014-94 and should 
be submitted on or before October 2, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\37\
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    \37\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-21649 Filed 9-10-14; 8:45 am]
BILLING CODE 8011-01-P