[Federal Register: June 10, 2008 (Volume 73, Number 112)]
[Notices]
[Page 32751-32771]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10jn08-88]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57917]
Notice of Proposed Order Approving Proposal by NYSE Arca, Inc. To
Establish Fees for Certain Market Data and Request for Comment
June 4, 2008.
I. Introduction
On May 23, 2006, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission),
pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule
change (``Proposal'') to establish fees for the receipt and use of
certain market data that the Exchange makes available. We are
publishing this notice and a proposed order approving the Proposal
(``Draft Order'') \3\ to provide interested persons with further
opportunity to comment.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ The Draft Order is included as Appendix A.
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The Proposal was published for comment in the Federal Register on
June 9, 2006.\4\ The Commission received 6 comment letters regarding
the Proposal. On October 12, 2006, the Commission issued an order, by
delegated authority, approving the Proposal.\5\ On November 6, 2006,
NetCoalition (``Petitioner'') submitted a notice, pursuant to Rule 430
of the Commission's Rules of Practice, indicating its intention to file
a petition requesting that the Commission review and set aside the
Delegated Order.\6\ On November 8, 2006, the Exchange submitted a
response to the Petitioner's Notice.\7\ On November 15, 2006,
Petitioner submitted its petition requesting that the Commission review
and set aside the Delegated Order.\8\ On December 27, 2006, the
Commission issued an order: (1) Granting Petitioner's request for the
Commission to review the Delegated Order; (2) allowing any party or
other person to file a statement in support of or in opposition to the
action made by delegated authority; and (3) continuing the
effectiveness of the automatic stay provided in Rule 431(e) of the
Commission's Rules of Practice.\9\
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\4\ Securities Exchange Act Release No. 53952 (June 7, 2006), 71
FR 33496 (June 9, 2006).
\5\ Securities Exchange Act Release No. 54597 (October 12,
2006), 71 FR 62029 (October 20, 2006) (``Delegated Order'').
\6\ Letter from Markham C. Erikson, Executive Director and
General Counsel, NetCoalition, to the Honorable Christopher Cox,
Chairman, SEC, dated November 6, 2006 (``Notice'').
\7\ Letter from Mary Yeager, Corporate Secretary, NYSE Arca
Inc., to the Honorable Christopher Cox, Chairman, SEC, dated
November 8, 2006 (``NYSE ARCA Petition Response'').
\8\ Petition for Commission Review submitted by Petitioner,
dated November 14, 2006 (``Petition'').
\9\ Securities Exchange Act Release No. 55011 (December 27,
2006).
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The Commission received 32 comments regarding the Petition. These
comment letters,\10\ along with other materials the Commission has
placed in the comment file, are available on our Web site. The
Commission has considered the Petition and the comments submitted on
the Petition, as well as the comments submitted on the Proposal.
Although not required by section 19(b) of the Exchange Act, in the
context of the Proposal we nonetheless are affording the public an
additional opportunity to provide comment by publishing the Draft
Order.
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\10\ While the comment period on the Petition closed on January
17, 2007, we have included in the public comment file on the
Petition all comment letters received after the close of the comment
period.
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II. Brief Overview of the Proposal and Draft Order
Under Section 19 of the Exchange Act, the Commission must approve a
proposed rule change related to setting fees for market data if it
finds that the proposed rule change is consistent with the requirements
of the Exchange Act and the rules thereunder. The attached Draft Order
describes the relevant Exchange Act provisions and rules.
The Proposal involves assessing fees for non-core market data. Core
data is the best-priced quotations and comprehensive last sale reports
of all markets that the Commission requires a central processor to
consolidate and distribute to the public pursuant to joint-SRO plans.
In contrast, individual exchanges and other market participants
distribute non-core data voluntarily. The Commission believes it is
able to incorporate the existence of competitive forces in its
determination of whether an exchange's proposal to distribute non-core
data meets the standards of the Exchange Act provisions and rules. This
approach follows the clear intent of Congress in adopting section 11A
of the Exchange Act that, whenever possible, competitive forces should
dictate the services and practices that constitute the U.S. national
market system for trading equity securities.
This market-based approach to non-core data has two parts. The
first is to ask whether the exchange was subject to significant
competitive forces in setting the terms of its proposal for non-core
data, including the level of any fees. If an exchange was subject to
significant competitive forces in setting the terms of a proposal, the
Commission would approve the proposal unless it determines that there
is a substantial countervailing basis to find that the terms
nevertheless fail to meet an applicable requirement of the Exchange Act
or the rules thereunder. If, however, the exchange was not subject to
significant competitive forces in setting the terms of a proposal for
non-core data, the Commission would require the exchange to provide a
substantial basis, other than competitive forces, in its proposed rule
change demonstrating that the terms of the proposal are equitable,
fair, reasonable, and not unreasonably discriminatory.
The Commission believes that, when possible, reliance on
competitive forces is the most appropriate and effective means to
assess whether terms for the distribution of non-core data are
equitable, fair and reasonable, and not unreasonably discriminatory. If
competitive forces are operative, the self-interest of the exchanges
themselves
[[Page 32752]]
will work powerfully to constrain unreasonable or unfair behavior. As
discussed further in the attached Draft Order, when an exchange is
subject to competitive forces in its distribution of non-core data,
many market participants would be unlikely to purchase the exchange's
data products if it sets fees that are inequitable, unfair,
unreasonable, or unreasonably discriminatory. As a result, competitive
forces generally will constrain an exchange in setting fees for non-
core data because it should recognize that its own business will suffer
if it acts unreasonably or unfairly.
As discussed in the attached Draft Order, the Commission believes
that at least two broad types of significant competitive forces applied
to NYSE Arca in setting the terms of its Proposal: (1) NYSE Arca's
compelling need to attract order flow from market participants; and (2)
the availability to market participants of alternatives to purchasing
its data. The Commission requests comment on whether NYSE Arca was
subject to competitive forces in setting the terms of its Proposal,
including the level of fees and the different rates for professional
and non-professional subscribers.
The Draft Order states that broker-dealers are not required to
obtain depth-of-book order data, including the NYSE Arca data, to meet
their duty of best execution and notes the established principles of
best execution that support this statement.\11\ The Commission requests
comment on whether the discussion in the Draft Order makes it clear
that broker-dealers are not required to purchase depth-of-book order
data because of their best execution obligations. If not, what else
could we say to make this point more clear?
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\11\ Draft Order, notes 223-226 and accompanying text.
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III. Request for Comment
Interested persons are invited to submit written data, views, and
arguments concerning any aspect of the Draft Order. 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 e-mail to rule-comments@sec.gov. Please include
File Number SR-NYSEArca-2006-21 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSEArca-2006-21. This
file number should be included on the subject line if e-mail 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 inspection
and copying in the Commission's Public Reference Room, 100 F Street,
NE., Washington, DC 20549, on official business days between the hours
of 10 a.m. and 3 p.m. Copies of the filing also will be available for
inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NYSEArca-2006-21 and should
be submitted on or before July 10, 2008.
By the Commission.
Florence E. Harmon,
Acting Secretary.
Appendix A to Release No. 34-57917
SECURITIES AND EXCHANGE COMMISSION
(Release No. 34-XXXXX; File No. SR-NYSEArca-2006-21)
[Month], 2008
Self-Regulatory Organizations; NYSE Arca, Inc.; Order Setting Aside
Action by Delegated Authority and Approving Proposed Rule Change
Relating to NYSE Arca Data
On May 23, 2006, NYSE Arca, Inc. (``NYSE Arca'' or ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'' or
``SEC''), pursuant to Section 19(b)(1) of the Securities Exchange Act
of 1934 (``Exchange Act'') \12\ and Rule 19b-4 thereunder,\13\ a
proposed rule change (``Proposal'') to establish fees for the receipt
and use of certain market data that the Exchange makes available. The
Proposal was published for comment in the Federal Register on June 9,
2006.\14\ On October 12, 2006, the Commission issued an order, by
delegated authority, approving the Proposal.\15\ On November 6, 2006,
NetCoalition (``Petitioner'') submitted a notice, pursuant to Rule 430
of the Commission's Rules of Practice, indicating its intention to file
a petition requesting that the Commission review and set aside the
Delegated Order.\16\ On November 8, 2006, the Exchange submitted a
response to the Petitioner's Notice.\17\ On November 15, 2006,
Petitioner submitted its petition requesting that the Commission review
and set aside the Delegated Order.\18\ On December 27, 2006, the
Commission issued an order: (1) Granting Petitioner's request for the
Commission to review the Delegated Order; (2) allowing any party or
other person to file a statement in support of or in opposition to the
action made by delegated authority; and (3) continuing the
effectiveness of the automatic stay provided in Rule 431(e) of the
Commission's Rules of Practice.\19\ The Commission received 25 comments
regarding the Petition.\20\
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\12\ 15 U.S.C. 78s(b)(1).
\13\ 17 CFR 240.19b-4.
\14\ Securities Exchange Act Release No. 53952 (June 7, 2006),
71 FR 33496 (June 9, 2006).
\15\ Securities Exchange Act Release No. 54597 (October 12,
2006) 71 FR 62029 (October 20, 2006) (``Delegated Order'').
\16\ Letter from Markham C. Erikson, Executive Director and
General Counsel, NetCoalition, to the Honorable Christopher Cox,
Chairman, SEC, dated November 6, 2006 (``Notice'').
\17\ Letter from Mary Yeager, Corporate Secretary, NYSE Arca
Inc., to the Honorable Christopher Cox, Chairman, SEC, dated
November 8, 2006 (``NYSE ARCA Petition Response'').
\18\ Petition for Commission Review submitted by Petitioner,
dated November 14, 2006 (``Petition'').
\19\ Securities Exchange Act Release No. 55011 (December 27,
2006).
\20\ The comments on the Petition, as well as the earlier
comments on the Proposal, are identified and summarized in section
III below. NYSE Arca's responses to the commenters are summarized in
section IV below.
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The Commission has considered the Petition and the comments
submitted on the Petition as well as the comments submitted on the
proposal. For the reason described below, it is setting the earlier
action taken by delegated authority and approving the Proposal
directly.
Table of Contents
I. Introduction
II. Description of Proposal
III. Summary of Comments Received
[[Page 32753]]
A. Commenters Opposing the Action by Delegated Authority
1. Need for a Comprehensive Review of Market Data Issues
2. Need for a Cost-Based Justification of Market Data Fees
3. Exchange Act Rule 19b-4 Process
4. Importance of Depth-of-Book Data
5. Lack of Competition in Market Data Pricing
6. Increase in Market Data Revenues
7. Recommended Solutions
B. Commenters Supporting the Action by Delegated Authority
IV. NYSE Arca Responses to Commenters
A. Response to Commenters on Proposal
B. Response to Commenters on Petition
V. Discussion
A. Commission Review of Proposals for Distributing Non-Core Data
B. Review of the NYSE Arca Proposal
1. Competitive Forces Applicable to NYSE Arca
a. Competition for Order Flow
b. Availability of Alternatives to ArcaBook Data
c. Response to Commenters on Competition Issues
2. Terms of the Proposal
VI. Conclusion
I. Introduction
The Commission's Rules of Practice set forth procedures for the
review of actions made pursuant to delegated authority. Rule 431(b)(2)
provides that the Commission, in deciding whether to accept or decline
a discretionary review, will consider the factors set forth in Rule
411(b)(2). One of these factors is whether an action pursuant to
delegated authority embodies a decision of law or policy that is
important and that the Commission should review.
The Petitioner and commenters raised a number of important issues
that the Commission believes it should address directly at this time.
In particular, section V below addresses issues related to the nature
of the Commission's review of proposed rule changes for the
distribution of ``non-core'' market data, which includes the NYSE Arca
data that is the subject of the Proposal. Individual exchanges and
other market participants distribute non-core data independently. Non-
core data should be contrasted with ``core'' data--the best-priced
quotations and last sale information of all markets in U.S.-listed
equities that Commission rules require to be consolidated and
distributed to the public by a single central processor.\21\ Pursuant
to the authority granted by Congress under section 11A of the Exchange
Act, the Commission requires the self-regulatory organizations
(``SROs'') to participate in joint-industry plans for disseminating
core data, and requires broker-dealers and vendors to display core data
to investors to help inform their trading and order-routing decisions.
In contrast, no Commission rule requires exchanges or market
participants either to distribute non-core data to the public or to
display non-core data to investors.
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\21\ See section V.A below for a fuller discussion of the
arrangements for distributing core and non-core data.
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Price transparency is critically important to the efficient
functioning of the equity markets. In 2006, the core data feeds
reported prices for more than $39.4 trillion in transactions in U.S.-
listed equities.\22\ In 2006, U.S. broker-dealers earned $21.7 billion
in commissions from trading in U.S.-listed equities--an amount that
does not include any revenues from proprietary trading by U.S. broker-
dealers or other market participants.\23\ Approximately 420,000
securities industry professionals subscribe to the core data products
of the joint-industry plans, while only about 5% of these professionals
have chosen to subscribe to the non-core data products of
exchanges.\24\
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\22\ Source: ArcaVision (available at www.arcavision.com).
\23\ Frank A. Fernandez, Securities Industry and Financial
Markets Association Research Report, ``Securities Industry Financial
Results: 2006'' (May 2, 2006) (``SIFMA Research Report''), at 7-9,
21.
\24\ See note 213 below and accompanying text.
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In December 2007, NYSE Arca executed a 15.4% share of trading in
U.S.-listed equities.\25\ The reasonably projected revenues from the
proposed fees for NYSE Arca's non-core data are $8 million per
year.\26\ Commenters opposing the Proposal claimed that NYSE Arca
exercised monopoly power to set excessive fees for its non-core data
and recommended that the Commission adopt a ``cost-of-service''
ratemaking approach when reviewing exchange fees for non-core data--an
approach comparable to the one traditionally applied to utility
monopolies.\27\
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\25\ See note 180 below and accompanying text.
\26\ See note 241 below and accompanying text.
\27\ The commenters' views are summarized in section III.A.2
below.
In 2005, however, the Commission stated its intention to apply a
market-based approach that relies primarily on competitive forces to
determine the terms on which non-core data is made available to
investors.\28\ This approach follows the clear intent of Congress in
adopting Section 11A of the Exchange Act that, whenever possible,
competitive forces should dictate the services and practices that
constitute the U.S. national market system for trading equity
securities. Section V discusses this market-based approach and applies
it in the specific context of the Proposal by NYSE Arca. The Commission
is approving the Proposal primarily because NYSE Arca was subject to
significant competitive forces in setting the terms of the Proposal.
The Commission believes that reliance on competitive forces, whenever
possible, is the most effective means to assess whether proposed fees
for non-core data meet the applicable statutory requirements.
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\28\ Securities Exchange Act Release No. 51808 (June 9, 2005),
70 FR 37496, 37566-37568 (June 29, 2005) (``Regulation NMS
Release'').
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The Petitioner and commenters discussed and recommended solutions
for a wide range of market data issues that were beyond the scope of
the Proposal. The Petitioner particularly called attention to the data
needs of users of advertiser-supported Internet Web sites, many of whom
are individual retail investors. In this regard, the Commission
recognizes that exchanges have responded by developing innovative new
data products specifically designed to meet the reference data needs
and economic circumstances of these Internet users.\29\
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\29\ See Securities Exchange Act Release No. 55354 (February 26,
2007), 72 FR 9817 (March 5, 2007) (notice of filing of File No. SR-
NYSE-2007-04) (``New York Stock Exchange (``NYSE'') Internet
Proposal''); Securities Exchange Act Release No. 55255 (February 8,
2007), 72 FR 7100 (February 14, 2007) (notice of filing of File No.
SR-NASDAQ-2006-060) (``Nasdaq Reference Data Proposal'').
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Some commenters also suggested that, pending a comprehensive
resolution of all market data issues, the Commission impose a
moratorium on all proposed rule changes related to market data,
including the Proposal. The Commission recognizes the importance of
many of the issues raised by commenters relating to core data that are
beyond the scope of the Proposal. It is continuing to consider these
issues, and others, as part of its ongoing review of SRO structure,
governance, and transparency.\30\ The Commission does not, however,
believe that imposing a moratorium on the review of proposed rule
changes related to market data products and fees would be appropriate
or consistent with the Exchange Act. A primary Exchange Act objective
for the national market system is to promote fair competition.\31\
Failing to act on the proposed rule changes of particular exchanges
would be inconsistent with this Exchange Act objective, as well as with
the requirements pertaining to SRO rule filings more generally.
Accordingly,
[[Page 32754]]
the Commission will continue to act on proposed rule changes for the
distribution of market data in accordance with the applicable Exchange
Act requirements.
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\30\ See Securities Exchange Act Release No. 50699 (November 18,
2004), 69 FR 71126 (December 8, 2004) (proposed rules addressing SRO
governance and transparency); Securities Exchange Act Release No.
50700 (November 18, 2004), 69 FR 71256 (December 8, 2004) (``Concept
Release Concerning Self-Regulation'').
\31\ Section 11A(a)(1)(C)(ii) of the Exchange Act, 15 U.S.C.
78k-1(a)(1)(C)(ii).
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II. Description of Proposal
Through NYSE Arca, LLC, the equities trading facility of NYSE Arca
Equities, Inc., the Exchange makes available on a real-time basis
ArcaBookSM, a compilation of all limit orders resident in
the NYSE Arca limit order book. In addition, the Exchange makes
available real-time information relating to transactions and limit
orders in debt securities that are traded through the Exchange's
facilities. The Exchange makes ArcaBook and the bond transaction and
limit order information (collectively, ``NYSE Arca Data'') available to
market data vendors, broker-dealers, private network providers, and
other entities by means of data feeds. Currently, the Exchange does not
charge fees for the receipt and use of NYSE Arca Data.
The Exchange's proposal would establish fees for the receipt and
use of NYSE Arca Data. Specifically, the Exchange proposes to establish
a $750 per month access fee for access to the Exchange's data feeds
that carry the NYSE Arca Data. In addition, the Exchange proposes to
establish professional and non-professional device fees for the NYSE
Arca Data.\32\ For professional subscribers, the Exchange proposes to
establish a monthly fee of $15 per device for the receipt of ArcaBook
data relating to exchange-traded funds (``ETFs'') and those equity
securities for which reporting is governed by the CTA Plan (``CTA Plan
and ETF Securities'') and a monthly fee of $15 per device for the
receipt of ArcaBook data relating to those equity securities, excluding
ETFs, for which reporting is governed by the Nasdaq UTP Plan (``Nasdaq
UTP Plan Securities'').\33\ For non-professional subscribers, the
Exchange proposes to establish a monthly fee of $5 per device for the
receipt of ArcaBook data relating to CTA Plan and ETF Securities and a
monthly fee of $5 per device for the receipt of ArcaBook data relating
to Nasdaq UTP Plan Securities.\34\
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\32\ In differentiating between professional and non-
professional subscribers, the Exchange proposes to apply the same
criteria used by the Consolidated Tape Association Plan (``CTA
Plan'') and the Consolidated Quotation Plan (``CQ Plan'') for
qualification as a non-professional subscriber. The two plans, which
have been approved by the Commission, are available at http://
www.nysedata.com.
\33\ The ``Nasdaq UTP Plan'' is the Joint Self-Regulatory
Organization Plan Governing the Collection, Consolidation and
Dissemination of Quotation and Transaction Information for Nasdaq-
Listed Securities Traded on Exchanges on an Unlisted Trading
Privileges Basis. The plan, which has been approved by the
Commission, is available at http://www.utpdata.com.
\34\ There will be no monthly device fees for limit order and
last sale price information relating to debt securities traded
through the Exchange's facilities.
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The Exchange also proposes a maximum monthly payment for device
fees paid by any broker-dealer for non-professional subscribers that
maintain brokerage accounts with the broker-dealer.\35\ For 2006, the
Exchange proposed a $20,000 maximum monthly payment. For the months
falling in a subsequent calendar year, the maximum monthly payment will
increase (but not decrease) by the percentage increase (if any) in the
annual composite share volume \36\ for the calendar year preceding that
subsequent calendar year, subject to a maximum annual increase of five
percent.
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\35\ Professional subscribers may be included in the calculation
of the monthly maximum amount so long as: (1) Nonprofessional
subscribers comprise no less than 90% of the pool of subscribers
that are included in the calculation; (2) each professional
subscriber that is included in the calculation is not affiliated
with the broker-dealer or any of its affiliates (either as an
officer, partner or employee or otherwise); and (3) each such
professional subscriber maintains a brokerage account directly with
the broker-dealer (that is, with the broker-dealer rather than with
a correspondent firm of the broker-dealer).
\36\ ``Composite share volume'' for a calendar year refers to
the aggregate number of shares in all securities that trade over
NYSE Arca facilities for that calendar year.
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Lastly, the Exchange proposes to waive the device fees for ArcaBook
data during the duration of the billable month in which a subscriber
first gains access to the data.
III. Summary of Comments Received
The Commission received four comments from three commenters
regarding the Proposal after it was published for comment.\37\ NYSE
Arca responded to the comments.\38\ After granting the Petition, the
Commission received 25 comments from 17 commenters regarding the
approval of the Proposal by delegated authority.\39\ Nine commenters
urged the Commission to set aside the action by delegated
authority,\40\ and five commenters supported the action by
[[Page 32755]]
delegated authority.\41\ One commenter expressed no views regarding the
specifics of the Proposal, but urged the Commission to address market
data fees as part of a more comprehensive modernization of SROs in
light of recent market structure developments.\42\ NYSE Arca responded
to the comments submitted after the Commission granted the
Petition.\43\ Three commenters submitted additional comments addressing
NYSE Arca's response and arguments raised by other commenters, or
provided additional information.\44\
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\37\ Web comment from Steven C. Spencer, dated June 18, 2006
(``Spencer Letter''); letter from Markham C. Erickson, Executive
Director and General Counsel, NetCoalition, to Christopher Cox,
Chairman, Commission, dated August 9, 2006 (``NetCoalition I''); and
letters from Gregory Babyak, Chairman, Market Data Subcommittee of
the Securities Industry Association (``SIA'') Technology and
Regulation Committee, and Christopher Gilkerson, Chairman, SIA
Technology and Regulation Committee, to Nancy Morris, Secretary,
Commission, dated June 30, 2006 (``SIFMA I'') and August 18, 2006
(``SIFMA II''). The SIA has merged into the Securities Industry and
Financial Markets Association (``SIFMA'').
\38\ Letters from Janet Angstadt, Acting General Counsel, NYSE
Arca, to Nancy J. Morris, Secretary, Commission, dated July 25, 2006
(``NYSE Arca Response I''), and August 25, 2006 (``NYSE Arca
Response II'').
\39\ Letters from Christopher Gilkerson and Gregory Babyak, Co-
Chairs, Market Data Subcommittee of SIFMA Technology and Regulation
Committee, dated February 14, 2008 (``SIFMA VIII''); Ira D.
Hammerman, Senior Managing Director and General Counsel, SIFMA,
dated February 7, 2007 (``SIFMA VII''); Markham C. Erickson,
Executive Director and General Counsel, NetCoalition, dated January
11, 2008 (``NetCoalition V''); The Honorable Paul E. Kanjorski,
Chairman, Subcommittee on Capital Markets, Insurance, and Government
Sponsored Enterprises, dated December 12, 2007 (``Kanjorski
Letter''); Melissa MacGregor, Vice President and Assistant General
Counsel, SIFMA, dated November 7, 2007 (``SIFMA VI''); The Honorable
Richard H. Baker, Member of Congress, dated October 1, 2007 (``Baker
Letter''); Markham C. Erickson, Executive Director and General
Counsel, NetCoalition, dated September 14, 2007 (``NetCoalition
IV''); Ira D. Hammerman, Senior Managing Director and General
Counsel, SIFMA, dated August 1, 2007 (``SIFMA V''); Jeffrey Davis,
Vice President and Deputy General Counsel, The Nasdaq Stock Market
(``Nasdaq''), dated May 18, 2007 (``Nasdaq Letter''); David T.
Hirschmann, Senior Vice President, Chamber of Commerce of the United
States of America, dated May 3, 2007 (``Chamber of Commerce
Letter''); Markham C. Erickson, Executive Director and General
Counsel, NetCoalition, dated March 6, 2007 (``NetCoalition III'');
Ira D. Hammerman, Senior Managing Director and General Counsel,
SIFMA, dated March 5, 2007 (``SIFMA IV''); Joseph Rizzello, Chief
Executive Officer, National Stock Exchange (``NSX''), dated February
27, 2007 (``NSX Letter''); Keith F. Higgins, Chair, Committee on
Federal Regulation of Securities, American Bar Association
(``ABA''), dated February 12, 2007 (``ABA Letter''); James A.
Forese, Managing Director and Head of Global Equities, Citigroup
Global Markets Inc. (``Citigroup''), dated February 5, 2007
(``Citigroup Letter''); Meyer S. Frucher, Chairman and Chief
Executive Officer, PHLX, dated January 31, 2007 (``PHLX Letter'');
Amex, Boston Stock Exchange, Chicago Board Options Exchange, Chicago
Stock Exchange, ISE, The Nasdaq Stock Market, NYSE, NYSE Arca, and
Philadelphia Stock Exchange (``PHLX'') (collectively, the ``Exchange
Market Data Coalition''), dated January 26, 2007 (``Exchange Market
Data Coalition Letter''); Oscar N. Onyema, Senior Vice President and
Chief Administrative Officer, American Stock Exchange LLC
(``Amex''), dated January 18, 2007 (``Amex Letter''); Sanjiv Gupta,
Bloomberg, dated January 17, 2007 (``Bloomberg Letter''); Richard M.
Whiting, Executive Director and General Counsel, Financial Services
Roundtable, dated January 17, 2007 (``Financial Services Roundtable
Letter''); Markham C. Erickson, Executive Director and General
Counsel, NetCoalition, dated January 17, 2007 (``NetCoalition II'');
Michael J. Simon, Secretary, International Securities Exchange, LLC
(``ISE''), dated January 17, 2007 (``ISE Letter''); Jeffrey T.
Brown, Senior Vice President, Office of Legislative and Regulatory
Affairs, Charles Schwab & Co., Inc. (``Schwab''), dated January 17,
2007 (``Schwab Letter''); and Ira Hammerman, Senior Managing
Director and General Counsel, SIFMA, dated January 17, 2007 (``SIFMA
III''); and letter from David Keith, Vice President, Web Products
and Solutions, The Globe and Mail, to the Honorable Christopher Cox,
Chairman, Commission, dated January 17, 2007 (``Globe and Mail
Letter'').
\40\ SIFMA III and IV, and Bloomberg, Chamber of Commerce,
Citigroup, Financial Services Roundtable, Globe and Mail,
NetCoalition, NSX, and Schwab Letters.
\41\ Amex, Exchange Market Data Coalition, ISE, Nasdaq, and PHLX
Letters.
\42\ ABA Letter at 1.
\43\ Letter from Mary Yeager, Corporate Secretary, NYSE Arca, to
the Honorable Christopher Cox, Chairman, Commission, dated February
6, 2007 (``NYSE Arca Response III'').
\44\ Nasdaq Letter; SIFMA IV, V, and VI; NetCoalition III and
IV.
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The comments submitted in connection with the Proposal and the
Petition are summarized in this section. NYSE Arca's responses are
summarized in section V below.
A. Commenters Opposing the Action by Delegated Authority
1. Need for a Comprehensive Review of Market Data Issues
Several commenters seeking a reversal of the staff's approval of
the Proposal by delegated authority believed that recent regulatory and
market structure developments warrant a broader review of market data
fees and of the Commission's procedures for reviewing and evaluating
market data proposals.\45\ According to these commenters, these
developments include the transformation of most U.S. securities
exchanges into for-profit entities; the increasing importance of
single-market depth-of-book information following decimalization and
the adoption of Regulation NMS; and the absence of competitive forces
that could limit the fees that an exchange may charge for its depth-of-
book data. Some commenters believed that the Commission should consider
not only market data fees, but also the contract terms governing the
use of an exchange's market data, which may impose additional costs and
include restrictions on the use of the data.\46\
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\45\ Citigroup Letter at 2; SIFMA III at 10, 26; SIFMA IV at 15.
See also ABA Letter at 1; Bloomberg Letter at 7-8; NetCoalition I at
2; NetCoalition III at 13. Among other things, the Bloomberg and
Citigroup Letters support the recommendations in SIFMA III.
Bloomberg Letter at 8 n. 19; Citigroup Letter at 1.
\46\ Citigroup Letter at 2; SIFMA III at 23.
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In light of the significance and complexity of the issues raised,
several commenters asked the Commission not only to reverse the staff's
action, but also to impose a moratorium on the approval or processing
of market data proposals while the Commission conducts a broader review
of the issues associated with market data, including ``the underlying
issues of market structure, market power, transparency, and ease of
dissemination and analysis of market data.'' \47\
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\47\ Citigroup Letter at 2. See also ABA Letter at 3; Financial
Services Roundtable Letter at 1; NetCoalition III at 13; Schwab
Letter at 1; SIFMA III at 26; SIFMA IV at 15.
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2. Need for a Cost-Based Justification of Market Data Fees
Several commenters argued that the staff erred in approving the
Proposal because NYSE Arca did not provide a cost-based justification
for the Proposal's market data fees or other evidence to demonstrate
that its proposed fees meet the applicable Exchange Act standards.\48\
They asserted that the Exchange Act requires that an exchange's market
data fees be ``fair and reasonable,'' ``not unreasonably
discriminatory,'' and ``an equitable allocation of costs,'' \49\ and
that the Commission apply a cost-based standard in evaluating market
data fees.\50\ One commenter argued that market data fees ``must be
reasonably related to market data costs'' and that the Commission
should require exchanges to identify and substantiate their market data
costs in their market data fee proposals.\51\
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\48\ Bloomberg Letter at 3; Petition at 5; SIFMA I at 6; SIFMA
III at 20.
\49\ Schwab Letter at 4; SIFMA III at 19; SIFMA IV at 7.
\50\ Bloomberg Letter at 2; NetCoalition II at 3; NetCoalition
III at 11; Schwab Letter at 3; SIFMA I at 6; SIFMA III at 16; SIFMA
IV at 10.
\51\ SIFMA III at 1, 20.
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Several commenters argued that the Commission itself has recognized
the need for a cost-based justification of market data fees.\52\ They
believed that the Commission's position in its 1999 market information
concept release \53\ ``underscores the fundamental role that a rigorous
cost-based analysis must play in reviewing market data fee filings.''
\54\ In particular, these commenters cited the following statement from
the release:
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\52\ Bloomberg Letter at 2; NetCoalition II at 3; NetCoalition
III at 11; Schwab Letter at 3; SIFMA III at 20; SIFMA IV at 10.
\53\ Securities Exchange Act Release No. 42208 (December 9,
1999), 64 FR 70613 (December 17, 1999) (``Market Information Concept
Release'').
\54\ NetCoalition II at 3. See also Bloomberg Letter at 2; SIFMA
I at 6.
[T]he fees charged by a monopolistic provider of a service (such
as the exclusive processors of market information) need to be tied
to some type of cost-based standard in order to preclude excessive
profits if fees are too high or underfunding or subsidization if
fees are too low. The Commission therefore believes that the total
amount of market information revenues should remain reasonably
related to the cost of market information.\55\
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\55\ 64 FR at 70627 (cited in Bloomberg Letter at 2;
NetCoalition II at 3; NetCoalition III at 11 n. 47; SIFMA III at 1).
One commenter maintained that the cost-based analysis requirement is
based on Congressional concerns regarding the dangers of exclusive
processors, in the context of either consolidated or single-market
data. NetCoalition II at 3.
Similarly, a commenter stated that the Commission acknowledged in
its Concept Release Concerning Self-Regulation that the amount of
market data revenues should be reasonably related to the cost of market
information.\56\ Another commenter, citing proceedings involving
Instinet's challenge to proposed NASD market data fees,\57\ argued that
the Commission in that case ``emphatically embraced the cost-based
approach to setting market data fees * * *,'' and insisted on a strict
cost-based justification for the market data fees at issue.\58\
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\56\ NetCoalition III at 11 n. 47.
\57\ Securities Exchange Act Release No. 20874 (April 17, 1984),
49 FR 17640 (April 24, 1984), aff'd sub nom. NASD, Inc. v. SEC, 802
F.2d 1415 (D.C. Cir. 1986).
\58\ SIFMA IV at 10.
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The commenters believed, further, that the costs attributable to
market data should be limited to the cost of collecting, consolidating,
and distributing the data,\59\ and that market data fees should not be
used to fund regulatory activities or to cross-subsidize an exchange's
competitive operations.\60\ One commenter maintained that, in the
absence of cost data, the Commission cannot determine whether NYSE Arca
uses market data revenues to subsidize competitive activities.\61\ In
particular, the commenter believed that the Commission must scrutinize
the cost justification for NYSE Arca's fees to ``be sure that NYSE Arca
is not using its market power in the upstream data market as the
exclusive processor for
[[Page 32756]]
this data * * * to price squeeze its competitors in the downstream
transaction market and to cross-subsidize its reduction in transaction
fees.'' \62\
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\59\ Citigroup Letter at 1; SIFMA III at 21. One commenter
believed that the Commission ``should create standards that allow
producers of market data to recover their costs and make a
reasonable profit (e.g., a 10% return), but not an excessive
profit.'' Schwab Letter at 6.
\60\ SIFMA III at 8; SIFMA IV at 10. The commenter believed that
other costs, including member regulation and market surveillance,
should be funded by listing, trading, and regulatory fees, rather
than market data fees. See SIFMA III at 21. Another commenter
maintained that funding regulatory activities through an explicit
regulatory fee, rather than through market data revenues, ``would be
more logical and transparent * * *.'' NSX Letter at 2. See also
Schwab Letter at 5.
\61\ SIFMA IV at 10.
\62\ SIFMA IV at 10.
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One commenter argued that NYSE Arca's proposed fees are not an
``equitable allocation'' of costs among its users and are unreasonably
discriminatory because the fees are based on the number of people who
view the data. Thus, a broker-dealer with many customers seeking to
view market data pays considerably more for market data than an
institution or algorithmic trader that pays only for the data link to
its computer systems.\63\
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\63\ Schwab Letter at 4. The commenter argued that this fee
structure ``is a subsidization program whereby exchanges rebate
revenue to their favored traders based on market data fees imposed
on retail investors.'' Id.
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3. Exchange Act Rule 19b-4 Process
One commenter argued that the Proposal fails to satisfy the
requirements of Exchange Act Rule 19b-4 and Form 19b-4, because, among
other things, the Proposal does not: (1) Explain why NYSE Arca must
charge for data that it previously provided free of charge; (2) address
the change in circumstances caused by the NYSE's conversion from a
member-owned, not-for-profit entity to a shareholder-owned, for-profit
entity; (3) address the effect of the fee on retail investors, whom the
commenter believes will be denied access to NYSE Arca's data as a
result of the fees; (4) explain how making available a faster single-
market data feed at a high price, while most investors must rely on
slower consolidated market data products, is consistent with the
mandates under the Exchange Act for equal access to and transparency in
market data; and (5) include the contract terms governing access to and
use of NYSE Arca's data or address the administrative costs and burdens
that the contract terms impose.\64\ Another commenter, citing the
Petition, asserted that the Proposal fails to satisfy the requirements
of Form 19b-4 because it provides no disclosure regarding the burdens
on competition that could result from its proposed fees or a
justification for the proposed fees.\65\
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\64\ SIFMA III at 11-12.
\65\ Bloomberg Letter at 3. See also Petition at 6-7.
---------------------------------------------------------------------------
Commenters also raised more general concerns regarding the Exchange
Act Rule 19b-4 rule filing process as it applies to proposed rule
changes relating to market data. In light of the significant policy
issues that market data proposals raise, commenters questioned whether
such proposals should be eligible to be effective upon filing pursuant
to Exchange Act Rule 19b-4(f)(6).\66\ One commenter believed that all
market data proposals should be subject to notice and comment, and that
the Commission should provide a 30-day comment period for such
proposals.\67\ In addition, the commenter cautioned that the rule
filing process should not become a ``rubberstamp'' of an exchange's
proposal.\68\ One commenter suggested that the Commission narrow its
delegation of authority with respect to proposed rule changes to
exclude proposals that have generated significant public comment.\69\
---------------------------------------------------------------------------
\66\ Baker Letter at 1-2; SIFMA III at 22; Bloomberg Letter at
6.
\67\ SIFMA III at 22.
\68\ SIFMA I at 2 n. 3.
\69\ NetCoalition III at 3-4.
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4. Importance of Depth-of-Book Data
One commenter maintained that because single-market depth-of-book
data products have significant advantages over consolidated top-of-book
products in terms of both speed and the depth of interest displayed,
many broker-dealers believe that it is prudent to purchase single-
market depth-of-book data to satisfy their best execution and
Regulation NMS order routing obligations.\70\ The commenter noted that
NYSE Arca has indicated in its advertising materials that its ArcaBook
data feed is approximately 60 times faster than the consolidated data
feeds and displays six times the liquidity within five cents of the
inside quote.\71\ The commenter also maintained that the NYSE has
linked its depth-of-book products to best execution by stating that
``NYSE Arca's market data products are designed to improve trade
execution.'' \72\
---------------------------------------------------------------------------
\70\ SIFMA III at 5-6. The commenter stated that depth-of-book
information has become more important because of the reduction in
liquidity at the inside quote and the increase in quote volatility
since decimalization, and because depth-of-book quotations are
likely to become more executable following the implementation of
Regulation NMS. SIFMA III at 12-13. Similarly, another commenter
maintained that, through Regulation NMS, the Commission ``has
imposed a system that requires access to depth-of-book
information.'' Schwab Letter at 5. Likewise, a commenter believed
that market participants require depth-of-book information to trade
effectively in decimalized markets. SIFMA IV at 8. See also
NetCoalition III at 5.
\71\ SIFMA III at 14 n. 24.
\72\ SIFMA IV at 12.
---------------------------------------------------------------------------
One commenter argued that the central processors that distribute
consolidated data have little incentive to invest in modernizing their
operations.\73\ Another commenter believed that the disparity between
faster and more expensive depth-of-book proprietary data feeds and the
slower, less costly, and less valuable consolidated data feeds results
in a ``two-tiered structure with institutions having access to prices
not reasonably available to small investors * * *,'' circumstances that
the commenter believed ``recreate the informational advantage that once
existed on the physical floors of the open outcry markets.'' \74\
---------------------------------------------------------------------------
\73\ SIFMA III at 13.
\74\ Financial Services Roundtable Letter at 3. One commenter
believed that market participants who choose not to purchase depth-
of-book data will face the informational disadvantages that
Regulation NMS seeks to eliminate. NSX Letter at 2.
---------------------------------------------------------------------------
Another commenter believed that depth-of-book information should be
considered basic information for retail investors as well as
professional investors and that one goal of the National Market System
should be to assure that ``all investors * * * whether professional or
non-professional * * * have equal access to the same quality
information, at a reasonable price, and at the same time.'' \75\
Similarly, a commenter believed that retail investors require
quotations beyond the national best bid or offer to assess the quality
of the executions they receive.\76\
---------------------------------------------------------------------------
\75\ SIFMA IV at 13.
\76\ NetCoalition III at 5 n. 16.
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5. Lack of Competition in Market Data Pricing
Commenters argued that there are no effective competitive or market
forces that limit what an exchange may charge for its depth-of-book
data.\77\ Although one commenter acknowledged the argument that
competition in the market for liquidity and transactions could serve as
a constraint on what exchanges may charge for their data products, the
commenter believed that the consolidations of the NYSE with Archipelago
and Nasdaq with BRUT and INET have limited this constraint.\78\ The
commenter also asserted that competition in the market for order
execution is not the same as competition in the market for market data,
and that an economic analysis must consider the market for market data
from the consumer's perspective.\79\ Because proprietary market data is
a ``sole-source product,'' the commenter believed that no market forces
operate on the transaction between an exchange and the consumer of its
data.\80\ The commenter believed that the unique characteristics of the
market for market
[[Page 32757]]
data--including increased market concentration and market participants'
obligation to purchase sole-source proprietary market data to trade
effectively--resulted in a ``classic economic market failure * * * that
requires comprehensive regulatory intervention to ensure `fair and
reasonable' prices.'' \81\ Similarly, another commenter maintained
that, with respect to market data that is exclusive to an exchange,
``[t]here is no way for competitive forces to produce market-driven or
`fair and reasonable' prices required by the Exchange Act * * *.'' \82\
---------------------------------------------------------------------------
\77\ NetCoalition III at 9; SIFMA III at 16-17; SIFMA IV at 5.
\78\ SIFMA III at 17.
\79\ SIFMA IV at 5. See also NetCoalition III at 2.
\80\ SIFMA IV at 5.
\81\ SIFMA IV at 8. The commenter believed that Congress
envisioned the Commission regulating exclusive processors in a
manner similar to the way in which public utilities are regulated.
SIFMA I at 5.
\82\ NetCoalition III at 2.
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Other commenters believed that an exchange has a monopoly position
as the exclusive processor of its proprietary data that ``creates a
serious potential for abusive pricing practices,'' \83\ and urged the
Commission to consider the lack of competition and the inability to
obtain market data from other sources.\84\ One commenter asserted that
``broker-dealers will * * * be forced to purchase market data at a
fixed and * * * arbitrary price'' until market data fees are
reformed.\85\
---------------------------------------------------------------------------
\83\ Schwab Letter at 6. See also Spencer Letter.
\84\ Citigroup Letter at 1. Similarly, a commenter believed that
``[u]nless checked by effective regulatory oversight * * * exchanges
have both the incentives and the power to charge whatever they can
for the market data over which they have exclusive control.'' SIFMA
III at 4. The commenter also asserted that ``[t]he lack of both
economic market forces and comprehensive oversight of exchanges as
the sole-source processors of market data * * * has allowed the
exchange to simply `name their prices' * * *.'' SIFMA IV at 2.
\85\ NSX Letter at 2.
---------------------------------------------------------------------------
In addition, several commenters believed that the transformation of
most U.S. securities exchanges from not-for-profit membership
organizations to for-profit entities has eliminated an important
constraint on market data fees as the for-profit exchanges seek to
maximize value for their shareholders.\86\ In this regard, one
commenter explained that ``exchanges are beholden to their shareholders
to increase revenue, and market data is the revenue stream that holds
the greatest potential for doing so.'' \87\ Other commenters argued
that the advent of for-profit exchanges has eliminated the governance
checks on market data pricing that operated when exchange members--
broker-dealers who were obligated to purchase consolidated market
data--sat on the boards of the non-profit, member-owned exchanges.\88\
---------------------------------------------------------------------------
\86\ ABA Letter at 2-3; Financial Services Roundtable Letter at
2; Schwab Letter at 5; SIFMA III at 24.
\87\ Schwab Letter at 5. See also NetCoalition II at 4; SIFMA
III at 24; SIFMA IV at 2.
\88\ Financial Services Roundtable Letter at 2; NetCoalition II
at 4; SIFMA III at 15.
---------------------------------------------------------------------------
6. Increase in Market Data Revenues
With respect to the increase in the NYSE Group's market data
revenues following its merger with Archipelago, one commenter stated
that ``NYSE Group's reported market data segment revenues totaled $57.5
million in the third quarter of 2006: up 33.7% from the same three
month period in 2005.'' \89\ According to the commenter, the NYSE Group
attributed its revenue growth in market data to the contribution of
NYSE Arca's operations following the completion of the merger between
the NYSE and Archipelago on March 7, 2006.\90\ The commenter maintained
that Nasdaq has experienced similar growth in its market data revenues
and that the exchanges ``propose to charge fees for a series of market
data products that, when multiplied by the number of potential
subscribers, are resulting in increased costs of doing business
totaling tens of millions of dollars per year for some individual firms
and hundreds of millions of dollars per year across the financial
markets.'' \91\ The commenter identified the current fees for
proprietary and consolidated market data products and claimed that
investors ultimately pay these fees.\92\
---------------------------------------------------------------------------
\89\ SIFMA III at 18-19 (citations omitted).
\90\ SIFMA III at 18 (citation omitted).
\91\ SIFMA III at 4.
\92\ SIFMA IV at 14 and Appendix A.
---------------------------------------------------------------------------
7. Recommended Solutions
To address the issues raised by market data fees, the commenters
suggested several potential solutions. One commenter recommended that
the Commission adopt a specialized market data form for market data
rule proposals that would require a detailed justification of proposed
fee changes by the SROs.\93\ The commenter believed that the form
should, among other things, require an exchange to substantiate its
historical costs of producing market data, its current market data
revenues, how and why its costs have changed and the existing revenue
is no longer appropriate, how the fee would impact market participants,
how the revenues would be used, and the contract terms, system
specifications, and audit requirements that would be associated with
the proposed fee change.\94\
---------------------------------------------------------------------------
\93\ SIFMA III at 21-22.
\94\ SIFMA III at 21-22.
---------------------------------------------------------------------------
The commenter also believed that the contract terms governing the
use of market data should be included in market data rule filings and
subject to notice and comment.\95\ The commenter maintained that the
contract terms are effectively non-negotiable and that the compliance
costs associated with them may affect the efficiency and transparency
of the markets. Another commenter asserted that exchange market data
contracts limit the use and dissemination of the data provided under
the contracts, potentially impairing the flow and further analysis of
the information, and impose administrative and technological burdens on
firms.\96\
---------------------------------------------------------------------------
\95\ SIFMA III at 23.
\96\ Citigroup Letter at 2.
---------------------------------------------------------------------------
The commenters also suggested structural changes to address market
data issues, including requiring exchanges to place their market data
operations in a separate subsidiary and to make their raw market data
available to third parties on the same terms as they make the data
available to their market data subsidiary and to the independent
central processor.\97\ The commenters believed that this could
encourage competition in providing market data products and services
\98\ and create a mechanism for free market pricing.\99\
---------------------------------------------------------------------------
\97\ Bloomberg Letter at 4; Kanjorski Letter at 1; NetCoalition
I at 2; Schwab Letter at 7; SIFMA III at 24-25.
\98\ SIFMA III at 25.
\99\ Schwab Letter at 7.
---------------------------------------------------------------------------
Finally, the commenters suggested that the Commission increase the
quality and depth of the required consolidated quotation information to
allow retail investors to determine the prices at which their orders
will be executed and to observe pricing movements in the market.\100\
One commenter recommended that the Commission require exchanges to
consolidate and distribute their top and depth-of-book data, and that
the associated costs be paid by investors who act on the
information.\101\
---------------------------------------------------------------------------
\100\ Schwab Letter 5; SIFMA III at 25-26.
\101\ NSX Letter at 2. Other commenters endorse this
recommendation. NetCoalition III at 7, 13; SIFMA IV at 15.
---------------------------------------------------------------------------
B. Commenters Supporting the Action by Delegated Authority
Several commenters who supported the approval of the Proposal by
delegated authority argued that the staff applied the correct legal
standard \102\ and that the broader policy questions raised by the
Petition should be addressed in the context of Commission rulemaking,
rather than in connection
[[Page 32758]]
with a specific exchange market data proposal.\103\
---------------------------------------------------------------------------
\102\ Amex Letter at 2; ISE Letter at 3; PHLX Letter at 2-3.
\103\ Amex Letter at 4; PHLX Letter at 8.
---------------------------------------------------------------------------
Several commenters rejected the assertion that a cost-based
standard is the correct standard for the Commission to apply in
reviewing market data fee proposals.\104\ In this regard, the
commenters distinguished between the standards applicable to ``core''
market data (i.e., consolidated quotation and last sale data for U.S.-
listed equities) and the standards applicable to proprietary market
data products.\105\ One commenter maintained that the Commission, in
adopting Regulation NMS, authorized exchanges to distribute market data
outside of the national market system plans, subject to the general
fairness and nondiscrimination standards of Rule 603 of Regulation NMS,
but ``otherwise [left] to free market forces the determination of what
information would be provided and at what price.'' \106\ Another
commenter, noting that the Commission specifically considered and
refrained from adopting the cost-based standard that NetCoalition
proposes, argued that NetCoalition's approach ``would replace
Regulation NMS * * * with a complex and intrusive rate-making approach
that is inconsistent with the goals of the * * * [Exchange Act] and
would be more costly than beneficial.'' \107\
---------------------------------------------------------------------------
\104\ Exchange Market Data Coalition Letter at 2; ISE Letter at
3; PHLX Letter at 4.
\105\ Amex Letter at 1; ISE Letter at 2-3; PHLX Letter at 4-5.
\106\ Amex Letter at 2. The commenter noted that exchange fees
also are subject to the requirements of section 6(b)(4) of the
Exchange Act. See also PHLX Letter at 7.
\107\ Exchange Market Data Coalition Letter at 2. One commenter
asserted that ``[a]pplying NetCoalition's proposed strict cost-based
fee analysis to every exchange market data rule filing is unworkable
and * * * is not required under the Act.'' ISE Letter at 3.
Similarly, noting that SROs must ensure that market data is not
corrupted by fraud or manipulation, another commenter believed that
it would be virtually impossible to identify the costs specifically
associated with the production of market data versus other SRO
functions. PHLX Letter at 6.
---------------------------------------------------------------------------
One commenter disagreed with the assertion that an exchange
possesses monopoly pricing power with respect to its proprietary data
products. It contended that assertions concerning an exchange's
monopoly pricing power ``ignore * * * market reality and market
discipline. If any exchange attempts to charge excessive fees, there
simply will not be buyers for such products.'' \108\ Nasdaq noted that,
as of April 30, 2007, over 420,000 professional users purchased core
data, but less than 19,000 professional users purchased TotalView,
Nasdaq's proprietary depth-of-book order product.\109\ It concluded
that ``[b]roker-dealers may claim they are required to purchase
TotalView, but their actions indicate otherwise.'' \110\
---------------------------------------------------------------------------
\108\ ISE Letter at 3. Similarly, another commenter noted that
the users of data will purchase data ``if it provides them value and
is priced reasonably.'' Amex Letter at 1.
\109\ Nasdaq Letter at 6.
\110\ Nasdaq Letter at 6.
---------------------------------------------------------------------------
The commenters emphasized that the exchanges face significant
competition in their efforts to attract order flow:
Exchanges compete not only with one another, but also with
broker-dealers that match customer orders within their own systems
and also with a proliferation of alternative trading systems
(``ATSs'') and electronic communications networks (``ECNs'') that
the Commission has also nurtured and authorized to execute trades in
any listed issue. As a result, market share of trading fluctuates
among execution facilities based on their ability to service the end
customer. The execution business is highly competitive and exhibits
none of the characteristics of a monopoly as suggested in the
NetCoalition Petition.\111\
---------------------------------------------------------------------------
\111\ Exchange Market Data Coalition Letter at 4.
Similarly, another commenter stated that ``the market for
proprietary data products is currently 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.'' \112\ It also
noted that market data ``is the totality of the information assets that
each Exchange creates by attracting order flow'' and emphasized that
``[i]t is in each Exchange's best interest to provide proprietary
information to investors to further their business objectives, and each
Exchange chooses how best to do that.'' \113\ Commenters stated that,
in the absence of a regulatory requirement to provide non-core market
data, it is necessary to provide a financial or other business
incentive for exchanges to make such data available.\114\
---------------------------------------------------------------------------
\112\ Nasdaq Letter at 7.
\113\ Id. at 3, 4.
\114\ Amex Letter at 1; ISE Letter at 2; PHLX Letter at 7.
---------------------------------------------------------------------------
IV. NYSE Arca Responses to Commenters
A. Response to Commenters on Proposal
In its responses to commenters on the Proposal, the Exchange argued
that the Proposal establishes ``a framework for distributing data in
which all vendors and end users are permitted to receive and use the
Exchange's market data on equal, non-discriminatory terms.'' \115\ The
Exchange asserted that the proposed professional and non-professional
device fees for the NYSE Arca Data were fair and reasonable because
they ``are far lower than those already established--and approved by
the Commission--for similar products offered by other U.S. equity
exchanges and stock markets.'' \116\ In particular, the Exchange noted
that the proposed $15 per month device fee for each of the ArcaBook
data products is less than both the $60 per month and $70 per month
device fees that the NYSE and Nasdaq, respectively, charge for
comparable market data products.\117\
---------------------------------------------------------------------------
\115\ NYSE Arca Response I at 2.
\116\ Id.
\117\ NYSE Arca Response I at 2-3.
---------------------------------------------------------------------------
With respect to its proposed fees, the Exchange noted, further,
that it had invested significantly in its ArcaBook products, including
making technological enhancements that allowed the Exchange to expand
capacity and improve processing efficiency as message traffic
increased, thereby reducing the latency associated with the
distribution of ArcaBook data.\118\ The Exchange stated that ``[i]n
determining to invest the resources necessary to enhance ArcaBook
technology, the Exchange contemplated that it would seek to charge for
the receipt and use of ArcaBook data.'' \119\ The Exchange also
emphasized the reasonableness of its proposed fee relative to other
comparable market data products, asserting, for example, that ``NYSE
Arca is at the inside price virtually as often as Nasdaq, yet the
proposed fee for ArcaBook is merely one-fifth of the TotalView fee.''
\120\ Moreover, it stated that its decision to commence charging for
ArcaBook data was based on its view that ``market data charges are a
particularly equitable means for funding a market's investment in
technology and its operations. In contrast with transaction,
membership, listing, regulatory and other SRO charges, market data
charges cause all consumers of a securities market's services,
including investors and market data vendors, to contribute.'' \121\
---------------------------------------------------------------------------
\118\ NYSE Arca Response II at 2.
\119\ Id. at 3.
\120\ Id.
\121\ Id. at 4.
---------------------------------------------------------------------------
The Exchange stated that it proposes to use the CTA and CQ Plan
contracts to govern the distribution of NYSE Arca Data and that it was
not amending the terms of these existing contracts or imposing
restrictions on the use or display of its data beyond those that are
currently set forth in the contracts.\122\ Further, the Exchange
specifically noted that these contracts do not prohibit a
[[Page 32759]]
broker-dealer from making its own data available outside of the CTA and
CQ Plans.\123\ Finally, the Exchange argued that by using this current
structure, it believes that the administrative burdens on firms and
vendors should be low.\124\
---------------------------------------------------------------------------
\122\ NYSE Arca Response I at 3.
\123\ Id. at n. 12 and accompanying text.
\124\ Id. at 5.
---------------------------------------------------------------------------
B. Response to Commenters on Petition
In its response to commenters on the Petition, the Exchange argued
that recent market-based solutions have mooted the concerns expressed
in the Petition regarding the affordability of market data for internet
portals.\125\ In particular, the Exchange noted that the NYSE recently
submitted a proposed rule change for a market data product that would
provide unlimited real-time last sale prices to vendors for a fixed
monthly fee (``NYSE Internet Proposal'').\126\ The Exchange stated that
this NYSE Internet Proposal ``would meet the needs of internet portals
and add to the number of choices that are available to intermediaries
and investors for their receipt of real-time prices.'' \127\ The
Exchange asserted that the NYSE Internet Proposal ``provides a
significant benefit to investors'' since ``it adds to the data-access
alternatives available to them and improves the quality, timeliness and
affordability of data they can receive over the internet.'' \128\
---------------------------------------------------------------------------
\125\ NYSE Arca Response III at 5-6.
\126\ See id. at 5 (citing NYSE Internet Proposal, supra note
29).
\127\ NYSE Arca Response III at 5.
\128\ Id.
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The Exchange also reiterated the argument that the proposed market
data fees meet the statutory standards for such fees under the Exchange
Act.\129\ The Exchange argued that the fees represent an equitable
allocation of fees and charges since they ``represent the first time
that [the Exchange] has established a fee that a person or entity other
than an [Exchange] member or listed company must pay'' and are being
imposed ``on those who use the facilities of [the Exchange] but do not
otherwise contribute to [the Exchange's] operating costs.'' \130\
---------------------------------------------------------------------------
\129\ Id. at 11.
\130\ Id.
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The Exchange argued that the proposed market data fees are not
``unreasonably discriminatory'' since ``all professional subscribers
are subject to the same fees and all nonprofessional subscribers are
subject to the same fees.'' \131\ The Exchange noted that the only
discrimination that occurs is the ``reasonable'' distinction that would
require professional subscribers to pay higher fees than
nonprofessional subscribers.\132\
---------------------------------------------------------------------------
\131\ Id.
\132\ Id.
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The Exchange asserted that the fees are fair and reasonable
because: (1) ``They compare favorably to the level of fees that other
U.S. markets and the CTA and Nasdaq/UTP Plans impose for comparable
products''; (2) ``the quantity and quality of data NYSE Arca includes
in Arca Book compares favorably to the data that other markets include
in their market data products''; and (3) ``the fees will enable NYSE
Arca to recover the resources that NYSE Arca devoted to the technology
necessary to produce Arca Book data.'' \133\
---------------------------------------------------------------------------
\133\ Id. at 11-12.
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The Exchange also rejected the Petitioner's assertion that the
Exchange acted ``arbitrarily or capriciously'' by using a comparison of
similar market data fees in setting the level of the proposed
fees.\134\ The Exchange noted that in addition to studying ``what other
markets charge for comparable products,'' the Exchange also considered:
(1) The needs of those entities that would likely purchase the Arca
Book data; (2) the ``contribution that revenues from Arca Book Fees
would make toward replacing the revenues that NYSE Arca stands to lose
as a result of the removal of the NQDS service from the Nasdaq/UTP
Plan''; (3) ``the contribution that revenues accruing from Arca Book
Fees would make toward NYSE Arca's market data business''; (4) the
contribution that revenues accruing from Arca Book Fees would make
toward meeting the overall costs of NYSE Arca's operations''; (5)
``projected losses to NYSE Arca's business model and order flow that
might result from marketplace resistance to Arca Book Fees''; and (6)
``the fact that Arca Book is primarily a product for market
professionals, who have access to other sources of market data and who
will purchase Arca Book only if they determine that the perceived
benefits outweigh the cost.'' \135\
---------------------------------------------------------------------------
\134\ Id. at 12.
\135\ Id. at 12-13.
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The Exchange also rejected the Petitioner's assertion that all
proposed market data fees must be subjected to a rigorous cost-based
analysis.\136\ The Exchange noted that the Petitioner ``is able to cite
only one instance'' that supports such an assertion.\137\ The Exchange
also noted that Petitioner ``fails to mention that a significant
portion of the industry'' expressed opposition to a cost-based approach
to analyzing market data fees in response to various Commission
releases and other initiatives.\138\ The Exchange argued that a cost-
based analysis of market data fees is impractical because ``[i]t would
inappropriately burden both the government and the industry, stifle
competition and innovation, and in the end, raise costs and,
potentially, fees.'' \139\
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\136\ Id. at 13.
\137\ Id.
\138\ Id. at 14-15. The Exchange referenced opposition in the
industry to a cost-based analysis of market data fees expressed in
connection with the Market Information Concept Release, the Concept
Release Concerning Self-Regulation, the Regulation NMS initiative,
and the Commission's Advisory Committee on Market Information.
\139\ Id. at 15 (citing NYSE Response to Market Information
Concept Release (April 10, 2000) (emphasis in original).
---------------------------------------------------------------------------
The Exchange also disputed Petitioner's argument that the
Exchange's proposed market data fees amount to an exercise of monopoly
pricing power.\140\ It noted that ``[m]arkets compete with one another
by seeking to maximize the amount of order flow that they attract. The
markets base the competition for order flow on such things as
technology, customer service, transaction costs, ease of access,
liquidity and transparency.'' \141\ The Exchange noted that ``[t]he
Commission has prescribed top-of-the-book consolidated market data as
the data required for best execution purposes'' and that there is ``no
regulatory requirement'' for brokers to receive depth-of-book or other
proprietary market data products.\142\ Accordingly, the Exchange
asserted that no monopoly power exists, and that the marketplace
determines the fees charged by the Exchange for depth-of-book market
data.\143\ Further, the Exchange claimed that if the market data fees
were excessive, market participants ``would forego Arca Book data and
would choose to receive the depth-of-book service of other markets.''
\144\ It noted that:
---------------------------------------------------------------------------
\140\ Id. at 16.
\141\ Id. at 16. See also id. at 18 (``If too many market
professionals reject Arca Book as too expensive, NYSE Arca would
have to reassess the Arca Book Fees because Arca Book data provides
transparency to NYSE Arca's market, transparency that plays an
important role in the competition for order flow.'')
\142\ Id. at 18.
\143\ Id.
\144\ Id.
As a result of all of the choices and discretion that are
available to brokers, the displayed depth-of-book data of one
trading center does not provide a complete picture of the full
market for the security. It displays only a portion of all interest
in the security. A brokerage firm has potentially dozens of
different information sources to choose from
[[Page 32760]]
in determining if, where, and how to represent an order for
execution.\145\
---------------------------------------------------------------------------
\145\ Id. at 17.
The Exchange also addressed other concerns raised by commenters in
connection with the Petition. First, the Exchange indicated that it has
no intention of retroactively imposing the proposed market data
fees.\146\ The Exchange also disputed a commenter's statement which
indicated that ``market data revenues of the NYSE Group (the parent
company of Exchange and NYSE) for the third quarter of 2006 rose 33.7%
from the year-earlier.'' \147\ According to the Exchange, this
statistic does not demonstrate ``a significant increase in market data
revenues during 2006'' since the 2005 market data revenue from the NYSE
Group used to generate this statistic did not include the Exchange's
market data revenue because the Exchange was not part of the NYSE Group
in 2005.\148\ The Exchange notes that the combined market data revenues
for the Exchange and NYSE have actually declined slightly.\149\ Lastly,
the Exchange rejects the commenters' contention that a significant
speed variance exists between proprietary market data products and the
consolidated data feed that markets make available under the CQ and
Nasdaq/UTP Plans. The Exchange notes that the ``variations in speed are
measured in milliseconds'' and that ``[f]rom a display perspective the
difference is imperceptible.'' \150\ Furthermore, the Exchange notes
that the CQ Plan participants have undertaken a technology upgrade that
would reduce the latency of the consolidated feed from ``several
hundred milliseconds to approximately 30 milliseconds.'' \151\
---------------------------------------------------------------------------
\146\ Id. at 20.
\147\ Id.
\148\ Id.
\149\ Id. at n. 50 and accompanying text. According to the
Exchange, pro forma results indicate that the Exchange and NYSE
received a combined $242 million in 2005, while they only received a
combined $235 million in 2006.
\150\ Id. at 21.
\151\ Id.
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V. Discussion
The Commission finds that the Proposal is consistent with the
requirements of the Exchange Act and the rules and regulations
thereunder applicable to a national securities exchange. In particular,
it is consistent with section 6(b)(4) of the Exchange Act,\152\ which
requires that the rules of a national securities exchange provide for
the equitable allocation of reasonable dues, fees, and other charges
among its members and issuers and other parties using its facilities,
and section 6(b)(5) of the Exchange Act,\153\ which requires, among
other things, that the rules of a national securities exchange be
designed to promote just and equitable principles of trade, to remove
impediments to and perfect the mechanism of a free and open market and
a national market system and, in general, to protect investors and the
public interest, and not be designed to permit unfair discrimination
between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------
\152\ 15 U.S.C. 78f(b)(4).
\153\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The Commission also finds that the Proposal is consistent with the
provisions of section 6(b)(8) of the Exchange Act,\154\ which requires
that the rules of an exchange not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act. Finally, the Commission finds that the Proposal is consistent with
Rule 603(a) of Regulation NMS,\155\ adopted under section 11A(c)(1) of
the Exchange Act, which requires an exclusive processor that
distributes information with respect to quotations for or transactions
in an NMS stock to do so on terms that are fair and reasonable and that
are not unreasonably discriminatory.\156\
---------------------------------------------------------------------------
\154\ 15 U.S.C. 78f(b)(8).
\155\ 17 CFR 242.603(a).
\156\ NYSE Arca is an exclusive processor of the NYSE Arca Data
under Section 3(a)(22)(B) of the Exchange Act, 15 U.S.C.
78c(a)(22)(B), which defines an exclusive processor as, among other
things, an exchange that distributes information with respect to
quotations or transactions on an exclusive basis on its own behalf.
---------------------------------------------------------------------------
A. Commission Review of Proposals for Distributing Non-Core Data
The standards in Section 6 of the Exchange Act and Rule 603 of
Regulation NMS do not differentiate between types of data and therefore
apply to exchange proposals to distribute both core data and non-core
data. Core data is the best-priced quotations and comprehensive last
sale reports of all markets that the Commission, pursuant to Rule
603(b), requires a central processor to consolidate and distribute to
the public pursuant to joint-SRO plans.\157\ In contrast, individual
exchanges and other market participants distribute non-core data
voluntarily. As discussed further below, the mandatory nature of the
core data disclosure regime leaves little room for competitive forces
to determine products and fees. Non-core data products and their fees
are, by contrast, much more sensitive to competitive forces. For
example, the Commission does not believe that broker-dealers are
required to purchase depth-of-book order data, including the NYSE Arca
data, to meet their duty of best execution.\158\ The Commission
therefore is able to use competitive forces in its determination of
whether an exchange's proposal to distribute non-core data meets the
standards of Section 6 and Rule 603.
---------------------------------------------------------------------------
\157\ See Rule 603(b) of Regulation NMS (``Every national
securities exchange on which an NMS stock is traded and national
securities association shall act jointly pursuant to one or more
effective national market system plans to disseminate consolidated
information, including a national best bid and national best offer,
on quotations for and transactions in NMS stocks. Such plan or plans
shall provide for the dissemination of all consolidated information
for an individual NMS stock through a single plan processor.'')
\158\ See notes 224-226 below and accompanying text.
---------------------------------------------------------------------------
The requirements for distributing core data to the public were
first established in the 1970s as part of the creation of the national
market system for equity securities.\159\ Although Congress intended to
rely on competitive forces to the greatest extent possible to shape the
national market system, it also granted the Commission full rulemaking
authority in the Exchange Act to achieve the goal of providing
investors with a central source of consolidated market
information.\160\
---------------------------------------------------------------------------
\159\ These requirements are discussed in detail in section III
of the Concept Release on Market Information, 64 FR at 70618-70623.
\160\ H.R. Rep. No. 94-229, 94th Cong., 1st Sess. 92 (1975)
(``Conference Report'').
---------------------------------------------------------------------------
Pursuant to this Exchange Act authority, the Commission has
required the SROs to participate in three joint-industry plans
(``Plans'') pursuant to which core data is distributed to the
public.\161\ The Plans establish three separate networks to disseminate
core data for NMS stocks: (1) Network A for securities primarily listed
on the NYSE; (2) Network C for securities primarily listed on Nasdaq;
and (3) Network B for securities primarily listed on exchanges other
than the NYSE and Nasdaq. For each security, the data includes: (1) A
national best bid and offer (``NBBO'') with prices, sizes, and market
center identifications; (2) the best bids and offers from each SRO that
include prices, sizes, and market center
[[Page 32761]]
identifications; and (3) last sale reports from each SRO. The three
Networks establish fees for this core data, which must be filed for
Commission approval.\162\ The Networks collect the applicable fees and,
after deduction of Network expenses, distribute the remaining revenues
to their individual SRO participants.
---------------------------------------------------------------------------
\161\ The three joint-industry plans, approved by the
Commission, are: (1) The CTA Plan, which is operated by the
Consolidated Tape Association and disseminates transaction
information for securities primarily listed on an exchange other
than Nasdaq; (2) the CQ Plan, which disseminates consolidated
quotation information for securities primarily listed on an exchange
other than Nasdaq; and (3) the Nasdaq UTP Plan, which disseminates
consolidated transaction and quotation information for securities
primarily listed on Nasdaq. The CTA Plan and CQ Plan are available
at http://www.nysedata.com. The Nasdaq UTP Plan is available at
http://www.utpdata.com.
\162\ Rule 608(b)(1) of Regulation NMS, 17 CFR 242.608(b)(1).
---------------------------------------------------------------------------
The Plans promote the wide availability of core market data.\163\
For each of the more than 7000 NMS stocks, quotations and trades are
continuously collected from many different trading centers and then
disseminated to the public by the central processor for a Network in a
consolidated stream of data. As a result, investors have access to a
reliable source of information for the best prices in NMS stocks.
Commission rules long have required broker-dealers and data vendors, if
they provide any data to customers, to also provide core data to
investors in certain contexts, such as trading and order-routing.\164\
In addition, compliance with the trade-through requirements of Rule 611
of Regulation NMS \165\ necessitates obtaining core quotation data
because it includes all the quotations that are entitled to protection
against trade-throughs.\166\
---------------------------------------------------------------------------
\163\ The Plan provisions for distributing quotation and
transaction information are discussed in detail in section II of the
Concept Release on Market Information, 64 FR at 70615-70618.
\164\ Rule 603(c) of Regulation NMS, 17 CFR 242.603(c).
\165\ 17 CFR 242.611.
\166\ Rule 600(b)(57)(iii) of Regulation NMS, 17 CFR
242.600(b)(57)(iii) (definition of ``protected bid'' and ``protected
offer'' limited to the best bids and best offers of SROs). The
Commission decided not to adopt a proposal which would have
protected depth-of-book quotations against trade-throughs if the
market displaying such quotations voluntarily disseminated them in
the consolidated quotation stream. Regulation NMS Release, 70 FR at
37529.
---------------------------------------------------------------------------
For many years, the core data distributed through the Networks
overwhelmingly dominated the field of equity market data in the U.S.
With the initiation of decimal trading in 2001, however, the value to
market participants of non-core data, particularly depth-of-book order
data, increased. An exchange's depth-of-book order data includes
displayed trading interest at prices inferior to the best-priced
quotations that exchanges are required to provide for distribution in
the core data feeds. Prior to decimal trading, significant size
accumulated at the best-priced quotes because the minimum spread
between the national best bid and the national best offer was 1/16th,
or 6.25 cents. When the minimum inside spread was reduced to one cent,
the size displayed at the best quotes decreased substantially, while
the size displayed at the various one-cent price points away from the
inside quotes became a more useful tool to assess market depth.
In 2005, the Commission adopted new rules that, among other things,
addressed market data.\167\ Some commenters on the rule proposals
recommended that the Commission eliminate or substantially modify the
consolidation model for distributing core data. In addressing these
comments, the Commission described both the strengths and weaknesses of
the consolidation model. It emphasized the benefits of the model for
retail investors, but noted the limited opportunity for market forces
to determine the level and allocation of fees for core data and the
negative effects on innovation by individual markets in the provision
of their data.\168\
---------------------------------------------------------------------------
\167\ Regulation NMS Release, 70 FR at 37557-37570.
\168\ Id. at 37558.
---------------------------------------------------------------------------
The Commission ultimately decided that the consolidation model
should be retained for core data because of the benefit it afforded to
investors, namely ``helping them to assess quoted prices at the time
they place an order and to evaluate the best execution of their orders
against such prices by obtaining data from a single source that is
highly reliable and comprehensive.'' \169\
---------------------------------------------------------------------------
\169\ Id. at 37504.
---------------------------------------------------------------------------
With respect to the distribution of non-core data, however, the
Commission decided to maintain a deconsolidation model that allows
greater flexibility for market forces to determine data products and
fees.\170\ In particular, the Commission both authorized the
independent dissemination of an individual market's or broker-dealer's
trade data, which previously had been prohibited by Commission rule,
and streamlined the requirements for the consolidated display of core
market data to customers of broker-dealers and vendors.\171\ Most
commenters supported this approach.\172\ A few commenters, however,
recommended that ``the Commission should expand the consolidated
display requirement to include additional information on depth-of-book
quotations, stating that the NBBO alone had become less informative
since decimalization.'' \173\ Such an approach effectively would have
treated an individual market's depth-of-book order data as consolidated
core data and thereby eliminated the operation of competitive forces on
depth-of-book order data. The Commission did not adopt this
recommendation, but instead decided to:
---------------------------------------------------------------------------
\170\ When describing the deconsolidation model in the context
of deciding whether to propose a new model for core data, the
Commission noted that ``the strength of this model is the maximum
flexibility it allows for competitive forces to determine data
products, fees, and SRO revenues.'' Securities Exchange Act Release
No. 49325 (February 26, 2004), 69 FR 11126, 11177 (March 9, 2004).
As discussed in the text, the Commission decided to retain the
consolidation model, rather than proposing a new deconsolidation
model, for core data.
\171\ See Regulation NMS Release, 70 FR at 37566-37567
(addressing differences in distribution standards between core data
and non-core data).
\172\ Id.
\173\ Id. at 37567 (citation omitted).
allow market forces, rather than regulatory requirements, to
determine what, if any, additional quotations outside the NBBO are
displayed to investors. Investors who need the BBOs of each SRO, as
well as more comprehensive depth-of-book information, will be able
to obtain such data from markets or third party vendors.\174\
---------------------------------------------------------------------------
\174\ Id. (citations omitted) (emphasis added).
Some commenters on the Proposal and the Petition recommended
fundamental changes in the regulatory treatment of non-core data in
general and depth-of-book quotations in particular.\175\ The
Commission, however, considered this issue in 2005 and continues to
hold the views just described. It does not believe that circumstances
have changed significantly since 2005 and will continue to apply a
primarily market-based approach for assessing whether exchange
proposals to distribute non-core data meet the applicable statutory
standards.
---------------------------------------------------------------------------
\175\ See section IV.A.4 above.
---------------------------------------------------------------------------
The Exchange Act and its legislative history strongly support the
Commission's reliance on competition, whenever possible, in meeting its
regulatory responsibilities for overseeing the SROs and the national
market system. Indeed, competition among multiple markets and market
participants trading the same products is the hallmark of the national
market system.\176\ A national market ``system'' can be contrasted with
a single monopoly market that overwhelmingly dominates trading its
listed products. Congress repeatedly emphasized the benefits of
competition among markets in protecting investors and promoting the
public interest. When directing the Commission to facilitate the
establishment of a national market system, for example, Congress
emphasized the importance of allowing competitive forces to work:
---------------------------------------------------------------------------
\176\ See, e.g., Exchange Act Section 11A(a)(1)(C)(ii).
[[Page 32762]]
---------------------------------------------------------------------------
In 1936, this Committee pointed out that a major responsibility
of the SEC in the administration of the securities laws is to
``create a fair field of competition.'' This responsibility
continues today. The bill would more clearly identify this
responsibility and clarify and strengthen the SEC's authority to
carry it out. The objective would be to enhance competition and to
allow economic forces, interacting within a fair regulatory field,
to arrive at appropriate variations in practices and services.\177\
---------------------------------------------------------------------------
\177\ S. Rep. No. 94-75, 94th Cong., 1st Sess. 8 (1975)
(``Senate Report'').
In addition, Congress explicitly noted the importance of relying on
---------------------------------------------------------------------------
competition in overseeing the activities of the SROs:
S. 249 would give the SEC broad authority not only to oversee
the general development of a national market system but also to
insure that the ancillary programs of the self-regulatory
organizations and their affiliates are consistent with the best
interests of the securities industry and the investing public. * * *
This is not to suggest that under S. 249 the SEC would have either
the responsibility or the power to operate as an `economic czar' for
the development of a national market system. Quite the contrary, for
a fundamental premise of the bill is that the initiative for the
development of the facilities of a national market system must come
from private interests and will depend on the vigor of competition
within the securities industry as broadly defined.\178\
---------------------------------------------------------------------------
\178\ Senate Report at 12.
With respect to market information, Congress again expressed its
preference for the Commission to rely on competition, but noted the
possibility that competition might not be sufficient in the specific
context of core data--the central facilities for the required
---------------------------------------------------------------------------
distribution of consolidated data to the public:
It is the intent of the conferees that the national market
system evolve through the interplay of competitive forces as
unnecessary regulatory restrictions are removed. The conferees
expect, however, that in those situations where competition may not
be sufficient, such as in the creation of a composite quotation
system or a consolidated transactional reporting system, the
Commission will use the powers granted to it in this bill to act
promptly and effectively to insure that the essential mechanisms of
an integrated secondary trading system are put into effect as
rapidly as possible.\179\
---------------------------------------------------------------------------
\179\ Conference Report at 92 (emphasis added).
The Commission's approach to core data and non-core data follows
this Congressional intent exactly. With respect to the systems for the
required distribution of consolidated core data, the Commission
retained a regulatory approach that uses joint-industry plans and a
central processor designed to assure access to the best quotations and
most recent last sale information that is so vital to investors. With
respect to non-core data, in contrast, the Commission has maintained a
market-based approach that leaves a much fuller opportunity for
competitive forces to work.
This market-based approach to non-core data has two parts. The
first is to ask whether the exchange was subject to significant
competitive forces in setting the terms of its proposal for non-core
data, including the level of any fees. If an exchange was subject to
significant competitive forces in setting the terms of a proposal, the
Commission will approve the proposal unless it determines that there is
a substantial countervailing basis to find that the terms nevertheless
fail to meet an applicable requirement of the Exchange Act or the rules
thereunder. If, however, the exchange was not subject to significant
competitive forces in setting the terms of a proposal for non-core
data, the Commission will require the exchange to provide a substantial
basis, other than competitive forces, in its proposed rule change
demonstrating that the terms of the proposal are equitable, fair,
reasonable, and not unreasonably discriminatory.
As discussed above, the Commission believes that, when possible,
reliance on competitive forces is the most appropriate and effective
means to assess whether terms for the distribution of non-core data are
equitable, fair and reasonable, and not unreasonably discriminatory. If
competitive forces are operative, the self-interest of the exchanges
themselves will work powerfully to constrain unreasonable or unfair
behavior. As discussed further below, when an exchange is subject to
competitive forces in its distribution of non-core data, many market
participants would be unlikely to purchase the exchange's data products
if it sets fees that are inequitable, unfair, unreasonable, or
unreasonably discriminatory. As a result, competitive forces generally
will constrain an exchange in setting fees for non-core data because it
should recognize that its own profits will suffer if it attempts to act
unreasonably or unfairly. For example, an exchange's attempt to impose
unreasonably or unfairly discriminatory fees on a certain category of
customers would likely be counter-productive for the exchange because,
in a competitive environment, such customers generally would be able
respond by using alternatives to the exchange's data.\180\ The
Commission therefore believes that the existence of significant
competition provides a substantial basis for finding that the terms of
an exchange's fee proposal are equitable, fair, reasonable, and not
unreasonably or unfairly discriminatory.
---------------------------------------------------------------------------
\180\ See, e.g., Richard Posner, Economic Analysis of Law Sec.
9.1 (5th ed. 1998) (discussing the theory of monopolies and
pricing). See also U.S. Dep't of Justice & Fed'l Trade Comm'n,
Horizontal Merger Guidelines Sec. 1.11 (1992), as revised (1997)
(explaining the importance of alternative products in evaluating the
presence of competition and defining markets and market power).
Courts frequently refer to the Department of Justice and Federal
Trade Commission merger guidelines to define product markets and
evaluate market power. See, e.g., FTC v. Whole Foods Market, Inc.,
502 F. Supp. 2d 1 (D.D.C. 2007); FTC v. Arch Coal, Inc., 329 F.
Supp. 2d 109 (D.D.C. 2004).
---------------------------------------------------------------------------
Even when competitive forces are operative, however, the Commission
will continue to review exchange proposals for distributing non-core
data to assess whether there is a substantial countervailing basis for
determining that a proposal is inconsistent with the Exchange Act.\181\
For example, an exchange proposal that seeks to penalize market
participants for trading in markets other than the proposing exchange
would present a substantial countervailing basis for finding
unreasonable and unfair discrimination and likely would prevent the
Commission from approving an exchange proposal.\182\ In the absence of
such a substantial countervailing basis for finding that a proposal
failed to meet the applicable statutory standards, the Commission would
approve the exchange proposal as consistent with the Exchange Act and
rules applicable to the exchange.
---------------------------------------------------------------------------
\181\ See Exchange Act Section 19(b)(2) (``The Commission shall
approve a proposed rule change of a self-regulatory organization if
it finds that such proposed rule change is consistent with the
requirements of this title and the rules and regulations thereunder
applicable to such organization. The Commission shall disapprove a
proposed rule change of a self-regulatory organization if it does
not make such finding.'')
\182\ Cf. Regulation NMS Release, 70 FR at 37540 (in discussion
of market access fees under Rule 610 of Regulation NMS, the
Commission noted that ``any attempt by an SRO to charge differential
fees based on the non-member status of the person obtaining indirect
access to quotations, such as whether it is a competing market
maker, would violate the anti-discrimination standard of Rule
610.'').
---------------------------------------------------------------------------
B. Review of the NYSE Arca Proposal
The terms of an exchange's proposed rule change to distribute
market data for which it is an exclusive processor must, among other
things, provide for an equitable allocation of reasonable fees under
section 6(b)(4), not be designed to permit unfair discrimination under
section 6(b)(5), be fair and reasonable under Rule 603(a)(1), and not
be unreasonably discriminatory under Rule 603(a)(2). Because NYSE Arca
is
[[Page 32763]]
proposing to distribute non-core data, the Commission reviewed the
terms of the Proposal under the market-based approach described above.
The first question is whether NYSE Arca was subject to significant
competitive forces in setting the terms of the Proposal.
1. Competitive Forces Applicable to NYSE Arca
At least two broad types of significant competitive forces applied
to NYSE Arca in setting the terms of its Proposal to distribute the
ArcaBook data: (1) NYSE Arca's compelling need to attract order flow
from market participants; and (2) the availability to market
participants of alternatives to purchasing the ArcaBook data.
a. Competition for Order Flow
Attracting order flow is the core competitive concern of any equity
exchange--it is the ``without which, not'' of an exchange's competitive
success. If an exchange cannot attract orders, it will not be able to
execute transactions. If it cannot execute transactions, it will not
generate transaction revenue. If an exchange cannot attract orders or
execute transactions, it will not have market data to distribute, for a
fee or otherwise, and will not earn market data revenue.\183\
---------------------------------------------------------------------------
\183\ See Exchange Market Data Coalition Letter at 3 (``The end
product of these efforts--the listings, the members, the trading
facilities, the regulation--is market data. Market data is the
totality of the information assets that each Exchange creates by
attracting order flow.'').
---------------------------------------------------------------------------
In the U.S. national market system, buyers and sellers of
securities, and the broker-dealers that act as their order-routing
agents, have a wide range of choices of where to route orders for
execution. They include, of course, any of the nine national securities
exchanges that currently trade equities, but also include a wide
variety of non-exchange trading venues: (1) Electronic communication
networks (``ECNs'') that display their quotes directly in the core data
stream by participating in FINRA's Alternative Display Facility
(``ADF'') or displaying their quotations through an exchange; (2)
alternative trading systems (``ATSs'') that offer a wide variety of
order execution strategies, including block crossing services for
institutions that wish to trade anonymously in large size and midpoint
matching services for the execution of smaller orders; and (3)
securities firms that primarily trade as principal with their customer
order flow.
NYSE Arca must compete with all of these different trading venues
to attract order flow, and the competition is fierce. For example, in
its response to the commenters, NYSE Arca notes that its share of
trading in 2005 was 3.6% in Network A stocks, 23% in Network C stocks,
and 30% in Network B stocks.\184\ More recently during December 2007,
NYSE Arca share volume was 12.5% in Network A stocks, 14.8% in Network
C stocks, and 29.4% in Network B stocks, adding up to 15.4% of total
U.S. market volume.\185\
---------------------------------------------------------------------------
\184\ NYSE Arca Response III at 18 n. 44. The NYSE and NYSE Arca
are wholly-owned subsidiaries of NYSE Group, Inc. One commenter
stated that the NYSE had ``combined Arca's liquidity pool with its
own,'' and that ``the networking effect of the NYSE Group's combined
pool of liquidity'' had resulted in ``greater market power over its
pricing for market data.'' SIFMA IV at 8 (emphasis in original). In
fact, the NYSE and NYSE Arca liquidity pools have not been combined.
The two exchanges operate as separate trading centers with separate
limit order books, and each distributes its depth-of-book order data
separately for separate fees. In analyzing the competitive position
of NYSE Arca for purposes of distributing such data, the Commission
has considered NYSE Arca as a trading center separate from the NYSE.
\185\ Source: ArcaVision (available at http://
www.arcavision.com); see also NYSE Arca Response III at 18 (``NYSE
Arca does not maintain a dominant share of the market in any of the
three networks.''); Lehman Brothers, Inc., Equity Research,
``Exchanges December Volume Analysis'' at 1 (Jan. 3, 2008) (``Lehman
Trading Volume Analysis'') (NYSE Arca's matched market share during
the month of December 2007 was 12.4% in NYSE-listed stocks and 14.8%
in Nasdaq-listed stocks).
---------------------------------------------------------------------------
Given the competitive pressures that currently characterize the
U.S. equity markets, no exchange can afford to take its market share
percentages for granted--they can change significantly over time,
either up or down.\186\ Even the most dominant exchanges are subject to
severe pressure in the current competitive environment. For example,
the NYSE's reported market share of trading in NYSE-listed stocks
declined from 79.1% in January 2005 to 41.1% in December 2007.\187\ In
addition, a recent non-exchange entrant to equity trading--the BATS
ECN--has succeeded in capturing 5.1% of trading in NYSE-listed stocks
and 7.9% of trading in Nasdaq-listed stocks.\188\ Another ECN--Direct
Edge--has a matched market share of 3.0% in NYSE-listed stocks and 6.9%
in Nasdaq-listed stocks.\189\ Moreover, nearly all venues now offer
trading in all U.S.-listed equities, no matter the particular exchange
on which a stock is listed or on which the most trading occurs. As a
result, many trading venues stand ready to provide an immediately
accessible order-routing alternative for broker-dealers and investors
if an exchange attempts to act unreasonably in setting the terms for
its services.
---------------------------------------------------------------------------
\186\ See Exchange Market Data Coalition Letter at 4
(``Exchanges compete not only with one another, but also with broker
dealers that match customer orders within their own systems and also
with a proliferation of alternative trading systems (``ATSs'') and
electronic communications networks (``ECNs'') that the Commission
has also nurtured and authorized to execute trades in any listed
issue. As a result, market share of trading fluctuates among
execution facilities based upon their ability to service the end
customer.'').
\187\ Source: ArcaVision (available at http://
www.arcavision.com).
\188\ Lehman Trading Volume Analysis at 1. The Commission
recently published for comment an application by BATS Exchange,
Inc., to be registered as a national securities exchange. Securities
Exchange Act Release No. 57322 (Feb. 13, 2008), 73 FR 9370 (Feb. 20,
2008).
\189\ Lehman Trading Volume Analysis at 1.
---------------------------------------------------------------------------
Table 1 below provides a useful recent snapshot of the state of
competition in the U.S. equity markets in the month of December
2007:\190\
---------------------------------------------------------------------------
\190\ Source: ArcaVision (available at http://
www.arcavision.com).
Table 1.--Reported Share Volume in U.S-Listed Equities During December
2007 (%)
------------------------------------------------------------------------
Market
Trading venue share
------------------------------------------------------------------------
All Non-Exchange........................................... 30.2
Nasdaq..................................................... 29.1
NYSE....................................................... 22.6
NYSE Arca.................................................. 15.4
American Stock Exchange.................................... 0.8
International Stock Exchange............................... 0.7
National Stock Exchange.................................... 0.6
Chicago Stock Exchange..................................... 0.5
CBOE Stock Exchange........................................ 0.2
Philadelphia Stock Exchange................................ 0.1
------------------------------------------------------------------------
Perhaps the most notable item of information from Table 1 is that
non-exchange trading venues collectively have a larger share of trading
than any single exchange. Much of this volume is attributable to ECNs
such as BATS and Direct Edge, noted above. In addition, the
proliferation of non-exchange pools of liquidity has been a significant
development in the U.S. equity markets.\191\ Broker-dealers often check
the liquidity available in these pools as a first choice prior to
routing orders to an exchange. In sum, no exchange possesses a
monopoly, regulatory or otherwise, in the execution of order flow from
broker-dealers.
---------------------------------------------------------------------------
\191\ See, e.g., NYSE Arca Response III at 17 (``If the
brokerage firm is unable to internalize the trade, typically, it
next takes the order to dark pools, crossing networks, ECNs,
alternative trading systems, or other non-traditional execution
facilities to search for an execution.''); http://
www.advancedtrading.com/directories/darkpool (directory of more than
20 non-exchange pools of liquidity that are classified as
``independent,'' ``broker-dealer-owned,'' and ``consortium-
owned.'').
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The market share percentages in Table 1 strongly indicate that NYSE
Arca must compete vigorously for order flow to maintain its share of
trading volume. As discussed below, this compelling need
[[Page 32764]]
to attract order flow imposes significant pressure on NYSE Arca to act
reasonably in setting its fees for depth-of-book order data,
particularly given that the market participants that must pay such fees
often will be the same market participants from whom NYSE Arca must
attract order flow.\192\ These market participants particularly include
the large broker-dealer firms that control the handling of a large
volume of customer and proprietary order flow. Given the portability of
order flow from one trading venue to another, any exchange that sought
to charge unreasonably high data fees would risk alienating many of the
same customers on whose orders it depends for competitive
survival.\193\
---------------------------------------------------------------------------
\192\ See, e.g., Exchange Market Data Coalition Letter at 4
(``It is in the Exchange's best interest to provide proprietary
information to investors to further their business objectives, and
each Exchange chooses how best to do that.''); Nasdaq Letter at 9
(``Like the market for electronic executions, the related market for
proprietary data is also influenced by the equity investments of
major financial institutions in one or more exchanges.* * * Equity
investors control substantial order flow and transaction reports
that are the essential ingredients of successful proprietary data
products. Equity investors also can enable exchanges to develop
competitive proprietary products.* * *'').
\193\ See NYSE Arca Response III at 16 (``Markets compete with
one another by seeking to maximize the amount of order flow that
they attract. The markets base competition for order flow on such
things as technology, customer service, transaction costs, ease of
access, liquidity and transparency. In recent months, significant
changes in market share, the rush to establish trade-reporting
facilities for the reporting of off-exchange trades, frequent
changes in transaction fees and new market data proposals have
provided evidence of the intensity of the competition for order
flow.'').
---------------------------------------------------------------------------
Some commenters asserted that an exchange's distribution of depth-
of-book order data is not affected by its need to attract order
flow.\194\ Attracting order flow and distributing market data, however,
are in fact two sides of the same coin and cannot be separated.\195\
Moreover, the relation between attracting order flow and distributing
market data operates in both directions. An exchange's ability to
attract order flow determines whether it has market data to distribute,
while the exchange's distribution of market data significantly affects
its ability to attract order flow.\196\
---------------------------------------------------------------------------
\194\ See section III.A.5 above.
\195\ See, e.g., Larry Harris, Trading and Exchanges, Market
Microstructure for Practitioners 99 (2003) (noting that it would be
``very difficult for innovative trading systems to compete for order
flow'' if the data from those trading venues were not distributed).
\196\ See, e.g., NYSE Arca Response III at 13 (in setting level
of fees, one factor was ``projected losses to NYSE Arca's business
model and order flow that might result from marketplace resistance
to Arca Book Fees''); Report of the Advisory Committee on Market
Information: A Blueprint for Responsible Change (September 14,
2001), section VII.B.1 (available at http://www.sec.gov) (``[A]
market's inability to widely disseminate its prices undoubtedly will
adversely impact its ability to attract limit orders and,
ultimately, all order flow. This barrier to intermarket competition,
in turn, could decrease liquidity and innovation in the
marketplace.'').
---------------------------------------------------------------------------
For example, orders can be divided into two broad types--those that
seek to offer liquidity to the market at a particular price (non-
marketable orders) and those that seek an immediate execution by taking
the offered liquidity (marketable orders). The wide distribution of an
exchange's market data, including depth-of-book order data, to many
market participants is an important factor in attracting both types of
orders. Depth-of-book order data consists of non-marketable orders that
a prospective buyer or seller has chosen to display. The primary reason
for a prospective buyer or seller to display its trading interest at a
particular price, and thereby offer a free option to all market
participants at that price, is to attract contra trading interest and a
fast execution. The extent to which a displayed non-marketable order
attracts contra interest will depend greatly on the wide distribution
of the displayed order to many market participants. If only a limited
number of market participants receive an exchange's depth-of-book order
data, it reduces the chance of an execution for those who display non-
marketable orders on that exchange. Limited distribution of displayed
orders thereby reduces the ability of the exchange to attract such
orders. Moreover, by failing to secure wide distribution of its
displayed orders, the exchange will reduce its ability to attract
marketable orders seeking to take the displayed liquidity. In other
words, limited distribution of depth-of-book order data will limit an
exchange's ability to attract both non-marketable and marketable
orders. Consequently, an exchange generally will have strong
competitive reasons to price its depth-of-book order data so that it
will be distributed widely to those most likely to use it to
trade.\197\
---------------------------------------------------------------------------
\197\ See NYSE Arca Response III at 18 (``If too many market
professionals reject Arca Book as too expensive, NYSE Arca would
have to reassess the Arca Book Fees because Arca Book data provides
transparency to NYSE Arca's market, transparency that plays an
important role in the competition for order flow.''). This pressure
on exchanges to distribute their order data widely is heightened for
those exchanges that have converted from member-owned, not-for
profit entities to shareholder-owned, for-profit companies. For-
profit exchanges are more likely to place greater importance on
distributing market information widely than on limiting such
information for the use of their members.
---------------------------------------------------------------------------
A notable example of the close connection between a trading venue's
distribution of order data and its ability to attract order flow was
provided by the Island ECN in 2002. To avoid the application of certain
regulatory requirements, Island ceased displaying its order book to the
public in three very active exchange-traded funds (``ETFs'') in which
it enjoyed a substantial market share. After going ``dark,'' Island's
market share in the three ETFs dropped by 50%.\198\
---------------------------------------------------------------------------
\198\ See Terrence Hendershott and Charles. M. Jones, ``Island
Goes Dark: Transparency, Fragmentation, and Regulation,'' 18 The
Review of Financial Studies (No. 3) 743, 756 (2005); see also Nasdaq
Letter at 7 (``[T]he market for proprietary data products is
currently 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
data products themselves.''). In contrast to the Island example, and
as noted in the Nasdaq Letter at 9, an element of the BATS ECN's
business strategy over the last two years in gaining order flow has
been to provide its order data to customers free of charge. See BATS
Trading, Newsletter (July 2007) (available at http://
www.batstrading.com/newsletters/0707Newsletter.pdf) (``BATS has
chosen not to charge for many of the things for which our
competitors charge. * * * More importantly, our market data is free.
Why would a market charge its participants for the data they send to
that market? Feel free to pose this same question to our
competitors.'').
---------------------------------------------------------------------------
This competitive pressure to attract order flow is likely what led
NYSE Arca, and its predecessor corporation, to distribute its depth-of-
book order data without charge in the past.\199\ It now has made a
business decision to begin charging for that data, apparently believing
that it has a sufficiently attractive data product that the benefit
obtained from increased data revenues will outweigh the potential harm
of reduced order flow if significant numbers of data users choose not
to pay the fee.\200\ Commenters concede that NYSE Arca is entitled to
charge a fee for its depth-of-book order data,\201\ but claim that the
fee chosen by NYSE Arca is unaffected by its need to attract order
flow.\202\ The Commission disagrees and notes that NYSE Arca, in
setting the fee, acknowledged that it needed to balance its desire for
market data revenues with the potential damage that a high fee would do
to its ability to attract order flow.\203\
---------------------------------------------------------------------------
\199\ Cf. NYSE Arca Response III at 4 (``Several years ago,
certain [ECNs] began to make their real-time quotes available for
free in order to gain visibility in the market place.'').
\200\ NYSE Arca Response I at 4 (``[F]ees will enable the
Exchange to further diversify its revenue to compete with its
rivals. The Exchange believes that its business has reached the
point where its customers are willing to pay for the value of the
Exchange's information.'').
\201\ See, e.g., Petition at 9; SIFMA I at 7.
\202\ See notes 66-71 above and accompanying text.
\203\ NYSE Arca Response III at 13 (in setting the level of fees
for ArcaBook data, NYSE Arca considered ``projected losses to NYSE
Arca's business model and order flow that might result from
marketplace resistance to'' the fees).
---------------------------------------------------------------------------
[[Page 32765]]
b. Availability of Alternatives to ArcaBook Data
In addition to the need to attract order flow, the availability of
alternatives to an exchange's depth-of-book order data significantly
affects the terms on which an exchange distributes such data.\204\ The
primary use of depth-of-book order data is to assess the depth of the
market for a stock beyond that which is shown by the best-priced
quotations that are distributed in core data. Institutional investors
that need to trade in large size typically seek to assess market depth
beyond the best prices, in contrast to retail investors who generally
can expect to receive the best price or better when they trade in
smaller sizes.\205\
---------------------------------------------------------------------------
\204\ See NYSE Arca Response III at 13 (in setting fees for
ArcaBook data, NYSE Arca considered ``the fact that Arca Book is
primarily a product for market professionals, who have access to
other sources of market data and who will purchase Arca Book only if
they determine that the perceived benefits outweigh the cost''); see
also the authorities cited in note 170 above. In considering
antitrust issues, courts have recognized the value of competition in
producing lower prices. See, e.g., Leegin Creative Leather Products
v. PSKS, Inc., 127 S. Ct. 2705 (2007); Atlanta Richfield Co. v.
United States Petroleum Co., 495 U.S. 328 (1990); Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986); State Oil Co.
v. Khan, 522 U.S. 3 (1997); Northern Pacific Railway Co. v. U.S.,
356 U.S. 1 (1958).
\205\ The market information needs of retail investor are
discussed at notes 246-259 below and accompanying text.
---------------------------------------------------------------------------
In setting the fees for its depth-of-book order data, an exchange
must consider the extent to which sophisticated traders would choose
one or more alternatives instead of purchasing the exchange's
data.\206\ Of course, the most basic source of information concerning
the depth generally available at an exchange is the complete record of
an exchange's transactions that is provided in the core data feeds. In
this respect, the core data feeds that include an exchange's own
transaction information are a significant alternative to the exchange's
depth-of-book data product.
---------------------------------------------------------------------------
\206\ See NYSE Arca Response III at 17 (``As a result of all of
the choices and discretion that are available to brokers, the
displayed depth-of-book data of one trading center does not provide
a complete picture of the full market for a security. * * * A
brokerage firm has potentially dozens of different information
sources to choose from in determining if, where, and how to
represent an order for execution.'').
---------------------------------------------------------------------------
For more specific information concerning depth, market participants
can choose among the depth-of-book order products offered by the
various exchanges and ECNs.\207\ A market participant is likely to be
more interested in other exchange and ECN products when the exchange
selling its data has a small share of trading volume, because the
depth-of-book order data provided by other exchanges and ECNs will be
proportionally more important in assessing market depth. As a result,
smaller exchanges may well be inclined to offer their data for no
charge or low fees as a means to attract order flow. Even larger
exchanges, however, must consider the lower fees of other exchanges in
setting the fees for the larger exchanges' data. Significant fee
differentials could lead to shifts in order flow that, over time, could
harm a larger exchange's competitive position and the value of its non-
core data.
---------------------------------------------------------------------------
\207\ See Nasdaq Letter at 7-8 (``The large number of SROs,
TRFs, and ECNs that currently produce proprietary data or are
currently capable of producing it provides further pricing
discipline for proprietary data products. As shown on Exhibit A,
each SRO, TRF, ECN and BD is currently permitted to produce
proprietary data products, and many currently do or have announced
plans to do so, including Nasdaq, NYSE, NYSEArca, and BATS.'').
---------------------------------------------------------------------------
Market depth also can be assessed with tools other than depth-of-
book order data. For example, market participants can ``ping'' the
various markets by routing oversized marketable limit orders to access
an exchange's total liquidity available at an order's limit price or
better.\208\ In contrast to depth-of-book order data, pinging orders
have the important advantage of searching out both displayed and
reserve (i.e., nondisplayed) size at all price points within an order's
limit price. Reserve size can represent a substantial portion of the
liquidity available at exchanges.\209\ It often will be available at
prices that are better than or equal to an exchange's best displayed
prices, and none of this liquidity will be discernible from an
exchange's depth-of-book order data. Pinging orders thereby give the
sender an immediate and more complete indication of the total liquidity
available at an exchange at a particular time. Moreover, sophisticated
order routers are capable of maintaining historical records of an
exchange's responses to pinging orders over time to gauge the extent of
total liquidity that generally can be expected at an exchange. These
records are a key element used to program smart order routing systems
that implement the algorithmic trading strategies that have become so
prevalent in recent years.\210\
---------------------------------------------------------------------------
\208\ See Regulation NMS Release, 70 FR at 37514 (discussion of
pinging orders noting that they ``could as aptly be labeled
'liquidity search' orders'').
\209\ See, e.g., NYSE Arca Response III at 17 (noting that
brokers ``may elect to have NYSE Arca hold a portion of the order as
hidden interest that NYSE Arca holds in reserve, which means that
NYSE Arca will not include the undisplayed portion of the order as
part of the Arca Book display''); Michael Scotti, ``The Dark Likes
Nasdaq,'' Traders Magazine (May 1, 2007) (quoting statement of
Nasdaq's executive vice president that 15 to 18 percent of Nasdaq's
executed liquidity is non-displayed).
\210\ See, e.g., http://www.advancedtrading.com/directories/
dark-algorithms (descriptions of product offerings for ``dark
algorithms'' that seek undisplayed liquidity at multiple trading
venues); EdgeTrade, Inc., ``EdgeTrade issues white paper on market
fragmentation and unprecedented liquidity opportunities through
smart order execution'' (September 10, 2007) (available at http:/
www.edgetrade.com) (``EdgeTrade's smart order execution strategy * *
* simultaneously sprays aggregated dark pools and public markets,
and then continuously moves an order in line with shifting liquidity
until best execution is fulfilled.'').
---------------------------------------------------------------------------
Another alternative to depth-of-book order data products offered by
exchanges is the threat of independent distribution of order data by
securities firms and data vendors.\211\ As noted above, one of the
principal market data reforms adopted in 2005 was to authorize the
independent distribution of data by individual firms. To the extent
that one or more securities firms conclude that the cost of exchange
depth-of-book order products is too high and appreciably exceeds the
cost of aggregating and distributing such data, they are entitled to
act independently and distribute their own order data, with or without
a fee. Indeed, a consortium of major securities firms in Europe has
undertaken such a market data project as part of the implementation of
the Markets in Financial Instruments Directive (``MiFID'') adopted by
the European Union.\212\ No securities statue or regulation prevents
U.S. firms from undertaking an analogous project in the U.S. for the
display of depth-of-book order data. This data could encompass orders
that are executed off of the exchanges, as well as orders that are
submitted to exchanges for execution. If major U.S. firms handling
significant order flow participated in the project, the project could
collect and distribute data that covered a large proportion of
liquidity in U.S. equities.
---------------------------------------------------------------------------
\211\ See Nasdaq Letter at 3 (``Proprietary optional data may be
offered by a single broker-dealer, a group of broker-dealers, a
national securities exchange, or a combination of broker-dealers or
exchanges, unlike consolidated data which is only available through
a consortium of SROs.'').
\212\ The project--currently named ``Markit BOAT''--distributes
both quotes and trades and is described at http://www.markit.com/
information/boat/boat-data.html. It currently intends to charge fees
of 120 euros per month per user for its quote and trade data. See
Nasdaq Letter at 9 (noting the potential for firms to export Project
BOAT technology to the United States).
---------------------------------------------------------------------------
The Commission recognizes that the depth-of-book order data for a
particular exchange may offer advantages over the alternatives for
assessing market depth. The relevant issue, however, is whether the
availability of these alternatives imposes significant competitive
restraints on an exchange in setting the
[[Page 32766]]
terms, particularly the fees, for distributing its depth-of-book order
data. For example, Nasdaq has a substantial trading share in Nasdaq-
listed stocks, yet only 19,000 professional users purchase Nasdaq's
depth-of-book data product and 420,000 professional users purchase core
data in Nasdaq-listed stocks.\213\ A reasonable conclusion to draw from
this disparity in the number of professional users of consolidated core
data and Nasdaq's non-core data is that the great majority of
professional users either believe they do not need Nasdaq's depth-of-
book order data or simply do not think it is worth $76 per month to
them (approximately $3.50 per trading day) compared to other sources of
information on market depth in Nasdaq-listed stocks. The fact that 95%
of the professional users of core data choose not to purchase the
depth-of-book order data of a major exchange strongly suggests that no
exchange has monopoly pricing power for its depth-of-book order
data.\214\
---------------------------------------------------------------------------
\213\ Nasdaq Letter at 6.
\214\ See id. (``Empirical sales data for Nasdaq TotalView,
Nasdaq's proprietary depth-of-book data, demonstrate that broker-
dealers do not consider TotalView to be required for compliance with
Regulation NMS or any other regulation. * * * [O]f the 735 broker-
dealer members that trade Nasdaq securities, only 20 or 2.7 percent
spend more than $7,000 per month on TotalView users. Nasdaq
understands that firms with more than 100 TotalView professional
users generally provide TotalView to only a small fraction of their
total user populations.'').
---------------------------------------------------------------------------
In sum, there are a variety of alternative sources of information
that impose significant competitive pressures on an exchange in setting
fees for its depth-of-book order data. The Commission believes that the
availability of these alternatives, as well as NYSE Arca's compelling
need to attract order flow, imposed significant competitive pressure on
NYSE Arca to act equitably, fairly, and reasonably in setting the terms
of the Proposal.
c. Response to Commenters on Competition Issues
Some commenters suggested that exchanges are impervious to
competitive forces in distributing their order data because Exchange
Act rules require broker-dealers to provide their orders to an
exchange, and that exchanges therefore enjoy a regulatory
monopoly.\215\ As discussed above, however, exchanges face fierce
competition in their efforts to attract order flow. For the great
majority of orders, Exchange Act rules do not require that they be
routed to an exchange.\216\ These include all marketable orders and
most non-marketable orders. With respect to certain types of non-
marketable orders, two Exchange Act rules can require broker-dealers to
provide such orders to an exchange in certain circumstances, but only
when the broker-dealer chooses to do business on the exchange. Rule 602
of Regulation NMS \217\ requires certain broker-dealers, once they have
chosen to communicate quotations on an exchange, to provide their best
quotations to the exchange.\218\ Rule 604 of Regulation NMS \219\
requires market makers and specialists to reflect their displayable
customer limit orders in their quotations in certain circumstances, but
provides an exception if the order is delivered for display through an
exchange or FINRA, or to a non-exchange ECN that delivers the order for
display through an exchange or FINRA. Most significantly, while these
rules can require certain orders to be displayed through an exchange or
FINRA, broker-dealers have a great deal of flexibility in deciding
which exchange or FINRA. As discussed above, exchanges compete
vigorously to display the non-marketable orders handled by broker-
dealers. No particular exchange has a regulatory monopoly to display
these orders.\220\
---------------------------------------------------------------------------
\215\ See, e.g., Bloomberg Letter at 4; Financial Services
Roundtable Letter at 1; NetCoalition III at 6. Some commenters
suggested that broker-dealers were required to provide their data to
exchanges for free and then buy that data back from the exchanges.
NSX Letter at 1; SIFMA III at 12. A broker-dealer, however, has no
need to buy back its own data, with which it is already familiar.
Rather, broker-dealers need to see data submitted by other broker-
dealers and market participants. This need is served by the core
function of a securities exchange, which is to provide a central
point for bringing buy and sell orders together, thereby enabling
the resulting market data to be distributed to all market
participants. See, e.g., Section 3(a)(1) of the Exchange Act, 15
U.S.C. 78c(a)(1) (``exchange'' defined as, among other things,
``facilities for bringing together purchasers and sellers of
securities'').
\216\ For example, a broker-dealer commenter asserted that
exchanges enjoy a ``government-protected monopoly'' as exclusive
processors of their market information. Schwab Letter at 6; see also
SIFMA IV at 7 (``Normal market forces cannot be relied upon here
because of the unique structure of the market for data that the
exchanges compile from their captive broker-dealer customers and
then sell back to them.''). As noted in Table 1 above, non-exchange
trading venues now execute more volume in U.S.-listed equities than
any single exchange.
\217\ 17 CFR 242.602 (previously designated as Rule 11Ac1-1).
\218\ Only broker-dealers that choose to participate on an
exchange as ``responsible broker-dealers'' are required to provide
their best bid and best offer to such exchange. Rule 602(b) and Rule
600(b)(65)(i) of Regulation NMS. Broker-dealers that participate
only in the over-the-counter (i.e., non-exchange) market as
responsible broker-dealers are required to provide their quotations
to FINRA, a not-for-profit membership organization of broker-
dealers. Rule 602(b) and Rule 600(b)(65)(ii) of Regulation NMS.
\219\ 17 CFR 242.604 (previously designated as Rule 11Ac1-4).
\220\ One commenter asserted that ``exchanges have government-
granted exclusive access to market data for securities listed in
their respective markets.'' SIFMA I at 12. In fact, a listing
exchange does not have any particular privileges over other
exchanges in attracting quotation and trade data in its listed
stocks. Rather, other exchanges are free to trade such stocks
pursuant to unlisted trading privileges, and the listing exchange
must compete with those exchanges for order flow. If the listing
exchange is unable to attract order flow, it will not have
quotations or trades to distribute.
---------------------------------------------------------------------------
Some commenters asserted that exchanges act as monopolies in
distributing depth-of-book order data because they are the exclusive
processors of such data, as defined in section 3(a)(22)(B) of the
Exchange Act. Many businesses, however, are the exclusive sources of
their own products, but this exclusivity does not mean that a business
has monopoly pricing power when selling its product and is impervious
to competitive pressures. The particular circumstances of the business
and its product must be examined. As discussed above, the U.S.
exchanges are subject to significant competitive forces in setting the
terms for their depth-of-book order products, including the need to
attract order flow and the availability of alternatives to their depth-
of-book order products. Consequently, NYSE Arca does not have monopoly
pricing power for ArcaBook data merely because it meets the statutory
definition of an exclusive processor of the data.\221\
---------------------------------------------------------------------------
\221\ A straightforward example may help illustrate this point.
Table 1 shows that there are several exchanges with a very small
share of trading volume. Such an exchange would meet the statutory
definition of an exclusive processor, but clearly would be unable to
exert monopoly pricing power if it attempted to sell its depth-of-
book order data at an unreasonably high price. Accordingly, the
relevant issue is not whether an exchange falls within the statutory
definition of an exclusive processor, but whether it is subject to
significant competitive forces in setting the terms for distribution
of its depth-of-book data.
---------------------------------------------------------------------------
Commenters cited a decision of the U.K. competition authorities
concerning proposed acquisitions of the London Stock Exchange plc
(``LSE'') for the proposition that an exchange is a monopolist of its
proprietary market information.\222\ Their reliance on this decision is
misplaced for two important reasons. First, unlike the U.S. where the
core data feeds provide an essential source of information for every
exchange's most valuable data--its best quoted prices and last sale
information--the LSE's proprietary data is the sole source of
information for trading on the LSE. As a result, market participants
have few, if any, useful alternatives for LSE proprietary data. In the
U.S., in contrast, the availability of
[[Page 32767]]
an exchange's essential trading information in the core data feeds, as
well as other valuable alternatives, discussed above, for assessing
market depth beyond the best quoted prices, precludes the U.S.
exchanges from exerting monopoly power over the distribution of their
non-core data. Second, there historically has been very little
effective competition among markets for order flow in the U.K. The U.K.
Competition Commission, for example, found that the most important
competitive constraint on the LSE was not the existence of other
trading venues with significant trading volume in LSE-listed stocks,
but rather ``primarily, the threat that [other exchanges, including
foreign exchanges such as the NYSE and Nasdaq] will expand their
services and compete directly with LSE.'' \223\ In contrast, the U.S.
has a national market system for trading equities in which competition
is provided not merely by the threat of other markets attempting to
trade an exchange's listed products, but by the on-the-ground existence
of multiple markets with a significant share of trading in such
products. These competitors also distribute depth-of-book order
products with substantial liquidity in the same stocks included in an
exchange's depth-of-book product. In sum, the competitive forces facing
NYSE Arca in its distribution of ArcaBook data were entirely
inapplicable to the LSE in its distribution of proprietary data in
2005.
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\222\ NetCoalition IV at 9; SIFMA V at 8.
\223\ U.K. Competition Commission, A Report on the Proposed
Acquisition of London Stock Exchange plc by Deutsche Borse AG or
Euronext NV (November 2005), at 57 (emphasis added). The intensity
of competition among markets trading the same products in Europe
could increase substantially in the wake of the implementation of
MiFID in November 2007.
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In addition, the existence of significant competitive forces
applicable to NYSE Arca renders inapposite the citations of commenters
to statements in Exchange Act legislative history and Commission
releases regarding monopoly data distribution. Such statements were
made in the context of the central processors of core data for the
Networks, which in fact have monopoly pricing power for such mandated
data. Central processors of core data therefore are in a very different
economic and legal position than NYSE Arca as exclusive processor for
its depth-of-book order data.\224\
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\224\ One commenter cited two papers for the claim that
exchanges have government-conferred monopolies over the collection
and distribution of trading data. NetCoalition IV at 9-10 (citing
Wilkie Farr & Gallagher, counsel to Bloomberg L.P., ``Discussion
Paper: Competition, Transparency, and Equal Access to Financial
Market Data'' (September 24, 2002) (submitted by Bloomberg L.P. in
consultation with George A. Hay and Erik R. Sirri); Erik R. Sirri,
``What glory price? Institutional form and the changing nature of
equity trading'' (Federal Reserve Bank of Atlanta 2000 Financial
Markets Conference on e-Finance, October 15-17). Dr. Sirri currently
is Director of the Commission's Division of Trading and Markets. The
papers were prepared when he was not a member of the Commission's
staff. As discussed at length above, the commenter's claim that
exchanges have a monopoly over the collection and distribution of
trading data confuses core data, which Commission rules require to
be collected by a central processor pursuant to the joint-industry
Plans, and non-core data, which the individual exchanges must
compete to attract from market participants. Indeed, the major
shifts in order flow among exchanges and other trading venues in the
years since the papers were written in 2000 and 2002 amply
demonstrate that no exchange has a monopoly over the collection of
orders displayed in the exchanges' depth-of-book data feeds. As
noted above (text accompanying note 187), for example, the NYSE's
market share in its listed stocks has declined from 79.1% in January
2005 to 41.1% in December 2007. For these reasons and those
explained in the text, the two papers are outdated. Neither the
NYSE, nor any other exchange, currently has a monopoly over the
collection and distribution of depth-of-book order data in its
listed stocks.
---------------------------------------------------------------------------
For example, commenters cited a passage from the legislative
history of the 1975 amendments to the Exchange Act for the proposition
that any exclusive processor must be considered a monopoly, but this
passage applies only to the central processors of consolidated core
data that Rule 603(b) requires to be consolidated:
Despite the diversity of views with respect to the practical
details of a national market system, all current proposals appear to
assume there will be an exclusive processor or service bureau to
which the exchanges and the NASD will transmit data and which in
turn will make transactions and quotation information available to
vendors of such information. Under the composite tape ``plan''
declared effective by the Commission, SIAC would serve as this
exclusive processor. The Committee believes that if such a central
facility is to be utilized, the importance of the manner of its
regulation cannot be overestimated. * * * The Committee believes
that if economics and sound regulation dictate the establishment of
an exclusive central processor for the composite tape or any other
element of the national market system, provision must be made to
insure that this central processor is not under the control or
domination of any particular market center. Any exclusive processor
is, in effect, a public utility, and thus it must function in a
manner which is absolutely neutral with respect to all market
centers, all market makers, and all private firms. Although the
existence of a monopolistic processing facility would not
necessarily raise antitrust problems, serious antitrust questions
would be posed if access to this facility and its services were not
available on reasonable and nondiscriminatory terms to all in the
trade or its charges were not reasonable.\225\
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\225\ Senate Report at 11-12 (emphasis added).
These Congressional concerns apply to a central processor that has
no competitors in the distribution of data that must be consolidated
from all the markets. They do not apply to the independent distribution
of non-core data by an individual exchange that is subject to
significant competitive forces.
Similarly, commenters cited a passage from the Commission's Market
Information Concept Release for the proposition that an exchange must
submit cost data to justify a proposed fee for the exchange's depth-of-
book order data.\226\ The Release stated that ``the total amount of
market information revenues should remain reasonably related to the
cost of market information.'' \227\ The Market Information Concept
Release, however, was published in 1999, prior to the start of decimal
trading and to the increased usefulness of non-core data distributed
outside the Networks. The Market Information Concept Release in
general, and the cited statement in particular, solely addressed a
central exclusive processor that has no competitors in
[[Page 32768]]
distributing consolidated core data to the public pursuant to the
Plans.\228\
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\226\ See section III.A.2 above. As noted in section III.A.7
above, commenters recommended a variety of market data regulatory
solutions, in addition to a cost-based justification of fees. One
was a regulatory mandate that exchanges place their market data
operations in separate subsidiaries and provide their data to third
parties on the same terms they make the data available to the
subsidiary. Given its determination that NYSE Arca was subject to
significant competitive forces in setting the terms of the Proposal,
the Commission does not believe this regulatory mandate is necessary
or appropriate. It also notes that the recommendation alone would
not address the potential problem of an exchange's unreasonably high
fees under the per device fee structure that is used throughout the
exchange industry. For example, the proposed fees for ArcaBook data
would be levied based on the number of professional and non-
professional subscribers who receive the data on their devices.
Regardless of whether subscribers obtained their data from an
exchange subsidiary or another competing vendor, the exchange would
receive the same total amount of fees based on the total number of
subscribers who chose to receive the data. From the standpoint of
maximizing its revenues from per device fees, the exchange likely
would be indifferent to whether subscribers purchased through its
subsidiary or elsewhere. It therefore would be willing to make the
data available to its subsidiary for the same per device fees that
it made the data available to third parties. Moreover, to the extent
that an exchange would want to benefit a subsidiary that it was
required to create to act as a vendor of market data, that
requirement need not cause the exchange to charge lower fees.
Instead, it could create conflicts of interest under which the
exchange would have incentives to favor the subsidiary over other
vendors in ways that might be difficult to monitor effectively.
Under its proposal, NYSE Arca will make the ArcaBook data available
to vendors on a non-discriminatory basis. For the same reason that
NYSE Arca's proposed fees for the ArcaBook data are not unreasonably
high--the competitiveness of the market for that data--other
potential problems cited by commenters as arising in a non-
competitive environment are not an obstacle to approval of the NYSE
Arca proposal under the relevant Exchange Act provisions and rules.
\227\ 64 FR at 70627.
\228\ See, e.g., 64 FR at 70615 (``These [joint-SRO] plans
govern all aspects of the arrangements for disseminating market
information. * * * The plans also govern two of the most important
rights of ownership of the information--the fees that can be charged
and the distribution of revenues derived from those fees. As a
consequence, no single market can be said to fully 'own' the stream
of consolidated information that is made available to the public.
Although markets and others may assert a proprietary interest in the
information that they contribute to the stream, the practical effect
of comprehensive federal regulation of market information is that
proprietary interests in this information are subordinated to the
Exchange Act's objectives for a national market system.'')
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Moreover, the Commission did not propose, much less adopt, a
``strictly cost-of-service (or `ratemaking') approach to its review of
market information fees in every case,'' noting that ``[s]uch an
inflexible standard, although unavoidable in some contexts, can entail
severe practical difficulties.'' \229\ Rather, the Commission concluded
that ``Congress, consistent with its approach to the national market
system in general, granted the Commission some flexibility in
evaluating the fairness and reasonableness of market information
fees.'' \230\
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\229\ 64 FR at 70619. In the Market Information Concept Release,
the Commission discussed the one context in which it had previously
adopted a strict cost-of-service standard for market data fees--a
denial of access proceeding involving the NASD and Instinet. See
supra, note 53. It emphasized, however, that the scope of its
decision was limited to the ``particular competitive situation
presented in the proceedings.'' 64 FR at 70622-70623. Specifically,
the NASD essentially had sought to charge a retail rate for a
wholesale product that would have severely curtailed the opportunity
for a data vendor like Instinet to compete with the NASD in the
retail market. The practical difficulties of implementing the strict
cost-of-service approach were amply demonstrated by the long and
difficult history of the attempt to determine the NASD's cost of
producing the data. See 64 FR at 70623.
\230\ Id. at 70619. Commenters also pointed to Commission and
staff statements about costs in the context of the entry of an
exchange as a new participant in one of the Plans. NetCoalition IV
at 12-14; SIFMA V at 9-10. Again, competitive forces are not
operative in this context because Rule 603(b) requires an exchange
to join the Plans and disseminate its best quotations and trades
through a central processor in the core data feeds. A cost-based
analysis is necessary in this context, not because it is universally
required by the Exchange Act to determine fair and reasonable fees,
but because the absence of competitive forces impels the use of a
regulatory alternative.
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Some commenters suggested that depth-of-book order data has become
so important since the initiation of decimal trading that broker-
dealers now are effectively required to purchase the exchanges' depth-
of-book data products.\231\ No regulatory requirement, however, compels
broker-dealers to purchase an exchange's depth-of-book order data. As
discussed above, only core data is necessary for broker-dealers to
comply with the consolidated display requirements of Rule 603(c) of
Regulation NMS.\232\ In addition, only core data is necessary to comply
with the trade-through requirements of Rule 611 of Regulation NMS.\233\
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\231\ See section III.A.4 above. Commenters cited a passage from
the Regulation NMS Release for the proposition that exchanges could
exert market power when distributing non-core data. NetCoalition III
at 6; SIFMA V at 11-12. The concern mentioned in the Regulation NMS
Release, however, explicitly applied only to the ``best quotations
and trades'' of an SRO--i.e., an SRO's core data--and not to non-
core data.
\232\ Note 164 above and accompanying text. Rule 603(c) requires
broker-dealers and vendors, in certain trading and order-routing
contexts, to provide a consolidated display of the national best bid
and offer and the most recent last sale report. All of this
information is included in the core data feeds.
\233\ Note 166 above and accompanying text. When it adopted
Regulation NMS, the Commission declined to adopt a proposal that
would have extended trade-through protection to depth-of-book
quotations if the market displaying such quotations voluntarily
disseminated them in the consolidated core quotation stream.
Regulation NMS Release, 70 FR at 37529.
---------------------------------------------------------------------------
Commenters also asserted that an exchange's depth-of-book order
data may be necessary for a broker-dealer to meet its duty of best
execution to its customers.\234\ The Commission believes, however, that
broker-dealers are not required to obtain depth-of-book order data,
including the NYSE Arca data, to meet their duty of best execution. For
example, a broker-dealer can satisfy this duty ``to seek the most
favorable terms reasonably available under the circumstances for a
customer's transaction'' \235\ by, among other things, reviewing
executions obtained from routing orders to a market. Under established
principles of best execution, a broker-dealer is entitled to consider
the cost and difficulty of trading in a particular market, including
the costs and difficulty of assessing the liquidity available in that
market, in determining whether the prices or other benefits offered by
that market are reasonably available.\236\ Although the Commission has
urged broker-dealers to ``evaluate carefully'' the different options
for execution, we have acknowledged that cost considerations are
legitimate constraints on what a broker-dealer must do to obtain best
execution.\237\ In order to ``evaluate carefully'' execution options a
broker-dealer need not purchase all available market data. The
Commission does not view obtaining depth-of-book data as a necessary
prerequisite to broker-dealers' satisfying the duty of best
execution.\238\
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\234\ See note 70 above and accompanying text.
\235\ See Securities Exchange Act Release No. 37619A (Sept. 6,
1996), 61 FR 48290, 48322 (Sept. 12, 1996) (``Order Handling Rules
Release'').
\236\ See Order Handling Rules Release, 61 FR at 48323
(acknowledging that, consistent with best execution, broker-dealers
may take into account cost and feasibility of accessing markets and
their price information); Regulation NMS Release, 70 FR at 37538 n.
341 (noting that the ``cost and difficulty of executing an order in
particular market'' is a relevant factor in making a best execution
determination). NYSE Arca and Nasdaq also stated their view that
depth-of-book order products are not required for best execution
purposes. NYSE Arca Response III at 18; Nasdaq Letter at 5-6.
\237\ Order Execution Obligations, Proposing Release, Securities
Exchange Act Release No. 36310 (Sept. 29, 1995), 60 FR 52792 at
52794 (Oct. 10, 1995) (``While not all markets and trading systems
are equally accessible to large and small broker-dealers, and not
all order handling technologies are equally affordable to all
broker-dealers, when efficient and cost-effective systems are
readily accessible, broker-dealers must evaluate carefully whether
they can be used in fulfilling their duty of best execution.'').
\238\ Some broker-dealers may conclude that, as a business
matter to attract customers and generate commissions, they should
obtain depth-of-book order data from one or more exchanges to inform
their order-routing and pricing decisions. As with any other
business decision, if the costs of obtaining the market data
outweigh the benefits, broker-dealers will not buy it. This will put
pressure on the exchange selling the data to lower the price that it
charges. If, however, such firms believed that an exchange's depth-
of-book order product is overpriced for certain business purposes,
they could limit their use of the product to other contexts, such as
``black-box'' order routing systems and a block trading desk, where
the depth-of-book data feed is most directly used to assess market
depth. The firm would not display the data widely throughout the
firm as a means to minimize the fees that must be paid for the data.
This limited use of the data would drastically reduce the revenues
that an exchange might have sought to obtain by charging a high fee
and therefore be self-defeating for the exchange. In sum, exchanges
will be subject to competitive pressures to price their depth-of-
book order data in a way that will promote wider distribution and
greater total revenues.
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2. Terms of the Proposal
As discussed in the preceding section, NYSE Arca was subject to
significant competitive forces in setting the terms of the Proposal.
The Commission therefore will approve the Proposal in the absence of a
substantial countervailing basis to find that its terms nevertheless
fail to meet an applicable requirement of the Exchange Act or the rules
thereunder.\239\ An analysis of the Proposal and of the views of
commenters does not provide such a basis.
---------------------------------------------------------------------------
\239\ The Exchange Act requirements are addressed in the text
accompanying notes 142-172 above.
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First, the proposed fees for ArcaBook data will apply equally to
all professional subscribers and equally to all non-professional
subscribers (subject only to the maximum monthly payment for device
fees paid by any broker-dealer for non-professional subscribers). The
fees therefore do not unreasonably discriminate among types of
subscribers, such as by favoring participants in the NYSE Arca market
or penalizing participants in other markets.
[[Page 32769]]
Second, the proposed fees for the ArcaBook data are substantially
less than those charged by other exchanges for depth-of-book order
data. For example, the NYSE charges a $60 per month terminal fee for
depth-of-book order data in NYSE-listed stocks. Similarly, Nasdaq
charges a $76 per month device fee for professional subscribers to
depth-of-book order data on all NMS stocks. By comparison, the NYSE
Arca fee is 75% less than the NYSE fee for data in NYSE-listed stocks,
and more than 60% less than the Nasdaq fee for data in all NMS stocks.
It is reasonable to conclude that competitive pressures led NYSE Arca
to set a substantially lower fee for its depth-of-book order data than
the fees charged by other markets. If, in contrast, NYSE Arca were a
monopoly data provider impervious to competitive pressures, there would
be little reason for it to set significantly lower fees than other
exchanges.\240\
---------------------------------------------------------------------------
\240\ See Table 1, note 179 above and accompanying text.
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Third, NYSE Arca projects that the total revenues generated by the
fee for ArcaBook data initially will amount to less than $8 million per
year,\241\ and that its market data revenue as a percentage of total
revenue is likely to remain close to the 2005 figure, which was
approximately 17%.\242\ Viewed in the context of NYSE Arca's overall
funding, therefore, the fees for ArcaBook data are projected to
represent a small portion of NYSE Arca's market data revenues and an
even smaller portion of NYSE Arca's total revenues (using NYSE Arca's
$8 million estimate, the fees will amount to less than 12.9% of NYSE
Arca's 2005 market data revenues and less than 1.6% of NYSE Arca's 2005
total revenues). In addition, NYSE Arca generated approximately $415.4
million in revenue from equity securities transaction fees in
2005.\243\ These transaction fees are paid by those who voluntarily
choose to submit orders to NYSE Arca for execution. The fees therefore
are subject to intense competitive pressure because of NYSE Arca's need
to attract order flow. In comparison, the $8 million in projected
annual fees for ArcaBook data do not appear to be inequitable, unfair,
or unreasonable.
---------------------------------------------------------------------------
\241\ NYSE Arca Response III at 12 n. 28. The reasonableness of
this projection is supported by referring to the number of data
users that have subscribed to Nasdaq's proprietary depth-of-book
product for Nasdaq-listed stocks. Nasdaq reports 19,000 professional
users and 12,000 non-professional users as of April 30, 2007. Nasdaq
Letter at 6. If the same number of users purchased ArcaBook data for
all stocks, the total revenue for NYSE Arca would be $8,280,000 per
year. As noted in Table 1, NYSE Arca has a smaller market share than
Nasdaq and therefore may not attract as many subscribers to its
depth-of-book product. On the other hand, NYSE Arca is charging
substantially less for its data and may attract more users. In the
final analysis, market forces will determine the actual revenues
generated by NYSE Arca's pricing decision.
\242\ NYSE Arca Response III at 12 nn. 28-29. One commenter
noted that the market data revenues of the NYSE Group, which
includes both NYSE and NYSE Arca, had grown by 33.7% from the third
quarter of 2005 to the third quarter of 2006. See section IV.A.6
above. Although correct, this figure does not demonstrate any growth
in market data revenues because the 2005 figure only included the
market data revenues of NYSE, while the 2006 figure included the
market data revenues of both the NYSE and NYSE Arca. Using an
``apples-to-apples'' comparison that includes both exchanges for
both time periods, their combined market data revenues declined
slightly from 2005 to 2006. NYSE Arca Response III at 20.
\243\ NYSE Group, Inc., Form 10-K for period ending December 31,
2005 (filed March 31, 2006), at 19.
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One commenter, although agreeing that exchange transaction fees are
subject to intense competitive pressure, asserted that such
``intermarket competition does not constrain the exchanges'' pricing of
market data, but it actually creates an incentive for the exchanges to
increase their prices for data.'' \244\ If, however, NYSE Arca were
truly able to exercise monopoly power in pricing its non-core data, it
likely would not choose a fee that generates only a small fraction of
the transaction fees that admittedly are subject to fierce competitive
forces. As discussed above, NYSE Arca was indeed subject to significant
competitive forces in pricing the ArcaBook data.
---------------------------------------------------------------------------
\244\ SIFMA V at 14-15.
---------------------------------------------------------------------------
Several commenters expressed concern that the Proposal would
adversely affect market transparency.\245\ They noted that NYSE Arca
previously had distributed the ArcaBook data without charge and
asserted that the new fees could substantially limit the availability
of the data. The Petition, for example, stated that ``the cumulative
impact of [the Proposal] and other pending and recently approved market
data proposals threaten to place critical data, which should be
available to the general public, altogether beyond the reach of the
average retail investor.'' \246\
---------------------------------------------------------------------------
\245\ Financial Services Roundtable Letter at 3; Schwab Letter
at 5.
\246\ Petition at 3.
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Assuring the wide availability of quotation and trade information
is a primary objective of the national market system.\247\ With respect
to non-professional users, and particularly individual retail
investors, the Commission long has sought to assure that retail
investors have ready access to the data they need to participate
effectively in the equity markets. Indeed, the Commission's 1999 review
of market information was prompted by a concern that retail investors
should have ready access to affordable market data through their on-
line accounts with broker-dealers. The Concept Release on Market
Information noted that, in the course of the 1999 review, the Networks
had reduced by up to 80% the fees for non-professional subscribers to
obtain core data with the best-priced quotations and most recent last
sale prices.\248\ It also emphasized the importance of such affordable
data for retail investors:
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\247\ Section 11A(a)(1)(C)(iii) of the Exchange Act.
\248\ Market Information Concept Release, 64 FR at 70614. Since
1999, the Network data fees applicable to retail investors have
either remained the same or been further reduced. Currently,
nonprofessional investors can obtain unlimited amounts of core data
for no more than $1 per month each for Network A, B, and C stocks.
See SIFMA III, Appendix A.
One of the most important functions that the Commission can
perform for retail investors is to ensure that they have access to
the information they need to protect and further their own
interests. Communications technology now has progressed to the point
that broad access to real-time market information should be an
affordable option for most retail investors, as it long has been for
professional investors. This information could greatly expand the
ability of retail investors to monitor and control their own
securities transactions, including the quality of execution of their
transactions by broker-dealers. The Commission intends to assure
that market information fees applicable to retail investors do not
restrict their access to market information, in terms of both number
of subscribers and quality of service. In addition, such fees must
not be unreasonably discriminatory when compared with the fees
charged to professional users of market information.\249\
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\249\ Market Information Concept Release, 64 FR at 70614.
The Commission appreciates the efforts of the Petitioner and other
commenters in advocating the particular needs of users of advertiser-
supported Internet Web sites, a great many of whom are likely to be
individual retail investors. The Commission believes that the exchanges
and other entities that distribute securities market information will
find business-justified ways to attend to the needs of individual
investors and, as markets evolve, develop innovative products that meet
the needs of these users and are affordable in light of the users'
economic circumstances. In this respect, it recognizes the exchange
proposals to distribute new types of data products specifically
designed to meet the needs of Internet users for reference data on
equity prices.\250\
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\250\ See NYSE Internet Proposal and Nasdaq Reference Data
Proposal, note 18 above.
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[[Page 32770]]
The Commission does not believe, however, that the Proposal will
significantly detract from transparency in the equity markets. Of
course, any increase in fees can lower the marginal demand for a
product. To assess an effect on transparency, however, the relevant
question is whether the fees for a particular product deter a
significant number of market participants from obtaining the market
data they need because the fees are not affordable given their economic
circumstances.\251\ Market transparency does not require that the same
products be made available to all users on the same terms and
conditions. Such a one-size-fits-all approach would ignore the
important differences among data users in terms of both their needs and
their economic circumstances. Most importantly, such an approach would
fail to address the particular needs of individual retail investors.
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\251\ See Market Information Concept Release, 64 FR at 70630
(``[T]he relevant Exchange Act question is whether the fees for
particular classes of subscribers, given their economic
circumstances and their need for and use of real-time information,
are at a sufficiently high level that a significant number of users
are deterred from obtaining the information or that the quality of
their information services is reduced.'')
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With respect to professional data users (i.e., those who earn their
living through the markets), the Commission believes that competitive
forces, combined with the heightened ability of professional users to
advance their own interests, will produce an appropriate level of
availability of non-core data. With respect to non-professional users,
as well, the Commission believes that the ArcaBook fees will not
materially affect their access to the information they need to
participate effectively in the equity markets.\252\ The ArcaBook data
likely is both too narrow and too broad to meet the needs of most
retail investors. It likely is too narrow for most retail investors
when they make their trading and order-routing decisions. The best
prices quoted for a stock in the ArcaBook data reflect only the NYSE
Arca market. Other markets may be offering substantially better prices.
It is for this reason that Rule 603(c) of Regulation NMS requires
broker-dealers and vendors to provide their customers with a
consolidated display of core data in the context of trading and order-
routing decisions. A consolidated display includes the national best
bid and offer for a stock, as well as the most recent last sale for
such stock reported at any market. This consolidated display thereby
gives retail investors a valuable tool for ascertaining the best prices
for a stock.
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\252\ See NYSE Arca Response III at 18 (``The overwhelming
majority of retail investors are unaffected by the inter-market
competition over proprietary depth-of-book products. For them, the
consolidated top-of-book data that the markets make available under
the NMS Plans provides adequate information on which they can base
trading decisions.'').
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Two commenters stated that the average retail order is 1000 or more
shares and is larger than the size typically reflected in the
consolidated quotation in core data.\253\ This issue was raised,
however, when the Commission was formulating its approach to non-core
data in 2005. It noted that the average execution price for small
market orders (the order type typically used by retail investors) is
very close to, if not better than, the NBBO.\254\ In addition, a study
by the Commission's Office of Economic Analysis of quoting in 2003 in
3,429 Nasdaq stocks found that the average displayed depth of
quotations at the NBBO was 1,833 shares--greater than the size of the
average order cited by commenters.\255\
---------------------------------------------------------------------------
\253\ Schwab Letter at 1-2; SIFMA IV at 14.
\254\ Regulation NMS Release, 70 FR at 37567. Most retail
investors receive order executions at prices equal to or better than
the NBBO that is disseminated in core data. See also Dissent of
Commissioners Cynthia A. Glassman and Paul S. Atkins to the Adoption
of Regulation NMS, 70 FR 37636 (estimating that between 98% and 99%
of all trades did not trade through better-priced bids or offers).
\255\ 70 FR at 37511 n. 108.
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Some commenters suggested that the core data provided by the
Networks disadvantaged retail investors because it was not distributed
as fast as the depth-of-book order data obtained directly from an
exchange.\256\ The central processors of core data must first obtain
data from each SRO and then consolidate it into a single data feed for
distribution to the public. While exchanges are prohibited from
providing their data to direct recipients any sooner than they provide
it to the Network central processor,\257\ the additional step of
transmitting data to the central processor inevitably means that a
direct data feed can be distributed faster to users than the Network
data feed. The size of this time latency, however, is extremely small
in absolute terms. For example, a technology upgrade by the central
processor for Network A and Network B has reduced the latency of the
core data feed to approximately 3/100ths of a second.\258\ The
Commission does not believe that such a small latency under current
market conditions disadvantages retail investors in their use of core
data, but rather would be most likely relevant only to the most
sophisticated and active professional traders with state-of-the-art
systems.
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\256\ Schwab Letter at 4; SIFMA III at 6 n. 11.
\257\ Regulation NMS Release, 70 FR at 37567.
\258\ NYSE Arca Response III at 21. The upgrade was completed in
April 2007. See Securities Industry Automation Corporation, Notice
to CTA Recipients, ``Reminder Notice--CQS Unix Activation--New
Source IP Addresses'' (April 27, 2007) (available at http://
www.nysedata.com).
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Moreover, outside of trading contexts, the ArcaBook data will be
far broader than individual investors typically need. The ArcaBook data
encompasses all quotations for a stock at many prices that are well
away from the current best prices. For retail investors that are not
trading but simply need a useful reference price to track the value of
their portfolio and monitor the market, the enormous volume of data
regarding trading interest outside the best prices is not needed.\259\
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\259\ See NYSE Arca Response II at 2 (``during the first ten
months of 2005 the number of messages processed by the Exchange
greatly increased from approximately 9,800 MPS [messages per second]
to 14,100 MPS'').
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Some commenters asserted that the Proposal failed to satisfy the
requirements of Exchange Act Rule 19b-4 and Form 19b-4.\260\ Form 19b-4
requires, among other things, that SROs provide a statement of the
purpose of the proposed rule change and its basis under the Exchange
Act. The statement must be sufficiently detailed and specific to
support a finding that the proposed rule change meets the requirements
of the Exchange Act, including that the proposed rule change does not
unduly burden competition or efficiency, does not conflict with the
securities laws, and is not inconsistent with the public interest or
the protection of investors. The NYSE Arca Proposal met these
requirements. Among other things, the Proposal noted that the proposed
fees compared favorably to the fees that other competing markets charge
for similar products, including those of other exchanges that
previously had been approved by the Commission.\261\
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\260\ See section III.A.3 above.
\261\ See Proposal, 71 FR at 33499.
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One commenter argued that NYSE Arca should have addressed a number
of specific points that it raised in opposition to the Proposal, such
as including a statement of costs to produce the ArcaBook data.\262\
The purpose of Form 19b-4, however, is to elicit information necessary
for the public to provide meaningful comment on the proposed rule
change and for the Commission to determine whether the proposed rule
change is consistent with the requirements of the Exchange Act and the
rules thereunder.\263\ The
[[Page 32771]]
Proposal met these objectives. Although Form 19b-4 requires that a
proposed rule change be accurate, consistent, and complete, including
the information necessary for the Commission's review, the Form does
not require SROs to anticipate and respond in advance to each of the
points that commenters may raise in opposition to a proposed rule
change. With this Order, the Commission has determined that the points
raised by the commenter do not provide a basis to decline to approve
the Proposal.
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\262\ SIFMA III at 11-12.
\263\ Section B of the General Instructions for Form 19b-4.
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Finally, commenters raised concerns regarding the contract terms
that will govern the distribution of ArcaBook data.\264\ In particular,
one notes that NYSE Arca has not filed its vendor distribution
agreement with the Commission for public notice and comment and
Commission approval.\265\
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\264\ See section III.A.7 above.
\265\ SIFMA I at 7. In this regard, the commenter states that,
procedurally, the Exchange ``is amending and adding to the CTA
vendor agreement without first submitting its contractual changes
through the CTA's processes, which are subject to industry input
through the new Advisory Committee mandated by Regulation NMS.''
SIFMA I at 8.
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NYSE Arca has stated, however, that it plans to use the vendor and
subscriber agreements used by CTA and CQ Plan Participants (the ``CTA/
CQ Vendor and Subscriber Agreements'') to govern the distribution of
NYSE Arca Data. According to the Exchange, the CTA/CQ Vendor and
Subscriber Agreements ``are drafted as generic one-size-fits-all
agreements and explicitly apply to the receipt and use of certain
market data that individual exchanges make available in the same way
that they apply to data made available under the CTA and CQ Plans,''
and the contracts need not be amended to cause them to govern the
receipt and use of the Exchange's data.\266\ The Exchange maintains
that because ``the terms and conditions of the CTA/CQ contracts do not
change in any way with the addition of the Exchange's market data * * *
there are no changes for the industry or Commission to review.'' \267\
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\266\ NYSE Arca Response I at 3.
\267\ NYSE Arca Response I at 3 (emphasis in original).
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The Commission believes that the Exchange may use the CTA/CQ Vendor
and Subscriber Agreements to govern the distribution of NYSE Arca
Data.\268\ It notes that the NYSE used the CTA Vendor Agreement to
govern the distribution of its OpenBook and Liquidity Quote market data
products.\269\ Moreover, the Exchange represents that, following
consultations with vendors and end-users, and in response to client
demand:
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\268\ The Commission is not approving the CTA/CQ Vendor and
Subscriber Agreements, which the CTA and CQ Plan Participants filed
with the Commission as amendments to the CTA and CQ Plans that were
effective on filing with the Commission pursuant to Rule
608(b)(3)(iii) of Regulation NMS (previously designated as Exchange
Act Rule 11Aa3-2(c)(3)(iii)). See, e.g., Securities Exchange Act
Release No. 28407 (September 6, 1990), 55 FR 37276 (September 10,
1990) (File No. 4-2811) (notice of filing and immediate
effectiveness of amendments to the CTA Plan and the CQ Plan). Rule
608(b)(3)(iii) of Regulation NMS (previously designated as Exchange
Act Rule 11Aa3-2(c)(3)(iii)) allows a proposed amendment to a
national market system plan to be put into effect upon filing with
the Commission if the plan sponsors designate the proposed amendment
as involving solely technical or ministerial matters.
\269\ Securities Exchange Act Release Nos. 53585 (March 31,
2006), 71 FR 17934 (April 7, 2006) (order approving File Nos. SR-
NYSE-2004-43 and NYSE-2005-32) (relating to OpenBook); and 51438
(March 28, 2005), 70 FR 17137 (April 4, 2005) (order approving File
No. SR-NYSE-2004-32) (relating to Liquidity Quote). For both the
OpenBook and Liquidity Quote products, the NYSE attached to the CTA
Vendor Agreement an Exhibit C containing additional terms governing
the distribution of those products, which the Commission
specifically approved. NYSE Arca is not including additional
contract terms in the Proposal.
[The Exchange] chose to fold itself into an existing contract
and administration system rather than to burden clients with another
set of market data agreements and another market data reporting
system, both of which would require clients to commit additional
legal and technical resources to support the Exchange's data
products.\270\
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\270\ NYSE Arca Response I at 4.
In addition, the Exchange has represented that it is ``not imposing
restrictions on the use or display of its data beyond those set forth''
in the existing CTA/CQ Vendor and Subscriber Agreements.\271\ The
Commission therefore does not believe that the Exchange is amending or
adding to such agreements.
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\271\ NYSE Arca Response I at 3.
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A commenter also stated that the Exchange has not recognized the
rights of a broker or dealer, established in Regulation NMS, to
distribute its order information, subject to the condition that it does
so on terms that are fair and reasonable and not unreasonably
discriminatory.\272\ In response, the Exchange states that the CTA/CQ
Vendor and Subscriber Agreements do not prohibit a broker-dealer member
of an SRO participant in a Plan from making available to the public
information relating to the orders and transaction reports that it
provides to the SRO participant.\273\ Accordingly, the Commission
believes that the Exchange has acknowledged the rights of a broker or
dealer to distribute its market information, subject to the
requirements of Rule 603(a) of Regulation NMS.
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\272\ SIFMA I at 7.
\273\ NYSE Arca Response I at 4.
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A commenter also stated that the Exchange has failed to consider
the administrative burdens that the proposal would impose, including
the need for broker-dealers to develop system controls to track
ArcaBook access and usage.\274\ In response, the Exchange represents
that it has communicated with its customers to ensure system readiness
and is using ``a long-standing, well-known, broadly-used administrative
system'' to minimize the amount of development effort required to meet
the administrative requirements associated with the proposal.\275\
Accordingly, the Commission believes that NYSE Arca has reasonably
addressed the administrative requirements associated with the Proposal.
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\274\ SIFMA I at 8.
\275\ NYSE Arca Response I at 4-5.
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VI. Conclusion
It is therefore ordered that the earlier action taken by delegated
authority, Securities Exchange Act Release No. 54597 (October 12, 2006)
71 FR 62029 (October 20, 2006), is set aside and, pursuant to section
19(b)(2) of the Exchange Act, the Proposal (SR-NYSEArca-2006-21) is
approved.
[FR Doc. E8-12928 Filed 6-9-08; 8:45 am]
BILLING CODE 8010-01-P