
[Federal Register: August 17, 2009 (Volume 74, Number 157)]
[Notices]               
[Page 41466-41468]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17au09-118]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-60459; File No. SR-Phlx-2009-54]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Order 
Approving a Proposed Rule Change To Establish Fees for the Top of Phlx 
Options Direct Data Feed Product

August 7, 2009.

I. Introduction

    On June 30, 2009, NASDAQ OMX PHLX, Inc. (``Phlx'' or ``Exchange'') 
filed with the Securities and Exchange Commission (``Commission''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ a proposed rule change to 
amend its fee schedule by establishing subscriber fees for a direct 
data product related to the trading of standardized options on the 
Exchange's enhanced electronic trading platform for options, Phlx XL 
II.\3\ Notice of the proposed rule change was published for comment in 
the Federal Register on July 8, 2009.\4\ The Commission received no 
comments on the proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 59995 (May 28, 
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32).
    \4\ See Securities Exchange Act Release No. 60202 (June 30, 
2009), 74 FR 32675 (``Notice'').
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II. Description of the Proposal

    In conjunction with the launch and rollout of its Phlx XL II 
system, the Exchange is developing Top of Phlx Options (``TOPO''), a 
direct data feed product that includes the Exchange's best bid and 
offer price, with aggregate size, based on displayable order and 
quoting interest on the Phlx XL II system. The data contained in the 
TOPO data feed is identical to the data sent to the processor for the 
Options Price Regulatory Authority (``OPRA''), and the TOPO and OPRA 
data will leave the Phlx XL II System at the same time.
    In coordination with the projected completion of the rollout of the 
Phlx XL II system, the Exchange proposes to charge monthly fees to 
distributors, beginning August 1, 2009, for use of TOPO.\5\ The monthly 
``Distributor Fee'' charged will depend on whether the distributor is 
an ``Internal Distributor'' or an ``External Distributor.'' \6\ 
Specifically, the Exchange proposed to charge Internal Distributors a 
monthly fee of $2,000 per organization and to charge External 
Distributors a monthly fee of $2,500 per organization.
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    \5\ A ``distributor receives a feed or data file of data 
directly from NASDAQ OMX PHLX or indirectly through another entity 
and then distributes it either internally or externally. All 
distributors will be required to execute a NASDAQ OMX PHLX 
distributor agreement.
    \6\ An Internal Distributor is an organization that subscribes 
to the Exchange for the use of TOPO, and is permitted by agreement 
with the Exchange to provide TOPO data to internal users (i.e., 
users within their own organization). An External Distributor is an 
organization that subscribes to the Exchange for the use of TOPO, 
and is permitted by agreement with the Exchange to provide TOPO data 
to both internal users and to external users (i.e., users outside of 
their own organization).
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III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange.\7\ 
In particular, the Commission finds that the proposed rule change is 
consistent with the requirements of Section 6(b)(4) of the Act,\8\ 
which requires that the rules of a national securities exchange provide 
for the equitable allocation of reasonable dues, fees and other charges 
among members and issuers and other persons using its facilities, and 
Section 6(b)(5) of

[[Page 41467]]

the Act,\9\ which requires, among other things, that the rules of an 
exchange be designed to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, 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. The Commission also finds that 
the proposed rule change is consistent with Section 6(b)(8) of the Act 
\10\ in that it does not impose any burden on competition not necessary 
or appropriate in furtherance of the purposes of the Act.
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    \7\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(4).
    \9\ 15 U.S.C. 78f(b)(5).
    \10\ 15 U.S.C. 78f(b)(8).
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    The Commission has reviewed the proposal using the approach set 
forth in the approval order for SR-NYSEArca-2006-21 for non-core market 
data fees.\11\ In the NYSE Arca Order, the Commission stated that 
``when possible, reliance on competitive forces is the most appropriate 
and effective means to assess whether the terms for the distribution of 
non-core data are equitable, fair and reasonable, and not unreasonably 
discriminatory.'' \12\ It noted 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.'' \13\ If an exchange ``was 
subject to significant competitive forces in setting the terms of a 
proposal,'' the Commission will approve a 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.'' \14\
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    \11\ See Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770 (December 9, 2008) (SR-NYSEArca-2006-21) (``NYSE 
Arca Order'').
    \12\ Id. at 74771.
    \13\ Id. at 74782.
    \14\ Id. at 74781.
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    As noted in the NYSE Arca Order, the standards in Section 6 of the 
Act do not differentiate between types of data and therefore apply to 
exchange proposals to distribute both core data and non-core data.\15\ 
All U.S. options exchanges are required pursuant to the Plan for 
Reporting of Consolidated Options Last Sale Reports and Quotation 
Information (``OPRA Plan'') to provide ``core data''--the best-priced 
quotations and comprehensive last sale reports--to OPRA, which data is 
then distributed to the public pursuant to the OPRA Plan.\16\ In 
contrast, individual exchanges and other market participants distribute 
non-core data voluntarily.\17\ The mandatory nature of the core data 
disclosure regime leaves little room for competitive forces to 
determine products and fees.\18\ Non-core data products and their fees 
are, by contrast, much more sensitive to competitive forces. The 
Commission therefore is able to rely on competitive forces in its 
determination of whether an exchange's proposal to distribute non-core 
data meets the standards of Section 6.\19\
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    \15\ Id. at 74779.
    \16\ See OPRA Plan, Sections V(a)-(c).
    \17\ See NYSE Arca Order, supra, note 11, at 74779.
    \18\ Id.
    \19\ Id.
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    Because Phlx's instant proposal relates to the distribution of non-
core data, the Commission will apply the market-based approach set 
forth in the NYSE Arca Order. Pursuant to this approach, the first step 
is to determine whether Phlx was subject to significant competitive 
forces in setting the terms of its non-core market data proposal, 
including the level of any fees. As in the NYSE Arca Order, in 
determining whether Phlx was subject to significant competitive forces 
in setting the terms of its proposal, the Commission has analyzed 
Phlx's compelling need to attract order flow from market participants, 
and the availability to market participants of alternatives to 
purchasing Phlx's non-core market data.
    The Commission believes that the options industry currently is 
subject to significant competitive forces. It is generally accepted 
that the start of wide-spread multiple listing of options across 
exchanges in August 1999 greatly enhanced competition among the 
exchanges.\20\ The launch of three options exchanges since that time, 
numerous market structure innovations, and the start of the options 
penny pilot \21\ have all further intensified intermarket competition 
for order flow.\22\
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    \20\ See generally Concept Release: Competitive Developments in 
the Options Markets, Securities Exchange Act Release No. 49175 
(February 3, 2004), 69 FR 6124 (February 9, 2004); see also 
Battalio, Robert, Hatch, Brian, and Jennings, Robert, Toward a 
National Market System for U.S. Exchange-listed Equity Options, The 
Journal of Finance 59 (933-961); De Fontnouvelle, Patrick, Fishe, 
Raymond P., and Harris, Jeffrey H., The Behavior of Bid-Ask Spreads 
and Volume in Options Markets During the Competition for Listings in 
1999, The Journal of Finance 58 (2437-2463); and Mayhew, Stewart, 
Competition, Market Structure, and Bid-Ask Spreads in Stock Option 
Markets, The Journal of Finance 57 (931-958).
    \21\ See, e.g., Securities Exchange Act Release Nos. 55162 
(January 24, 2007), 72 FR 4738 (February 1, 2007) (SR-Amex-2006-
106); 55073 (January 9, 2007), 72 FR 4741 (February 1, 2007) (SR-
BSE-2006-48); 55154 (January 23, 2007), 72 FR 4743 (February 1, 
2007) (SR-CBOE-2006-92); 55161 (January 24, 2007), 72 FR 4754 
(February 1, 2007) (SR-Phlx-2006-62); 55156 (January 23, 2007), 72 
FR 4759 (February 1, 2007) (SR-NYSEArca-2006-73); and 55153 (January 
23, 2007), 72 FR 4553 (January 31, 2007) (SR-Phlx-2006-74).
    \22\ See Securities Exchange Act Release No. 59949 (May 20, 
2009), 74 FR 25593 (May 28, 2009) (SR-ISE-2007-97) (order approving 
a proposed rule change by ISE to establish fees for a depth of 
market data product).
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    Phlx currently competes with six options exchanges for order 
flow.\23\ Attracting order flow is an essential part of Phlx's 
competitive success.\24\ If Phlx cannot attract order flow to its 
market, it will not be able to execute transactions. If Phlx cannot 
execute transactions on its market, it will not generate transaction 
revenue. If Phlx cannot attract orders or execute transactions on its 
market, it will not have market data to distribute, for a fee or 
otherwise, and will not earn market data revenue and thus not be 
competitive with other exchanges that have this ability. In its filing, 
Phlx provided market share data for the seven options exchanges.\25\
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    \23\ In its filing, Phlx states that ``[a]s an illustration of 
the intensity of the competition for options order flow among the 
seven U.S. options exchanges, the ISE and * * * CBOE each enjoy 
close to thirty percent market share of volume, followed by Phlx at 
close to twenty percent market share, followed by four other 
exchanges with meaningful market share.'' See Notice, supra, note 4, 
at 32676.
    \24\ Phlx states in its filing that it ``has a compelling need 
to attract order flow from market participants * * * in order to 
maintain its share of trading volume.'' See Notice, supra, note 4, 
at 32676.
    \25\ See Notice, supra, note 4, at 32676.
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    These market share percentages strongly indicate that Phlx must 
compete vigorously for order flow to maintain its share of trading 
volume. This compelling need to attract order flow imposes significant 
pressure on Phlx to act reasonably in setting its fees for Phlx market 
data, particularly given that the market participants that will pay 
such fees often will be the same market participants from whom Phlx 
must attract order flow. These market participants include broker-
dealers that control the handling of a large volume of customer and 
proprietary order flow. Given the portability of order flow from one 
exchange 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.\26\
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    \26\ Id.
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    Phlx currently trades options on seven proprietary index products 
that are not traded on any other exchange. Phlx represents that these 
seven options

[[Page 41468]]

currently represent less than 0.04% of Phlx's total contract 
volume.\27\ The Commission believes that, given the small percentage of 
Phlx's total contract volume represented by these seven products, the 
inclusion of data on these products in Phlx's TOPO product will not 
confer market power on Phlx to compel market participants to purchase 
the entire Phlx data feed. The Commission therefore believes that the 
inclusion of top-of-book data for these products in Phlx's TOPO product 
does not undermine the finding that Phlx was subject to significant 
competitive forces in setting the terms of its proposal.
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    \27\ Id.
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    In addition to the need to attract order flow, the availability of 
alternatives to TOPO product significantly affect the terms on which 
Phlx can distribute this market data.\28\ In setting the fees for its 
TOPO product, Phlx must consider the extent to which market 
participants would choose one or more alternatives instead of 
purchasing its data.\29\ The most basic source of information 
concerning the top-of-book generally available at an exchange is the 
complete record of an exchange's transactions that is provided in the 
core data feeds.\30\ In this respect, the core data feeds that include 
an exchange's own transaction information are a significant alternative 
to the exchange's market data product.\31\ Further, other options 
exchanges can produce their own top-of-book products, and thus are 
sources of potential competition for Phlx.\32\
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    \28\ See NYSE Arca Order, supra note 11, at 74784.
    \29\ Id. at 74783.
    \30\ Id.
    \31\ Id. Information on transactions executed on Phlx is 
available through OPRA.
    \32\ In its filing, Phlx states that ``ISE and CBOE are 
potential competitors because each exchange enjoys greater market 
share and thus the ability to offer a top-of-book product that would 
compete favorably with TOPO.'' See Notice, supra, note 4, at 32677.
     Phlx also notes that although the TOPO data feed is separate 
from the core data feed made available by OPRA, all of the 
information made available in TOPO is included in the core data 
feed. Phlx states that the OPRA data is widely distributed and 
relatively inexpensive, thus constraining Phlx's ability to price 
TOPO. See Notice, supra, note 4, at 32677.
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    The Commission believes that there are a number of alternative 
sources of information that impose significant competitive pressures on 
Phlx in setting the terms for distributing its TOPO product. The 
Commission believes that the availability of those alternatives, as 
well as Phlx's compelling need to attract order flow, imposed 
significant competitive pressure on Phlx to act equitably, fairly, and 
reasonably in setting the terms of its proposal.
    Because Phlx was subject to significant competitive forces in 
setting the terms of the proposal, the Commission will approve the 
proposal in the absence of a substantial countervailing basis to find 
that the terms of the proposal fail to meet the applicable requirements 
of the Act or the rules thereunder. The Commission did not receive any 
comments on the proposal. Further, an analysis of the proposal does not 
provide such a basis. The Commission notes that the proposed fees for 
TOPO are lower for Internal Distributors than for External 
Distributors. Because Internal Distributors are by definition more 
limited in the scope of their distribution of TOPO data than External 
Distributors, it is reasonable to expect that Internal Distributors 
will provide TOPO data to a smaller number of internal subscribers.\33\ 
The fees therefore do not unreasonably discriminate among types of 
subscribers, such as by favoring participants in the Phlx market or 
penalizing participants in other markets.
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    \33\ Conversely, External Distributors can reasonably be 
expected to distribute the TOPO data to a higher number of 
subscribers because they do not have the same limitation. 
Accordingly, the Exchange will charge a higher fee to External 
Distributors than to Internal Distributors. See id.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change (SR-Phlx-2009-54), be and hereby is 
approved.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\34\
Florence E. Harmon,
Deputy Secretary.
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    \34\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E9-19569 Filed 8-14-09; 8:45 am]

BILLING CODE 8010-01-P
