
[Federal Register: November 29, 2010 (Volume 75, Number 228)]
[Notices]               
[Page 73140-73144]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29no10-141]                         


[[Page 73140]]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63351; File No. SR-Phlx-2010-154]

 
Self-Regulatory Organizations; NASDAQ OMX PHLX, Inc.; Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating to 
Fees for the PHOTO Historical Data Product

November 19, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 8, 2010, NASDAQ OMX PHLX, Inc. (``Phlx'' or the 
``Exchange'') filed with the Securities and Exchange Commission (the 
``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its fee schedule by establishing 
fees for a new market data product, PHLX Options Trade Outline 
(``PHOTO'') Historical Data. PHOTO Historical Data provides subscribers 
with historical information about the past activity on the Exchange 
during a particular calendar month, broken down by each option series 
traded on the Exchange.\3\ The proposed fees would become effective on 
and after November 15, 2010. PHOTO Historical Data is available only 
for internal use and distribution by subscribers.
---------------------------------------------------------------------------

    \3\ PHOTO Historical Data will be available for the month of 
August 2010 and for each calendar month dating back to January 2009. 
PHOTO Historical Data will not be available for any calendar month 
prior to January 2009.
---------------------------------------------------------------------------

    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqtrader.com/micro.aspx?id=PHLXfilings, at the 
principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

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

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

1. Purpose
    The purpose of the proposed rule change is to establish fees for 
the PHOTO Historical Data market data product.
PHOTO
    In September 2010, the Exchange established fees for its PHOTO 
market data product.\4\ PHOTO is a market data product offered by the 
Exchange that is designed to provide proprietary electronic trade data 
to subscribers. PHOTO is available as either an ``End-of-Day'' data 
product or an ``Intra-Day'' data product, as described more fully 
below. PHOTO Historical Data will permit a subscriber to select a 
particular prior calendar month or months and receive the ``End of 
Day'' or ``Intra-Day'' data for each trading session conducted during 
the calendar month(s) selected. Like PHOTO, the PHOTO Historical Data 
product is available to any person who wishes to subscribe to it, 
regardless of whether or not they are a member of the Exchange. The 
fees for the PHOTO Historical Data product are uniform for all 
subscribers.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 62887 (September 10, 
2010), 75 FR 57092 (September 17, 2010) (SR-Phlx-2010-121).
---------------------------------------------------------------------------

PHOTO Historical Data
    PHOTO Historical Data provides information about the past activity 
of all option series for each trading session conducted during a 
particular prior calendar month, as selected by the subscriber. PHOTO 
Historical Data subscribers will receive the following data:
     Aggregate number of buy and sell transactions in the 
affected series for each trading session conducted during the specified 
calendar month(s);
     Aggregate volume traded electronically on the Exchange in 
the affected series for each trading session conducted during the 
specified calendar month(s);
     Aggregate number of trades effected on the Exchange to 
open a position \5\ for each trading session conducted during the 
specified calendar month(s);
---------------------------------------------------------------------------

    \5\ PHOTO Historical Data will provide subscribers with the 
aggregate number of ``opening purchase transactions'' in the 
affected series for each trading session conducted during the 
calendar month(s) selected. An opening purchase transaction is an 
Exchange options transaction in which the purchaser's intention is 
to create or increase a long position in the series of options 
involved in such transaction. See Exchange Rule 1000(b)(24). PHOTO 
Historical Data will also provide subscribers with the aggregate 
number of ``opening writing transactions'' in the affected series 
for each trading session conducted during the calendar month(s) 
selected. An opening writing transaction is an Exchange options 
transaction in which the seller's (writer's) intention is to create 
or increase a short position in the series of options involved in 
such transaction. See Exchange Rule 1000(b)(25).
---------------------------------------------------------------------------

     Aggregate number of trades effected on the Exchange to 
close a position \6\ for each trading session conducted during the 
specified calendar month(s);
---------------------------------------------------------------------------

    \6\ PHOTO Historical Data will provide subscribers with the 
aggregate number of ``closing purchase transactions'' in the 
affected series for each trading session conducted during the 
calendar month(s) selected. A closing purchase transaction is an 
Exchange options transaction in which the purchaser's intention is 
to reduce or eliminate a short position in the series of options 
involved in such transaction. See Exchange Rule 1000(b)(27). PHOTO 
Historical Data will also provide subscribers with the aggregate 
number of ``closing sale transactions'' in the affected series for 
each trading session conducted during the calendar month(s) 
selected. A closing sale transaction is an Exchange options 
transaction in which the seller's intention is to reduce or 
eliminate a long position in the series of options involved in such 
transaction. See Exchange Rule 1000(b)(26).
---------------------------------------------------------------------------

     Origin of the orders involved in trades on the Exchange in 
the affected series for each trading session conducted during the 
specified calendar month(s), specifically aggregated in the following 
categories of participants: Customers, broker-dealers, market makers 
(including specialists, Registered Options Traders (``ROTs''), 
Streaming Quote Traders (``SQTs'') \7\ and Remote Streaming Quote 
Traders (``RSQTs'') \8\), and professionals.\9\
---------------------------------------------------------------------------

    \7\ An SQT is an Exchange Registered Options Trader (``ROT'') 
who has received permission from the Exchange to generate and submit 
option quotations electronically in options to which such SQT is 
assigned. See Exchange Rule 1014(b)(ii)(A).
    \8\ An RSQT is an ROT that is a member or member organization 
with no physical trading floor presence who has received permission 
from the Exchange to generate and submit option quotations 
electronically in options to which such RSQT has been assigned. An 
RSQT may only submit such quotations electronically from off the 
floor of the Exchange. See Exchange Rule 1014(b)(ii)(B).
    \9\ The term ``professional'' means any person or entity that 
(i) is not a broker or dealer in securities, and (ii) places more 
than 390 orders in listed options per day on average during a 
calendar month for its own beneficial account(s). A professional 
will be treated in the same manner as an off-floor broker-dealer for 
purposes of Rules 1014(g) (except with respect to all-or-none 
orders, which will be treated like customer orders), 1033(e), 
1064.02 (except professional orders will be considered customer 
orders subject to facilitation), and 1080.08 as well as Options 
Floor Procedure Advices B-6, B-11 and F-5. Member organizations must 
indicate whether orders are for professionals. See Exchange Rule 
1000(b)(14).

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

[[Page 73141]]

End of Day Product
    The End-of-Day product includes the aggregate data described above 
representing the entire trading session. It is calculated during an 
overnight process after each trading session and is available to 
subscribers for download the following morning at approximately 7 a.m., 
ET. PHOTO Historical Data will provide this data for each trading 
session conducted during the calendar month(s) selected by the 
subscriber.
    The fee for the PHOTO Historical Data End of Day product for 
subscribers is $400.00 per calendar month selected.\10\
---------------------------------------------------------------------------

    \10\ For example, a subscriber who requests End of Day PHOTO 
Historical Data for the month of March, 2009 would be charged 
$400.00. A subscriber who requests End of Day PHOTO Historical Data 
for the months of March, 2009 and April, 2009 would be charged 
$400.00 for the March, 2009 End of Day PHOTO Historical Data and 
$400.00 for the April, 2009 End of Day PHOTO Historical Data, for a 
total of $800.00, etc.
---------------------------------------------------------------------------

Intra-Day Product
    The Intra-Day product includes periodic, cumulative data for a 
particular trading session. The Intra-Day product is produced and 
updated every ten minutes during the trading day. Data is captured in 
``snapshots'' taken every 10 minutes throughout the trading day and is 
available to subscribers within 5 minutes of the conclusion of each 10-
minute period. For example, subscribers to the Intra-Day product will 
receive the first calculation of intra-day data at 9:44 a.m. ET, which 
represents data captured from 9:30 a.m. to 9:39 a.m. Subscribers will 
receive the next update at 9:54 a.m., representing the data previously 
provided together with data captured from 9:40 a.m. through 9:49 a.m., 
and so forth. Each update will represent the aggregate data captured 
from the current ``snapshot'' and all previous ``snapshots.''
    PHOTO Historical Data will provide this regularly updated data for 
each trading session conducted during the specified calendar month(s) 
selected by the subscriber. The fee for the PHOTO Historical Data 
Intra-Day product subscribers is $750.00 per calendar month 
selected.\11\
---------------------------------------------------------------------------

    \11\ For example, a subscriber who requests Intra-Day PHOTO 
Historical Data for the Month of March, 2009 would be charged 
$750.00. A subscriber who requests Intra-Day PHOTO Historical Data 
for the months of March, 2009 and April, 2009 would be charged 
$750.00 for the March, 2009 Intra-Day PHOTO Historical Data and 
$750.00 for the April, 2009 Intra-Day PHOTO Historical Data, for a 
total of $1,500.00, etc.
---------------------------------------------------------------------------

    PHOTO Historical Data provides subscribers data that should enhance 
their ability to analyze option trade and volume data, to evaluate 
historical trends in the trading activity of a particular option 
series, and to create and test trading models and analytical 
strategies. The Exchange believes that PHOTO Historical Data is a 
valuable tool that subscribers can use to gain comprehensive insight 
into the trading activity in a particular series.
2. Statutory Basis
    PHLX believes that the proposed rule change is consistent with the 
provisions of Section 6 of the Act,\12\ in general, and with Section 
6(b)(4) of the Act,\13\ in particular, in that it provides an equitable 
allocation of reasonable fees among users and recipients of PHLX data. 
In adopting Regulation NMS, the Commission granted self-regulatory 
organizations and broker-dealers increased authority and flexibility to 
offer new and unique market data to the public. It was believed that 
this authority would expand the amount of data available to consumers, 
and also spur innovation and competition for the provision of market 
data.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f.
    \13\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    The Commission concluded that Regulation NMS--by deregulating the 
market in proprietary data--would itself further the Act's goals of 
facilitating efficiency and competition:

    ``[E]fficiency is promoted when broker-dealers who do not need 
the data beyond the prices, sizes, market center identifications of 
the NBBO and consolidated last sale information are not required to 
receive (and pay for) such data. The Commission also believes that 
efficiency is promoted when broker-dealers may choose to receive 
(and pay for) additional market data based on their own internal 
analysis of the need for such data.''\14\
---------------------------------------------------------------------------

    \14\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).

    By removing ``unnecessary regulatory restrictions'' on the ability 
of exchanges to sell their own data, Regulation NMS advanced the goals 
of the Act and the principles reflected in its legislative history. If 
the free market should determine whether proprietary data is sold to 
broker-dealers at all, it follows that the price at which such data is 
sold should be set by the market as well. PHOTO is precisely the sort 
of market data product that the Commission envisioned when it adopted 
Regulation NMS.
    On July 21, 2010, President Barak Obama signed into law H.R. 4173, 
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 
(``Dodd-Frank Act''), which amended Section 19 of the Act. Among other 
things, Section 916 of the Dodd-Frank Act amended paragraph (A) of 
Section 19(b)(3) of the Act by inserting the phrase ``on any person, 
whether or not the person is a member of the self-regulatory 
organization'' after ``due, fee or other charge imposed by the self-
regulatory organization.'' As a result, all SRO rule proposals 
establishing or changing dues, fees, or other charges are immediately 
effective upon filing regardless of whether such dues, fees, or other 
charges are imposed on members of the SRO, non-members, or both. 
Section 916 further amended paragraph (C) of Section 19(b)(3) of the 
Exchange Act to read, in pertinent part, ``At any time within the 60-
day period beginning on the date of filing of such a proposed rule 
change in accordance with the provisions of paragraph (1) [of Section 
19(b)], the Commission summarily may temporarily suspend the change in 
the rules of the self-regulatory organization made thereby, if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of this title. If the Commission takes 
such action, the Commission shall institute proceedings under paragraph 
(2)(B) [of Section 19(b)] to determine whether the proposed rule should 
be approved or disapproved.''
    PHLX believes that these amendments to Section 19 of the Act 
reflect Congress' intent to allow the Commission to rely upon the 
forces of competition to ensure that fees for market data are 
reasonable and equitably allocated. Although Section 19(b) had formerly 
authorized immediate effectiveness for a ``due, fee or other charge 
imposed by the self-regulatory organization,'' the Commission adopted a 
policy and subsequently a rule stipulating that fees for data and other 
products available to persons that are not members of the self-
regulatory organization must be approved by the Commission after first 
being published for comment. At the time, the Commission supported the 
adoption of the policy and the rule by pointing out that unlike 
members, whose representation in self-regulatory organization 
governance was mandated by the Act, non-members should be given the 
opportunity to comment on fees before being required to pay them, and 
that the Commission should specifically approve all such fees.
    PHLX believes that the amendment to Section 19 reflects Congress' 
conclusion that the evolution of self-regulatory organization 
governance and competitive market structure have rendered the 
Commission's prior policy on non-member fees obsolete.
    Specifically, many exchanges have evolved from member-owned not-
for-profit corporations into for-profit investor-owned corporations (or 
subsidiaries of investor owned

[[Page 73142]]

corporations). Accordingly, exchanges no longer have narrow incentives 
to manage their affairs for the exclusive benefit of their members, but 
rather have incentives to maximize the appeal of their products to all 
customers, whether members or nonmembers, so as to broaden distribution 
and grow revenues. Moreover, we believe that the change also reflects 
an endorsement of the Commission's determinations that reliance on 
competitive markets is an appropriate means to ensure equitable and 
reasonable prices. Simply put, the change reflects a presumption that 
all fee changes should be permitted to take effect immediately, since 
the level of all fees are constrained by competitive forces.
    The recent decision of the United States Court of Appeals for the 
District of Columbia Circuit in NetCoaliton [sic] v. SEC, No. 09-1042 
(DC Cir. 2010), although reviewing a Commission decision made prior to 
the effective date of the Dodd-Frank Act, upheld the Commission's 
reliance upon competitive markets to set reasonable and equitably 
allocated fees for market data. ``In fact, the legislative history 
indicates that the Congress intended that the market system `evolve 
through the interplay of competitive forces as unnecessary regulatory 
restrictions are removed' and that the SEC wield its regulatory power 
`in those situations where competition may not be sufficient,' such as 
in the creation of a `consolidated transactional reporting system.' '' 
\15\
---------------------------------------------------------------------------

    \15\ NetCoaltion [sic], at 15 (quoting H.R. Rep. No. 94-229, at 
92 (1975), as reprinted in 1975 U.S.C.C.A.N. 321, 323).
---------------------------------------------------------------------------

    The court's conclusions about Congressional intent are therefore 
reinforced by the Dodd-Frank Act amendments, which create a presumption 
that exchange fees, including market data fees, may take effect 
immediately, without prior Commission approval, and that the Commission 
should take action to suspend a fee change and institute a proceeding 
to determine whether the fee change should be approved or disapproved 
only where the Commission has concerns that the change may not be 
consistent with the Act.

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

    PHLX does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. Notwithstanding its 
determination that the Commission may rely upon competition to 
establish fair and equitably allocated fees for market data, the 
NetCoaltion [sic] court found that the Commission had not, in that 
case, compiled a record that adequately supported its conclusion that 
the market for the data at issue in the case was competitive.
    For the reasons discussed above, PHLX believes that the Dodd-Frank 
Act amendments to Section 19 materially alter the scope of the 
Commission's review of future market data filings, by creating a 
presumption that all fees may take effect immediately, without prior 
analysis by the Commission of the competitive environment.
    Even in the absence of this important statutory change, however, 
PHLX believes that a record may readily be established to demonstrate 
the competitive nature of the market in question.
    There is intense competition between trading platforms that provide 
transaction execution and routing services and proprietary data 
products. Transaction execution and proprietary data products are 
complementary in that market data is both an input and a by-product of 
the execution service. In fact, market data and trade execution are a 
paradigmatic example of joint products with joint costs. The decision 
whether and on which platform to post an order will depend on the 
attributes of the platform where the order can be posted, including the 
execution fees, data quality and price and distribution of its data 
products. Without the prospect of a taking order seeing and reacting to 
a posted order on a particular platform, the posting of the order would 
accomplish little.
    Without trade executions, exchange data products cannot exist. Data 
products are valuable to many end users only insofar as they provide 
information that end users expect will assist them or their customers 
in making trading decisions.
    The costs of producing market data include not only the costs of 
the data distribution infrastructure, but also the costs of designing, 
maintaining, and operating the exchange's transaction execution 
platform and the cost of regulating the exchange to ensure its fair 
operation and maintain investor confidence. The total return that a 
trading platform earns reflects the revenues it receives from both 
products and the joint costs it incurs. Moreover, an exchange's 
customers view the costs of transaction executions and of data as a 
unified cost of doing business with the exchange. A broker-dealer will 
direct orders to a particular exchange only if the expected revenues 
from executing trades on the exchange exceed net transaction execution 
costs and the cost of data that the broker-dealer chooses to buy to 
support its trading decisions (or those of its customers). The choice 
of data products is, in turn, a product of the value of the products in 
making profitable trading decisions. If the cost of the product exceeds 
its expected value, the broker-dealer will choose not to buy it. 
Moreover, as a broker-dealer chooses to direct fewer orders to a 
particular exchange, the value of the product to that broker-dealer 
decreases, for two reasons. First, the product will contain less 
information, because executions of the broker-dealer's orders will not 
be reflected in it. Second, and perhaps more important, the product 
will be less valuable to that broker-dealer because it does not provide 
information about the venue to which it is directing its orders. Data 
from the competing venue to which the broker-dealer is directing orders 
will become correspondingly more valuable.
    Thus, a super-competitive increase in the fees charged for either 
transactions or data has the potential to impair revenues from both 
products. ``No one disputes that competition for order flow is 
`fierce'.'' \16\ However, the existence of fierce competition for order 
flow implies a high degree of price sensitivity on the part of broker-
dealers with order flow, since they may readily reduce costs by 
directing orders toward the lowest-cost trading venues. A broker-dealer 
that shifted its order flow from one platform to another in response to 
order execution price differentials would both reduce the value of that 
platform's market data and reduce its own need to consume data from the 
disfavored platform. Similarly, if a platform increases its market data 
fees, the change will affect the overall cost of doing business with 
the platform, and affected broker-dealers will assess whether they can 
lower their trading costs by directing orders elsewhere and thereby 
lessening the need for the more expensive data.
---------------------------------------------------------------------------

    \16\ NetCoalition at 24.
---------------------------------------------------------------------------

    Analyzing the cost of market data distribution in isolation from 
the cost of all of the inputs supporting the creation of market data 
will inevitably underestimate the cost of the data. Thus, because it is 
impossible to create data without a fast, technologically robust, and 
well-regulated execution system, system costs and regulatory costs 
affect the price of market data. It would be equally misleading, 
however, to attribute all of the exchange's costs to the market data 
portion of an exchange's

[[Page 73143]]

joint product. Rather, all of the exchange's costs are incurred for the 
unified purposes of attracting order flow, executing and/or routing 
orders, and generating and selling data about market activity. The 
total return that an exchange earns reflects the revenues it receives 
from the joint products and the total costs of the joint products.
    Competition among trading platforms can be expected to constrain 
the aggregate return each platform earns from the sale of its joint 
products, but different platforms may choose from a range of possible, 
and equally reasonable, pricing strategies as the means of recovering 
total costs. For example, some platforms may choose to pay rebates to 
attract orders, charge relatively low prices for market information (or 
provide information free of charge) and charge relatively high prices 
for accessing posted liquidity. Other platforms may choose a strategy 
of paying lower rebates (or no rebates) to attract orders, setting 
relatively high prices for market information, and setting relatively 
low prices for accessing posted liquidity. In this environment, there 
is no economic basis for regulating maximum prices for one of the joint 
products in an industry in which suppliers face competitive constraints 
with regard to the joint offering. This would be akin to strictly 
regulating the price that an automobile manufacturer can charge for car 
sound systems despite the existence of a highly competitive market for 
cars and the availability of aftermarket alternatives to the 
manufacturer-supplied system.
    The market for market data products is competitive and inherently 
contestable because there is fierce competition for the inputs 
necessary to the creation of proprietary data and strict pricing 
discipline for the proprietary products themselves. Numerous exchanges 
compete with each other for listings, trades, and market data itself, 
providing virtually limitless opportunities for entrepreneurs who wish 
to produce and distribute their own market data. This proprietary data 
is produced by each individual exchange, as well as other entities, in 
a vigorously competitive market. Broker-dealers currently have numerous 
alternative venues for their order flow, including ten self-regulatory 
organization (``SRO'') markets, as well as internalizing broker-dealers 
(``BDs'') and various forms of alternative trading systems (``ATSs''), 
including dark pools and electronic communication networks (``ECNs''). 
Each SRO market competes to produce transaction reports via trade 
executions, and two FINRA regulated Trade Reporting Facilities 
(``TRFs'') compete to attract internalized transaction reports. 
Competitive markets for order flow, executions, and transaction reports 
provide pricing discipline for the inputs of proprietary data products. 
For example, the Exchange notes that at least one other U.S. options 
exchange offers a market data product that is substantially similar to 
the PHOTO Historical Data product, which the PHLX must consider in its 
pricing discipline in order to compete for listings, trades, and the 
market data itself.\17\
---------------------------------------------------------------------------

    \17\ The International Securities Exchange, Inc. (``ISE'') Open/
Close Trade Profile and the ISE Open/Close Trade Profile Intra-Day 
contain substantially similar data to that included in PHOTO End of 
Day and PHOTO Intra-Day. See Securities Exchange Act Release No. 
56254 (August 15, 2007), 72 FR 47104 (August 22, 2007) (SR-ISE-2007-
70). ISE currently sells the ISE Open/Close Trade Profile with 
historical data available back to May 2005, and sells the ISE Open/
Close Trade Profile Intraday with historical data available 
separately back to October 2009. See Securities Exchange act Release 
No. 61317 (January 8, 2010), 75 FR 2915 (January 19, 2010) (SR-ISE-
2009-103).
---------------------------------------------------------------------------

    The large number of SROs, TRFs, BDs, and ATSs that currently 
produce proprietary data or are currently capable of producing it 
provides further pricing discipline for proprietary data products. Each 
SRO, TRF, ATS, and BD is currently permitted to produce proprietary 
data products, and many currently do or have announced plans to do so, 
including PHLX, NASDAQ, NYSE, NYSE Amex, NYSEArca, and BATS.
    Any ATS or BD can combine with any other ATS, BD, or multiple ATSs 
or BDs to produce joint proprietary data products. Additionally, order 
routers and market data vendors can facilitate single or multiple 
broker-dealers' production of proprietary data products. The potential 
sources of proprietary products are virtually limitless.
    The fact that proprietary data from ATSs, BDs, and vendors can by-
pass SROs is significant in two respects. First, non-SROs can compete 
directly with SROs for the production and sale of proprietary data 
products, as BATS and Arca did before registering as exchanges by 
publishing proprietary book data on the Internet. Second, because a 
single order or transaction report can appear in an SRO proprietary 
product, a non-SRO proprietary product, or both, the data available in 
proprietary products is exponentially greater than the actual number of 
orders and transaction reports that exist in the marketplace.
    Market data vendors provide another form of price discipline for 
proprietary data products because they control the primary means of 
access to end users. Vendors impose price restraints based upon their 
business models. For example, vendors such as Bloomberg and Reuters 
that assess a surcharge on data they sell may refuse to offer 
proprietary products that end users will not purchase in sufficient 
numbers. Internet portals, such as Yahoo, impose a discipline by 
providing only data that will enable them to attract ``eyeballs'' that 
contribute to their advertising revenue. Retail broker-dealers, such as 
Schwab and Fidelity, offer their customers proprietary data only if it 
promotes trading and generates sufficient commission revenue. Although 
the business models may differ, these vendors' pricing discipline is 
the same: They can simply refuse to purchase any proprietary data 
product that fails to provide sufficient value. PHLX and other 
producers of proprietary data products must understand and respond to 
these varying business models and pricing disciplines in order to 
market proprietary data products successfully.
    In addition to the competition and price discipline described 
above, the market for proprietary data products is also highly 
contestable because market entry is rapid, inexpensive, and profitable. 
The history of electronic trading is replete with examples of entrants 
that swiftly grew into some of the largest electronic trading platforms 
and proprietary data producers: Archipelago, Bloomberg Tradebook, 
Island, RediBook, Attain, TracECN, BATS Trading and Direct Edge. A 
proliferation of dark pools and other ATSs operate profitably with 
fragmentary shares of consolidated market volume.
    Regulation NMS, by deregulating the market for proprietary data, 
has increased the contestability of that market. While broker-dealers 
have previously published their proprietary data individually, 
Regulation NMS encourages market data vendors and broker-dealers to 
produce proprietary products cooperatively in a manner never before 
possible. Multiple market data vendors already have the capability to 
aggregate data and disseminate it on a profitable scale, including 
Bloomberg, and Thomson-Reuters.
    The court in NetCoalition concluded that the Commission had failed 
to demonstrate that the market for market data was competitive based on 
the reasoning of the Commission's NetCoalition order because, in the 
court's view, the Commission had not adequately demonstrated that the 
depth-of-book data at issue in the case is used to attract order flow. 
PHLX believes, however, that evidence not before the

[[Page 73144]]

court clearly demonstrates that availability of depth data attracts 
order flow.
    Competition among platforms has driven PHLX continually to improve 
its platform data offerings and to cater to customers' data needs. For 
example, PHLX offers front end applications such as its Top of PHLX 
Options (``TOPO'') and TOPO Plus Orders data products to help customers 
utilize data.
    For the foregoing reasons, PHLX does not believe that the proposed 
rule change will result in any burden on competition that is not 
necessary or appropriate in furtherance of the purpose of the Act.

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

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\18\ At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-Phlx-2010-154 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-Phlx-2010-154. 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 Web site viewing and 
printing in the Commission's Public Reference Room, 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-Phlx-2010-154 and should be submitted on or before 
December 20, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
---------------------------------------------------------------------------

    \19\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2010-29892 Filed 11-26-10; 8:45 am]
BILLING CODE 8011-01-P

