
[Federal Register Volume 76, Number 151 (Friday, August 5, 2011)]
[Notices]
[Pages 47630-47635]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-19856]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65002; File No. SR-ISE-2011-50]


Self-Regulatory Organizations; International Securities Exchange, 
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Relating to Market Data Fees

August 1, 2011.
    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 August 1, 2011, the International Securities Exchange, LLC (the 
``Exchange'' or the ``ISE'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its Schedule of Fees to adopt 
subscription fees for the sale of two market data offerings, the ISE 
Top Quote Feed and the ISE Spread Book Feed. The text of the proposed 
rule change is available on the Exchange's Web site http://www.ise.com, 
at the principal office of the Exchange, and at the Commission's Public 
Reference Room.

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

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

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

1. Purpose
    ISE proposes to amend its Schedule of Fees to adopt subscription 
fees for the sale of two market data offerings, the ISE Top Quote Feed 
and the ISE Spread Book Feed. The Exchange previously submitted a 
proposed rule change to establish the two data feeds.\3\ The Exchange 
proposes to implement the proposed fees for both market data offerings 
on August 1, 2011.
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    \3\ See SR-ISE-2011-44.
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ISE Top Quote Feed
    The ISE Top Quote Feed (``Top Quote'') is a real-time feed that 
aggregates all quotes and orders at the top price level on the 
Exchange, on both the bid and offer side of the market. Top Quote 
provides subscribers with a consolidated view of tradable prices at the 
BBO, the same data that is displayed on the OPRA feed. Top Quote shows 
bid/ask quote size for Customer and Professional Customer option orders 
for ISE traded options that are not currently distinguishable through 
the OPRA feed.\4\ The identification of Customer orders is useful for 
market makers and market participants generally since Customer orders 
take precedence over all other order types on the ISE. The Exchange 
believes it is not discriminatory or a burden on competition for these 
orders to be identified because doing so increases the likelihood that 
these orders will be executed as they have priority on the ISE while 
Professional Customers, i.e., persons or entities that (i) Are not a 
broker or dealer in securities, and (ii) place more than 390 orders in 
listed options per day on average during a calendar month for its own 
beneficial account(s), do not have priority on the Exchange.
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    \4\ Customer and Professional Customer orders are identified in 
a number of market data offerings currently sold by other options 
exchanges on a subscription basis. See Securities Exchange Act 
Release No. 63351 (November 10, 2010), 75 FR 73140 (November 29, 
2010) (SR-PHLX-2010-154) (Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change Relating to Fees for the PHOTO 
Historical Data Product). See also Securities Exchange Act Release 
No. 63997 (March 1, 2011), 76 FR 12388 (March 7, 2011) (SR-CBOE-
2011-014) (Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Codify a Fee Schedule for the Sale by Market Data 
Express, LLC, of a BBO Data Feed for CBOE Listed Options).
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    Top Quote is currently imbedded in the Exchange's Depth of Market 
data feed offering and is available to subscribers of the Depth of 
Market data feed offering. With this proposed rule change, the Exchange 
is offering Top Quote as a separate subscription-based data feed. Top 
Quote will be available to members and non-members, and to both 
professional and non-professional subscribers.
Proposed Fees for Top Quote
    The Exchange proposes to charge distributors \5\ of Top Quote 
$3,000 per month. In addition, the Exchange proposes to charge a 
monthly controlled device \6\ fee of $20 per controlled device for 
Professionals at a distributor where the data is for internal and/or 
external use. There are no monthly controlled device fees proposed for 
Non-Professionals subscribers to Top Quote. Further, the Exchange 
proposes to adopt an enterprise license fee, regardless of the number 
of controlled devices, as follows: (i) $4,000 for Professionals at a 
distributor where the data is for internal use only, (ii) $5,000 for 
Professionals at a distributor where the data is for internal and/or 
external use in a controlled device and (iii) $3,000 per month for Non-
Professionals.
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    \5\ ISE proposes that a ``distributor'' be defined as any firm 
that receives a ISE data feed directly from ISE or indirectly 
through a vendor and then distributes it either internally or 
externally. Further, ISE proposes that all distributors execute an 
ISE distributor agreement.
    \6\ ISE proposes that a ``controlled device'' be defined as any 
device that a distributor of the ISE Top Quote Feed permits to: (a) 
Access the information in the Top Quote Feed offering, or (b) 
communicate with the distributor so as to cause the distributor to 
access the information in the Top Quote Feed offering. If a 
controlled device is part of an electronic network between computers 
used for investment, trading or order routing activities, the burden 
will be on the distributor to demonstrate that the particular 
controlled device should not be subject to the proposed fees.
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ISE Spread Book Feed
    The ISE Spread Book Feed (``Spread Feed'') is a real-time feed that 
consists

[[Page 47631]]

of options quotes and orders for all complex orders (i.e., spreads, 
buy-writes, delta neutral strategies, etc.) aggregated at the top price 
level on both the bid and offer side of the market as well as all 
aggregated quotes and orders for complex orders at the top five price 
levels on both the bid and offer side of the market. In addition, the 
Spread Feed provides real-time updates every time a new complex limit 
order that is not immediately executable at the BBO is placed on the 
ISE complex order book. The Spread Feed shows bid/ask quote size for 
Customer and Professional Customer option orders for ISE traded 
options. As noted above, since Customer orders take precedence over all 
other order types, the identification of these orders in the Spread 
Feed is useful information for market makers and market participants 
generally. Again, the Exchange believes it is not discriminatory or a 
burden on competition for these orders to be identified because doing 
so increases the likelihood that these orders will be executed as they 
have priority on the ISE while Professional Customers, i.e., persons or 
entities that (i) Are not a broker or dealer in securities, and (ii) 
place more than 390 orders in listed options per day on average during 
a calendar month for its own beneficial account(s), do not have 
priority on the Exchange.
    The Exchange further notes that ISE Market Makers currently receive 
a spread book data feed as part of their membership. Pursuant to this 
proposed rule change, however, all recipients, including ISE Market 
Makers, will be subject to the proposed fees to access the Spread Feed. 
The Spread Feed will be available to members and non-members and to 
both professional and non-professional subscribers and will not be 
available on a non-subscription basis.
Proposed Fees for Spread Feed
    The Exchange proposes to charge distributors of Spread Feed $3,000 
per month. In addition, the Exchange proposes to charge a monthly 
controlled device \7\ fee of $25 per controlled device for 
Professionals at a distributor where the data is for internal and/or 
external use. There are no monthly controlled device fees proposed for 
Non-Professionals subscribers to the Spread Feed. Further, the Exchange 
proposes to adopt an enterprise license fee, regardless of the number 
of controlled devices, as follows: (i) $4,250 for Professionals at a 
distributor where the data is for internal use only, (ii) $5,500 for 
Professionals at a distributor where the data is for internal and/or 
external use in a controlled device, and (iii) $3,000 for Non-
Professionals.
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    \7\ ISE proposes that a ``controlled device'' be defined as any 
device that a distributor of the ISE Spread Feed permits to: (a) 
Access the information in the Spread Feed offering, or (b) 
communicate with the distributor so as to cause the distributor to 
access the information in the Spread Feed offering. If a controlled 
device is part of an electronic network between computers used for 
investment, trading or order routing activities, the burden will be 
on the distributor to demonstrate that the particular controlled 
device should not be subject to the proposed fees.
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Multi-Product Subscription Discount
    The Exchange currently offers two real-time market data feed 
offerings, the ISE Depth of Market Data Feed \8\ and the ISE Order 
Feed.\9\ With the addition of the Spread Feed and Top Quote, the 
Exchange will have four fee-liable real-time market data feed 
offerings. In order to encourage subscriptions to multiple market data 
feeds, ISE proposes to adopt a multi-product subscription discount, as 
follows: Ten percent (10%) discount for subscribers who subscribe to 
two feeds and twenty percent (20%) discount for subscribers who 
subscribe to three feeds.
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    \8\ See Securities Exchange Act Release No. 59949 (May 20, 
2009), 74 FR 25593 (May 28, 2009) (SR-ISE-2007-97) (Order Approving 
Proposed Rule Change Relating to Market Data Fees).
    \9\ See Securities Exchange Act Release No. 62399 (June 28, 
2010), 75 FR 38587 (July 2, 2010) (SR-ISE-2010-34) (Order Approving 
Proposed Rule Change Relating to Fees for the ISE Order Feed).
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2. Basis
    The basis under the Securities Exchange Act of 1934 (the ``Act'') 
for this proposed rule change is the requirement under Section 6(b)(4) 
that an exchange have an equitable allocation of reasonable dues, fees 
and other charges among its members and other persons using its 
facilities. The Exchange believes that the proposed rule change is 
consistent with the provisions of Section 6 of the Act,\10\ in general, 
and with Sections 6(b)(4) of the Act,\11\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among members and issuers and other persons using any 
facility or system which ISE operates or controls.
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(4).
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    The Exchange believes that the proposed rule change is also 
consistent with Section 6(b)(8) of the Act \12\ in that it does not 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The fees charged would be the 
same for all market participants, and therefore do not unreasonably 
discriminate among market participants.
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    \12\ 15 U.S.C. 78f(b)(8).
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    The Commission concluded that Regulation NMS--by deregulating the 
market in proprietary data--would itself further the Act's goals of 
facilitating efficiency and competition:

    [E]fficiency is promoted when broker-dealers who do not need the 
data beyond the prices, sizes, market center identifications of the 
NBBO and consolidated last sale information are not required to 
receive (and pay for) such data. The Commission also believes that 
efficiency is promoted when broker-dealers may choose to receive 
(and pay for) additional market data based on their own internal 
analysis of the need for such data.\13\
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    \13\ 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.
    On July 21, 2010, President Barack Obama signed into law H.R. 4173, 
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 
(``Dodd-Frank Act''), which amended Section 19 of the Act. Among other 
things, Section 916 of the Dodd-Frank Act amended paragraph (A) of 
Section 19(b)(3) of the Act by inserting the phrase ``on any person, 
whether or not the person is a member of the self-regulatory 
organization'' after ``due, fee or other charge imposed by the self-
regulatory organization.'' As a result, all SRO rule proposals 
establishing or changing dues, fees, or other charges are immediately 
effective upon filing regardless of whether such dues, fees, or other 
charges are imposed on members of the SRO, non-members, or both. 
Section 916 further amended paragraph (C) of Section 19(b)(3) of the 
Exchange Act to read, in pertinent part, ``At any time within the 60-
day period beginning on the date of filing of such a proposed rule 
change in accordance with the provisions of paragraph (1) [of Section 
19(b)], the Commission summarily may temporarily suspend the change in 
the rules of the self-regulatory organization made thereby, if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of this title. If the Commission takes 
such action, the Commission shall institute proceedings under paragraph

[[Page 47632]]

(2)(B) [of Section 19(b)] to determine whether the proposed rule should 
be approved or disapproved.''
    ISE believes that these amendments to Section 19 of the Act reflect 
Congress's 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. ISE 
believes that the amendment to Section 19 reflects Congress's 
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 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 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.' '' \14\
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    \14\ NetCoaltion, at 15 (quoting H.R. Rep. No. 94-229, at 92 
(1975), as reprinted in 1975 U.S.C.C.A.N. 321, 323).
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    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.
    The Exchange believes that the proposed market data fees are 
consistent with the requirements of the Act for several reasons. First, 
the Exchange notes that the categories of Top Quote and Spread Feed 
market data and fees compare favorably with similar products offered by 
other markets such as NASDAQ Stock Market (``NASDAQ''), NASDAQ OMX PHLX 
(``Phlx''), and Chicago Board Options Exchange (``CBOE''). For example, 
NASDAQ offers a market data product that is similar to Top Quote: a 
data feed that shows the top of the market entitled Best of NASDAQ 
Options (``BONO\SM\).\15\ Phlx also offers a market data feed, entitled 
Top of Phlx Options (``TOPO''), which is similar to Top Quote. TOPO 
shows orders and quotes at the top of the market, as well as 
trades.\16\ Lastly, a subsidiary of CBOE for which CBOE charges fees 
offers a market data product that is similar to Spread Feed. The CBOE 
BBO Data Feed includes, among other things, customer versus non-
customer contracts at the BBO and BBO data and last sale data for 
complex strategies (e.g., spreads, straddles, buy-writes, etc.).\17\
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    \15\ BONO has a monthly base access fee of $1,500 plus a $5 user 
fee for internal use professionals; a monthly base access fee of 
$2,000 plus (i) a $5 user fee for internal use professionals or, 
(ii) $1 user fee for internal use non-professionals. NASDAQ also has 
a monthly enterprise license fee of $2,500. See Securities Exchange 
Act Release No. 64652 (June 13, 2011), 76 FR 35498 (June 17, 2011) 
(SR-NASDAQ-2011-075).
    \16\ TOPO has a monthly fee of $2,000 per firm for internal use 
and a monthly fee of $2,500 per firm for internal and external use. 
See Securities Exchange Act Release No. 60459 (August 7, 2009), 74 
FR 41466 (August 17, 2009) (SR-PHLX-2009-54).
    \17\ The subsidiary is identified as Market Data Express, LLC 
(``MDX'') by CBOE, which indicates that the feed will also provide 
data regarding contingency orders and complex strategies, the latter 
being comparable to the Spread Feed proposed by this rule filing. 
The monthly fee charged by CBOE for the data is $3,500 plus a $25 
per user or device fee. See Securities Exchange Act Release No. 
63997 (March 1, 2011), 76 FR 12388 (March 7, 2011) (SR-CBOE-2011-
014) (Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change To Codify a Fee Schedule for the Sale by Market Data Express, 
LLC, of a BBO Data Feed for CBOE Listed Options).
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    The Exchange also believes that the proposed fee for Top Quote and 
Spread Feed are consistent with the requirements of the Act because 
competition provides an effective constraint on the market data fees 
that the Exchange has the ability and the incentive to charge. ISE has 
a compelling need to attract order flow from market participants in 
order to maintain its share of trading volume. This compelling need to 
attract order flow imposes significant pressure on ISE to act 
reasonably in setting the fees for its market data offerings, 
particularly given that the market participants that will pay such fees 
often will be the same market participants from whom ISE 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 market 
data fees would risk alienating many of the same customers on whose 
orders it depends for competitive survival. ISE currently competes with 
eight options exchanges for order flow.\18\
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    \18\ The Commission has previously made a finding that the 
options industry is subject to significant competitive forces. See 
Securities Exchange Act Release No. 59949 (May 20, 2009), 74 FR 
25593 (May 28, 2009) (SR-ISE-2009-97) (order approving ISE's 
proposal to establish fees for a real-time depth of market 
offering).
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    ISE is constrained in pricing Top Quote and Spread Feed by the 
availability to market participants of alternatives to purchasing these 
products. ISE must consider the extent to which market participants 
would choose one or more alternatives instead of purchasing the 
Exchange's data. For example, although Top Quote is separate from the 
core data feed made available by OPRA, all the information available in 
Top Quote is included in the core data feed. The core OPRA data is 
widely distributed and relatively

[[Page 47633]]

inexpensive, thus constraining ISE's ability to price Top Quote. In 
this respect, the OPRA data feed, which includes the Exchange's 
transaction information, is a significant alternative to the Exchange's 
product. Further, other options exchanges have produced their own 
products and thus are sources of potential competition for both Top 
Quote and Spread Feed. As noted above, NASDAQ, Phlx and CBOE all offer 
market data products that compete with either Top Quote and Spread Feed 
or both.
    For the reasons cited above, the Exchange believes that the 
proposed fees for Top Quote and Spread Feed are equitable, fair, 
reasonable and not unreasonably discriminatory. The Exchange further 
believes that the continued availability of Top Quote and Spread Feed 
data feeds enhances transparency, fosters competition among orders and 
markets, and enables buyers and sellers to obtain better prices. In 
addition, the Exchange believes that no substantial countervailing 
basis exists to support a finding that the proposed terms and fees for 
these products fail to meet the requirements of the Act.

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

    ISE 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 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, ISE 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, ISE believes that 
a record may readily be established to demonstrate the competitive 
nature of the market in question.
    As recently noted by a number of exchanges,\19\ there is intense 
competition between trading platforms that provide transaction 
execution and routing services and proprietary data products. 
Transaction execution and proprietary data products are complementary 
in that market data is both an input and a byproduct of the execution 
service. In fact, market data and trade execution are a paradigmatic 
example of joint products with joint costs. The decision whether and on 
which platform to post an order will 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.
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    \19\ See Securities Exchange Act Release Nos. 63084 (October 13, 
2010), 75 FR 64379 (October 19, 2010) (Notice of Filing and 
Immediate Effectiveness of Proposed Rule Change To Revise an 
Optional Depth Data Enterprise License Fee for Broker-Dealer 
Distribution of Depth-of-Book Data) (SR-NASDAQ-2010-125); and 62887 
(September 10, 2010), 75 FR 57092 (September 17, 2010) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change Relating 
to Market Data Feeds) (SR-PHLX-2010-121).
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    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 
decrease, 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.' '' \20\ 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.
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    \20\ NetCoalition, at 24.
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    Analyzing the cost of market data distribution in isolation from 
the cost of all of the inputs supporting the creation of market data 
will inevitably underestimate the cost of the data. Thus, because it is 
impossible to create data without a fast, technologically robust, and 
well-regulated execution system, system costs and regulatory costs 
affect the price of market data. It would be equally misleading, 
however, to attribute all of the exchange's costs to the market data 
portion of an exchange's joint product. Rather, all of the exchange's 
costs are incurred for the unified purposes of attracting order flow, 
executing and/or routing orders, and generating and selling data about 
market activity. The total return that an exchange earns reflects the 
revenues it receives from the joint products and the total costs of the 
joint products.
    Competition among trading platforms can be expected to constrain 
the aggregate return each platform earns from the sale of its joint 
products, but different platforms may choose from a range of possible, 
and equally reasonable, pricing strategies as the means of recovering 
total costs. For

[[Page 47634]]

example, some platform may choose to pay rebates to attract orders, 
charge relatively low prices for market information (or provide 
information free of charge) and charge relatively high prices for 
accessing posted liquidity. Other platforms may choose a strategy of 
paying lower rebates (or no rebates) to attract orders, setting 
relatively high prices for market information, and setting relatively 
low prices for accessing posted liquidity. In this environment, there 
is no economic basis for regulating maximum prices for one of the joint 
products in an industry in which suppliers face competitive constraints 
with regard to the joint offering.
    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 numerous 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. 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 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 Google, 
impose a discipline by providing only data that will enable them to 
attract ``eyeballs'' that contribute to their advertising revenue. 
Retail broker-dealers, such as Schwab and Fidelity, offer their 
customers proprietary data only if it promotes trading and generates 
sufficient commission revenue. Although the business models may differ, 
these vendors' pricing discipline is the same: they can simply refuse 
to purchase any proprietary data product that fails to provide 
sufficient value. NASDAQ 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.
    Competition among platforms has driven ISE continually to improve 
its platform data offerings and to cater to customers' data needs. For 
example, ISE has developed and maintained multiple delivery mechanisms 
that enable customers to receive data in the form and manner they 
prefer and at the lowest cost to them. ISE offers front end 
applications such as its PrecISE Trade application which helps 
customers utilize data. ISE offers data via multiple extranet 
providers, thereby helping to reduce network and total cost for its 
data products. ISE also offers an enterprise license option to help 
reduce the administrative burden and costs to firms that purchase 
market data. Despite these enhancements and a dramatic increase in 
message traffic, ISE's fees for market data have, for the most part, 
remained flat.

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

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

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 \21\ and Rule 19b-4(f)(2) \22\ thereunder. 
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 change should be approved or disapproved.
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    \21\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \22\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File No. SR-ISE-2011-50 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-ISE-2011-50. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your

[[Page 47635]]

comments more efficiently, please use only one method. The Commission 
will post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent 
amendments, all written statements with respect to the proposed rule 
change that are filed with the Commission, and all written 
communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for Web site viewing and printing in the Commission's Public 
Reference Room, 100 F Street, NE., Washington, DC 20549, on official 
business days between the hours of 10 a.m. and 3 p.m. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the ISE. 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-ISE-2011-50 and should be submitted by August 26, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-19856 Filed 8-4-11; 8:45 am]
BILLING CODE 8011-01-P


