
[Federal Register Volume 77, Number 200 (Tuesday, October 16, 2012)]
[Notices]
[Pages 63362-63367]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-25320]



[[Page 63362]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68005; File No. SR-NYSEARCA-2012-106]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Establishing Fees 
for Certain Proprietary Options Market Data Products

October 9, 2012.
    Pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby 
given that, on September 26, 2012, NYSE Arca, Inc. (the ``Exchange'' or 
``NYSE Arca'') 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 self-regulatory 
organization. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    The Exchange proposes to establish fees for certain proprietary 
options market data products. The text of the proposed rule change is 
available on the Exchange's Web site at www.nyse.com, at the principal 
office of the Exchange, and at the Commission's Public Reference Room.

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

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

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

1. Purpose
    The Exchange proposes to establish fees for certain proprietary 
options market data products. The products covered by the fees are 
ArcaBook for Arca Options--Trades, ArcaBook for Arca Options--Top of 
Book, ArcaBook for Arca Options--Depth of Book, ArcaBook for Arca 
Options--Complex, ArcaBook for Arca Options--Series Status, and 
ArcaBook for Arca Options--Order Imbalance (collectively, the ``Arca 
Options Products'').\4\ The fees set forth below, which will be 
implemented on October 1, 2012, are for all six of the Arca Options 
Products collectively; at this time, the Exchange is not establishing 
separate pricing for each of the individual products.
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    \4\ See Securities Exchange Act Release No. 67720 (Aug. 23, 
2012); 77 FR 52769 (Aug. 30, 2012) (SR-NYSEArca-2012-89).
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Access and Redistribution Fees
    The Exchange proposes to charge an Access Fee of $3,000 per month 
and a Redistribution Fee of $2,000 per month.
Professional End-User \5\ Fee
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    \5\ A Professional End-User is a person or entity that receives 
market data from the Exchange or a Redistributor and uses that 
market data solely for its own internal purposes. A Professional 
End-User is not permitted to redistribute that market data to any 
person or entity outside of its organization.
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    For the receipt and use of the Arca Options Products, the Exchange 
proposes to charge Professional End-Users $50 per month for each ``User 
per Source.'' \6\ A ``Source'' is a Professional End-User-controlled 
source of data from a Redistributor,\7\ such as a data feed; in this 
case, it is the Arca Options Products. Professional End-Users must 
receive approval to report User per Source by way of a license with the 
Exchange; without such approval, the Professional End-User must report 
each access identifier (``Access ID''). An Access ID is a unique 
identifier that a Professional End-User has assigned to a natural 
person, application, or device (each, a ``User''),\8\ which identifier 
the Professional End-User's Entitlement System uses to administer 
technical controls over access to market data.\9\
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    \6\ The Exchange notes that the User per Source reporting policy 
differs from the unit-of-count policy used for other Exchange market 
data products, such as NYSE Arca Trades and NYSE Arca BBO. See 
Securities Exchange Act Release No. 62188 (May 27, 2010), 75 FR 
31484 (June 3, 2010) (SR-NYSEArca-2010-23). Because the Arca Options 
Products are new and the Exchange has not charged for them before, 
the Exchange has determined to utilize an updated methodology that 
it believes may be easier for it and its customers to administer. 
Based on its experience with these products, the Exchange will 
consider adopting User per Source reporting for other market data 
products in the future.
    \7\ A Redistributor is any entity that makes market data 
available to any person other than the Redistributor and its 
employees, directors, officers and partners, irrespective of the 
means of transmission or access.
    \8\ An Access ID may be a User name, but is not limited to a 
User name. For example, it could be a host name, Internet protocol 
(``IP'') address, or a MAC/network address. A User may have more 
than one Access ID assigned to control access to market data. 
Sharing of passwords and/or Access IDs among Users is prohibited, as 
is simultaneous access by multiple Users using the same Access ID. 
Simultaneous access by an individual User is allowed if the 
Professional End-User discloses in advance the technical and/or 
process controls that prohibit the sharing of Access IDs or other 
means of accessing data.
    \9\ The Exchange considers any mechanism that controls access to 
market data to constitute an Entitlement System. Examples of an 
Entitlement System include a system that a Redistributor provides 
for permissioning Users to receive and use market data, a dedicated 
system that a Professional End-User develops internally, a server-
based market data application that controls access to a limited 
group of authorized Users, and a closed network in which physical 
access to the network determines a User's ability to access market 
data. Each Professional End-User must use an Entitlement System to 
control all data distribution. Each Entitlement System should 
control or track simultaneous access, generate authentic entitlement 
reports, control Access IDs and passwords, and maintain an audit 
trail.
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Controlled Access
    The unit-of-count for Redistributors of controlled accesses to 
market data, such as display devices and single-use application program 
interfaces (``APIs''), is each Access ID. Redistributors must ensure, 
by way of their agreements with clients, that Access IDs are not shared 
among Users. If a Professional End-User cannot or does not disclose in 
advance its restrictions relating to Access ID sharing, thereby 
enabling simultaneous access by multiple Users, the maximum number of 
potential accesses (i.e., the greatest number of natural persons, 
applications, and devices that can access the market data) will be 
chargeable.
Reporting Internal Use
    Professional End-Users approved for User per Source reporting may 
report the total number of natural persons per each Source rather than 
the number of Access IDs per Source. For example, if a natural person 
has two Access IDs receiving data from a single Redistributor's data 
feed, the Professional End-User may report a count of one. If a natural 
person has one Access ID receiving data from two Redistributors' data 
feeds, however, the Professional End-User must report a count of two. 
Likewise, if a natural person has two Access IDs receiving data feeds 
from two separate Redistributors, the Professional End-User must report 
a count of two.
    In order to report User per Source, the Professional End-User must 
identify the User associated with each Access ID. Possible methods to 
identify the User include using human resources or other

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corporate identifiers associated with a User in an inventory system. 
Where an Access ID cannot be associated to a natural person User, the 
Professional End-User must treat that Access ID as a User per Source.
    This aspect of User per Source reporting applies only to a 
Professional End-User's controlled internal distribution of data, and 
does not apply to Redistributor-controlled access as described above; 
therefore, a Professional End-User may not net internal Users against 
Access IDs for a Redistributor's controlled access, such as a device or 
API, as described in the preceding section.
Application Usage
    Some internal distribution networks feature downstream applications 
that control access to market data without using a centralized 
Entitlement System. The Access IDs of each such application must be 
reported, and Professional End-Users must ensure that audit trails are 
maintained. Professional End-Users that have been approved for User per 
Source reporting may report each of the Users of the application and 
not the Access IDs of these systems; however, Professional End-Users 
must ensure that all Users are reported across all Entitlement Systems 
and applications. For example, a User that has an Access ID from an 
Entitlement System and an Access ID from a downstream application each 
receiving data from a single Redistributor source would be reported 
once.
Counting Users in Closed Networks
    In a Closed Network, a Professional End-User has an environment 
whereby market data is published on an intranet or subnet with no other 
access control such as an Entitlement System. In environments such as 
this, all assigned IP addresses on the network range are considered a 
User per Source and are therefore reportable. In the case of a closed 
network in which physical access to the network determines a User's 
ability to access market data, the Professional End-User must report 
any device that has physical access to the network as a separate User 
per Source.
    In closed networks that employ virtual devices, the Professional 
End-User must report all physical and virtual devices. For example, if 
a server provides five different market data products through five 
different IP addresses, each of which is capable of accessing market 
data, the Professional End-User must report all five IP addresses for 
each of the five products. That is, the Professional End-User must 
report virtual devices (in the form of IP addresses) as well as 
physical devices, and not just the physical server.\10\
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    \10\ If a physical or virtual device (including an IP address) 
is capable of receiving a market data product, the Professional End-
User must report the device regardless of whether a User uses the 
device to gain access to the market data product.
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Audit Trails
    In order to remove an Access ID from the reporting and fee 
obligations for the Arca Options Products, the Professional End-User 
must disable the ability of the Access ID to receive such data 
entirely. The Professional End-User must maintain an audit trail to 
evidence the disabling of an Access ID for any period. In the absence 
of an adequate audit trail, all Access IDs that connect to the server 
remain fee liable. If the Professional End-User cannot limit or track 
the number of Access IDs, it must report all Access IDs.
Same User Name for Multiple Uses
    Frequently, Users are assigned the same User name to log into 
multiple services and applications that do not share a common 
Entitlement System. For example, a natural person might elect to use 
the same User name to gain access to Redistributor A's services as it 
uses to gain access to Redistributor B's services. Or, he or she may 
use the same User name to access Redistributor A's Service X as he or 
she uses to gain access to Redistributor A's Service Y. Or, he or she 
may use the same User name to access Application A with Redistributor 
A's data as he or she may use to access Application B with 
Redistributor A's data. Despite the use of the same User name for 
multiple purposes, each use of a User name by a separate Entitlement 
System must be treated as a separate Access ID.
Simultaneous Access and Contention-Based Entitlement Systems
    Simultaneous Access is the capability of a single Access ID to be 
used concurrently on two or more devices identified on a network by 
their host name, IP address, or other system-level identifier for 
network access. Entitlement Systems must control and track the number 
of simultaneous accesses by a single Access ID.
    Contention-Based Entitlement Systems are not consistent with User 
per Source reporting. Those are systems for which a limited number of 
``tokens'' or ``accesses'' that control the number of simultaneous 
Users are shared among Users. As is the case if a Professional End-User 
cannot or does not disclose in advance its restrictions relating to 
Access ID sharing, thereby enabling simultaneous access by multiple 
Users, the maximum number of potential accesses (i.e., the greatest 
number of natural persons, applications, and devices that can access 
the market data) will be chargeable.
Nonprofessional End-User Fees
    The Exchange proposes to charge each Redistributor $1.00 per month 
for each Nonprofessional End-User to whom it provides Arca Options 
Products. The Exchange proposes to impose the charge on the 
Redistributor, rather than on the Nonprofessional End-User. In 
addition, the Exchange proposes to cap the Nonprofessional End-User Fee 
at $5,000 per month for each Redistributor. The Exchange proposes to 
apply the same criteria for qualification as a Non-Professional End-
User as it does for non-professional subscribers to its other 
products.\11\
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    \11\ The Exchange defines a nonprofessional subscriber as a 
natural person who receives market data solely for his or her 
personal, non-business use and who is not a ``Securities 
Professional,'' meaning that the person is not (1) registered or 
qualified with the Commission, the Commodities Futures Trading 
Commission, any state securities agency, any securities exchange or 
association, or any commodities or futures contract market or 
association; (2) engaged as an ``investment adviser'' as that term 
is defined in Section 202(a)(11) of the Investment Advisors Act of 
1940 (whether or not registered or qualified under that statute); or 
(3) employed by a bank or other organization that is exempt from 
registration under federal and/or state securities laws to perform 
functions that would require him or her to be so registered or 
qualified if he or she were to perform such function for an 
organization not so exempt. The nonprofessional subscriber policy is 
available at http://www.nyxdata.com/Docs/Market-Data/Policies.
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Securities Exchange Act of 1934 
(the ``Act'') \12\ in general and with Section 6(b)(4) and 6(b)(5) of 
the Act \13\ in particular in that it provides an equitable allocation 
of reasonable fees among users and recipients of the data and is not 
designed to permit unfair discrimination among customers, issuers, and 
brokers. The proposed Arca Options Products fees are reasonable, 
equitable, and not unfairly discriminatory because they will provide 
additional data to the marketplace and give investors greater choices 
at prices that are comparable to other similar products. For example, 
the Chicago Board Options Exchange (``CBOE'') offers CBOE Streaming 
Markets, a streaming data feed that includes best bids and offers 
(``BBOs''), trades, customer vs. non-customer breakdown of the BBOs, 
contingent

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prices (all-or-none orders) better than or equal to the BBOs, and BBO 
data and last sale data for complex strategies.\14\ CBOE charges a 
direct connect fee of $3,500 per connection per month, a per user fee 
of $25 per month per Authorized User or Device, and $500 per month per 
data port for receipt of this data.\15\ NASDAQ PHLX offers PHLX Depth 
of Market, a data product that provides order and quotation information 
for individual quotes and orders on the PHLX book, last sale 
information for trades executed on PHLX, and an imbalance message, for 
which it charges $4,000 per month for internal distribution and $4,500 
per month for external distribution.\16\ The Exchange also notes that 
it offers an integrated equities market data feed and equity depth-of-
book product that are priced comparably to the proposed Arca Options 
Products pricing.\17\ The Exchange further believes that the proposed 
Arca Options Products fees are equitable and not unfairly 
discriminatory because the general categories of fees--Direct Access, 
Redistributor, Professional End-User, and Non-Professional End-User--
are comparable to the fee categories already established by the 
Exchange as well as other exchanges for market data products and the 
fees will apply equally to all persons in the respective categories 
that choose to purchase the Arca Options Product.
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    \12\ 15 U.S.C. 78f(b).
    \13\ 15 U.S.C. 78f(b)(4) and (5).
    \14\ See Securities Exchange Act Release No. 66486 (Feb. 28, 
2012), 77 FR 13166 (Mar. 5, 2012) (SR-CBOE-2012-016).
    \15\ Id.
    \16\ See Securities Exchange Act Release No. 67466 (July 19, 
2012), 77 FR 43629 (July 25, 2012) (SR-Phlx-2012-93) (``PHLX 
Filing'').
    \17\ The proposed Access Fee of $3,000 per month is the same as 
the $3,000 Direct Access Fee for the NYSE Arca Integrated Data Feed, 
an equities market data product that includes NYSE Arca BBO, NYSE 
Arca Trades, NYSE ArcaBook, and certain additional market data. The 
proposed Redistribution Fee of $2,000 per month is less than the 
$3,000 Redistribution Fee for the NYSE Arca Integrated Feed. The 
proposed Non-Professional End-User Fee of $1.00 per month (capped at 
$5,000) is less than the $10 per month Non-Professional Subscriber 
Fee (capped at $20,000) charged by the Exchange for NYSE ArcaBook. 
The Professional End-User Fee of $50 per month per User per Source 
is more than the NYSE ArcaBook $30 per month Professional Subscriber 
Fee. See Securities Exchange Act Release Nos. 66128 (Jan. 10, 2012), 
77 FR 2331 (Jan. 17, 2012) (SR-NYSEArca-2011-96), and 63291 (Nov. 9, 
2010), 75 FR 70311 (Nov. 17, 2010) (SR-NYSEArca-2010-97). However, 
the Exchange believes that the difference in the Professional fees 
is reasonable and equitable because the Arca Options Products offer 
more data than the NYSE Arca Integrated Feed.
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    The Exchange believes that the proposed User per Source reporting 
methodology is reasonable, equitable, and not unfairly discriminatory 
because it will help to simplify market data administration. The 
Exchange recognizes that each Redistributor and Professional End-User 
may use Arca Options Products differently, and the reporting 
methodology takes into account the various uses and provides a means to 
avoid duplicative counting that will allow data recipients to better 
manage their costs. Moreover, the reporting methodology does not 
discriminate among data recipients and users, as the reporting 
methodology would apply equally to all Professional End-Users that 
choose to utilize it.
    The existence of alternatives to the Arca Options Products, 
including real-time consolidated data, free delayed consolidated data, 
and proprietary data from other sources, ensures that the Exchange 
cannot set unreasonable fees, or fees that are unreasonably 
discriminatory, when vendors and subscribers can elect such 
alternatives. The recent decision of the United States Court of Appeals 
for the District of Columbia Circuit in NetCoalition v. SEC, No. 09-
1042 (DC Cir. 2010), upheld the Commission's reliance upon the 
existence of competitive market mechanisms to set reasonable and 
equitably allocated fees for proprietary market data:

    In fact, the legislative history indicates that the Congress 
intended that the market system `evolve through the interplay of 
competitive forces as unnecessary regulatory restrictions are 
removed' and that the SEC wield its regulatory power `in those 
situations where competition may not be sufficient,' such as in the 
creation of a `consolidated transactional reporting system.'
    NetCoalition 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 agreed with the 
Commission's conclusion that ``Congress intended that `competitive 
forces should dictate the services and practices that constitute the 
U.S. national market system for trading equity securities.' ''\18\
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    \18\ NetCoalition at 16.
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    As explained below in the Exchange's Statement on Burden on 
Competition, the Exchange believes that there is substantial evidence 
of competition in the marketplace for data and that the Commission can 
rely upon such evidence in concluding that the fees established in this 
filing are the product of competition and therefore satisfy the 
relevant statutory standards.\19\
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    \19\ Section 916 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 (``Dodd-Frank Act'') amended 
paragraph (A) of Section 19(b)(3) of the Act, 15 U.S.C. 78s(b)(3), 
to make clear that all exchange fees for market data may be filed by 
exchanges on an immediately effective basis.
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    As the NetCoalition decision noted, the Commission is not required 
to undertake a cost-of-service or ratemaking approach, and the Exchange 
incorporates by reference into this proposed rule change its analysis 
of this topic in another recent rule filing.\20\
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    \20\ See Securities Exchange Act Release No. 63291 (Nov. 9, 
2010), 75 FR 70311 (Nov. 17, 2010) (SR-NYSEArca-2010-97).
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    For these reasons, the Exchange believes that the proposed fees are 
reasonable, equitable, and not unfairly discriminatory.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. An exchange's ability to 
price its data feed products is constrained by (1) competition among 
exchanges in a variety of dimensions, (2) the existence of inexpensive 
real-time consolidated data and free delayed consolidated data, and (3) 
the inherent contestability of the market for proprietary data.
    The market for proprietary data products is currently competitive 
and inherently contestable because there is fierce competition for the 
inputs necessary to the creation of proprietary data and strict pricing 
discipline for the proprietary products themselves. Numerous options 
exchanges compete with each other for trades and market data, 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 in a vigorously competitive market.
    It is common for broker-dealers to further exploit this competition 
by sending their order flow to multiple markets, rather than providing 
it all to a single market. The current options market structure is 
dispersed and complex with trading volume dispersed among many highly 
automated trading centers that compete for order flow in the same 
options, with trading centers offering a wide range of services that 
are designed to attract different types of market participants with 
varying trading needs.\21\
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    \21\ See, e.g., Securities Exchange Act Release No. 49175, 
Concept Release: Competitive Developments in the Options Markets 
(Feb. 3, 2004), 69 FR 6124, 6125-6126 (Feb. 3, 2004) (S7-07-04).
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    Competitive markets for order flow, executions, and transaction 
reports provide pricing discipline for the inputs of proprietary data 
products and therefore constrain markets from overpricing proprietary 
market data. The U.S. Department of Justice recently

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acknowledged the aggressive competition among exchanges. In announcing 
the abandoned bid for NYSE Euronext by NASDAQ OMX Group Inc. and 
IntercontinentalExchange Inc., Assistant Attorney General Christine 
Varney stated that exchanges ``compete head to head to offer real-time 
equity data products. These data products include the best bid and 
offer of every exchange and information on each equity trade, including 
the last sale.''\22\ Similarly, the options markets vigorously compete 
with respect to options data products.\23\
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    \22\ Press Release, U.S. Department of Justice, ``Assistant 
Attorney General Christine Varney Holds Conference Call Regarding 
NASDAQ OMX Group Inc. and IntercontinentalExchange Inc. Abandoning 
Their Bid for NYSE Euronext'' (May 16, 2011), available at http://www.justice.gov/iso/opa/atr/speeches/2011/at-speech-110516.html.
    \23\ See PHLX Filing, supra note 16 [sic], which describes a 
variety of options market data products and their pricing.
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    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 trade executions, exchange data products cannot 
exist. Further, 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. In that respect, 
the Exchange believes that the Arca Options Products will offer options 
market data information that is useful for both professionals and non-
professionals in making trading and investment 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.\24\ The total return that a 
trading platform earns reflects the revenues it receives from both 
products and the joint costs it incurs. Moreover, an exchange's broker-
dealer customers 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 
proprietary product exceeds its expected value, the broker-dealer will 
choose not to buy it.
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    \24\ Although the Exchange charges an Options Regulatory Fee, it 
does not offset the full cost of the Exchange's regulatory program, 
e.g., non-customer trading activity. See Securities Exchange Act 
Release No. 64399 (May 4, 2011), 76 FR 27114 (May 10, 2011) (SR-
NYSEArca-2011-20).
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    Moreover, if broker-dealers choose to direct fewer orders to a 
particular exchange, the value of that exchange's market data product 
to those broker-dealers decreases for two reasons. First, the product 
will contain less information because executions of fewer orders will 
be reflected in it. Second, and perhaps more importantly, the product 
will be less valuable to broker-dealers that choose to direct their 
orders to other venues because it does not provide information about 
the venues to which they are directing their orders. Data from the 
competing venues to which the broker-dealers are directing orders would 
become correspondingly more valuable.
    Similarly, in the case of products that are distributed through 
market data vendors, the vendors provide price discipline for 
proprietary data products because they control the primary means of 
access to certain end-users. Vendors impose price restraints based upon 
their business models. For example, vendors such as Bloomberg and 
Thomson 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.
    Other market participants have noted that the liquidity provided by 
the order book, trade execution, core market data, and non-core market 
data are joint products of a joint platform and have common costs.\25\ 
The Exchange agrees with and adopts those discussions and the arguments 
therein. The Exchange also notes that the economics literature confirms 
that there is no way to allocate common costs between joint products 
that would shed any light on competitive or efficient pricing.\26\
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    \25\ See Securities Exchange Act Release No. 62887 (Sept. 10, 
2010), 75 FR 57092, 57095 (Sept. 17, 2010) (SR-Phlx-2010-121); 
Securities Exchange Act Release No. 62907 (Sept. 14, 2010), 75 FR 
57314, 57317 (Sept. 20, 2010) (SR-NASDAQ-2010-110); and Securities 
Exchange Act Release No. 62908 (Sept. 14, 2010) (SR-NASDAQ-2010-
111), 75 FR 57321, 57324 (Sept. 20, 2010) (``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.''); see also August 1, 2008 
Comment Letter of Jeffrey S. Davis, Vice President and Deputy 
General Counsel, NASDAQ OMX Group, Inc., Statement of Janusz Ordover 
and Gustavo Bamberger (``because market data is both an input to and 
a byproduct of executing trades on a particular platform, market 
data and trade execution services are an example of `joint products' 
with `joint costs.' ''), attachment at pg. 4, available at 
www.sec.gov/comments/34-57917/3457917-12.pdf.
    \26\ See generally Mark Hirschey, Fundamentals of Managerial 
Economics, at 600 (2009) (``It is important to note, however, that 
although it is possible to determine the separate marginal costs of 
goods produced in variable proportions, it is impossible to 
determine their individual average costs. This is because common 
costs are expenses necessary for manufacture of a joint product. 
Common costs of production--raw material and equipment costs, 
management expenses, and other overhead--cannot be allocated to each 
individual by-product on any economically sound basis. * * * Any 
allocation of common costs is wrong and arbitrary.''). This is not 
new economic theory. See, e.g., F. W. Taussig, ``A Contribution to 
the Theory of Railway Rates,'' Quarterly Journal of Economics V(4) 
438, 465 (July 1891) (``Yet, surely, the division is purely 
arbitrary. These items of cost, in fact, are jointly incurred for 
both sorts of traffic; and I cannot share the hope entertained by 
the statistician of the Commission, Professor Henry C. Adams, that 
we shall ever reach a mode of apportionment that will lead to 
trustworthy results.'').
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    The Exchange believes that retail broker-dealers, such as Schwab 
and Fidelity, offer their customers proprietary data only if it 
promotes trading and generates what they believe is sufficient 
commission revenue to justify the cost of acquiring that data. 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 what they believe is sufficient value. 
The Exchange 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. 
Moreover, the Exchange believes that products can enhance order flow to 
the Exchange by providing more widespread distribution of information 
about transactions in real time, thereby encouraging wider 
participation in the market. Conversely, less order flow to a venue 
decreases the value of that venue's market data products to 
distributors and investors because the products contain less content.
    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

[[Page 63366]]

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 an exchange's costs to the market data portion of an exchange's 
joint product. Rather, all of an exchange's costs are incurred for the 
unified purposes of attracting order flow, executing and/or routing 
orders, and generating and selling data about market activity. The 
total return that an exchange earns reflects the revenues it receives 
from the joint products and the total costs of the joint products.
    Competition among trading platforms can be expected to constrain 
the aggregate return that each platform earns from the sale of its 
joint products, but different 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.
    The level of competition and contestability in the market is 
evident in the numerous alternative venues that compete for order flow, 
including 10 self-regulatory organization (``SRO'') options markets. 
Plans to launch two new options exchanges have been announced.\27\ Each 
SRO market competes to produce transaction reports via trade 
executions. The large number of SROs that currently produce proprietary 
data or are currently capable of producing it provides further pricing 
discipline for proprietary data products. Each SRO is currently 
permitted to produce proprietary data products, and many currently do 
or have announced plans to do so, including but not limited to the 
Exchange, NYSE MKT, CBOE, C2, ISE, NASDAQ OMX, NASDAQ PHLX, NASDAQ BX, 
and BATS. Because market data users can thus find suitable substitutes 
for most proprietary market data products, a market that overprices its 
market data products stands a high risk that users may substitute 
another source of market information for its own.
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    \27\ Nina Mehta and Nikolaj Gammeltoft, ``Miami Options Exchange 
Moves Closer to Becoming 11th U.S. Venue,'' Bloomberg.com (Aug. 16, 
2012), available at http://www.bloomberg.com/news/2012-08-16/miami-options-exchange-moves-closer-to-becoming-11th-u-s-venue.html.
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    In addition to the competition and price discipline described 
above, the market for proprietary data products is also highly 
contestable because market entry is rapid, 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, TrackECN, BATS Trading and Direct Edge.\28\ 
As noted above, two new options exchanges recently have been 
proposed.\29\
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    \28\ Today, BATS provides data at no charge on its Web site in 
order to attract more order flow, and uses market data revenue 
rebates from resulting additional executions to maintain low 
execution charges for its users. This is simply a securities market-
specific example of the well-established principle that in certain 
circumstances more sales at lower margins can be more profitable 
than fewer sales at higher margins; this example is additional 
evidence that market data is an inherent part of a market's joint 
platform.
    \29\ See supra note 28 [sic].
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    In this environment, a super-competitive increase in the fees 
charged for either transactions or data has the potential to impair 
revenues from both products. 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. If a platform increases its market data fees, the change may 
affect the overall cost of doing business with the platform, and 
affected market participants will assess whether they can lower their 
trading costs by directing orders elsewhere, thereby lessening the need 
for the more expensive data, or simply not purchase the data.
    In establishing the fees for the Arca Options Products, the 
Exchange considered the competitiveness of the market for data and all 
of the implications of that competition. The Exchange believes that it 
has considered all relevant factors and has not considered irrelevant 
factors in order to establish fair, reasonable, and not unreasonably 
discriminatory fees and an equitable allocation of fees among all 
users. The existence of numerous alternatives to the Exchange's 
product, including real-time consolidated data, free delayed 
consolidated data, and proprietary data from other sources, ensures 
that the Exchange cannot set unreasonable fees, or fees that are 
unreasonably discriminatory, when vendors and subscribers can elect 
these alternatives. Accordingly, the Exchange believes that the 
acceptance of data feed products in the marketplace demonstrates the 
consistency of these fees with applicable statutory standards.

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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The foregoing rule change is effective upon filing pursuant to 
Section 19(b)(3)(A) \30\ of the Act and subparagraph (f)(2) of Rule 
19b-4 \31\ thereunder, because it establishes a due, fee, or other 
charge imposed by NYSE Arca.
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    \30\ 15 U.S.C. 78s(b)(3)(A).
    \31\ 17 CFR 240.19b-4(f)(2).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NYSEARCA-2012-106 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.


[[Page 63367]]


All submissions should refer to File Number SR-NYSEARCA-2012-106. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSEARCA-2012-106 and should 
be submitted on or before November 6, 2012.
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    \32\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-25320 Filed 10-15-12; 8:45 am]
BILLING CODE 8011-01-P


