
[Federal Register Volume 78, Number 95 (Thursday, May 16, 2013)]
[Notices]
[Pages 28917-28924]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-11635]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-69554; File No. SR-NYSEArca-2013-47]


Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change Establishing Non-
Display Usage Fees and Amending the Professional End-User Fees for NYSE 
Arca Options Market Data

May 10, 2013.
    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 May 1, 2013, 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 Substance 
of the Proposed Rule Change

    The Exchange proposes to establish non-display usage fees and to 
amend the Professional End-User fees for NYSE Arca Options market data, 
operative on May 1, 2013. 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to establish non-display usage fees and to 
amend the Professional End-User fees for NYSE Arca Options market data, 
operative on May 1, 2013. The subsections below describe (1) the 
background on the current fees for these real-time products; (2) the 
rationale for creating the new non-display usage fee structure; (3) the 
proposed fee change for non-display usage by Professional End-Users; 
(4) the proposed fee change for display usage by Professional End-
Users; and (5) an example comparing the current and proposed fees.

Background

    On October 1, 2012, the Exchange began offering the following real-
time options market data products: 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, ``Arca Options Products'').\4\ Fees cover all six 
products.\5\
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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).
    \5\ See SR-NYSEArca-2013-41 (establishing a fee schedule) and 
Securities Exchange Act Release No. 68005 (Oct. 9, 2012), 77 FR 
63362 (Oct. 16, 2012) (SR-NYSEArca-2012-106) (establishing fees for 
Arca Options Products). Arca Options Products are not offered with 
separate fees for the individual underlying products.
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    The Exchange charges an access fee of $3,000 per month and a 
redistribution fee of $2,000 per month for the Arca Options Products.
    The Exchange charges Professional End-Users $50 per month for each 
``User per Source'' for the receipt and use of the Arca Options 
Products.\6\ 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. A ``Source'' is a Professional End-
User-controlled

[[Page 28918]]

source of data from a Redistributor,\7\ such as a data feed; in this 
case, it is the Arca Options Products. An access identifier (``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\ The term 
``device'' includes display and non-display devices.
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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).
    \7\ Under the current User per Source policy, 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. See 
infra n.13.
    \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, an 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. See supra n.5.
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    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.
    The following sections describe the unit-of-count for different 
types of access to and usage of Arca Options Products.

Redistributor 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) is charged.

Internal Use

    Professional End-Users using 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.\10\
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    \10\ The Professional End-User must identify the User associated 
with each Access ID. Where an Access ID cannot be associated to a 
natural person User (e.g., because it is associated with a non-
display device), the Professional End-User must treat that Access ID 
as a User per Source.
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    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 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. (A virtual 
device can be either a display or non-display device.) 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.\11\
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    \11\ 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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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

[[Page 28919]]

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.

Rationale for New Non-Display Usage Fee Structure

    As noted in a previous market data fee filing by the Exchange's 
affiliate, ``technology has made it increasingly difficult to define 
`device' and to control who has access to devices, [and] the markets 
have struggled to make device counts uniform among their customers.'' 
\12\ Significant change has characterized the industry in recent years, 
stemming in large measure from changes in regulation and technological 
advances, which has led to the rise in automated and algorithmic 
trading. Additionally, market data feeds have become faster and contain 
a vastly larger number of quotes and trades. Today, a majority of 
trading is done by leveraging non-display devices consuming massive 
amounts of data. Some firms base their business models largely on 
incorporating non-display data into applications and do not require 
widespread data access by the firm's employees. Changes in market data 
consumption patterns have increased the use and importance of non-
display data.
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    \12\ See Securities Exchange Act Release No. 59544 (Mar. 9, 
2009), 74 FR 11162 (Mar. 16, 2009) (SR-NYSE-2008-131). At least one 
other Exchange also has noted such administrative challenges. In 
establishing a non-display usage fee for internal distributors of 
TotalView and OpenView, NASDAQ Stock Market LLC (``NASDAQ'') noted 
that as ``the number of devices increase, so does the administrative 
burden on the end customer of counting these devices.'' See 
Securities Exchange Act Release No. 61700 (Mar. 12, 2010), 75 FR 
13172 (Mar. 18, 2010) (SR-NASDAQ-2010-034).
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    Applications that can be used in non-display devices provide added 
value in their capability to manipulate and spread the data they 
consume. Such applications have the ability to perform calculations on 
the live data stream and manufacture new data out of it. Data can be 
processed much faster by a non-display device than it can be by a human 
being processing information that he or she views on a data terminal. 
Non-display devices also can dispense data to multiple computer 
applications as compared with the restriction of data to one display 
terminal.
    While the non-display data has become increasingly valuable to data 
recipients who can use it to generate substantial profits, it has 
become increasing difficult for them and the Exchange to accurately 
count non-display devices. The number and type of non-display devices, 
as well as their complexity and interconnectedness, have grown in 
recent years, creating administrative challenges for vendors, data 
recipients, and the Exchange to accurately count such devices and audit 
such counts. Unlike a display device, such as a Bloomberg terminal, it 
is not possible to simply walk through a trading floor or areas of a 
data recipient's premises to identify non-display devices. During an 
audit, an auditor must review a firm's entitlement report to determine 
usage. While display use is generally associated with an individual end 
user and/or unique user ID, a non-display use is more difficult to 
account for because the entitlement report may show a server name or IP 
address or it may not. The auditor must review each IP or server and 
further inquire about downstream use and quantity of servers with 
access to data; this type of counting is very labor-intensive and prone 
to inaccuracies.
    For these reasons, the Exchange determined that its current fee 
structure, which in certain instances is based on counting non-display 
devices, does not adequately reflect market and technology developments 
and the value of the non-display data and its many profit-generating 
uses for subscribers. As such, the Exchange, in conjunction with its 
domestic and foreign affiliate exchanges, undertook a review of its 
market data policies with a goal of bringing greater consistency and 
clarity to its fee structure; easing administration for itself, 
vendors, and subscribers; and setting fees at a level that better 
reflects the current value of the data provided. As a result of this 
review, the Exchange has determined to amend its fee schedule.

Proposed Non-Display Usage Fees

    The Exchange proposes to establish new monthly fees for non-display 
usage, which will be consistent with the structure of certain non-
display fees established for certain equity market data products of the 
Exchange and its affiliates.\13\ Non-display usage will mean accessing, 
processing or consuming an NYSE Arca data product delivered via direct 
and/or Redistributor \14\ data feeds, for a purpose other than in 
support of its display or further internal or external redistribution. 
The proposed non-display fees will apply to the non-display use of the 
data product as part of automated calculations or algorithms to support 
trading decision-making processes or the operation of trading platforms 
(``Non-Display Trading Activities''). They include, but are not limited 
to, high frequency trading, automated order or quote generation and/or 
order pegging, or price referencing for the purposes of algorithmic 
trading and/or smart order routing. Applications and devices that 
solely facilitate display, internal distribution, or redistribution of 
the data product with no other uses and applications that use the data 
product for other non-trading activities, such as the creation of 
derived data, quantitative analysis, fund administration, portfolio 
management, and compliance, are not covered by the proposed non-display 
fee structure and are subject to the current fee structure. The 
Exchange reserves the right to audit data recipients' use of NYSE Arca 
market data products in Non-Display Trading Activities in accordance 
with NYSE Arca's vendor and subscriber agreements.
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    \13\ See Securities Exchange Act Release Nos. 69315 (Apr. 5, 
2013), 78 FR 21668 (Apr. 11, 2013) (SR-NYSEArca-2013-37); 69278 
(Apr. 2, 2013), 78 FR 20973 (Apr. 8, 2013) (SR-NYSE-2013-25); 69285 
(Apr. 3, 2013), 78 FR 21172 (Apr. 9, 2013) (SR-NYSEMKT-2013-32). The 
Exchange and its affiliates established fees for internal use and 
for managed non-display services. Under the latter, a data 
recipient's non-display applications must be hosted by a 
Redistributor approved by the respective exchange. The Exchange does 
not propose to establish fees for managed non-display services for 
options market data products at this time.
    \14\ ``Redistributor'' will be defined to mean a vendor or any 
other person that provides an NYSE Arca data product to a data 
recipient or to any system that a data recipient uses, irrespective 
of the means of transmission or access. Although the text differs 
from the definition in n.7 supra, the Exchange does not believe 
there is any material difference in the definition.
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    The fee structure will have three categories, which recognize the 
different uses for the market data. Category 1 Fees apply where a data 
recipient's non-display use of real time market data is for the purpose 
of principal trading. Category 2 Fees apply where a data recipient's 
non-display use of market data is for the purpose of broker/agency 
trading, i.e., trading-based activities to facilitate the recipient's 
customers' business. If a data recipient trades both on a principal and 
agency basis, then the data recipient must pay both categories of fees. 
Category 3 Fees apply where a data recipient's non-display use of 
market data is, in whole or in part, for the purpose of providing 
reference prices in the operation of one or more trading platforms, 
including but not limited to multilateral trading facilities, 
alternative trading systems, broker crossing networks, dark pools, and

[[Page 28920]]

systematic internalization systems.\15\ A data recipient will not be 
liable for Category 3 Fees for those market data products for which it 
is also paying Category 1 and/or Category 2 Fees.
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    \15\ The Exchange is not aware of any such trading platform for 
options products, but is including the category to maintain 
consistency with the structure of its internal non-display use fees 
for equities products. See supra n.13.
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    The fees for NYSE Arca Options non-display use per data recipient 
organization for each category will be as follows:

----------------------------------------------------------------------------------------------------------------
                                                    Category 2 trading as broker/   Category 3 trading platform
    Category 1 trading as principal (per month)           agency (per month)                (per month)
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$1,000............................................                        $1,000                         $1,000
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    For non-display use, there will be no reporting requirements 
regarding non-display device counts, thus doing away with the 
administrative burdens described above. Data recipients will be 
required to declare the market data products used within their non-
display trading applications by executing an NYSE Euronext Non-Display 
Usage Declaration.

Proposed Tiered Fee Structure for Display Usage by Professional End-
Users

    The Exchange proposes to introduce a tiered fee structure for 
display usage by Professional End-Users based on the number of users. 
Specifically, the Exchange proposes to charge the following monthly 
fees for Professional End-Users:

------------------------------------------------------------------------
                                              Fee per professional end-
          Professional end-users                        user
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1-50......................................                           $50
51-100....................................                            35
101+......................................                            20
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Example

    Broker-Dealer A obtains Arca Options Products directly from the 
Exchange for internal use. Broker-Dealer A trades both on a principal 
and agency basis and has (i) 80 individual persons who use 100 display 
devices and (ii) 50 non-display devices.
     Under the current fee schedule, Broker-Dealer A pays the 
Exchange the $3,000 access fee plus $50 for each of 80 individuals who 
use display devices, or $4,000, and $50 for each of the 50 non-display 
devices, or $2,500, for a total of $9,500 per month.
     Under the proposed fee schedule, Broker-Dealer A will pay 
the Exchange the $3,000 access fee, plus $50 for each of the first 50 
Professional End-Users of display devices and $35 for the remaining 30 
Professional End-Users of display devices, or $3,550, plus Category 1 
and Category 2 fees for non-display use, or $2,000, for a total of 
$8,550 per month. The new fees will result in a $950 monthly savings.
    No redistribution fee is charged in either case.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\16\ in general, and 
Sections 6(b)(4) and 6(b)(5) of the Act,\17\ 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.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(4), (5).
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    As described in detail in the section ``Rationale for New Non-
Display Usage Fee Structure'' above, which is incorporated by reference 
herein, technology has made it increasingly difficult to define 
``device'' and to control who has access to devices. Significant change 
has characterized the industry in recent years, stemming in large 
measure from changes in regulation and technological advances, which 
has led to the rise in automated and algorithmic trading, which have 
the potential to generate substantial profits. Indeed, data used in a 
single non-display device running a single trading algorithm can 
generate large profits. Market data technology and usage has evolved to 
the point where it is no longer practical, nor fair and equitable, to 
count non-display devices. The administrative costs and difficulties of 
establishing reliable counts and conducting an effective audit of non-
display devices have become too burdensome, impractical, and non-
economic for the Exchange, vendors, and data recipients. Rather, the 
Exchange believes that its proposed flat fee structure for non-display 
use is reasonable, equitable, and not unfairly discriminatory in light 
of these developments.
    The Exchange and its affiliates already have established non-
display fees for certain equity market data products.\18\ Other 
exchanges also have established differentiated fees based on non-
display usage, including a flat or enterprise fee, for options market 
data. For example, NASDAQ Options Market (``NOM'') offers a $2,500 per 
month ``Non-Display Enterprise License'' fee that permits distribution 
of Best of NASDAQ Options (``BONO'') or NASDAQ ITCH-to-Trade Options 
(``ITTO'') to an unlimited number of non-display devices within a firm 
without any per user charge.\19\ In addition, NASDAQ OMX PHLX, Inc. 
(``Phlx'') offers an alternative $10,000 per month ``Non-Display 
Enterprise License'' fee that permits distribution to an unlimited 
number of internal non-display subscribers without incurring additional 
fees for each internal subscriber.\20\ The Non-Display Enterprise 
License covers non-display subscriber fees for all Phlx proprietary 
direct data feed products and is in addition to any other associated 
distributor fees for Phlx proprietary direct data feed products. NASDAQ 
OMX BX, Inc. (``BX'') also offers an alternative non-display usage fee 
of $16,000 for its BX TotalView data feed.\21\
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    \18\ See supra n.13.
    \19\ See NASDAQ Options Rules Chapter XV, Section 4. 
Alternatively, NOM charges each professional subscriber $5 per month 
for BONO and $10 per month for ITTO.
    \20\ See Section IX of the NASDAQ OMX PHLX LLC Pricing Schedule 
and Securities Exchange Act Release No. 68576 (Jan. 3, 2013), 78 FR 
1886 (Jan. 9, 2013) (SR-Phlx-2012-145). Alternatively, Phlx charges 
each professional subscriber $40 per month.
    \21\ See NASDAQ OMX BX Rule 7023(a)(2). Alternatively, BX 
charges each professional subscriber $20 per month for BX TotalView 
for NASDAQ issues and $20 per month for BX TotalView for NYSE and 
regional issues.
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    The Exchange believes that the new fee schedule, which could 
potentially result in certain data recipients with a small number of 
non-display devices paying more than they have previously, is fair and 
reasonable in light of market and technology developments. The current 
fee structure does not properly reflect the significant overall value 
that non-display data can provide in trading algorithms and other uses 
that provide

[[Page 28921]]

professional users with the potential to generate substantial profits. 
The Exchange believes that it is equitable and not unfairly 
discriminatory to establish an overall monthly fee that better reflects 
the value of the data to the data recipients in their profit-generating 
activities and does away with the costs and administrative burdens of 
counting non-display devices. It will also result in a more consistent 
pricing structure between equities and options markets.
    The Exchange also believes that the proposed tiered pricing 
structure for display usage by Professional End-Users is reasonable 
because other exchanges use tiered pricing for professional users. For 
example, professional subscribers pay a monthly fee for non-display 
usage based upon direct access to NASDAQ Level 2, NASDAQ TotalView, or 
NASDAQ OpenView ranging from $300 per month for 1-10 subscribers to 
$75,000 per month for 250+ subscribers.\22\ In addition, the 
Consolidated Tape Association (``CTA'') historically has offered CTA 
Tape A Market Data, which includes consolidated last sale and bid-ask 
data, for a monthly fee for professional subscribers on a tiered, 
sliding scale basis under which subscribers pay less per device as the 
number of devices increases.\23\
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    \22\ See NASDAQ Rule 7023.
    \23\ See, e.g., Exhibit E of CTA Plan dated July 25, 2012, 
Securities Exchange Act Release No. 69157 (Mar. 18, 2013), 78 FR 
17946 (Mar. 25, 2013) (SR-CTA/CQ-2013-01).
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    The Exchange also believes that the proposed display fees are 
reasonable because the Exchange is not increasing its fees for any 
current data recipient, but rather lowering fees for data recipients 
with a large number of Professional End-Users. The Exchange believes 
that the proposed display fees and tiered pricing structure are 
equitable and not unfairly discriminatory because they will encourage 
customers to provide access to the Exchange's market data to a greater 
number of Professional End-Users. In addition, encouraging greater 
access through reduced fees for display use of the Exchange's market 
data will increase transparency of the market, which would benefit all 
market participants.
    The Exchange also notes that purchasing Arca Options Products is 
entirely optional. Firms are not required to purchase them and have a 
wide variety of alternative options market data products from which to 
choose.\24\ Moreover, the Exchange is not required to make these 
proprietary data products available or to offer any specific pricing 
alternatives to any customers.
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    \24\ See supra nn.19-21.
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    The decision of the United States Court of Appeals for the District 
of Columbia Circuit in NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 
2010), upheld reliance by the Securities and Exchange Commission 
(``Commission'') 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.'

    Id. at 535 (quoting H.R. Rep. No. 94-229 at 92 (1975), as reprinted 
in 1975 U.S.C.C.A.N. 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.''' \25\ The Exchange 
believes that this is also true with respect to options markets.
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    \25\ NetCoalition, 615 F.3d at 535.
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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.\26\ In addition, the existence of 
alternatives to these data products, such as proprietary last sale data 
from other sources, as described below, further ensures that the 
Exchange cannot set unreasonable fees, or fees that are unreasonably 
discriminatory, when vendors and subscribers can elect such 
alternatives.
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    \26\ Section 916 of the Dodd-Frank Wall Street Reform and 
Consumer Protection Act of 2010 (the ``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 rule filing.\27\
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    \27\ 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 proprietary data products is constrained by actual 
competition for the sale of proprietary data products, the joint 
product nature of exchange platforms, and the existence of alternatives 
to the Exchange's proprietary data.
    The Existence of Actual Competition. The market for proprietary 
options data products is currently competitive and inherently 
contestable because there is fierce competition for the inputs 
necessary for the creation of proprietary data and strict pricing 
discipline to the proprietary products themselves. Numerous exchanges 
compete with each other for options trades and sales of options market 
data itself, providing virtually limitless opportunities for 
entrepreneurs who wish to compete in any or all of those areas, 
including producing and distributing their own options market data. 
Proprietary options data products are produced and distributed by each 
individual exchange, as well as other entities, in a vigorously 
competitive market.
    Competitive markets for order flow, executions, and transaction 
reports provide pricing discipline for the inputs of proprietary 
options data products and therefore constrain markets from overpricing 
proprietary market data. The U.S. Department of Justice has 
acknowledged the aggressive competition among exchanges, including for 
the sale of proprietary market data itself. In announcing that the bid 
for NYSE Euronext by NASDAQ OMX Group Inc. and IntercontinentalExchange 
Inc. had been abandoned, 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.'' \28\ Similarly, the options markets

[[Page 28922]]

vigorously compete with respect to options data products.\29\
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    \28\ 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.
    \29\ See, e.g., Securities Exchange Act Release No. 67466 (July 
19, 2012), 77 FR 43629 (July 25, 2012) (SR-Phlx-2012-93), which 
describes a variety of options market data products and their 
pricing.
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    It is common for broker-dealers to further exploit this recognized 
competitive constraint by sending their order flow and transaction 
reports to multiple markets, rather than providing them all to a single 
market. In addition, in the case of products that are distributed 
through market data vendors, the market data vendors themselves provide 
additional price discipline for proprietary data products because they 
control the primary means of access to certain end users. These vendors 
impose price discipline based upon their business models. For example, 
vendors that assess a surcharge on data they sell are able to refuse to 
offer proprietary products that their end users do not or will not 
purchase in sufficient numbers. Vendors will not elect to make 
available the Arca Options Products unless their customers request it, 
and data recipients with Professional End-Users will not elect to 
purchase them unless they can be used for profit-generating purposes. 
All of these operate as constraints on pricing proprietary data 
products.
    Joint Product Nature of Exchange Platform. 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 platforms where the order 
can be posted, including the execution fees, data quality, and price 
and distribution of their data products. The more trade executions a 
platform does, the more valuable its market data products become. 
Further, data products are valuable to many end-users only insofar as 
they provide information that end-users expect will assist them 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 professionals in making trading decisions based on 
both display and non-display usage, the latter of which includes, as 
described above, high frequency trading, automated order and quote 
generation and order pegging, and price referencing for the purposes of 
algorithmic trading and smart order routing.
    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 broker-
dealer customers view the costs of transaction executions and market 
data as a unified cost of doing business with the exchange.
    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.\30\ 
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.\31\
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    \30\ 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), 75 FR 57321, 57324 
(Sept. 20, 2010) (SR-NASDAQ-2010-111) (``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.
    \31\ 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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    Analyzing the cost of market data product production and 
distribution in isolation from the cost of all of the inputs supporting 
the creation of market data and market data products will inevitably 
underestimate the cost of the data and data products. Thus, because it 
is impossible to obtain the data inputs to create market data products 
without a fast, technologically robust, and well-regulated execution 
system, system costs and regulatory costs affect the price of both 
obtaining the market data itself and creating and distributing market 
data products. It would be equally misleading, however, to attribute 
all of an exchange's costs to the market data portion of an exchange's 
joint products. 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.
    The level of competition and contestability in the market is 
evident in the numerous alternative venues that compete for order flow, 
including 11 self-regulatory organization (``SRO'') options markets. 
One of the 11 just launched operations in December 2012; another one of 
the 11 SROs has announced plans to launch a second options 
exchange,\32\ which would bring the total number of options SROs to 12. 
The Exchange believes that these new entrants demonstrate that 
competition is robust.
---------------------------------------------------------------------------

    \32\ Press Release, SEC Publishes ISE's Form 1 Application for a 
Second Options Exchange (Mar. 5, 2013), available at http://
www.ise.com/assets/documents/AboutISE/PressRelease/CompanyNews/2013/
20130305$SEC_Publishes_ISEs_Form_1_Application_for_a_
Second_Options_Exchange.pdf.
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    Each SRO market competes to produce transaction reports via trade 
executions. 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 data 
products (or provide market data products 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 data 
products, and setting relatively low

[[Page 28923]]

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.
    Existence of Alternatives. 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 LLC; Chicago Board Options Exchange, 
Incorporated; C2 Options Exchange, Incorporated; International 
Securities Exchange, LLC; NASDAQ; Phlx; BX; BATS Exchange, Inc. 
(``BATS''); and Miami International Securities Exchange LLC. Because 
market data users can thus find suitable substitutes for most 
proprietary market data products,\33\ a market that overprices its 
market data products stands a high risk that users may substitute 
another source of market data information for its own.
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    \33\ See supra nn.19-21.
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    Those competitive pressures imposed by available alternatives are 
evident in the Exchange's proposed pricing. As noted above, the 
proposed non-display fees for NYSE Arca Options are generally lower 
than the maximum non-display fees charged by other exchanges such as 
NASDAQ, Phlx, and BX for comparable products.\34\ The proposed display 
fees are being reduced for data recipients with relatively larger 
numbers of Professional End-Users.
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    \34\ Id.
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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. 
As noted above, a new options exchange launched in December 2012, and a 
12th options exchange has filed for Commission approval to commence 
operations. 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, and 
Direct Edge. Today, BATS and Direct Edge provide certain market data at 
no charge on their Web sites in order to attract more order flow, and 
use revenue rebates from resulting additional executions to maintain 
low execution charges for their users.\35\
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    \35\ 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.
---------------------------------------------------------------------------

    Further, data products are valuable to certain end users only 
insofar as they provide information that end users expect will benefit 
them in their trading decisions. As noted above, non-display data can 
be particularly valuable for high frequency trading, automated order 
and quote generation and order pegging, and price referencing for the 
purposes of algorithmic trading and smart order routing, whereas 
display data can be used for monitoring real-time market conditions and 
trading activity. The Exchange believes the proposed fees will benefit 
customers by providing them with a clearer way to determine their fee 
liability for non-display devices and reduced prices for customers with 
larger numbers of display devices.
    In establishing the proposed fees, the Exchange considered the 
competitiveness of the market for proprietary options 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 
products, including 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 or choose not to purchase a specific proprietary 
data product if its cost to purchase is not justified by the returns 
any particular vendor or subscriber would achieve through the purchase.

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

    The Exchange published draft Data Policies on its Web site on 
November 20, 2012. Among other things, the Data Policies addressed non-
display use for certain market data products. The Exchange solicited 
comments on the Data Policies in the form of a survey. The Exchange 
received 12 comments relating to non-display use. Exhibit 2 contains a 
copy of the notice soliciting comment, the Data Policies, the 12 
comments received in alphabetical order, and an alphabetical listing of 
such comments.
    Nine commenters \36\ requested greater clarity with respect to the 
definition and examples of non-display use. Specifically, the 
commenters requested that the Exchange provide a consistent definition 
of non-display use. As described above, the definition of non-display 
use will be accessing, processing or consuming an NYSE Arca data 
product delivered via direct and/or Redistributor data feeds, for a 
purpose other than in support of its display or further internal or 
external redistribution. The Exchange believes that this definition 
addresses the comments and will clearly describe the types of 
activities that will qualify for the proposed fee. The Exchange also 
provided examples for illustrative purposes, which are not exclusive.
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    \36\ Barclays, Brown Brothers Harriman, CMC Markets, Deutsche 
Bank, Flowtraders, Nomura, Threadneedle, Transtrend BV, and UBS.
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    Four commenters \37\ also questioned whether price referencing, 
compliance, accounting or auditing activities, and derived data should 
be considered non-display use. The Data Policies listed price 
referencing, compliance, accounting or auditing activities, and derived 
data as examples of non-display usage; however, as discussed above, the 
Exchange has determined that price referencing for the purposes of 
algorithmic trading and/or smart order routing would be considered Non-
Display Trading Activities, and applications that use the data product 
for non-trading activities, such as compliance, accounting or auditing 
activities, and derived data are not covered by the non-display fees 
and are subject to the current standard per-device fee structure.
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    \37\ Barclays, CMC Markets, Transtrend BV, and UBS.
---------------------------------------------------------------------------

    Three commenters \38\ asked for examples of how the Exchange would 
charge for customers that use both display and non-display devices. The 
Exchange believes that the pricing examples provided above are 
responsive to this request. One commenter \39\ stated that the proposed 
fees are excessive. The Exchange believes that the proposed fees are 
reasonable, equitable, and not unfairly discriminatory for the reasons 
discussed in Section 3(b) above.
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    \38\ Essex Radez LLC, Fidelity Market Data, and Lloyds TSB Bank 
plc.
    \39\ Essex Radez LLC.

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[[Page 28924]]

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) \40\ of the Act and subparagraph (f)(2) of Rule 
19b-4 \41\ thereunder, because it establishes a due, fee, or other 
charge imposed by the Exchange.
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    \40\ 15 U.S.C. 78s(b)(3)(A).
    \41\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

    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. If the Commission 
takes such action, the Commission shall institute proceedings under 
Section 19(b)(2)(B) \42\ of the Act to determine whether the proposed 
rule change should be approved or disapproved.
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    \42\ 15 U.S.C. 78s(b)(2)(B).
---------------------------------------------------------------------------

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 2013-47 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-NYSEArca-2013-47. 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 publicly available. All 
submissions should refer to File Number SR-NYSEArca-2013-47 and should 
be submitted on or before June 6, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
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    \43\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-11635 Filed 5-15-13; 8:45 am]
BILLING CODE 8011-01-P


