[Federal Register Volume 75, Number 225 (Tuesday, November 23, 2010)]
[Notices]
[Pages 71475-71479]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-29402]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-63324; File No. SR-ISE-2010-103]
Self-Regulatory Organizations; International Securities Exchange,
LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule
Change Relating to Market Data Fees
November 17, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on November 4, 2010, the International Securities Exchange, LLC
(the ``Exchange'' or the ``ISE'') filed with the Securities and
Exchange Commission (``Commission'' or ``SEC'') the proposed rule
change as described in Items I, II, and III below, which items have
been prepared by the Exchange. The Commission is publishing this notice
to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to amend its fees for its real-time depth
of market data offering. The text of the proposed rule change is
available on the Exchange's Web site http://www.ise.com, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The self-regulatory organization has prepared summaries,
set forth in Sections A, B and C below, of the most significant aspects
of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
ISE currently creates market data that consists of options quotes
and orders and all trades that are executed on the Exchange. ISE also
produces a Best Bid/Offer, or BBO, with the aggregate size from all
outstanding quotes and orders at the top price level, or the ``top of
book.'' This ``core'' \3\ data is formatted according to Options Price
Reporting Authority (``OPRA'') specification and sent to OPRA for
redistribution to the public.
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\3\ ``Core'' data refers to the best-priced quotations and
comprehensive last sale reports of all markets that the Commission
requires a central processor to consolidate and distribute to the
public pursuant to joint-SRO plans. ``Non-core'' data refers to
products other than the consolidated products that markets offer
collectively under joint industry plans.
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Pursuant to Securities and Exchange Commission (``SEC'') approval,
the Exchange also offers a ``non-core'' data feed on a subscription
basis called the ISE Depth of Market Data Feed (``Depth Feed''). The
Depth Feed offering aggregates all quotes and orders at the top five
price levels on the Exchange, on both the bid and offer side of the
market. The Depth Feed offering consists of non-marketable orders and
quotes that a prospective buyer or seller has chosen to display. Depth
Feed, which is distributed in real time, provides subscribers with a
consolidated view of tradable prices beyond the BBO. Depth Feed also
shows additional liquidity and enhances transparency for ISE traded
options that are not currently available through the OPRA feed. The
offering is available to members and non-members, and to both
professional and non-professional subscribers.
The Exchange currently charges distributors \4\ of Depth Feed
$5,000 per month. In addition, the Exchange charges the distributor a
monthly fee per controlled device \5\ of (i) $50 per controlled device
for Professionals at a distributor where the data is for internal use
only, (ii) $50 per controlled device for Professionals who receive the
data from a distributor where the data is further redistributed
externally, and (iii) $5 per controlled device for Non-Professionals
who receive the date from a distributor. The Exchange also has a fee
cap currently in place where for any one month the combined maximum
amount of fees payable by a distributor is as follows: (i) $7,500 for
Professionals at a distributor where the data is for internal use only,
(ii) $12,500 for
[[Page 71476]]
Professionals where the data is further redistributed externally in a
controlled device, and (iii) $10,000 for Non-Professionals who receive
the data in a controlled device from a distributor. Additionally, in an
effort to accommodate a distributor's development effort to integrate
the Depth Feed offering, the Exchange charges distributors a flat fee
of $1,000 for the first month after connectivity has been established
between ISE and the distributor; the Exchange also waives all user fees
during this one month period.
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\4\ A ``distributor'' of a Depth Feed is defined on the ISE
Schedule of Fees as any firm that receives the Depth of Market data
feed directly from ISE or indirectly through a redistributor and
then distributes it either internally or externally. A redistributor
includes market data vendors and connectivity providers such as
extranets and private network providers.
\5\ A ``controlled device'' is defined on the ISE Schedule of
Fees as any device that a distributor of the Depth of Market data
feed permits to access the information in the Depth of Market Raw
Data Feed.
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In differentiating between Professional and Non-Professional
subscribers, the Exchange proposes to apply the same criteria for
qualification as a Non-Professional subscriber as the Consolidated Tape
Association (``CTA'') Plan and Consolidated Quotation System Plan
Participants use. Accordingly, a ``Non-Professional Subscriber'' is an
authorized end-user of Depth of Market data who is a natural person and
who is neither: (a) Registered or qualified with the Securities and
Exchange Commission (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; (b) engaged as an ``investment advisor'' as that term
is defined in Section 202(a)(11) of the Investment Advisers Act of 1940
(whether or not registered or qualified under that act); nor (c)
employed by a bank or other organization exempt from registration under
Federal and/or state securities laws to perform functions that would
require him/her to be so registered or qualified if he/she were to
perform such functions for an organization not so exempt. A
``Professional Subscriber'' is an authorized end-user of Depth of
Market data that has not qualified as a Non-Professional Subscriber.
The purpose of this filing is to lower the fee cap currently in
place for Professionals who redistribute the data externally in a
controlled device. Based on conversations ISE has had with prospective
subscribers, the Exchange believes lowering the fee cap for this
offering will lead to increased subscriptions. ISE therefore proposes
to lower the cap for these professional subscribers from $12,500 to
$10,000 per month. The Exchange is not proposing to make any other
changes to the Depth Feed offering.
2. Statutory Basis
ISE believes that the proposed rule change is consistent with the
provisions of Section 6 of the Act,\6\ in general, and with Section
6(b)(4) of the Act,\7\ in particular, in that it provides an equitable
allocation of reasonable fees among users and recipients of ISE data.
In adopting Regulation NMS, the Commission granted self-regulatory
organizations and broker-dealers increased authority and flexibility to
offer new and unique market data to the public. It was believed that
this authority would expand the amount of data available to consumers,
and also spur innovation and competition for the provision of market
data.
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\6\ 15 U.S.C. 78f.
\7\ 15 U.S.C. 78f(b)(4).
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The Commission concluded that Regulation NMS--by deregulating the
market in proprietary data--would itself further the Act's goals of
facilitating efficiency and competition:
[E]fficiency is promoted when broker-dealers who do not need the
data beyond the prices, sizes, market center identifications of the
NBBO and consolidated last sale information are not required to
receive (and pay for) such data. The Commission also believes that
efficiency is promoted when broker-dealers may choose to receive
(and pay for) additional market data based on heir own internal
analysis of the need for such data.\8\
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\8\ Securities Exchange Act Release No. 51808 (June 9, 2005), 70
FR 37496 (June 29, 2005).
By removing ``unnecessary regulatory restrictions'' on the ability
of exchanges to sell their own data, Regulation NMS advanced the goals
of the Act and the principles reflected in its legislative history. If
the free market should determine whether proprietary data is sold to
broker-dealers at all, it follows that the price at which such data is
sold should be set by the market as well.
On July 21, 2010, President Barak Obama signed into law H.R. 4173,
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(``Dodd-Frank Act''), which amended Section 19 of the Act. Among other
things, Section 916 of the Dodd-Frank Act amended paragraph (A) of
Section 19(b)(3) of the Act by inserting the phrase ``on any person,
whether or not the person is a member of the self-regulatory
organization'' after ``due, fee or other charge imposed by the self-
regulatory organization.'' As a result, all SRO rule proposals
establishing or changing dues, fees, or other charges are immediately
effective upon filing regardless of whether such dues, fees, or other
charges are imposed on members of the SRO, non-members, or both.
Section 916 further amended paragraph (C) of Section 19(b)(3) of the
Exchange Act to read, in pertinent part, ``At any time within the 60-
day period beginning on the date of filing of such a proposed rule
change in accordance with the provisions of paragraph (1) [of Section
19(b)], the Commission summarily may temporarily suspend the change in
the rules of the self-regulatory organization made thereby, if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of this title. If the Commission takes
such action, the Commission shall institute proceedings under paragraph
(2)(B) [of Section 19(b)] to determine whether the proposed rule should
be approved or disapproved.''
ISE believes that these amendments to Section 19 of the Act reflect
Congress's intent to allow the Commission to rely upon the forces of
competition to ensure that fees for market data are reasonable and
equitably allocated. Although Section 19(b) had formerly authorized
immediate effectiveness for a ``due, fee or other charge imposed by the
self-regulatory organization,'' the Commission adopted a policy and
subsequently a rule stipulating that fees for data and other products
available to persons that are not members of the self-regulatory
organization must be approved by the Commission after first being
published for comment. At the time, the Commission supported the
adoption of the policy and the rule by pointing out that unlike
members, whose representation in self-regulatory organization
governance was mandated by the Act, non-members should be given the
opportunity to comment on fees before being required to pay them, and
that the Commission should specifically approve all such fees. ISE
believes that the amendment to Section 19 reflects Congress's
conclusion that the evolution of self-regulatory organization
governance and competitive market structure have rendered the
Commission's prior policy on non-member fees obsolete. Specifically,
many exchanges have evolved from member-owned not-for-profit
corporations into for-profit investor-owned corporations (or
subsidiaries of investor-owned corporations). Accordingly, exchanges no
longer have narrow incentives to manage their affairs for the exclusive
benefit of their members, but rather have incentives to maximize the
appeal of their products to all customers, whether members or
nonmembers, so as to broaden distribution and grow revenues. Moreover,
we believe that the change also reflects an endorsement of the
Commission's determinations that
[[Page 71477]]
reliance on competitive markets is an appropriate means to ensure
equitable and reasonable prices. Simply put, the change reflects a
presumption that all fee changes should be permitted to take effect
immediately, since the level of all fees are constrained by competitive
forces.
The recent decision of the United States Court of Appeals for the
District of Columbia Circuit in NetCoalition v. SEC, No. 09-1042 (DC
Cir. 2010), although reviewing a Commission decision made prior to the
effective date of the Dodd-Frank Act, upheld the Commission's reliance
upon competitive markets to set reasonable and equitably allocated fees
for market data. ``In fact, the legislative history indicates that the
Congress intended that the market system `evolve through the interplay
of competitive forces as unnecessary regulatory restrictions are
removed' and that the SEC wield its regulatory power `in those
situations where competition may not be sufficient,' such as in the
creation of a `consolidated transactional reporting system.' '' \9\
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\9\ 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).
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The court's conclusions about Congressional intent are therefore
reinforced by the Dodd-Frank Act amendments, which create a presumption
that exchange fees, including market data fees, may take effect
immediately, without prior Commission approval, and that the Commission
should take action to suspend a fee change and institute a proceeding
to determine whether the fee change should be approved or disapproved
only where the Commission has concerns that the change may not be
consistent with the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
ISE does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended. Notwithstanding its
determination that the Commission may rely upon competition to
establish fair and equitably allocated fees for market data, the
NetCoaltion court found that the Commission had not, in that case,
compiled a record that adequately supported its conclusion that the
market for the data at issue in the case was competitive.
For the reasons discussed above, ISE believes that the Dodd-Frank
Act amendments to Section 19 materially alter the scope of the
Commission's review of future market data filings, by creating a
presumption that all fees may take effect immediately, without prior
analysis by the Commission of the competitive environment. Even in the
absence of this important statutory change, however, ISE believes that
a record may readily be established to demonstrate the competitive
nature of the market in question.
As recently noted by a number of exchanges,\10\ there is intense
competition between trading platforms that provide transaction
execution and routing services and proprietary data products.
Transaction execution and proprietary data products are complementary
in that market data is both an input and a byproduct of the execution
service. In fact, market data and trade execution are a paradigmatic
example of joint products with joint costs. The decision whether and on
which platform to post an order will depend on the attributes of the
platform where the order can be posted, including the execution fees,
data quality and price and distribution of its data products. Without
the prospect of a taking order seeing and reacting to a posted order on
a particular platform, the posting of the order would accomplish
little. Without trade executions, exchange data products cannot exist.
Data products are valuable to many end users only insofar as they
provide information that end users expect will assist them or their
customers in making trading decisions.
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\10\ See Securities Exchange Act Release Nos. 63084 (October 13,
2010), 75 FR 64379 (October 19, 2010) (Notice of Filing and
Immediate Effectiveness of Proposed Rule Change To Revise an
Optional Depth Data Enterprise License Fee for Broker-Dealer
Distribution of Depth-of-Book Data) (SR-NASDAQ-2010-125); and 62887
(September 10, 2010), 75 FR 57092 (September 17, 2010) (Notice of
Filing and Immediate Effectiveness of Proposed Rule Change Relating
to Market Data Feeds) (SR-PHLX-2010-121).
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The costs of producing market data include not only the costs of
the data distribution infrastructure, but also the costs of designing,
maintaining, and operating the exchange's transaction execution
platform and the cost of regulating the exchange to ensure its fair
operation and maintain investor confidence. The total return that a
trading platform earns reflects the revenues it receives from both
products and the joint costs it incurs. Moreover, an exchange's
customers view the costs of transaction executions and of data as a
unified cost of doing business with the exchange. A broker-dealer will
direct orders to a particular exchange only if the expected revenues
from executing trades on the exchange exceed net transaction execution
costs and the cost of data that the broker-dealer chooses to buy to
support its trading decisions (or those of its customers). The choice
of data products is, in turn, a product of the value of the products in
making profitable trading decisions. If the cost of the product exceeds
its expected value, the broker-dealer will choose not to buy it.
Moreover, as a broker-dealer chooses to direct fewer orders to a
particular exchange, the value of the product to that broker-dealer
decrease, for two reasons. First, the product will contain less
information, because executions of the broker-dealer's orders will not
be reflected in it. Second, and perhaps more important, the product
will be less valuable to that broker-dealer because it does not provide
information about the venue to which it is directing its orders. Data
from the competing venue to which the broker-dealer is directing orders
will become correspondingly more valuable. Thus, a super-competitive
increase in the fees charged for either transactions or data has the
potential to impair revenues from both products. ``No one disputes that
competition for order flow is `fierce'.'' \11\ However, the existence
of fierce competition for order flow implies a high degree of price
sensitivity on the part of broker-dealers with order flow, since they
may readily reduce costs by directing orders toward the lowest-cost
trading venues. A broker-dealer that shifted its order flow from one
platform to another in response to order execution price differentials
would both reduce the value of that platform's market data and reduce
its own need to consume data from the disfavored platform. Similarly,
if a platform increases its market data fees, the change will affect
the overall cost of doing business with the platform, and affected
broker-dealers will assess whether they can lower their trading costs
by directing orders elsewhere and thereby lessening the need for the
more expensive data.
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\11\ NetCoalition, at 24.
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Analyzing the cost of market data distribution in isolation from
the cost of all of the inputs supporting the creation of market data
will inevitably underestimate the cost of the data. Thus, because it is
impossible to create data without a fast, technologically robust, and
well-regulated execution system, system costs and regulatory costs
affect the price of market data. It would be equally misleading,
however, to attribute all of the exchange's costs to the market data
portion of an exchange's
[[Page 71478]]
joint product. Rather, all of the exchange's costs are incurred for the
unified purposes of attracting order flow, executing and/or routing
orders, and generating and selling data about market activity. The
total return that an exchange earns reflects the revenues it receives
from the joint products and the total costs of the joint products.
Competition among trading platforms can be expected to constrain
the aggregate return each platform earns from the sale of its joint
products, but different platforms may choose from a range of possible,
and equally reasonable, pricing strategies as the means of recovering
total costs. For example, some platform may choose to pay rebates to
attract orders, charge relatively low prices for market information (or
provide information free of charge) and charge relatively high prices
for accessing posted liquidity. Other platforms may choose a strategy
of paying lower rebates (or no rebates) to attract orders, setting
relatively high prices for market information, and setting relatively
low prices for accessing posted liquidity. In this environment, there
is no economic basis for regulating maximum prices for one of the joint
products in an industry in which suppliers face competitive constraints
with regard to the joint offering.
The market for market data products is competitive and inherently
contestable because there is fierce competition for the inputs
necessary to the creation of proprietary data and strict pricing
discipline for the proprietary products themselves. Numerous exchanges
compete with each other for listings, trades, and market data itself,
providing virtually limitless opportunities for entrepreneurs who wish
to produce and distribute their own market data. This proprietary data
is produced by each individual exchange, as well as other entities, in
a vigorously competitive market.
Broker-dealers currently have numerous alternative venues for their
order flow, including numerous self-regulatory organization (``SRO'')
markets, as well as internalizing broker-dealers (``BDs'') and various
forms of alternative trading systems (``ATSs''), including dark pools
and electronic communication networks (``ECNs''). Each SRO market
competes to produce transaction reports via trade executions, and two
FINRA-regulated Trade Reporting Facilities (``TRFs'') compete to
attract internalized transaction reports. Competitive markets for order
flow, executions, and transaction reports provide pricing discipline
for the inputs of proprietary data products. The large number of SROs,
TRFs, BDs, and ATSs that currently produce proprietary data or are
currently capable of producing it provides further pricing discipline
for proprietary data products. Each SRO, TRF, ATS, and BD is currently
permitted to produce proprietary data products, and many currently do
or have announced plans to do so, including NASDAQ, NYSE, NYSE Amex,
NYSEArca, and BATS.
Any ATS or BD can combine with any other ATS, BD, or multiple ATSs
or BDs to produce joint proprietary data products. Additionally, order
routers and market data vendors can facilitate single or multiple
broker-dealers' production of proprietary data products. The potential
sources of proprietary products are virtually limitless. The fact that
proprietary data from ATSs, BDs, and vendors can by-pass SROs is
significant in two respects. First, non-SROs can compete directly with
SROs for the production and sale of proprietary data products, as BATS
and Arca did before registering as exchanges by publishing proprietary
book data on the Internet. Second, because a single order or
transaction report can appear in an SRO proprietary product, a non-SRO
proprietary product, or both, the data available in proprietary
products is exponentially greater than the actual number of orders and
transaction reports that exist in the marketplace. Market data vendors
provide another form of price discipline for proprietary data products
because they control the primary means of access to end users. Vendors
impose price restraints based upon their business models. For example,
vendors such as Bloomberg and Reuters that assess a surcharge on data
they sell may refuse to offer proprietary products that end users will
not purchase in sufficient numbers. Internet portals, such as Google,
impose a discipline by providing only data that will enable them to
attract ``eyeballs'' that contribute to their advertising revenue.
Retail broker-dealers, such as Schwab and Fidelity, offer their
customers proprietary data only if it promotes trading and generates
sufficient commission revenue. Although the business models may differ,
these vendors' pricing discipline is the same: They can simply refuse
to purchase any proprietary data product that fails to provide
sufficient value. NASDAQ and other producers of proprietary data
products must understand and respond to these varying business models
and pricing disciplines in order to market proprietary data products
successfully.
Competition among platforms has driven ISE continually to improve
its platform data offerings and to cater to customers' data needs. For
example, ISE has developed and maintained multiple delivery mechanisms
that enable customers to receive data in the form and manner they
prefer and at the lowest cost to them. ISE offers front end
applications such as its PrecISE Trade application which helps
customers utilize data. ISE offers data via multiple extranet
providers, thereby helping to reduce network and total cost for its
data products. ISE also offers an enterprise license option to help
reduce the administrative burden and costs to firms that purchase
market data. Despite these enhancements and a dramatic increase in
message traffic, ISE's fees for market data have, for the most part,
remained flat or, as is the case with this proposal, decreased.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act \12\ and Rule 19b-4(f)(2) \13\ thereunder.
At any time within 60 days of the filing of the proposed rule change,
the Commission summarily may temporarily suspend such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of the Act. If the Commission takes such
action, the Commission shall institute proceedings to determine whether
the proposed rule change should be approved or disapproved.
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\12\ 15 U.S.C. 78s(b)(3)(A)(ii).
\13\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
[[Page 71479]]
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an E-mail to [email protected]. Please include
File No. SR-ISE-2010-103 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-ISE-2010-103. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commissions 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. Copies of such filing also will
be available for inspection and copying at the principal office of the
ISE. All comments received will be posted without change; the
Commission does not edit personal identifying information from
submissions. You should submit only information that you wish to make
available publicly. All submissions should refer to File Number SR-ISE-
2010-103 and should be submitted by December 14, 2010.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-29402 Filed 11-22-10; 8:45 am]
BILLING CODE 8011-01-P