[Federal Register Volume 75, Number 73 (Friday, April 16, 2010)]
[Notices]
[Pages 20023-20026]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-8686]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-61878; File No. SR-Phlx-2010-48]
Self-Regulatory Organizations; Notice of Filing of a Proposed
Rule Change by NASDAQ OMX PHLX, Inc. Relating to Market Data Fees
April 8, 2010.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 6, 2010, NASDAQ OMX PHLX, Inc. (``Phlx'' or the ``Exchange'')
filed with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend its fee schedule by establishing
fees for a direct data product, Top of Phlx Options Plus Orders (``TOPO
Plus Orders''), which currently provides disseminated Exchange top-of-
market data (including orders, quotes and trades), together with all
information that is included in the Exchange's Specialized Order Feed
(``SOF''), as described more fully below. The proposed fees would
become effective on and after June 1, 2010.
The Exchange anticipates that it will generally phase out SOF as of
June 1, 2010, and instead offer TOPO Plus Orders to participants that
wish to continue to receive the data currently included in SOF.
Accordingly, current SOF users must migrate to TOPO Plus Orders by June
1, 2010. In the event that an SOF user is unable to migrate to TOPO
Plus Orders by June 1, 2010 due to circumstances beyond their control,
the Exchange will apply the same monthly fee applicable to TOPO Plus
Orders users that are Internal Distributors (as defined below) to such
SOF users.
The text of the proposed rule change is available on the Exchange's
Web site at http://nasdaqtrader.com/micro.aspx?id=PHLXfilings, at the
principal office of the Exchange, and at the Commission's Public
Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of the proposed rule change is to raise revenue for the
Exchange by establishing fees for the TOPO Plus Orders market data
product.
Beginning in June, 2009, the Exchange launched its enhanced
electronic trading platform for options, Phlx XL II, on which all
options on the Exchange are currently traded.\3\
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\3\ See Securities Exchange Act Release No. 59995 (May 28,
2009), 74 FR 26750 (June 3, 2009) (SR-Phlx-2009-32).
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TOPO
In conjunction with the launch and rollout of the Phlx XL II
system, the Exchange developed the Top of Phlx Options data feed
(``TOPO'') \4\ which provides to subscribers a direct data feed that
includes the Exchange's best bid and offer position, with aggregate
size, based on displayable order and quoting interest on the Phlx XL II
system. The data contained in the TOPO data feed is identical to the
data sent to the processor for the Options Price Regulatory Authority
(``OPRA''), and the TOPO and OPRA data leave the Phlx XL II system at
the same time.
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\4\ See Securities Exchange Act Release No. 60459 (August 7,
2009), 74 FR 41466 (August 17, 2009) (SR-Phlx-2009-54).
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Specialized Order Feed
Specialized Order Feed (``SOF'') is the Exchange's real-time full
limit order book data feed. SOF is currently available to any Exchange
quoting participant (i.e., specialists, Streaming Quote Traders
(``SQTs''),\5\ and Remote Streaming Quote Traders (``RSQTs'') \6\
(collectively, ``users'')) and is available to users on an issue-by-
issue basis at the user's request. A user does not have to be assigned
in an issue for the Exchange to provide SQF to such user in that issue.
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\5\ An SQT is an Exchange Registered Options Trader (``ROT'')
who has received permission from the Exchange to generate and submit
option quotations electronically through an electronic interface
with AUTOM via an Exchange approved proprietary electronic quoting
device in eligible options to which such SQT is assigned. See
Exchange Rule 1014(b)(ii)(A).
\6\ An RSQT is an ROT that is a member or member organization
with no physical trading floor presence who has received permission
from the Exchange to generate and submit option quotations
electronically through AUTOM in eligible options to which such RSQT
has been assigned. An RSQT may only submit such quotations
electronically from off the floor of the Exchange. See Exchange Rule
1014(b)(ii)(B).
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The SOF provides real-time information to keep track of the single
order book(s), single and complex orders, complex strategy and Live
Auction for all symbols for which the user is configured. Users may be
configured for one or more symbols. SOF provides real-time data for the
entire book to its users. It is a compilation of limit order data
resident in the Exchange's limit order book for options traded on the
Exchange that the Exchange provides through a real-time data feed. The
Exchange updates SOF information upon receipt of each displayed limit
order. For every limit price, the SOF includes the aggregate order
volume.
TOPO Plus Orders
In October, 2009, the Exchange made the TOPO Plus Orders data feed
available to all market participants.\7\ TOPO Plus Orders provides
disseminated Exchange top-of-market data (including orders, quotes and
trades) together with all information that is included in SOF.
Currently, the Exchange does not charge fees for the use of TOPO Plus
Orders. When it established TOPO Plus Orders, the
[[Page 20024]]
Exchange represented that it would submit a proposed rule change to the
Commission in order to implement fees for the use of TOPO Plus Orders.
The instant proposed rule change is intended to establish and implement
such fees.
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\7\ See Securities Exchange act Release No. 60877 (October 26,
2009), 74 FR 56255 (October 30, 2009) (SR-Phlx-2009-92).
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The Exchange proposes to charge monthly fees to distributors for
use of TOPO Plus Orders. The amount of the monthly distributor fee will
depend on whether the distributor is an ``Internal Distributor'' or an
``External Distributor,'' as defined below.
The Exchange's fee schedule currently reflects that a
``distributor'' of NASDAQ OMX PHLX data is any entity that receives a
feed or data file of data directly from NASDAQ OMX PHLX or indirectly
through another entity and then distributes it either internally
(within that entity) or externally (outside that entity), and that all
distributors would be required to execute a NASDAQ OMX PHLX distributor
agreement.\8\
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\8\ The Exchange notes that the proposed definition of
``distributor'' and references to internal and external distribution
are identical to those set forth in NASDAQ Rule 7019(c).
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Discontinuation of SOF
As an incentive for SOF users to migrate to TOPO Plus Orders, the
Exchange anticipates that it will generally phase out SOF as of June 1,
2010. The Exchange recognizes, however, that some SOF users may
encounter issues beyond their control that render them unable to
migrate from SOF to the TOPO Plus Orders feed on or before that date.
Accordingly, the Exchange will make SOF available only to current SOF
users that have not migrated to TOPO Plus Orders for a period of time
after June 1, 2010. Beginning June 1, 2010, such SOF users will be
charged for SOF at the same monthly rate as TOPO Plus Orders users that
are Internal Distributors, as defined below.
Once migrated from SOF to TOPO Plus Orders, a user will not have
the option of reverting to SOF. New subscribers currently do not have,
and will not be given, the option to use SOF. New subscribers must
subscribe to TOPO Plus Orders to receive the market data feed.
Internal Distributor
An Internal Distributor is an organization that subscribes to the
Exchange for the use of TOPO or TOPO Plus Orders, and is permitted by
agreement with the Exchange to provide TOPO or TOPO Plus Orders data to
internal users (i.e., users within their own organization). Under the
proposal, Internal Distributors of TOPO Plus Orders would be charged a
monthly fee of $4,000 per organization.\9\ This charge will also apply
to SOF users that have not migrated to TOPO Plus Orders on or before
June 1, 2010.\10\
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\9\ Internal Distributors of TOPO are currently charged a
monthly fee of $2,000 per organization. This fee will continue to
apply to Internal Distributors that distribute the TOPO feed.
\10\ SOF users do not distribute SOF to any external users.
Therefore, the Exchange will assess the lesser fee applicable to
internal distributors of TOPO Plus Orders on SOF users that have not
migrated as of June 1, 2010.
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External Distributor
An External Distributor is an organization that subscribes to the
Exchange for the use of TOPO Plus Orders, and is permitted by agreement
with the Exchange to provide TOPO Plus Orders data to both internal
users and to external users (i.e., users outside of their own
organization). External Distributors will be charged a monthly fee of
$5,000 per organization.\11\
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\11\ External Distributors of TOPO are currently charged a
monthly fee of $2,500 per organization. This fee will continue to
apply to External Distributors that distribute the TOPO feed.
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Monthly Subscriber Fee
The Exchange proposes to assess a monthly Subscriber Fee on
External Distributors of TOPO Plus Orders. A ``subscriber'' is a person
or entity to whom the External Distributor provides the TOPO Plus
Orders data feed. The monthly Subscriber Fee would be assessed on a
per-subscriber basis depending upon whether the subscriber is a Non-
Professional Subscriber or a Professional Subscriber.
A Non-Professional Subscriber is a natural person who is neither:
(i) Registered or qualified in any capacity 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; (ii) engaged as an ``investment
adviser'' as that term is defined in Section 201(11) of the Investment
Advisors Act of 1940 (whether or not registered or qualified under that
Act); nor (iii) employed by a bank or other organization exempt from
registration under federal or state securities laws to perform
functions that would require registration or qualification if such
functions were performed for an organization not so exempt.\12\ The
monthly Subscriber Fee assessed to External Distributors would be $1
per Non-Professional Subscriber. This Monthly Subscriber Fee will also
apply to SOF users that have not migrated to TOPO Plus Orders on or
before June 1, 2010.
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\12\ This definition of ``non-professional'' is based on Nasdaq
Options Market (``NOM'') Rule 7011(B)(2).
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A Professional Subscriber is any subscriber that is not a Non-
Professional Subscriber. If the NASDAQ OMX PHLX distributor agreement
is signed in the name of a business or commercial entity, such entity
would be considered a Professional Subscriber. The monthly Subscriber
Fee assessed to External Distributors would be $20 per Professional
Subscriber. This Monthly Subscriber Fee will also apply to SOF users
that have not migrated to TOPO Plus Orders on or before June 1, 2010.
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the provisions of Section 6 of the Act,\13\ in general and with
Sections 6(b)(4) of the Act,\14\ in particular, in that it provides for
the equitable allocation of reasonable dues, fees and other charges
among members and issuers and other persons using any facility or
system which Phlx operates or controls.
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\13\ 15 U.S.C. 78f.
\14\ 15 U.S.C. 78f(b)(4).
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The Exchange believes that the proposed rule change is also
consistent with the provisions of Section 6(b)(5) of the Act,\15\ in
that it is designed to promote just and equitable principles of trade,
to foster cooperation and coordination with persons engaged in
regulating, clearing, settling, processing information with respect to,
and facilitating transactions in securities, to remove impediments to
and perfect the mechanism of a free and open market and a national
market system, and, in general, to protect investors and the public
interest; and is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers, or to regulate by virtue of
any authority conferred by the Act matters not related to the purposes
of the Act or the administration of the Exchange.
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\15\ 15 U.S.C. 78f(b)(5).
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The Exchange believes that the proposed rule change is also
consistent with Section 6(b)(8) of the Act \16\ in that it does not
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the Act, as set forth in more detail
below.
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\16\ 15 U.S.C. 78f(b)(8).
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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
[[Page 20025]]
data available to consumers, and also spur innovation and competition
for the provision of market data.
The Commission has recently issued an order firmly establishing
that in reviewing non-core data products such as TOPO Plus Orders, the
Commission will utilize a market-based approach that relies primarily
on competitive forces to determine the terms on which non-core data is
made available to investors.\17\ The Commission adopted a two-part
test:
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\17\ See Securities Exchange Act Release No. 57917 (Dec. 2,
2008) [sic] ([``]NetCoalition Order'' resolving File No. SR-
NYSEArca-2006-21).
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The first is to ask whether the exchange was subject to significant
competitive forces in setting the terms of its proposal for non-core
data, including the level of any fees. If an exchange was subject to
significant competitive forces in setting the terms of a proposal, the
Commission will approve the proposal unless it determines that there is
a substantial countervailing basis to find that the terms nevertheless
fail to meet an applicable requirement of the Exchange Act or the rules
thereunder. If, however, the exchange was not subject to significant
competitive forces in setting the terms of a proposal for non-core
data, the Commission will require the exchange to provide a substantial
basis, other than competitive forces, in its proposed rule change
demonstrating that the terms of the proposal are equitable, fair,
reasonable, and not unreasonably discriminatory.\18\
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\18\ Id. at 48-49 [sic].
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This standard begins from the premise that no Commission rule
requires exchanges or market participants either to distribute non-core
data to the public or to display non-core data to investors.\19\
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\19\ Id. at 4 [sic].
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In its NetCoalition Order, the Commission concluded that ``at least
two broad types of significant competitive forces applied to NYSE Arca
in setting the terms of its Proposal to distribute the ArcaBook data:
(1) NYSE Arca's compelling need to attract order flow from market
participants; and (2) the availability to market participants of
alternatives to purchasing the ArcaBook data. The Commission conducted
an exhaustive 14-page review of these two competitive forces before
concluding that the availability of alternatives, as well as the
compelling need to attract order flow, imposed significant competitive
pressure on the exchange's need to act equitably, fairly, and
reasonably in setting the terms of the fees for its non-core data
product.\20\
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\20\ Id. at 51-65 [sic]. The Commission then spent an additional
36 pages (65-101 [sic]) analyzing and refuting comments challenging
the Commission's competition analysis.
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The market data provided in TOPO Plus Orders is non-core data that
is governed by the same analysis the Commission set forth in the
NetCoalition Order. As with the NYSE Arca depth-of-book product, no
rule requires Phlx or any other exchange to offer depth of book data;
nor are vendors required to purchase or display that data.
Additionally, Phlx is constrained by the same two competitive
forces in the options market as the Commission found are present in the
proposal of the International Securities Exchange, Inc. (``ISE'') to
establish fees for a real-time depth of market data offering, the ISE
Depth of Market Data Feed (``Depth of Market'').\21\
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\21\ See Securities Exchange Act Release No. 59949 (May 20,
2009), 74 FR 25593 (May 28, 2009) (SR-ISE-2007-97) (Order Approving
Proposed Rule Change, as Modified by Amendment No. 1, Relating to
Market Data Fees).
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First, Phlx has a compelling need to attract order flow from market
participants, just as ISE, in order to maintain its share of trading
volume. This compelling need to attract order flow imposes significant
pressure on Phlx to act reasonably in setting its fees for Phlx market
data, particularly given that the market participants that will pay
such fees often will be the same market participants from whom Phlx
must attract order flow. These market participants include broker-
dealers that control the handling of a large volume of customer and
proprietary order flow. Given the portability of order flow from one
exchange to another, any exchange that sought to charge unreasonably
high data fees would risk alienating many of the same customers on
whose orders it depends for competitive survival.
As an illustration of the intensity of the competition for options
order flow among the seven U.S. options exchanges, the ISE and Chicago
Board Options Exchange, Inc. (``CBOE'') each enjoy close to thirty
percent market share of volume, followed by NYSE Arca and Phlx at close
to fifteen percent market share, followed by four other exchanges with
meaningful market share.
Phlx currently trades options on 7 proprietary index products that
are not traded on any other exchange. These 7 options currently
represent less than 0.04% of Phlx's total contract volume. Given the
small percentage of Phlx's total contract volume represented by these 7
products, the Exchange believes that the inclusion of data on these
products in the TOPO Plus Orders product should not confer market power
on Phlx to compel market participants to purchase the entire Phlx data
feed. The Exchange therefore believes that the inclusion of depth-of-
book data for these products in Phlx's TOPO Plus Orders product does
not undermine the fact that Phlx is subject to significant competitive
forces in setting the terms of its proposal.
Second, Phlx is constrained in pricing TOPO Plus Orders by the
availability to market participants of alternatives to purchasing TOPO
Plus Orders. Phlx must consider the extent to which market participants
would choose one or more alternatives instead of purchasing the
Exchange's data. For example, although the TOPO Plus Orders data feed
is separate from the core data feed made available by OPRA, all the
information available in the TOPO market data product, which is
included in the TOPO Plus Orders market data product, is included in
the core data feed. The core OPRA data is widely distributed and
relatively inexpensive, thus constraining Phlx's ability to price TOPO
and TOPO Plus Orders. Additionally, both ISE and CBOE are potential
competitors because each exchange enjoys greater market share and thus
the ability to offer a top-of-book product that would compete favorably
with TOPO.
If the Commission finds that Phlx is subject to significant
competitive forces in setting the terms of TOPO Plus Orders pricing,
then the Commission should approve the proposal in the absence of a
substantial countervailing basis to find that its terms nevertheless
fail to meet an applicable requirement of the Act or the rules
thereunder. Phlx submits that no such countervailing basis exists.
To the contrary, Phlx's considerations in setting the fees for TOPO
Plus Orders are virtually identical to those the Commission approved in
the NetCoaltion Order. First, the proposed fees for TOPO Plus Orders
are lower for Internal Distributors than for External Distributors.
Because Internal Distributors are by definition more limited in the
scope of their distribution of TOPO Plus Orders data than External
Distributors, it is reasonable to expect that Internal Distributors
will provide TOPO Plus Orders data to a smaller number of internal
subscribers. Conversely, External Distributors can reasonably be
expected to distribute the TOPO Plus Orders data to a higher number of
subscribers because they do not have the same limitation.
[[Page 20026]]
Accordingly, the Exchange will charge a higher fee to External
Distributors than to Internal Distributors. The fees therefore do not
unreasonably discriminate among types of distributors, such as by
favoring participants in the Phlx market or penalizing participants in
other markets. Second, Phlx projects that the total revenues generated
by the TOPO Plus Orders fee initially will amount to $1.2 million per
year, which is significantly less than the $8 million per year that
NYSE Arca projected would be generated by its ArcaBook data.\22\
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\22\ Id. at 101-104 [sic].
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The Exchange also reasonably believes that External Distributors
will distribute TOPO Plus Orders market data to Professional
Subscribers who would use the data for commercial purposes, whereas
Non-Professional Subscribers may not by definition use the data for any
commercial purpose. Therefore, the Exchange will assess on External
Distributors a monthly subscriber fee of $20 per Professional
Subscriber, and $1 per Non-Professional Subscriber. The monthly
subscriber fees assessed upon External Distributors are based upon the
manner in which the data will ultimately be used, i.e., for commercial
vs. non-commercial purposes, and therefore do not unreasonably
discriminate among types of distributors, such as by favoring
participants in the Phlx market or penalizing participants in other
markets.
B. Self-Regulatory Organization's Statement on Burden on Competition
Phlx does not believe that the proposed rule change will result in
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended. To the contrary,
the market for options orders and executions is already highly
competitive and Phlx's proposal is itself pro-competitive in several
ways. First, the TOPO Plus Orders depth of book data feed offers a
comprehensive, competitive alternative to the consolidated data OPRA
feed for users and situations where consolidated data is unnecessary.
Second, the Phlx believes that offering the TOPO Plus Orders data feed
will help attract new users and new order flow to the Phlx market,
thereby improving Phlx's ability to compete in the market for options
order flow and executions.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission shall: (a) By order approve
such proposed rule change, or (b) institute proceedings to determine
whether the proposed rule change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e-mail to [email protected]. Please include
File Number SR-Phlx-2010-48 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-Phlx-2010-48. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission,\23\ all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for Web site
viewing and printing in the Commission's Public Reference Room, on
official business days between the hours of 10 a.m. and 3 p.m. Copies
of the filing also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-Phlx-2010-48 and should be submitted on or before May 7,
2010.
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\23\ The text of the proposed rule change is available on the
Commission's Web site at http://www.sec.gov/rules/sro.shtml.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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\24\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-8686 Filed 4-15-10; 8:45 am]
BILLING CODE 8011-01-P