81 FR 81820 - Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending the Fees for NYSE Arca BBO and NYSE Arca Trades To Lower the Enterprise Fee
SECURITIES AND EXCHANGE COMMISSION Federal Register Volume 81, Issue 223 (November 18, 2016)
Federal Register Volume 81, Issue 223 (November 18, 2016)
| Page Range | 81820-81825 | |
| FR Document | 2016-27748 |
[Federal Register Volume 81, Number 223 (Friday, November 18, 2016)] [Notices] [Pages 81820-81825] From the Federal Register Online [www.thefederalregister.org] [FR Doc No: 2016-27748] ----------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION [Release No. 34-79310; File No. SR-NYSEArca-2016-142] Self-Regulatory Organizations; NYSE Arca, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending the Fees for NYSE Arca BBO and NYSE Arca Trades To Lower the Enterprise Fee November 14, 2016. 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 November 1, 2016, 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 [[Page 81821]] solicit comments on the proposed rule change from interested persons. --------------------------------------------------------------------------- \1\ 15 U.S.C. 78s(b)(1). \2\ 15 U.S.C. 78a. \3\ 17 CFR 240.19b-4. --------------------------------------------------------------------------- I. Self-Regulatory Organization's Statement of the Terms of the Substance of the Proposed Rule Change The Exchange proposes to amend the fees for NYSE Arca BBO and NYSE Arca Trades to lower the Enterprise Fee. The proposed rule change is available on the Exchange's Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission's Public Reference Room. II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to amend the fees for NYSE Arca BBO and NYSE Arca Trades market data products,\4\ as set forth on the NYSE Arca Equities Proprietary Market Data Fee Schedule (``Fee Schedule''). Specifically, the Exchange proposes to lower the Enterprise Fee. The Exchange proposes to make the fee change effective November 1, 2016. --------------------------------------------------------------------------- \4\ See Securities Exchange Act Release Nos. 59308 (January 28, 2009), 74 FR 5955 (February 3, 2009) (SR-NYSEArca-2009-05) (notice-- NYSE Arca Trades); 59598 (March 18, 2009), 74 FR 12919 (March 25, 2009) (SR-NYSEArca-2009-05) (approval order--NYSE Arca Trades); 61937 (April 16, 2010), 78 [sic] FR 21378 (April 23, 2010) (SR- NYSEArca-2010-23) (notice--NYSE Arca BBO); and 62188 (May 27, 2010), 75 FR 31484 (June 3, 2010) (SR-NYSEArca-2010-23) (approval order-- NYSE Arca BBO). --------------------------------------------------------------------------- The Exchange currently charges an enterprise fee of $170,000 per month for an unlimited number of professional and non-professional users for each of NYSE Arca BBO and NYSE Arca Trades.\5\ A single Enterprise Fee applies for clients receiving both NYSE Arca BBO and NYSE Arca Trades.\6\ The Exchange proposes to lower the enterprise fee to $34,500 per month. --------------------------------------------------------------------------- \5\ See Securities Exchange Act Release No. 76937 (January 20, 2016), 81 FR 4353 (January 26, 2016) (SR-NYSEArca-2016-09). \6\ See Securities Exchange Act Release No. 70213 (August 15, 2013), 78 FR 51796 (August 21, 2013) (SR-NYSEArca-2013-81). --------------------------------------------------------------------------- As an example, under the current fee structure for per user fees, if a firm had 40,000 professional users who each received NYSE Arca Trades at $4 per month and NYSE Arca BBO at $4 per month, without the Enterprise Fee, the firm would be subject to $320,000 per month in professional user fees. Under the current pricing structure, the charge would be capped at $170,000 and effective November 1, 2016 it would be capped at $34,500. Under the proposed enterprise fee, the firm would pay a flat fee of $34,500 for an unlimited number of professional and non-professional users for both products. As is the case currently, a data recipient that pays the enterprise fee would not have to report the number of such users on a monthly basis.\7\ However, every six months, a data recipient must provide the Exchange with a count of the total number of natural person users of each product, including both professional and non-professional users. --------------------------------------------------------------------------- \7\ Professional users currently are subject to a per display device count. See Securities Act [sic] Release No. 73998 (January 6, 2015), 80 FR 1549 (January 12, 2015) (SR-NYSEArca-2014-148). --------------------------------------------------------------------------- 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with the provisions of Section 6 of the Act,\8\ in general, and Sections 6(b)(4) and 6(b)(5) of the Act,\9\ 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. --------------------------------------------------------------------------- \8\ 15 U.S.C. 78f(b). \9\ 15 U.S.C. 78f(b)(4), (5). --------------------------------------------------------------------------- The proposed fee change is also equitable and not unfairly discriminatory because it would apply to all data recipients that choose to subscribe to NYSE Arca BBO and NYSE Arca Trades. The proposed enterprise fees for NYSE Arca BBO and NYSE Arca Trades are reasonable because they could result in a fee reduction for data recipients with a large number of professional and non-professional users, as described in the example above. If a data recipient has a smaller number of professional users of NYSE Arca BBO and/or NYSE Arca Trades, then it may continue to use the per user fee structure. By reducing prices for data recipient with a large number of professional and non-professional users, the Exchange believes that more data recipients may choose to offer NYSE Arca BBO and NYSE Arca Trades, thereby expanding the distribution of this market data for the benefit of investors. The Exchange also believes that offering an enterprise fee expands the range of options for offering NYSE Arca BBO and NYSE Arca Trades and allows data recipients greater choice in selecting the most appropriate level of data and fees for the professional and non- professional users they are servicing. The Exchange notes that NYSE Arca BBO and NYSE Arca Trades are entirely optional. The Exchange is not required to make NYSE Arca BBO and NYSE Arca Trades available or to offer any specific pricing alternatives to any customers, nor is any firm required to purchase NYSE Arca BBO and NYSE Arca Trades. Firms that do purchase NYSE Arca BBO and NYSE Arca Trades do so for the primary goals of using them to increase revenues, reduce expenses, and in some instances compete directly with the Exchange (including for order flow); those firms are able to determine for themselves whether NYSE Arca BBO and NYSE Arca Trades or any other similar products are attractively priced or not.\10\ --------------------------------------------------------------------------- \10\ See, e.g., Proposing Release on Regulation of NMS Stock Alternative Trading Systems, Securities Exchange Act Release No. 76474 (Nov. 18, 2015) (File No. S7-23-15). See also, ``Brokers Warned Not to Steer Clients' Stock Trades Into Slow Lane,'' Bloomberg Business, December 14, 2015 (Sigma X dark pool to use direct exchange feeds as the primary source of price data). --------------------------------------------------------------------------- Firms that do not wish to purchase NYSE Arca BBO and NYSE Arca Trades have a variety of alternative market data products from which to choose,\11\ or if NYSE Arca BBO and NYSE Arca Trades do not provide sufficient value to firms as offered based on the uses those firms have or planned to make of it, such firms may simply choose to conduct their business operations in ways that do not use NYSE Arca BBO and NYSE Arca Trades or use them at different levels or in different configurations. The Exchange notes that broker-dealers are not required to purchase proprietary market data to comply with their best execution obligations.\12\ --------------------------------------------------------------------------- \11\ See NASDAQ Rule 7047 (Nasdaq Basic) and Bats Rule 11.22 (Bats TOP and Last Sale). \12\ See FINRA Regulatory Notice 15-46, ``Best Execution,'' November 2015. --------------------------------------------------------------------------- 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 [[Page 81822]] 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.' '' \13\ --------------------------------------------------------------------------- \13\ NetCoalition, 615 F.3d at 535. --------------------------------------------------------------------------- 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 proprietary market 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. In addition, the existence of alternatives to these data products, such as consolidated data and proprietary 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 select such alternatives. As the NetCoalition decision noted, the Commission is not required to undertake a cost-of-service or ratemaking approach. The Exchange believes that, even if it were possible as a matter of economic theory, cost-based pricing for proprietary market data would be so complicated that it could not be done practically or offer any significant benefits.\14\ --------------------------------------------------------------------------- \14\ The Exchange believes that cost-based pricing would be impractical because it would create enormous administrative burdens for all parties and the Commission to cost-regulate a large number of participants and standardize and analyze extraordinary amounts of information, accounts, and reports. In addition, and as described below, it is impossible to regulate market data prices in isolation from prices charged by markets for other services that are joint products. Cost-based rate regulation would also lead to litigation and may distort incentives, including those to minimize costs and to innovate, leading to further waste. Under cost-based pricing, the Commission would be burdened with determining a fair rate of return, and the industry could experience frequent rate increases based on escalating expense levels. Even in industries historically subject to utility regulation, cost-based ratemaking has been discredited. As such, the Exchange believes that cost-based ratemaking would be inappropriate for proprietary market data and inconsistent with Congress's direction that the Commission use its authority to foster the development of the national market system, and that market forces will continue to provide appropriate pricing discipline. See Appendix C to NYSE's comments to the Commission's 2000 Concept Release on the Regulation of Market Information Fees and Revenues, which can be found on the Commission's Web site at http://www.sec.gov/rules/concept/s72899/buck1.htm. --------------------------------------------------------------------------- In addition, the Exchange believes that the proposed fees are reasonable when compared to fees for comparable products offered by at least one other exchange. For example, Bats BZX Exchange (``BZX'') charges an enterprise fee of $15,000 per month for each of BZX Top and BZX Last Sale, which includes best bid and offer and last sale data, respectively.\15\ While the Exchange is proposing enterprise fees that would be higher than the fees currently charged by BZX, the Exchange believes the proposed fees, which would be lower than current fees, are appropriate and would be beneficial to firms with a large number of users. --------------------------------------------------------------------------- \15\ See Market Data Fees at https://batstrading.com/support/fee_schedule/bzx/. --------------------------------------------------------------------------- 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 market data feed products is constrained by actual competition for the sale of proprietary market 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 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 for the proprietary products themselves. Numerous exchanges compete with one another for listings and order flow and sales of market data itself, providing ample opportunities for entrepreneurs who wish to compete in any or all of those areas, including producing and distributing their own market data. Proprietary data products are produced and distributed by each individual exchange, as well as other entities, in a vigorously competitive market. Indeed, the U.S. Department of Justice (``DOJ'') (the primary antitrust regulator) has expressly acknowledged the aggressive actual competition among exchanges, including for the sale of proprietary market data. In 2011, the DOJ 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.'' \16\ --------------------------------------------------------------------------- \16\ 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; see also Complaint in U.S. v. Deutsche Borse AG and NYSE Euronext, Case No. 11-cv-2280 (DC Dist.) ] 24 (``NYSE and Direct Edge compete head- to-head . . . in the provision of real-time proprietary equity data products.''). --------------------------------------------------------------------------- Moreover, competitive markets for listings, order flow, executions, and transaction reports provide pricing discipline for the inputs of proprietary data products and therefore constrain markets from overpricing proprietary market data. Broker-dealers send their order flow and transaction reports to multiple venues, rather than providing them all to a single venue, which in turn reinforces this competitive constraint. As a 2010 Commission Concept Release noted, the ``current market structure can be described as dispersed and complex'' with ``trading volume . . . dispersed among many highly automated trading centers that compete for order flow in the same stocks'' and ``trading centers offer[ing] a wide range of services that are designed to attract different types of market participants with varying trading needs.'' \17\ More recently, SEC Chair Mary Jo White has noted that competition for order flow in exchange-listed equities is ``intense'' and divided among many trading venues, including exchanges, more than 40 alternative trading systems, and more than 250 broker-dealers.\18\ --------------------------------------------------------------------------- \17\ Concept Release on Equity Market Structure, Securities Exchange Act Release No. 61358 (Jan. 14, 2010), 75 FR 3594 (Jan. 21, 2010) (File No. S7-02-10). This Concept Release included data from the third quarter of 2009 showing that no market center traded more than 20% of the volume of listed stocks, further evidencing the dispersal of and competition for trading activity. Id. at 3598. Data available on ArcaVision show that from June 30, 2013 to June 30, 2014, no exchange traded more than 12% of the volume of listed stocks by either trade or dollar volume, further evidencing the continued dispersal of and fierce competition for trading activity. See https://www.arcavision.com/Arcavision/arcalogin.jsp. \18\ Mary Jo White, Enhancing Our Equity Market Structure, Sandler O'Neill & Partners, L.P. Global Exchange and Brokerage Conference (June 5, 2014) (available on the Commission Web site), citing Tuttle, Laura, 2014, ``OTC Trading: Description of Non-ATS OTC Trading in National Market System Stocks,'' at 7-8. --------------------------------------------------------------------------- [[Page 81823]] If an exchange succeeds in competing for quotations, order flow, and trade executions, then it earns trading revenues and increases the value of its proprietary market data products because they will contain greater quote and trade information. Conversely, if an exchange is less successful in attracting quotes, order flow, and trade executions, then its market data products may be less desirable to customers in light of the diminished content and data products offered by competing venues may become more attractive. Thus, competition for quotations, order flow, and trade executions puts significant pressure on an exchange to maintain both execution and data fees at reasonable levels. In addition, in the case of products that are also redistributed through market data vendors, such as Bloomberg and Thompson Reuters, the 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 NYSE Arca BBO or NYSE Arca Trades unless their customers request it, and customers will not elect to pay the proposed fees unless NYSE Arca BBO and NYSE Arca Trades can provide value by sufficiently increasing revenues or reducing costs in the customer's business in a manner that will offset the fees. All of these factors 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, proprietary market data and trade executions are a paradigmatic example of joint products with joint costs. The decision of 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 availability and quality, and price and distribution of data products. Without a platform to post quotations, receive orders, and execute trades, exchange data products would not exist. 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 platform for posting quotes, accepting orders, and executing transactions 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 generally view the costs of transaction executions and market data as a unified cost of doing business with the exchange. A broker-dealer will only choose to direct orders to an exchange if the revenue from the transaction exceeds its cost, including the cost of any market data that the broker-dealer chooses to buy in support of its order routing and trading decisions. If the costs of the transaction are not offset by its value, then the broker-dealer may choose instead not to purchase the product and trade away from that exchange. Other market participants have noted that proprietary market data and trade executions are joint products of a joint platform and have common costs.\19\ 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.\20\ --------------------------------------------------------------------------- \19\ See Securities Exchange Act Release No. 72153 (May 12, 2014), 79 FR 28575, 28578 n.15 (May 16, 2014) (SR-NASDAQ-2014-045) (``[A]ll 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 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). \20\ 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.''). --------------------------------------------------------------------------- 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 because it is impossible to obtain the data inputs to create market data products without a fast, technologically robust, and well-regulated execution system, and system 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. As noted above, the level of competition and contestability in the market is evident in the numerous alternative venues that compete for order flow, including 13 equities self-regulatory organization (``SRO'') markets, as well as various forms of alternative trading systems (``ATSs''), including dark pools and electronic communication networks (``ECNs''), and internalizing broker-dealers. SRO markets compete to attract order flow and produce transaction reports via trade executions, and two FINRA-regulated Trade Reporting Facilities compete to attract transaction reports from the non-SRO venues. 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 trading 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 prices for accessing posted liquidity. For [[Page 81824]] example, Bats Global Markets (``Bats'') and Direct Edge, which previously operated as ATSs and obtained exchange status in 2008 and 2010, respectively, provided certain market data at no charge on their Web sites in order to attract more order flow, and used revenue rebates from resulting additional executions to maintain low execution charges for their users.\21\ 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. --------------------------------------------------------------------------- \21\ 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. --------------------------------------------------------------------------- Existence of Alternatives The large number of SROs, ATSs, and internalizing broker-dealers that currently produce proprietary data or are currently capable of producing it provides further pricing discipline for proprietary data products. Each SRO, ATS, and broker-dealer is currently permitted to produce and sell proprietary data products, and many currently do, including but not limited to the Exchange, New York Stock Exchange LLC, NYSE MKT LLC, NASDAQ, Bats, and Direct Edge. The fact that proprietary data from ATSs, internalizing broker- dealers, and vendors can bypass SROs is significant in two respects. First, non-SROs can compete directly with SROs for the production and sale of proprietary data products. By way of example, Bats and NYSE Arca both published proprietary data on the Internet before registering as exchanges. Second, because a single order or transaction report can appear in an SRO proprietary product, a non-SRO proprietary product, or both, the amount of data available via proprietary products is greater in size than the actual number of orders and transaction reports that exist in the marketplace. Indeed, in the case of NYSE Arca BBO and NYSE Arca Trades, the data provided through these products appears both in (i) real-time core data products offered by the Securities Information Processors (SIPs) for a fee, and (ii) free SIP data products with a 15- minute time delay, and finds a close substitute in similar products of competing venues.\22\ Because market data users can find suitable substitutes for most proprietary market data products, a market that overprices its market data products stands a high risk that users may substitute another source of market data information for its own. --------------------------------------------------------------------------- \22\ See supra note 15. --------------------------------------------------------------------------- Those competitive pressures imposed by available alternatives are evident in the Exchange's proposed pricing. 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 and inexpensive. The history of electronic trading is replete with examples of entrants that swiftly grew into some of the largest electronic trading platforms and proprietary data producers: Archipelago, Bloomberg Tradebook, Island, RediBook, Attain, TrackECN, BATS Trading and Direct Edge. A proliferation of dark pools and other ATSs operate profitably with fragmentary share of consolidated market volume. In determining the proposed changes to the fees for the NYSE Arca BBO and NYSE Arca Trades, the Exchange considered the competitiveness of the market for proprietary 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 the attendant fees are not justified by the returns that any particular vendor or data recipient would achieve through the purchase. C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were solicited or received with respect to the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change is effective upon filing pursuant to Section 19(b)(3)(A) \23\ of the Act and subparagraph (f)(2) of Rule 19b-4 \24\ thereunder, because it establishes a due, fee, or other charge imposed by the Exchange. --------------------------------------------------------------------------- \23\ 15 U.S.C. 78s(b)(3)(A). \24\ 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) \25\ of the Act to determine whether the proposed rule change should be approved or disapproved. --------------------------------------------------------------------------- \25\ 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 CommentsUse the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or Send an email to [email protected]. Please include File Number SR-NYSEArca-2016-142 on the subject line. Paper Comments Send paper comments in triplicate to Brent J. Fields, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090. All submissions should refer to File Number SR-NYSEArca-2016-142. 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 [[Page 81825]] 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR-NYSEArca-2016-142, and should be submitted on or before December 9, 2016. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.\26\ --------------------------------------------------------------------------- \26\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Brent J. Fields, Secretary. [FR Doc. 2016-27748 Filed 11-17-16; 8:45 am] BILLING CODE 8011-01-P
![81820 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Notices
II. Docketed Proceeding(s) This notice will be published in the the PCAOB’s 2016 budget of $257.7
I. Introduction Federal Register. million was consistent with Section 109
of the Sarbanes-Oxley Act and
Stacy L. Ruble,
The Commission gives notice that the accordingly, it approved the PCAOB’s
Postal Service filed request(s) for the Secretary. 2016 Budget on March 14, 2016.4
Commission to consider matters related [FR Doc. 2016–27709 Filed 11–17–16; 8:45 am] During 2016, the PCAOB determined
to negotiated service agreement(s). The BILLING CODE 7710–FW–P that it had under budgeted for
request(s) may propose the addition or inspections related travel for the year,
removal of a negotiated service and, on October 14, 2016 it submitted a
agreement from the market dominant or SECURITIES AND EXCHANGE supplemental budget request to the
the competitive product list, or the COMMISSION Commission. The PCAOB’s 2016
modification of an existing product supplemental budget requests
currently appearing on the market Order Approving Public Company Commission approval to transfer $1
dominant or the competitive product Accounting Oversight Board million of FY 2016 funding from certain
list. Supplemental Budget for Calendar program areas where the PCAOB has a
Section II identifies the docket Year 2016 2016 underspend to the Inspections
number(s) associated with each Postal Securities Act of 1933, Release No. 10255/ program area to cover the projected
Service request, the title of each Postal November 14, 2016 overspend in inspections related travel
Service request, the request’s acceptance Securities Exchange Act of 1934, Release No. costs. The supplemental budget does
date, and the authority cited by the 79303/November 14, 2016 not request an increase to the PCAOB’s
Postal Service for each request. For each previously approved 2016 Budget of
The Sarbanes-Oxley Act of 2002, as
request, the Commission appoints an $257.7 million.
amended (the ‘‘Sarbanes-Oxley Act’’),1
officer of the Commission to represent The Commission has determined that
established the Public Company
the interests of the general public in the the PCAOB’s 2016 supplemental budget
Accounting Oversight Board (‘‘PCAOB’’)
proceeding, pursuant to 39 U.S.C. 505 is consistent with Section 109 of the
to oversee the audits of companies that
(Public Representative). Section II also Sarbanes-Oxley Act. Accordingly,
are subject to the securities laws, and
establishes comment deadline(s) It is ordered, pursuant to Section 109
related matters, in order to protect the
pertaining to each request. of the Sarbanes-Oxley Act, that the
interests of investors and further the
The public portions of the Postal PCAOB supplemental budget for
public interest in the preparation of
Service’s request(s) can be accessed via calendar year 2016 is approved.
informative, accurate and independent
the Commission’s Web site (http:// audit reports. Section 982 of the Dodd- By the Commission.
www.prc.gov). Non-public portions of Frank Wall Street Reform and Consumer Brent J. Fields,
the Postal Service’s request(s), if any, Protection Act (the ‘‘Dodd-Frank Act’’) 2 Secretary.
can be accessed through compliance amended the Sarbanes-Oxley Act to [FR Doc. 2016–27708 Filed 11–17–16; 8:45 am]
with the requirements of 39 CFR provide the PCAOB with explicit BILLING CODE 8011–01–P
3007.40. authority to oversee auditors of broker-
The Commission invites comments on dealers registered with the Commission.
whether the Postal Service’s request(s) The PCAOB is to accomplish these goals SECURITIES AND EXCHANGE
in the captioned docket(s) are consistent through registration of public COMMISSION
with the policies of title 39. For accounting firms and standard setting,
request(s) that the Postal Service states inspection, and disciplinary programs. [Release No. 34–79310; File No. SR–
concern market dominant product(s), NYSEArca–2016–142]
The PCAOB is subject to the
applicable statutory and regulatory comprehensive oversight of the
requirements include 39 U.S.C. 3622, 39 Self-Regulatory Organizations; NYSE
Securities and Exchange Commission Arca, Inc.; Notice of Filing and
U.S.C. 3642, 39 CFR part 3010, and 39 (the ‘‘Commission’’).
CFR part 3020, subpart B. For request(s) Immediate Effectiveness of Proposed
Section 109(b) of the Sarbanes-Oxley Rule Change Amending the Fees for
that the Postal Service states concern Act directs the PCAOB to establish a
competitive product(s), applicable NYSE Arca BBO and NYSE Arca
budget for each fiscal year in accordance Trades To Lower the Enterprise Fee
statutory and regulatory requirements with the PCAOB’s internal procedures,
include 39 U.S.C. 3632, 39 U.S.C. 3633, subject to approval by the Commission. November 14, 2016.
39 U.S.C. 3642, 39 CFR part 3015, and Rule 190 of Regulation P facilitates the Pursuant to Section 19(b)(1) 1 of the
39 CFR part 3020, subpart B. Comment Commission’s review and approval of Securities Exchange Act of 1934 (the
deadline(s) for each request appear in PCAOB budgets and annual accounting ‘‘Act’’) 2 and Rule 19b–4 thereunder,3
section II. support fees.3 This budget rule notice is hereby given that, on
II. Docketed Proceeding(s) provides, among other things, limits on November 1, 2016, NYSE Arca, Inc. (the
the PCAOB’s ability to incur expenses ‘‘Exchange’’ or ‘‘NYSE Arca’’) filed with
1. Docket No(s).: CP2017–35; Filing and obligations except as provided in the Securities and Exchange
Title: Notice of United States Postal the approved budget as well as the Commission (the ‘‘Commission’’) the
Service of Filing a Functionally procedures for the submission of proposed rule change as described in
Equivalent Global Expedited Package supplemental budgets when it is Items I, II, and III below, which Items
Services 7 Negotiated Service
mstockstill on DSK3G9T082PROD with NOTICES
forecasted that the limits to incur have been prepared by the self-
Agreement and Application for Non- expenses and obligations will be regulatory organization. The
Public Treatment of Materials Filed exceeded in a given year. The Commission is publishing this notice to
Under Seal; Filing Acceptance Date: Commission previously determined that
November 10, 2016; Filing Authority: 39 4 Release No. 33–10054 (March 14, 2016).
CFR 3015.5; Public Representative: 1 15 U.S.C. 7201 et seq. 1 15 U.S.C. 78s(b)(1).
Curtis E. Kidd; Comments Due: 2 Public Law 111–203, 124 Stat. 1376 (2010). 2 15 U.S.C. 78a.
November 21, 2016. 3 17 CFR 202.190. 3 17 CFR 240.19b–4.
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![Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Notices 81821
solicit comments on the proposed rule BBO and NYSE Arca Trades.6 The number of professional and non-
change from interested persons. Exchange proposes to lower the professional users, the Exchange
enterprise fee to $34,500 per month. believes that more data recipients may
I. Self-Regulatory Organization’s As an example, under the current fee choose to offer NYSE Arca BBO and
Statement of the Terms of the Substance structure for per user fees, if a firm had NYSE Arca Trades, thereby expanding
of the Proposed Rule Change 40,000 professional users who each the distribution of this market data for
The Exchange proposes to amend the received NYSE Arca Trades at $4 per the benefit of investors. The Exchange
fees for NYSE Arca BBO and NYSE Arca month and NYSE Arca BBO at $4 per also believes that offering an enterprise
Trades to lower the Enterprise Fee. The month, without the Enterprise Fee, the fee expands the range of options for
proposed rule change is available on the firm would be subject to $320,000 per offering NYSE Arca BBO and NYSE
Exchange’s Web site at www.nyse.com, month in professional user fees. Under Arca Trades and allows data recipients
at the principal office of the Exchange, the current pricing structure, the charge greater choice in selecting the most
and at the Commission’s Public would be capped at $170,000 and appropriate level of data and fees for the
Reference Room. effective November 1, 2016 it would be professional and non-professional users
capped at $34,500. they are servicing.
II. Self-Regulatory Organization’s Under the proposed enterprise fee, the The Exchange notes that NYSE Arca
Statement of the Purpose of, and firm would pay a flat fee of $34,500 for BBO and NYSE Arca Trades are entirely
Statutory Basis for, the Proposed Rule an unlimited number of professional optional. The Exchange is not required
Change and non-professional users for both to make NYSE Arca BBO and NYSE
products. As is the case currently, a data Arca Trades available or to offer any
In its filing with the Commission, the recipient that pays the enterprise fee specific pricing alternatives to any
self-regulatory organization included would not have to report the number of customers, nor is any firm required to
statements concerning the purpose of, such users on a monthly basis.7 purchase NYSE Arca BBO and NYSE
and basis for, the proposed rule change However, every six months, a data Arca Trades. Firms that do purchase
and discussed any comments it received recipient must provide the Exchange NYSE Arca BBO and NYSE Arca Trades
on the proposed rule change. The text with a count of the total number of do so for the primary goals of using
of those statements may be examined at natural person users of each product, them to increase revenues, reduce
the places specified in Item IV below. including both professional and non- expenses, and in some instances
The Exchange has prepared summaries, professional users. compete directly with the Exchange
set forth in sections A, B, and C below, (including for order flow); those firms
of the most significant parts of such 2. Statutory Basis are able to determine for themselves
statements. The Exchange believes that the whether NYSE Arca BBO and NYSE
A. Self-Regulatory Organization’s proposed rule change is consistent with Arca Trades or any other similar
Statement of the Purpose of, and the provisions of Section 6 of the Act,8 products are attractively priced or not.10
in general, and Sections 6(b)(4) and Firms that do not wish to purchase
Statutory Basis for, the Proposed Rule
6(b)(5) of the Act,9 in particular, in that NYSE Arca BBO and NYSE Arca Trades
Change
it provides an equitable allocation of have a variety of alternative market data
1. Purpose reasonable fees among users and products from which to choose,11 or if
recipients of the data and is not NYSE Arca BBO and NYSE Arca Trades
The Exchange proposes to amend the designed to permit unfair do not provide sufficient value to firms
fees for NYSE Arca BBO and NYSE Arca discrimination among customers, as offered based on the uses those firms
Trades market data products,4 as set issuers, and brokers. have or planned to make of it, such
forth on the NYSE Arca Equities The proposed fee change is also firms may simply choose to conduct
Proprietary Market Data Fee Schedule equitable and not unfairly their business operations in ways that
(‘‘Fee Schedule’’). Specifically, the discriminatory because it would apply do not use NYSE Arca BBO and NYSE
Exchange proposes to lower the to all data recipients that choose to Arca Trades or use them at different
Enterprise Fee. The Exchange proposes subscribe to NYSE Arca BBO and NYSE levels or in different configurations. The
to make the fee change effective Arca Trades. Exchange notes that broker-dealers are
November 1, 2016. The proposed enterprise fees for not required to purchase proprietary
The Exchange currently charges an NYSE Arca BBO and NYSE Arca Trades market data to comply with their best
enterprise fee of $170,000 per month for are reasonable because they could result execution obligations.12
an unlimited number of professional in a fee reduction for data recipients The decision of the United States
and non-professional users for each of with a large number of professional and Court of Appeals for the District of
NYSE Arca BBO and NYSE Arca non-professional users, as described in Columbia Circuit in NetCoalition v.
Trades.5 A single Enterprise Fee applies the example above. If a data recipient SEC, 615 F.3d 525 (D.C. Cir. 2010),
for clients receiving both NYSE Arca has a smaller number of professional upheld reliance by the Securities and
users of NYSE Arca BBO and/or NYSE Exchange Commission (‘‘Commission’’)
4 See Securities Exchange Act Release Nos. 59308 Arca Trades, then it may continue to use upon the existence of competitive
(January 28, 2009), 74 FR 5955 (February 3, 2009) the per user fee structure. By reducing
10 See, e.g., Proposing Release on Regulation of
(SR–NYSEArca–2009–05) (notice—NYSE Arca prices for data recipient with a large
Trades); 59598 (March 18, 2009), 74 FR 12919 NMS Stock Alternative Trading Systems, Securities
(March 25, 2009) (SR–NYSEArca–2009–05) Exchange Act Release No. 76474 (Nov. 18, 2015)
mstockstill on DSK3G9T082PROD with NOTICES
6 See Securities Exchange Act Release No. 70213
(approval order—NYSE Arca Trades); 61937 (April (File No. S7–23–15). See also, ‘‘Brokers Warned Not
16, 2010), 78 [sic] FR 21378 (April 23, 2010) (SR– (August 15, 2013), 78 FR 51796 (August 21, 2013) to Steer Clients’ Stock Trades Into Slow Lane,’’
NYSEArca–2010–23) (notice—NYSE Arca BBO); (SR–NYSEArca–2013–81). Bloomberg Business, December 14, 2015 (Sigma X
7 Professional users currently are subject to a per dark pool to use direct exchange feeds as the
and 62188 (May 27, 2010), 75 FR 31484 (June 3,
2010) (SR–NYSEArca–2010–23) (approval order— display device count. See Securities Act [sic] primary source of price data).
NYSE Arca BBO). Release No. 73998 (January 6, 2015), 80 FR 1549 11 See NASDAQ Rule 7047 (Nasdaq Basic) and
5 See Securities Exchange Act Release No. 76937 (January 12, 2015) (SR–NYSEArca–2014–148). Bats Rule 11.22 (Bats TOP and Last Sale).
8 15 U.S.C. 78f(b).
(January 20, 2016), 81 FR 4353 (January 26, 2016) 12 See FINRA Regulatory Notice 15–46, ‘‘Best
(SR–NYSEArca–2016–09). 9 15 U.S.C. 78f(b)(4), (5). Execution,’’ November 2015.
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![81822 Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Notices
market mechanisms to set reasonable In addition, the Exchange believes the U.S. Department of Justice (‘‘DOJ’’)
and equitably allocated fees for that the proposed fees are reasonable (the primary antitrust regulator) has
proprietary market data: when compared to fees for comparable expressly acknowledged the aggressive
In fact, the legislative history indicates that products offered by at least one other actual competition among exchanges,
the Congress intended that the market system exchange. For example, Bats BZX including for the sale of proprietary
‘evolve through the interplay of competitive Exchange (‘‘BZX’’) charges an enterprise market data. In 2011, the DOJ stated that
forces as unnecessary regulatory restrictions fee of $15,000 per month for each of exchanges ‘‘compete head to head to
are removed’ and that the SEC wield its BZX Top and BZX Last Sale, which offer real-time equity data products.
regulatory power ‘in those situations where includes best bid and offer and last sale These data products include the best bid
competition may not be sufficient,’ such as
in the creation of a ‘consolidated
data, respectively.15 While the Exchange and offer of every exchange and
transactional reporting system.’ is proposing enterprise fees that would information on each equity trade,
be higher than the fees currently including the last sale.’’ 16
Id. at 535 (quoting H.R. Rep. No. 94– charged by BZX, the Exchange believes
229 at 92 (1975), as reprinted in 1975 Moreover, competitive markets for
the proposed fees, which would be listings, order flow, executions, and
U.S.C.C.A.N. 323). The court agreed lower than current fees, are appropriate
with the Commission’s conclusion that transaction reports provide pricing
and would be beneficial to firms with a discipline for the inputs of proprietary
‘‘Congress intended that ‘competitive large number of users.
forces should dictate the services and data products and therefore constrain
For these reasons, the Exchange markets from overpricing proprietary
practices that constitute the U.S. believes that the proposed fees are
national market system for trading market data. Broker-dealers send their
reasonable, equitable, and not unfairly order flow and transaction reports to
equity securities.’ ’’ 13 discriminatory.
As explained below in the Exchange’s multiple venues, rather than providing
Statement on Burden on Competition, B. Self-Regulatory Organization’s them all to a single venue, which in turn
the Exchange believes that there is Statement on Burden on Competition reinforces this competitive constraint.
substantial evidence of competition in The Exchange does not believe that As a 2010 Commission Concept Release
the marketplace for proprietary market the proposed rule change will impose noted, the ‘‘current market structure can
data and that the Commission can rely any burden on competition that is not be described as dispersed and complex’’
upon such evidence in concluding that necessary or appropriate in furtherance with ‘‘trading volume . . . dispersed
the fees established in this filing are the of the purposes of the Act. An among many highly automated trading
product of competition and therefore exchange’s ability to price its centers that compete for order flow in
satisfy the relevant statutory standards. proprietary market data feed products is the same stocks’’ and ‘‘trading centers
In addition, the existence of alternatives constrained by actual competition for offer[ing] a wide range of services that
to these data products, such as the sale of proprietary market data are designed to attract different types of
consolidated data and proprietary data products, the joint product nature of market participants with varying trading
from other sources, as described below, exchange platforms, and the existence of needs.’’ 17 More recently, SEC Chair
further ensures that the Exchange alternatives to the Exchange’s Mary Jo White has noted that
cannot set unreasonable fees, or fees proprietary data. competition for order flow in exchange-
that are unreasonably discriminatory, listed equities is ‘‘intense’’ and divided
when vendors and subscribers can The Existence of Actual Competition among many trading venues, including
select such alternatives. The market for proprietary data exchanges, more than 40 alternative
As the NetCoalition decision noted, products is currently competitive and trading systems, and more than 250
the Commission is not required to inherently contestable because there is broker-dealers.18
undertake a cost-of-service or fierce competition for the inputs
16 Press Release, U.S. Department of Justice,
ratemaking approach. The Exchange necessary for the creation of proprietary Assistant Attorney General Christine Varney Holds
believes that, even if it were possible as data and strict pricing discipline for the Conference Call Regarding NASDAQ OMX Group
a matter of economic theory, cost-based proprietary products themselves. Inc. and IntercontinentalExchange Inc. Abandoning
pricing for proprietary market data Numerous exchanges compete with one Their Bid for NYSE Euronext (May 16, 2011),
would be so complicated that it could available at http://www.justice.gov/iso/opa/atr/
another for listings and order flow and speeches/2011/at-speech-110516.html; see also
not be done practically or offer any sales of market data itself, providing Complaint in U.S. v. Deutsche Borse AG and NYSE
significant benefits.14 ample opportunities for entrepreneurs Euronext, Case No. 11–cv–2280 (DC Dist.) ¶ 24
who wish to compete in any or all of (‘‘NYSE and Direct Edge compete head-to-head . . .
13 NetCoalition, 615 F.3d at 535. in the provision of real-time proprietary equity data
those areas, including producing and products.’’).
14 The Exchange believes that cost-based pricing
would be impractical because it would create
distributing their own market data. 17 Concept Release on Equity Market Structure,
enormous administrative burdens for all parties and Proprietary data products are produced Securities Exchange Act Release No. 61358 (Jan. 14,
the Commission to cost-regulate a large number of and distributed by each individual 2010), 75 FR 3594 (Jan. 21, 2010) (File No. S7–02–
participants and standardize and analyze exchange, as well as other entities, in a 10). This Concept Release included data from the
extraordinary amounts of information, accounts, third quarter of 2009 showing that no market center
and reports. In addition, and as described below, it
vigorously competitive market. Indeed, traded more than 20% of the volume of listed
is impossible to regulate market data prices in stocks, further evidencing the dispersal of and
isolation from prices charged by markets for other proprietary market data and inconsistent with competition for trading activity. Id. at 3598. Data
services that are joint products. Cost-based rate Congress’s direction that the Commission use its available on ArcaVision show that from June 30,
regulation would also lead to litigation and may authority to foster the development of the national 2013 to June 30, 2014, no exchange traded more
distort incentives, including those to minimize market system, and that market forces will continue than 12% of the volume of listed stocks by either
mstockstill on DSK3G9T082PROD with NOTICES
costs and to innovate, leading to further waste. to provide appropriate pricing discipline. See trade or dollar volume, further evidencing the
Under cost-based pricing, the Commission would Appendix C to NYSE’s comments to the continued dispersal of and fierce competition for
be burdened with determining a fair rate of return, Commission’s 2000 Concept Release on the trading activity. See https://www.arcavision.com/
and the industry could experience frequent rate Regulation of Market Information Fees and Arcavision/arcalogin.jsp.
increases based on escalating expense levels. Even Revenues, which can be found on the Commission’s 18 Mary Jo White, Enhancing Our Equity Market
in industries historically subject to utility Web site at http://www.sec.gov/rules/concept/ Structure, Sandler O’Neill & Partners, L.P. Global
regulation, cost-based ratemaking has been s72899/buck1.htm. Exchange and Brokerage Conference (June 5, 2014)
discredited. As such, the Exchange believes that 15 See Market Data Fees at https:// (available on the Commission Web site), citing
cost-based ratemaking would be inappropriate for batstrading.com/support/fee_schedule/bzx/. Tuttle, Laura, 2014, ‘‘OTC Trading: Description of
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![Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Notices 81823
If an exchange succeeds in competing The costs of producing market data Analyzing the cost of market data
for quotations, order flow, and trade include not only the costs of the data product production and distribution in
executions, then it earns trading distribution infrastructure, but also the isolation from the cost of all of the
revenues and increases the value of its costs of designing, maintaining, and inputs supporting the creation of market
proprietary market data products operating the exchange’s platform for data and market data products will
because they will contain greater quote posting quotes, accepting orders, and inevitably underestimate the cost of the
and trade information. Conversely, if an executing transactions and the cost of data and data products because it is
exchange is less successful in attracting regulating the exchange to ensure its fair impossible to obtain the data inputs to
quotes, order flow, and trade operation and maintain investor create market data products without a
executions, then its market data confidence. The total return that a fast, technologically robust, and well-
products may be less desirable to trading platform earns reflects the regulated execution system, and system
customers in light of the diminished revenues it receives from both products and regulatory costs affect the price of
content and data products offered by and the joint costs it incurs. both obtaining the market data itself and
competing venues may become more Moreover, an exchange’s broker- creating and distributing market data
attractive. Thus, competition for dealer customers generally view the products. It would be equally
quotations, order flow, and trade costs of transaction executions and misleading, however, to attribute all of
executions puts significant pressure on market data as a unified cost of doing an exchange’s costs to the market data
an exchange to maintain both execution business with the exchange. A broker- portion of an exchange’s joint products.
and data fees at reasonable levels. dealer will only choose to direct orders Rather, all of an exchange’s costs are
In addition, in the case of products to an exchange if the revenue from the incurred for the unified purposes of
that are also redistributed through transaction exceeds its cost, including attracting order flow, executing and/or
market data vendors, such as Bloomberg the cost of any market data that the routing orders, and generating and
and Thompson Reuters, the vendors broker-dealer chooses to buy in support selling data about market activity. The
themselves provide additional price of its order routing and trading total return that an exchange earns
discipline for proprietary data products decisions. If the costs of the transaction reflects the revenues it receives from the
because they control the primary means are not offset by its value, then the joint products and the total costs of the
of access to certain end users. These broker-dealer may choose instead not to joint products.
vendors impose price discipline based purchase the product and trade away As noted above, the level of
upon their business models. For from that exchange. competition and contestability in the
example, vendors that assess a Other market participants have noted market is evident in the numerous
surcharge on data they sell are able to that proprietary market data and trade alternative venues that compete for
refuse to offer proprietary products that executions are joint products of a joint order flow, including 13 equities self-
their end users do not or will not platform and have common costs.19 The regulatory organization (‘‘SRO’’)
purchase in sufficient numbers. Vendors Exchange agrees with and adopts those markets, as well as various forms of
will not elect to make available NYSE discussions and the arguments therein. alternative trading systems (‘‘ATSs’’),
Arca BBO or NYSE Arca Trades unless The Exchange also notes that the including dark pools and electronic
their customers request it, and economics literature confirms that there communication networks (‘‘ECNs’’), and
customers will not elect to pay the is no way to allocate common costs internalizing broker-dealers. SRO
proposed fees unless NYSE Arca BBO between joint products that would shed markets compete to attract order flow
and NYSE Arca Trades can provide any light on competitive or efficient and produce transaction reports via
value by sufficiently increasing pricing.20 trade executions, and two FINRA-
revenues or reducing costs in the regulated Trade Reporting Facilities
customer’s business in a manner that 19 See Securities Exchange Act Release No. 72153 compete to attract transaction reports
(May 12, 2014), 79 FR 28575, 28578 n.15 (May 16, from the non-SRO venues.
will offset the fees. All of these factors 2014) (SR–NASDAQ–2014–045) (‘‘[A]ll of the
operate as constraints on pricing Competition among trading platforms
exchange’s costs are incurred for the unified
proprietary data products. purposes of attracting order flow, executing and/or can be expected to constrain the
routing orders, and generating and selling data aggregate return that each platform
Joint Product Nature of Exchange about market activity. The total return that an earns from the sale of its joint products,
Platform exchange earns reflects the revenues it receives but different trading platforms may
from the joint products and the total costs of the
Transaction execution and proprietary joint products.’’). See also Securities Exchange Act choose from a range of possible, and
data products are complementary in that Release No. 62907 (Sept. 14, 2010), 75 FR 57314, equally reasonable, pricing strategies as
market data is both an input and a 57317 (Sept. 20, 2010) (SR–NASDAQ–2010–110), the means of recovering total costs. For
and Securities Exchange Act Release No. 62908 example, some platforms may choose to
byproduct of the execution service. In (Sept. 14, 2010), 75 FR 57321, 57324 (Sept. 20,
fact, proprietary market data and trade 2010) (SR–NASDAQ–2010–111).
pay rebates to attract orders, charge
executions are a paradigmatic example 20 See generally Mark Hirschey, Fundamentals of relatively low prices for market data
of joint products with joint costs. The Managerial Economics, at 600 (2009) (‘‘It is products (or provide market data
decision of whether and on which important to note, however, that although it is products free of charge), and charge
possible to determine the separate marginal costs of relatively high prices for accessing
platform to post an order will depend goods produced in variable proportions, it is
on the attributes of the platforms where impossible to determine their individual average posted liquidity. Other platforms may
the order can be posted, including the costs. This is because common costs are expenses choose a strategy of paying lower
execution fees, data availability and necessary for manufacture of a joint product. rebates (or no rebates) to attract orders,
Common costs of production—raw material and setting relatively high prices for market
mstockstill on DSK3G9T082PROD with NOTICES
quality, and price and distribution of equipment costs, management expenses, and other
data products. Without a platform to overhead—cannot be allocated to each individual
data products, and setting relatively low
post quotations, receive orders, and by-product on any economically sound basis.. . . prices for accessing posted liquidity. For
execute trades, exchange data products Any allocation of common costs is wrong and
arbitrary.’’). This is not new economic theory. See, jointly incurred for both sorts of traffic; and I cannot
would not exist. e.g., F. W. Taussig, ‘‘A Contribution to the Theory share the hope entertained by the statistician of the
of Railway Rates,’’ Quarterly Journal of Economics Commission, Professor Henry C. Adams, that we
Non-ATS OTC Trading in National Market System V(4) 438, 465 (July 1891) (‘‘Yet, surely, the division shall ever reach a mode of apportionment that will
Stocks,’’ at 7–8. is purely arbitrary. These items of cost, in fact, are lead to trustworthy results.’’).
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![Federal Register / Vol. 81, No. 223 / Friday, November 18, 2016 / Notices 81825
10:00 a.m. and 3:00 p.m. Copies of such adviser or any affiliated person of its Written comments are invited on: (a)
filing also will be available for own investment adviser. Whether the proposed collection of
inspection and copying at the principal A fund may, however, rely on an information is necessary for the proper
office of the Exchange. All comments exemption in rule 12d3–1 to acquire performance of the functions of the
received will be posted without change; securities issued by its subadvisers in agency, including whether the
the Commission does not edit personal circumstances in which the subadviser information will have practical utility;
identifying information from would have little ability to take (b) the accuracy of the agency’s estimate
submissions. You should submit only advantage of the fund, because it is not of the burden of the collection of
information that you wish to make in a position to direct the fund’s information; (c) ways to enhance the
available publicly. All submissions securities purchases. The exemption in quality, utility, and clarity of the
should refer to File Number SR– rule 12d3–1(c)(3) is available if (i) the information collected; and (d) ways to
NYSEArca–2016–142, and should be subadviser is not, and is not an affiliated minimize the burden of the collection of
submitted on or before December 9, person of, an investment adviser that information on respondents, including
2016. provides advice with respect to the through the use of automated collection
For the Commission, by the Division of portion of the fund that is acquiring the techniques or other forms of information
Trading and Markets, pursuant to delegated securities, and (ii) the advisory contracts technology. Consideration will be given
authority.26 of the subadviser, and any subadviser to comments and suggestions submitted
Brent J. Fields, that is advising the purchasing portion in writing within 60 days of this
Secretary. of the fund, prohibit them from publication.
[FR Doc. 2016–27748 Filed 11–17–16; 8:45 am] consulting with each other concerning Please direct your written comments
securities transactions of the fund, and to Pamela Dyson, Director/Chief
BILLING CODE 8011–01–P
limit their responsibility in providing Information Officer, Securities and
advice to providing advice with respect Exchange Commission, C/O Remi
SECURITIES AND EXCHANGE to discrete portions of the fund’s Pavlik-Simon, 100 F Street NE.,
COMMISSION portfolio. Washington, DC 20549; or send an email
to: PRA_Mailbox@sec.gov.
Based on an analysis of third-party
Proposed Collection; Comment information, the staff estimates that Dated: November 14, 2016.
Request approximately 319 fund portfolios enter Brent J. Fields,
Upon Written Request, Copies Available into subadvisory agreements each year.1 Secretary.
From: Securities and Exchange Based on discussions with industry [FR Doc. 2016–27749 Filed 11–17–16; 8:45 am]
Commission, Office of Investor representatives, the staff estimates that BILLING CODE 8011–01–P
Education and Advocacy, it will require approximately 3 attorney
Washington, DC 20549–0213. hours to draft and execute additional
clauses in new subadvisory contracts in SECURITIES AND EXCHANGE
Extension:
Rule 12d3–1, SEC File No. 270–504, OMB order for funds and subadvisers to be COMMISSION
Control No. 3235–0561 able to rely on the exemptions in rule [Release No. 34–79304; File No. SR–DTC–
12d3–1. Because these additional 2016–013]
Notice is hereby given that, pursuant
clauses are identical to the clauses that
to the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.), the Securities a fund would need to insert in their Self-Regulatory Organizations; The
and Exchange Commission (the subadvisory contracts to rely on rules Depository Trust Company; Notice of
‘‘Commission’’) is soliciting comments 10f–3, 17a–10, and 17e–1 and because Filing and Immediate Effectiveness of
on the collections of information we believe that funds that use one such a Proposed Rule Change To Modify the
summarized below. The Commission rule generally use all of these rules, we DTC Settlement Service Guide and
plans to submit these existing apportion this 3 hour time burden Distributions Guide Relating to the
collections of information to the Office equally to all four rules. Therefore, we Anticipated U.S. Market Transition to a
of Management and Budget (‘‘OMB’’) for estimate that the burden allocated to Shortened Settlement Cycle
extension and approval. rule 12d3–1 for this contract change
November 14, 2016.
Section 12(d)(3) of the Investment would be 0.75 hours.2 Assuming that all
Pursuant to Section 19(b)(1) of the
Company Act of 1940 (15 U.S.C. 80a) 319 funds that enter into new
Securities Exchange Act of 1934
generally prohibits registered subadvisory contracts each year make
(‘‘Act’’) 1 and Rule 19b–4, thereunder 2
investment companies (‘‘funds’’), and the modification to their contract
notice is hereby given that on November
companies controlled by funds, from required by the rule, we estimate that
7, 2016, The Depository Trust Company
purchasing securities issued by a the rule’s contract modification
(‘‘DTC’’) filed with the Securities and
registered investment adviser, broker, requirement will result in 239.25
Exchange Commission (‘‘Commission’’)
dealer, or underwriter (‘‘securities- burden hours annually.3
the proposed rule change as described
related businesses’’). Rule 12d3–1 An agency may not conduct or in Items I, II and III below, which Items
(‘‘Exemption of acquisitions of sponsor, and a person is not required to have been prepared by the clearing
securities issued by persons engaged in respond to, a collection of information agency. DTC filed the proposed rule
securities related businesses’’ (17 CFR unless it displays a currently valid change pursuant to Section 19(b)(3)(A) 3
270.12d3–1)) permits a fund to invest control number. of the Act and Rule 19b–4(f)(4) 4
mstockstill on DSK3G9T082PROD with NOTICES
up to five percent of its assets in thereunder. The proposed rule change
securities of an issuer deriving more 1 Based on information available from
was effective upon filing with the
than fifteen percent of its gross revenues Morningstar and the ICI Fact Book, we estimate that
Commission. The Commission is
from securities-related businesses, but a 37 percent of funds are advised by subadvisers.
2 This estimate is based on the following
fund may not rely on rule 12d3–1 to calculation (3 hours ÷ 4 rules = .75 hours).
1 15 U.S.C. 78s(b)(1).
acquire securities of its own investment 3 This estimate is based on the following 2 17 CFR 240.19b–4.
calculation: (0.75 hours × 319 portfolios = 239.25 3 15 U.S.C. 78s(b)(3)(A).
26 17 CFR 200.30–3(a)(12). burden hours). 4 17 CFR 240.19b–4(f)(4).
VerDate Sep<11>2014 20:21 Nov 17, 2016 Jkt 241001 PO 00000 Frm 00107 Fmt 4703 Sfmt 4703 E:\FR\FM\18NON1.SGM 18NON1](https://thefederalregister.org/doc/81_FR_82043/page/6.svg)
Document Created: 2018-02-14 08:31:52
Document Modified: 2018-02-14 08:31:52
| Category | Regulatory Information | |
| Collection | Federal Register | |
| sudoc Class | AE 2.7: GS 4.107: AE 2.106: | |
| Publisher | Office of the Federal Register, National Archives and Records Administration | |
| Section | Notices | |
| FR Citation | 81 FR 81820 |
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