charge a fee for its depth-of-book order data,\221\ but claim that the
fee chosen by NYSE Arca is unaffected by its need to attract order
flow.\222\ The Commission disagrees and notes that NYSE Arca, in
setting the fee, acknowledged that it needed to balance its desire for
market data revenues with the potential damage that a high fee would do
to its ability to attract order flow.\223\
---------------------------------------------------------------------------

    \219\ Cf. NYSE Arca Response III at 4 (``Several years ago,
certain [ECNs] began to make their real-time quotes available for
free in order to gain visibility in the market place.'').
    \220\ NYSE Arca Response I at 4 (``[F]ees will enable the
Exchange to further diversify its revenue to compete with its
rivals. The Exchange believes that its business has reached the
point where its customers are willing to pay for the value of the
Exchange's information.'').
    \221\ See, e.g., Petition at 9; SIFMA I at 7.
    \222\ See notes 147-149 above and accompanying text.
    \223\ NYSE Arca Response III at 13 (in setting the level of fees
for ArcaBook data, NYSE Arca considered ``projected losses to NYSE
Arca's business model and order flow that might result from
marketplace resistance to'' the fees).
---------------------------------------------------------------------------

2. Availability of Alternatives to ArcaBook Data
    In addition to the need to attract order flow, the availability of
alternatives to an exchange's depth-of-book order data significantly
affects the terms on which an exchange distributes such data.\224\ The
primary use of depth-of-book order data is to assess the depth of the
market for a stock beyond that which is shown by the best-priced
quotations that are distributed in core data. Institutional investors
that need to trade in large size typically seek to assess market depth
beyond the best prices, in contrast to retail investors who generally
can expect to receive the best price or better when they trade in
smaller sizes.\225\
---------------------------------------------------------------------------

    \224\ See NYSE Arca Response III at 13 (in setting fees for
ArcaBook data, NYSE Arca considered ``the fact that Arca Book is
primarily a product for market professionals, who have access to
other sources of market data and who will purchase Arca Book only if
they determine that the perceived benefits outweigh the cost''); see
also the authorities cited in note 200 above. In considering
antitrust issues, courts have recognized the value of competition in
producing lower prices. See, e.g., Leegin Creative Leather Products
v. PSKS, Inc., 127 S. Ct. 2705 (2007); Atlanta Richfield Co. v.
United States Petroleum Co., 495 U.S. 328 (1990); Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (1986); State Oil Co.
v. Khan, 522 U.S. 3 (1997); Northern Pacific Railway Co. v. U.S.,
356 U.S. 1 (1958).
    \225\ The market information needs of retail investor are
discussed at notes 229-336 below and accompanying text.
---------------------------------------------------------------------------

    In setting the fees for its depth-of-book order data, an exchange
must consider the extent to which sophisticated traders would choose
one or more alternatives instead of purchasing the exchange's
data.\226\ Of course, the most basic source of information concerning
the depth generally available at an exchange is the complete record of
an exchange's transactions that is provided in the core data feeds. In
this respect, the core data feeds that include an exchange's own
transaction information are a significant alternative to the exchange's
depth-of-book data product.
---------------------------------------------------------------------------

    \226\ See NYSE Arca Response III at 17 (``As a result of all of
the choices and discretion that are available to brokers, the
displayed depth-of-book data of one trading center does not provide
a complete picture of the full market for a security * * *. A
brokerage firm has potentially dozens of different information
sources to choose from in determining if, where, and how to
represent an order for execution.'').
---------------------------------------------------------------------------

    For more specific information concerning depth, market participants
can choose among the depth-of-book order products offered by the
various exchanges and ECNs.\227\ A market participant is likely to be
more interested in other exchange and ECN products when the exchange
selling its data has a small share of trading volume, because the
depth-of-book order data provided by other exchanges and ECNs will be
proportionally more important in assessing market depth. As a result,
smaller exchanges may well be inclined to offer their data for no
charge or low fees as a means to attract order flow. Even larger
exchanges, however, must consider the lower fees of other exchanges in
setting the fees for the larger exchanges' data. Significant fee
differentials could lead to shifts in order flow that, over time, could
harm a larger exchange's competitive position and the value of its non-
core data.
---------------------------------------------------------------------------

    \227\ See Nasdaq Letter at 7-8 (``The large number of SROs,
TRFs, and ECNs that currently produce proprietary data or are
currently capable of producing it provides further pricing
discipline for proprietary data products. As shown on Exhibit A,
each SRO, TRF, ECN and BD is currently permitted to produce
proprietary data products, and many currently do or have announced
plans to do so, including Nasdaq, NYSE, NYSEArca, and BATS.'').
---------------------------------------------------------------------------

    Market depth also can be assessed with tools other than depth-of-
book order data. For example, market participants can ``ping'' the
various markets by routing oversized marketable limit orders to access
an exchange's total liquidity available at an order's limit price or
better.\228\ In contrast to depth-of-book order data, pinging orders
have the important advantage of searching out both displayed and
reserve (i.e., nondisplayed) size at all price points within an order's
limit price. Reserve size can represent a substantial portion of the
liquidity available at exchanges.\229\ It often will

be available at prices that are better than or equal to an exchange's
best displayed prices, and none of this liquidity will be discernible
from an exchange's depth-of-book order data. Pinging orders thereby
give the sender an immediate and more complete indication of the total
liquidity available at an exchange at a particular time. Moreover,
sophisticated order routers are capable of maintaining historical
records of an exchange's responses to pinging orders over time to gauge
the extent of total liquidity that generally can be expected at an
exchange. These records are a key element used to program smart order
routing systems that implement the algorithmic trading strategies that
have become so prevalent in recent years.\230\
---------------------------------------------------------------------------

    \228\ See Regulation NMS Release, 70 FR at 37514 (discussion of
pinging orders noting that they ``could as aptly be labeled
`liquidity search' orders'').
    \229\ See, e.g., NYSE Arca Response III at 17 (noting that
brokers ``may elect to have NYSE Arca hold a portion of the order as
hidden interest that NYSE Arca holds in reserve, which means that
NYSE Arca will not include the undisplayed portion of the order as
part of the Arca Book display''); Michael Scotti, ``The Dark Likes
Nasdaq,'' Traders Magazine (May 1, 2007) (quoting statement of
Nasdaq's executive vice president that 15 to 18 percent of Nasdaq's
executed liquidity is non-displayed).
    \230\ See, e.g., http://www.advancedtrading.com/directories/
dark-algorithms (descriptions of product offerings for ``dark
algorithms'' that seek undisplayed liquidity at multiple trading
venues); EdgeTrade, Inc., ``EdgeTrade issues white paper on market
fragmentation and unprecedented liquidity opportunities through
smart order execution'' (September 10, 2007) (available at http://
www.edgetrade.com) (``EdgeTrade's smart order execution strategy * *
* simultaneously sprays aggregated dark pools and public markets,
and then continuously moves an order in line with shifting liquidity
until best execution is fulfilled.'').
---------------------------------------------------------------------------

    Another alternative to depth-of-book order data products offered by
exchanges is the threat of independent distribution of order data by
securities firms and data vendors.\231\ As noted above, one of the
principal market data reforms adopted in 2005 was to authorize the
independent distribution of data by individual firms. To the extent
that one or more securities firms conclude that the cost of exchange
depth-of-book order products is too high and appreciably exceeds the
cost of aggregating and distributing such data, they are entitled to
act independently and distribute their own order data, with or without
a fee. Indeed, a consortium of major securities firms in Europe has
undertaken such a market data project as part of the implementation of
the Markets in Financial Instruments Directive (``MiFID'') adopted by
the European Union.\232\ No securities statute or regulation prevents
U.S. firms from undertaking an analogous project in the U.S. for the
display of depth-of-book order data. This data could encompass orders
that are executed off of the exchanges, as well as orders that are
submitted to exchanges for execution. If major U.S. firms handling
significant order flow participated in the project, the project could
collect and distribute data that covered a large proportion of
liquidity in U.S. equities.
---------------------------------------------------------------------------

    \231\ See Nasdaq Letter at 3 (``Proprietary optional data may be
offered by a single broker-dealer, a group of broker-dealers, a
national securities exchange, or a combination of broker-dealers or
exchanges, unlike consolidated data which is only available through
a consortium of SROs.'').
    \232\ The project--currently named ``Markit BOAT''--distributes
both quotes and trades and is described at http://www.markit.com/
information/boat/boat-data.html. It currently charges fees of 120
euros per month per user for its quote and trade data. See Nasdaq
Letter at 9 (noting the potential for firms to export Project BOAT
technology to the United States).
---------------------------------------------------------------------------

    The Commission recognizes that the depth-of-book order data for a
particular exchange may offer advantages over the alternatives for
assessing market depth. The relevant issue, however, is whether the
availability of these alternatives imposes significant competitive
restraints on an exchange in setting the terms, particularly the fees,
for distributing its depth-of-book order data. For example, Nasdaq has
a substantial trading share in Nasdaq-listed stocks, yet only 19,000
professional users purchase Nasdaq's depth-of-book data product and
420,000 professional users purchase core data in Nasdaq-listed
stocks.\233\ A reasonable conclusion to draw from this disparity in the
number of professional users of consolidated core data and Nasdaq's
non-core data is that the great majority of professional users either
believe they do not need Nasdaq's depth-of-book order data or simply do
not think it is worth $76 per month to them (approximately $3.50 per
trading day) compared to other sources of information on market depth
in Nasdaq-listed stocks. The fact that 95% of the professional users of
core data choose not to purchase the depth-of-book order data of a
major exchange strongly suggests that no exchange has monopoly pricing
power for its depth-of-book order data.\234\
---------------------------------------------------------------------------

    \233\ Nasdaq Letter at 6.
    \234\ See id. (``Empirical sales data for Nasdaq TotalView,
Nasdaq's proprietary depth-of-book data, demonstrate that broker-
dealers do not consider TotalView to be required for compliance with
Regulation NMS or any other regulation. * * * [O]f the 735 broker-
dealer members that trade Nasdaq securities, only 20 or 2.7 percent
spend more than $7,000 per month on TotalView users. Nasdaq
understands that firms with more than 100 TotalView professional
users generally provide TotalView to only a small fraction of their
total user populations.'').
---------------------------------------------------------------------------

    In sum, there are a variety of alternative sources of information
that impose significant competitive pressures on an exchange in setting
fees for its depth-of-book order data. The Commission believes that the
availability of these alternatives, as well as NYSE Arca's compelling
need to attract order flow, imposed significant competitive pressure on
NYSE Arca to act equitably, fairly, and reasonably in setting the terms
of the Proposal.
3. Response to Commenters on Competition Issues
    Some commenters suggested that exchanges are not constrained by
competitive forces in distributing their order data because Exchange
Act rules require broker-dealers to provide their orders to an
exchange, and that exchanges therefore enjoy a regulatory
monopoly.\235\ As discussed above, however, exchanges face fierce
competition in their efforts to attract order flow. For the great
majority of orders, Exchange Act rules do not require that they be
routed to an exchange.\236\ These include all marketable orders and
most non-marketable orders. With respect to certain types of non-
marketable orders, two Exchange Act rules can require broker-dealers to
provide such orders to an exchange in certain circumstances, but only
when the broker-dealer chooses to do business on the exchange. Rule 602
of Regulation NMS \237\ requires certain broker-dealers, once they have
chosen to communicate quotations on an exchange, to provide their best
quotations to the exchange.\238\ Rule 604

of Regulation NMS \239\ requires market makers and specialists to
reflect their displayable customer limit orders in their quotations in
certain circumstances, but provides an exception if the order is
delivered for display through an exchange or FINRA, or to a non-
exchange ECN that delivers the order for display through an exchange or
FINRA. Most significantly, while these rules can require certain orders
to be displayed through an exchange or FINRA, broker-dealers have a
great deal of flexibility in deciding which exchange or FINRA. As
discussed above, exchanges compete vigorously to display the non-
marketable orders handled by broker-dealers. No particular exchange has
a regulatory monopoly to display these orders.\240\
---------------------------------------------------------------------------

    \235\ See, e.g., Bloomberg Letter at 4; Financial Services
Roundtable Letter at 1; NetCoalition III at 6. Some commenters
suggested that broker-dealers were required to provide their data to
exchanges for free and then buy that data back from the exchanges.
NSX Letter at 1; SIFMA III at 12. A broker-dealer, however, has no
need to buy back its own data, with which it is already familiar.
Rather, broker-dealers need to see data submitted by other broker-
dealers and market participants. This need is served by the core
function of a securities exchange, which is to provide a central
point for bringing buy and sell orders together, thereby enabling
the resulting market data to be distributed to all market
participants. See, e.g., Section 3(a)(1) of the Exchange Act, 15
U.S.C. 78c(a)(1) (``exchange'' defined as, among other things,
``facilities for bringing together purchasers and sellers of
securities'').
    \236\ For example, a broker-dealer commenter asserted that
exchanges enjoy a ``government-protected monopoly'' as exclusive
processors of their market information. Schwab Letter at 6; see also
SIFMA IV at 7 (``Normal market forces cannot be relied upon here
because of the unique structure of the market for data that the
exchanges compile from their captive broker-dealer customers and
then sell back to them.''). As noted in Table 1 above, non-exchange
trading venues now execute more volume in U.S.-listed equities than
any single exchange.
    \237\ 17 CFR 242.602 (previously designated as Rule 11Ac1-1).
    \238\ Only broker-dealers that choose to participate on an
exchange as ``responsible broker-dealers'' are required to provide
their best bid and best offer to such exchange. Rule 602(b) and Rule
600(b)(65)(i) of Regulation NMS. Broker-dealers that participate
only in the over-the-counter (i.e., non-exchange) market as
responsible broker-dealers are required to provide their quotations
to FINRA, a not-for-profit membership organization of broker-
dealers. Rule 602(b) and Rule 600(b)(65)(ii) of Regulation NMS.
    \239\ 17 CFR 242.604 (previously designated as Rule 11Ac1-4).
    \240\ One commenter asserted that ``exchanges have government-
granted exclusive access to market data for securities listed in
their respective markets.'' SIFMA I at 12. In fact, a listing
exchange does not have any particular privileges over other
exchanges in attracting quotation and trade data in its listed
stocks. Rather, other exchanges are free to trade such stocks
pursuant to unlisted trading privileges, and the listing exchange
must compete with those exchanges for order flow. If the listing
exchange is unable to attract order flow, it will not have
quotations or trades to distribute.
---------------------------------------------------------------------------

    Some commenters asserted that exchanges act as monopolies in
distributing depth-of-book order data because they are the exclusive
processors of such data, as defined in section 3(a)(22)(B) of the
Exchange Act. Many businesses, however, are the exclusive sources of
their own products, but this exclusivity does not mean that a business
has monopoly pricing power when selling its product and is impervious
to competitive pressures. The particular circumstances of the business
and its product must be examined. As discussed above, the U.S.
exchanges are subject to significant competitive forces in setting the
terms for their depth-of-book order products, including the need to
attract order flow and the availability of alternatives to their depth-
of-book order products. Consequently, NYSE Arca does not have monopoly
pricing power for ArcaBook data merely because it meets the statutory
definition of an exclusive processor of the data.\241\
---------------------------------------------------------------------------

    \241\ A straightforward example may help illustrate this point.
Table 1 shows that there are several exchanges with a very small
share of trading volume. Such an exchange would meet the statutory
definition of an exclusive processor, but clearly would be unable to
exert monopoly pricing power if it attempted to sell its depth-of-
book order data at an unreasonably high price. Accordingly, the
relevant issue is not whether an exchange falls within the statutory
definition of an exclusive processor, but whether it is subject to
significant competitive forces in setting the terms for distribution
of its depth-of-book data.
---------------------------------------------------------------------------

    Commenters cited a decision of the U.K. competition authorities
concerning proposed acquisitions of the London Stock Exchange plc
(``LSE'') for the proposition that an exchange is a monopolist of its
proprietary market information.\242\ Their reliance on this decision is
misplaced for two important reasons. First, unlike the U.S. where the
core data feeds provide an essential source of information for every
exchange's most valuable data--its best quoted prices and last sale
information--the LSE's proprietary data is the sole source of
information for trading on the LSE. As a result, market participants
have few, if any, useful alternatives for LSE proprietary data. In the
U.S., in contrast, the availability of an exchange's essential trading
information in the core data feeds, as well as other valuable
alternatives, discussed above, for assessing market depth beyond the
best quoted prices, precludes the U.S. exchanges from exerting monopoly
power over the distribution of their non-core data. Second, there
historically has been very little effective competition among markets
for order flow in the U.K. The U.K. Competition Commission, for
example, found that the most important competitive constraint on the
LSE was not the existence of other trading venues with significant
trading volume in LSE-listed stocks, but rather ``primarily, the threat
that [other exchanges, including foreign exchanges such as the NYSE and
Nasdaq] will expand their services and compete directly with LSE.''
\243\ In contrast, the U.S. has a national market system for trading
equities in which competition is provided not merely by the threat of
other markets attempting to trade an exchange's listed products, but by
the on-the-ground existence of multiple markets with a significant
share of trading in such products. These competitors also distribute
depth-of-book order products with substantial liquidity in the same
stocks included in an exchange's depth-of-book product. In sum, the
competitive forces facing NYSE Arca in its distribution of ArcaBook
data were entirely inapplicable to the LSE in its distribution of
proprietary data in 2005.
---------------------------------------------------------------------------

    \242\ NetCoalition IV at 9; SIFMA V at 8.
    \243\ U.K. Competition Commission, A Report on the Proposed
Acquisition of London Stock Exchange plc by Deutsche Borse AG or
Euronext NV (November 2005), at 57 (emphasis added). The intensity
of competition among markets trading the same products in Europe
could increase substantially in the wake of the implementation of
MiFID in November 2007.
---------------------------------------------------------------------------

    In addition, the existence of significant competitive forces
applicable to NYSE Arca renders inapposite the citations of commenters
to statements in Exchange Act legislative history and Commission
releases regarding monopoly data distribution. Such statements were
made in the context of the central processors of core data for the
Networks, which in fact have monopoly pricing power for such mandated
data. Central processors of core data therefore are in a very different
economic and legal position than NYSE Arca as exclusive processor for
its depth-of-book order data.\244\
---------------------------------------------------------------------------

    \244\ One commenter cited two papers for the claim that
exchanges have government-conferred monopolies over the collection
and distribution of trading data. NetCoalition IV at 9-10 (citing
Wilkie Farr & Gallagher, counsel to Bloomberg L.P., ``Discussion
Paper: Competition, Transparency, and Equal Access to Financial
Market Data'' (September 24, 2002) (submitted by Bloomberg L.P. in
consultation with George A. Hay and Erik R. Sirri); Erik R. Sirri,
``What glory price? Institutional form and the changing nature of
equity trading'' (Federal Reserve Bank of Atlanta 2000 Financial
Markets Conference on e-Finance, October 15-17). Dr. Sirri currently
is Director of the Commission's Division of Trading and Markets. The
papers were prepared when he was not a member of the Commission's
staff. As discussed at length above, the commenter's claim that
exchanges have a monopoly over the collection and distribution of
trading data confuses core data, which Commission rules require to
be collected by a central processor pursuant to the joint-industry
Plans, and non-core data, which the individual exchanges must
compete to attract from market participants. Indeed, the major
shifts in order flow among exchanges and other trading venues in the
years since the papers were written in 2000 and 2002 amply
demonstrate that no exchange has a monopoly over the collection of
orders displayed in the exchanges' depth-of-book data feeds. As
noted above (text accompanying note 207), for example, the NYSE's
market share in its listed stocks has declined from 79.1% in January
2005 to 30.6% in June 2008. For these reasons and those explained in
the text, the two papers are outdated. Neither the NYSE, nor any
other exchange, currently has a monopoly over the collection and
distribution of depth-of-book order data in its listed stocks.
---------------------------------------------------------------------------

    For example, commenters cited a passage from the legislative
history of the 1975 amendments to the Exchange Act for the proposition
that any exclusive processor must be considered a monopoly, but this
passage applies only to the central processors of consolidated core
data that Rule 603(b) requires to be consolidated:

    Despite the diversity of views with respect to the practical
details of a national market system, all current proposals appear to
assume there will be an exclusive processor or service bureau to
which the exchanges and the NASD will transmit data and which in
turn will make transactions and quotation information available to
vendors of such information. Under the composite tape ``plan''
declared effective by the Commission, SIAC would serve as this
exclusive

processor. The Committee believes that if such a central facility is
to be utilized, the importance of the manner of its regulation
cannot be overestimated. * * * The Committee believes that if
economics and sound regulation dictate the establishment of an
exclusive central processor for the composite tape or any other
element of the national market system, provision must be made to
insure that this central processor is not under the control or
domination of any particular market center. Any exclusive processor
is, in effect, a public utility, and thus it must function in a
manner which is absolutely neutral with respect to all market
centers, all market makers, and all private firms. Although the
existence of a monopolistic processing facility would not
necessarily raise antitrust problems, serious antitrust questions
would be posed if access to this facility and its services were not
available on reasonable and nondiscriminatory terms to all in the
trade or its charges were not reasonable.\245\
---------------------------------------------------------------------------

    \245\ Senate Report at 11-12 (emphasis added).

    These Congressional concerns apply to a central processor that has
no competitors in the distribution of data that must be consolidated
from all the markets. They do not apply to the independent distribution
of non-core data by an individual exchange that is subject to
significant competitive forces.
    Commenters on the Draft Order questioned whether its reliance on
competitive forces is consistent with Exchange Act legal
standards.\246\ Their discussion, however, appears to conflate: (1) The
factual issue of whether competitive forces significantly constrain the
exchanges in setting the terms for their non-core data; with (2) the
legal issue of whether, if such competitive forces exist, the
Commission is authorized to consider those forces in determining
whether an exchange proposal meets the applicable Exchange Act
standards. If an exchange could, in fact, exert monopoly power over its
pricing of non-core data, it obviously would be inappropriate for the
Commission to rely on non-existent competitive forces as a basis for
approving an exchange proposal. If significant competitive forces do
apply to an exchange, the Commission believes that considering them in
its review is fully consistent with its regulatory responsibilities.
---------------------------------------------------------------------------

    \246\ NetCoalition V at 7-18; SIFMA IX at 8-20.
---------------------------------------------------------------------------

    For example, the Commission does not agree with commenters'
argument that the phrase ``fair and reasonable'' in the Exchange Act
requires the Commission always to undertake a cost-based review of
proposed exchange fees because it uses such an approach when applying
the fair and reasonable standard in other circumstances.\247\ Applying
the abstract standard ``fair and reasonable'' to a specific proposal
necessitates the use of factors that are appropriate to the
circumstances. In assessing the fairness and reasonableness of a price,
courts have emphasized that the existence of competitive forces is a
particularly appropriate factor.\248\
---------------------------------------------------------------------------

    \247\ NetCoalition V at 15-18; SIFMA IX at 12-13.
    \248\ See, e.g., Morgan Stanley Capital Group, Inc. v. Public
Utility Dist. No. 1, 554 U.S. ----, 128 S.Ct. 2733, 2738 (2008)
(``The statutory requirement that rates be `just and reasonable' is
obviously incapable of precise judicial definition, and we afford
great deference to the Commission in its rate decisions. We have
repeatedly emphasized that the Commission is not bound to any one
ratemaking formula.'') (citations omitted); Elizabethtown Gas Co. v.
FERC, 10 F.3d 866, 870 (D.C. Cir. 1993) (``[T]he Supreme Court `has
repeatedly held that the just and reasonable standard does not
compel the Commission to use any single pricing formula * * *,'' and
we have indicated that when there is a competitive market FERC may
rely upon market-based prices in lieu of cost-of-service regulation
to assure a `just and reasonable' result.'') (citations omitted).
---------------------------------------------------------------------------

    In addition, commenters on the Draft Order asserted that it
improperly relied on competition to the exclusion of all others
factors.\249\ In fact, the Commission considered several factors. The
first step of the market-based approach to non-core data proposals
examines competitive factors to determine whether there is a
substantial basis to believe that a proposed fee meets the applicable
Exchange Act standards. In the second step, the Commission will
evaluate whether there nevertheless is a substantial countervailing
basis to find that a proposal is inconsistent with the Exchange Act,
including the unfair discrimination concerns raised by a
commenter.\250\
---------------------------------------------------------------------------

    \249\ NetCoalition V at 8-9; SIFMA IX at 10-11.
    \250\ SIFMA IX at 11.
---------------------------------------------------------------------------

    Commenters also cited a passage from the Commission's Market
Information Concept Release for the proposition that an exchange must
submit cost data to justify a proposed fee for the exchange's depth-of-
book order data.\251\ The Release stated that ``the total amount of
market information revenues should remain reasonably related to the
cost of market information.'' \252\ The Market Information Concept
Release, however, was published in 1999, prior to the start of decimal
trading and to the increased usefulness of non-core data distributed
outside the Networks. The Market Information Concept Release in
general, and the cited statement in particular, solely addressed a
central exclusive processor that has no competitors in distributing
consolidated core data to the public pursuant to the Plans.\253\
---------------------------------------------------------------------------

    \251\ See section III.A.2 above. As noted in section III.A.7
above, commenters recommended a variety of market data regulatory
solutions, in addition to a cost-based justification of fees. One
was a regulatory mandate that exchanges place their market data
operations in separate subsidiaries and provide their data to third
parties on the same terms they make the data available to the
subsidiary. Given its determination that NYSE Arca was subject to
significant competitive forces in setting the terms of the Proposal,
the Commission does not believe this regulatory mandate is necessary
or appropriate. It also notes that the recommendation alone would
not address the potential problem of an exchange's unreasonably high
fees under the per device fee structure that is used throughout the
exchange industry. For example, the proposed fees for ArcaBook data
would be levied based on the number of professional and non-
professional subscribers who receive the data on their devices.
Regardless of whether subscribers obtained their data from an
exchange subsidiary or another competing vendor, the exchange would
receive the same total amount of fees based on the total number of
subscribers who chose to receive the data. From the standpoint of
maximizing its revenues from per device fees, the exchange likely
would be indifferent to whether subscribers purchased through its
subsidiary or elsewhere. It therefore would be willing to make the
data available to its subsidiary for the same per device fees that
it made the data available to third parties. Moreover, to the extent
that an exchange would want to benefit a subsidiary that it was
required to create to act as a vendor of market data, that
requirement need not cause the exchange to charge lower fees.
Instead, it could create conflicts of interest under which the
exchange would have incentives to favor the subsidiary over other
vendors in ways that might be difficult to monitor effectively.
Under its proposal, NYSE Arca will make the ArcaBook data available
to vendors on a non-discriminatory basis. For the same reason that
NYSE Arca's proposed fees for the ArcaBook data are not unreasonably
high--the competitiveness of the market for that data--other
potential problems cited by commenters as arising in a non-
competitive environment are not an obstacle to approval of the NYSE
Arca proposal under the relevant Exchange Act provisions and rules.
    \252\ 64 FR at 70627.
    \253\ See, e.g., 64 FR at 70615 (``These [joint-SRO] plans
govern all aspects of the arrangements for disseminating market
information. * * * The plans also govern two of the most important
rights of ownership of the information--the fees that can be charged
and the distribution of revenues derived from those fees. As a
consequence, no single market can be said to fully `own' the stream
of consolidated information that is made available to the public.
Although markets and others may assert a proprietary interest in the
information that they contribute to the stream, the practical effect
of comprehensive federal regulation of market information is that
proprietary interests in this information are subordinated to the
Exchange Act's objectives for a national market system.'')
---------------------------------------------------------------------------

    Moreover, the Commission did not propose, much less adopt, a
``strictly cost-of-service (or `ratemaking') approach to its review of
market information fees in every case,'' noting that ``[s]uch an
inflexible standard, although unavoidable in some contexts, can entail
severe practical difficulties.'' \254\ Rather, the Commission

concluded that ``Congress, consistent with its approach to the national
market system in general, granted the Commission some flexibility in
evaluating the fairness and reasonableness of market information
fees.'' \255\
---------------------------------------------------------------------------

    \254\ 64 FR at 70619. In the Market Information Concept Release,
the Commission discussed the one context in which it had previously
adopted a strict cost-of-service standard for market data fees--a
denial of access proceeding involving the NASD and Instinet. See
supra, note 47. It emphasized, however, that the scope of its
decision was limited to the ``particular competitive situation
presented in the proceedings.'' 64 FR at 70622-70623. Specifically,
the NASD essentially had sought to charge a retail rate for a
wholesale product that would have severely curtailed the opportunity
for a data vendor like Instinet to compete with the NASD in the
retail market. The practical difficulties of implementing the strict
cost-of-service approach were amply demonstrated by the long and
difficult history of the attempt to determine the NASD's cost of
producing the data. See 64 FR at 70623.
    \255\ Id. at 70619. Commenters also pointed to Commission and
staff statements about costs in the context of the entry of an
exchange as a new participant in one of the Plans. NetCoalition IV
at 12-14; SIFMA V at 9-10. Again, competitive forces are not
operative in this context because Rule 603(b) requires an exchange
to join the Plans and disseminate its best quotations and trades
through a central processor in the core data feeds. A cost-based
analysis is necessary in this context, not because it is universally
required by the Exchange Act to determine fair and reasonable fees,
but because the absence of competitive forces impels the use of a
regulatory alternative.
---------------------------------------------------------------------------

    Some commenters suggested that depth-of-book order data has become
so important since the initiation of decimal trading that broker-
dealers now are effectively required to purchase the exchanges' depth-
of-book data products.\256\ No regulatory requirement, however, compels
broker-dealers to purchase an exchange's depth-of-book order data. As
discussed above, only core data is necessary for broker-dealers to
comply with the consolidated display requirements of Rule 603(c) of
Regulation NMS.\257\ In addition, only core data is necessary to comply
with the trade-through requirements of Rule 611 of Regulation NMS.\258\
---------------------------------------------------------------------------

    \256\ See section III.A.4 above. Commenters cited a passage from
the Regulation NMS Release for the proposition that exchanges could
exert market power when distributing non-core data. NetCoalition III
at 6; SIFMA V at 11-12. The concern mentioned in the Regulation NMS
Release, however, explicitly applied only to the ``best quotations
and trades'' of an SRO--i.e., an SRO's core data--and not to non-
core data.
    \257\ Note 183 above and accompanying text. Rule 603(c) requires
broker-dealers and vendors, in certain trading and order-routing
contexts, to provide a consolidated display of the national best bid
and offer and the most recent last sale report. All of this
information is included in the core data feeds.
    \258\ Note 185 above and accompanying text. When it adopted
RegulationNMS, the Commission declined to adopt a proposal that
would have extended trade-through protection to depth-of-book
quotations if the market displaying such quotations voluntarily
disseminated them in the consolidated core quotation stream.
Regulation NMS Release, 70 FR at 37529.
---------------------------------------------------------------------------

    Commenters also asserted that an exchange's depth-of-book order
data may be necessary for a broker-dealer to meet its duty of best
execution to its customers.\259\ The Commission believes, however, that
broker-dealers are not required to obtain depth-of-book order data,
including the NYSE Arca data, to meet their duty of best execution. For
example, a broker-dealer can satisfy this duty ``to seek the most
favorable terms reasonably available under the circumstances for a
customer's transaction'' \260\ by, among other things, reviewing
executions obtained from routing orders to a market. Under established
principles of best execution, a broker-dealer is entitled to consider
the cost and difficulty of trading in a particular market, including
the costs and difficulty of assessing the liquidity available in that
market, in determining whether the prices or other benefits offered by
that market are reasonably available.\261\ Although the Commission has
urged broker-dealers to ``evaluate carefully'' the different options
for execution, we have acknowledged that cost considerations are
legitimate constraints on what a broker-dealer must do to obtain best
execution.\262\ In order to ``evaluate carefully'' execution options, a
broker-dealer need not purchase all available market data. The
Commission does not view obtaining depth-of-book data as a necessary
prerequisite to broker-dealers' satisfying the duty of best
execution.\263\
---------------------------------------------------------------------------

    \259\ See note 60 above and accompanying text.
    \260\ See Securities Exchange Act Release No. 37619A (Sept. 6,
1996), 61 FR 48290, 48322 (Sept. 12, 1996) (``Order Handling Rules
Release'').
    \261\ See Order Handling Rules Release, 61 FR at 48323
(acknowledging that, consistent with best execution, broker-dealers
may take into account cost and feasibility of accessing markets and
their price information); Regulation NMS Release, 70 FR at 37538 n.
341 (noting that the ``cost and difficulty of executing an order in
particular market'' is a relevant factor in making a best execution
determination). NYSE Arca and Nasdaq also stated their view that
depth-of-book order products are not required for best execution
purposes. NYSE Arca Response III at 18; Nasdaq Letter at 5-6.
    \262\ Order Execution Obligations, Proposing Release, Securities
ExchangeAct Release No. 36310 (Sept. 29, 1995), 60 FR 52792 at 52794
(Oct. 10, 1995) (``While not all markets and trading systems are
equally accessible to large and small broker-dealers, and not all
order handling technologies are equally affordable to all broker-
dealers, when efficient and cost-effective systems are readily
accessible, broker-dealers must evaluate carefully whether they can
be used in fulfilling their duty of best execution.'').
    \263\ Some broker-dealers may conclude that, as a business
matter to attractcustomers and generate commissions, they should
obtain depth-of-book order data from one or more exchanges to inform
their order-routing and pricing decisions. As with any other
business decision, if the costs of obtaining the market data
outweigh the benefits, broker-dealers will not buy it. This will put
pressure on the exchange selling the data to lower the price that it
charges. If, however, such firms believed that an exchange's depth-
of-book order product is overpriced for certain business purposes,
they could limit their use of the product to other contexts, such as
``black-box'' order routing systems and a block trading desk, where
the depth-of-book data feed is most directly used to assess market
depth. The firm would not display the data widely throughout the
firm as a means to minimize the fees that must be paid for the data.
This limited use of the data would drastically reduce the revenues
that an exchange might have sought to obtain by charging a high fee
and therefore be self-defeating for the exchange. In sum, exchanges
will be subject to competitive pressures to price their depth-of-
book order data in a way that will promote wider distribution and
greater total revenues.
---------------------------------------------------------------------------

    Commenters on the Draft Order questioned whether it lowered the
standard of best execution and whether its reasoning would be accepted
in other legal contexts,\264\ but the commenters cited no legal
authority to support their concerns. Moreover, contrary to the claim
that ``ascertaining the total price of an average retail trade requires
depth of book data,'' \265\ the inferior prices in depth-of-book data
provide a poor basis to assess the quality of execution of retail
orders. As discussed below, the availability of substantial undisplayed
liquidity enables such orders to be executed on average at prices
better than even the best displayed quotes in core data.\266\ In sum,
the Commission has not lowered the standard of best execution by
recognizing that there are reasonable tools other than depth-of-book
data to obtain high-quality executions of customer orders.
---------------------------------------------------------------------------

    \264\ NetCoalition V at 7; SIFMA IX at 19-20.
    \265\ NetCoalition V at 7 (emphasis in original).
    \266\ The execution quality of retail orders is discussed below
at notes 306-308 and accompanying text.
---------------------------------------------------------------------------

4. Response to Economic Assessments of the Draft Order
    Three commenters submitted economic assessments (with supplements)
of the Draft Order. The Ordover/Bamberger Statement agreed with the
Draft Order's conclusion that NYSE Arca was subject to significant
competitive forces that constrained its pricing of the ArcaBook data.
It noted that ``if competition is effective, regulation is not only not
needed, but can distort the operations of the market and lead to
unforeseen and unintended consequences that can harm the trading
public.'' \267\
---------------------------------------------------------------------------

    \267\ Ordover/Bamberger Statement at 2.
---------------------------------------------------------------------------

    In contrast, the SLCG Study and the Evans Report disputed the Draft
Order's conclusion that NYSE Arca was subject to significant
competitive forces. As discussed below, the Commission has reviewed
their data and analysis and does not find them persuasive for three
broad reasons:
    (1) Although the two assessments purport to accept that exchanges
must compete to attract order flow, their theoretical attempts to wall
off this order flow competition from data

competition are unconvincing--the two market forces are integrally
linked in the real world of exchange competition;
    (2) In rejecting all potential substitutes for an exchange's depth-
of-book data, the two economic assessments focus narrowly on whether
alternatives replicate the exchange's specific data and thereby miss
the critically important bigger picture of whether such data is in fact
necessary for traders effectively to assess the available liquidity in
a stock; and
    (3) The two economic assessments fail to recognize the important
ways in which the Exchange Act regulatory structure effectively
promotes market data competition, yet suggest regulatory alternatives
that would be costly and difficult to implement and still would offer
less reason to expect an efficient outcome than relying primarily on
the current level of competitive forces.
a. Order Flow and Market Data Competition
    Both economic assessments purport to accept the existence of
competition for order flow among exchanges and other trading
venues.\268\ They take different approaches, however, in attempting to
explain why this competition for order flow does not impose significant
constraints on the exchanges in setting the terms for their depth-of-
book data.
---------------------------------------------------------------------------

    \268\ SLCG Study at 2; Evans Report at 2.
---------------------------------------------------------------------------

    In its analysis of the ``supply-side conditions'' of market data,
the SLCG Study says that it will explain ``why fierce competition among
exchanges is not likely to result in competitively priced exclusive
data when significant `network externalities'' are present in the
market for order flow.'' \269\ Its analysis is unpersuasive for two
primary reasons. First, if network externalities are truly operative in
the market for order flow, they should impede competition for order
flow. For example, the SLCG Study notes that ``[a]t the individual
security level, the order flow externality makes it highly likely that
a dominant liquidity-providing market center will emerge.'' \270\ The
SLCG Study does not explain, however, how network externalities could
operate in the market for order flow, impede competition for market
data, but not impede fierce competition for order flow. If there is
competition for order flow, there necessarily will be competition for
the supply of market data because order flow creates the very data to
be supplied, and vice versa. The defect of the SLCG analysis highlights
the difficulty of separating two aspects of exchange competition that
are integrally linked.
---------------------------------------------------------------------------

    \269\ SLCG Study at 2.
    \270\ SLCG Study at 3.
---------------------------------------------------------------------------

    Second, the SLCG Study attempts to show that NYSE Euronext and
Nasdaq dominate trading in, respectively, NYSE-listed stocks and
Nasdaq-listed stocks by offering Herfindahl Index statistics on market
concentration. Based on these statistics, the SLCG Study concludes that
``trading is highly concentrated and that the listing exchange is the
dominant exchange.'' \271\
---------------------------------------------------------------------------

    \271\ SLCG Study at 10.
---------------------------------------------------------------------------

    This conclusion badly misuses the Herfindahl Index. In particular,
a ``concentrated'' market as measured by the Herfindahl Index does not
mean there is an absence of competition in the market. Rather, the U.S.
Department of Justice (``DOJ'') uses the Index to assess whether the
existing competition in a market would be substantially lessened by a
proposed merger.\272\ In this case, the SLCG Study's misuse of the
Herfindahl Index is quite apparent, given that the DOJ specifically
found that the U.S. equity markets were competitive in November 2005
when it investigated the merger of NYSE and Archipelago Holdings and
the merger of Nasdaq and Instinet Group Inc.\273\ The DOJ concluded
that neither merger would be ``likely to reduce competition
substantially'' because the ``planned and likely entry of several firms
* * * should result in additional viable alternatives to the two merged
firms sufficient to ensure that the markets remain competitive.'' \274\
---------------------------------------------------------------------------

    \272\ DOJ Merger Guidelines Sec.  0.1 (``The Guidelines
aredesigned primarily to articulate the analytical framework the
Agency applies in determining whether a merger is likely
substantially to lessen competition, not to describe how the Agency
will conduct the litigation of cases that it decides to bring.'').
    \273\ U.S. Department of Justice, Press Release No. 05-616,
``Department of Justice Antitrust Division Statement on the Closings
of Its Two Stock Exchange Investigations'' (Nov. 16, 2005)
(available at http://www.usdoj.gov/opa/pr/2005/November/05_at_
616.html).
    \274\ See also Comments of the United States Department of
Justice, Review of the Regulatory Structure Associated with
Financial Institutions, Section III.C. (Jan. 31, 2008) (available at
http://www.usdoj.gov/atr/public/comments/229911.htm) (``This
structure [of the equity markets]--and its regulatory overlay--
permits multiple exchanges and electronic trading venues to offer
the same or equivalent instruments. There is significant competition
among multiple equity trading venues, with low execution fees,
narrow spreads, and widespread system innovation--all to the benefit
of consumers.''); Nasdaq III at 3.
---------------------------------------------------------------------------

    Level of concentration alone does not reliably indicate the level
of competition in an industry. It is only one of a series of indicators
that may be used when analyzing competition and is a more appropriate
metric in some industries than others. In particular, industry
concentration is a more relevant measure of competitiveness in markets
where barriers to entry enable large firms to increase equilibrium
prices by restricting the quantity supplied.\275\ As the last three
years have shown, new competitors in the U.S. equity markets have
captured significant trading volume and have imposed strong competitive
pressure on the primary listing exchanges. Indeed, the NYSE--the
exchange with the highest market share in its listed stocks in November
2005--has seen its share of trading in those stocks drop from 79.1% to
30.6%.\276\ This is hardly evidence of network externalities that ``are
such powerful forces that listing exchanges are able to survive as
natural monopolies.'' \277\
---------------------------------------------------------------------------

    \275\ See, e.g., Jean Tirole, The Theory of
IndustrialOrganization 209-221 (1998).
    \276\ See note 207 above and accompanying text. The SLCG Study
and Evans Report asserted that the Draft Order failed to consider
the effect of competition at the individual stock level, noting, for
example, that Nasdaq's market share in Nasdaq-listed stocks is
higher than for other stocks. SLCG Study at 11; Evans Report at 7.
The Draft Order did, in fact, consider the market share of NYSE Arca
in various categories of stocks, as well as the NYSE in NYSE-listed
stocks. See 73 FR at 32673. Moreover, as noted in Table 1 above, no
exchange (or even NYSE and NYSE Arca combined) currently executes
more than 45% of the volume in its listed stocks. The relatively
small variations in market share across different stocks are
consistent with the Commission's finding that the exchanges are
subject to significant competitive forces, particularly given the
ready portability of order flow from one exchange to another (as
well evidenced by the decline in the NYSE's market share in its
listed stocks). Any attempt by an exchange to capitalize on its
market share in one stock or group of stocks by acting unreasonably
with respect to its customers is likely to drive that order flow
away and soon end whatever ``dominance'' the exchange once had.
    \277\ SLCG Study at 19. See Ordover/Bamberger Statement at 15
(``HHI analysis can be unreliable when the shares of firms in the
market can change rapidly (i.e., competition can be vigorous and
intense even in markets in which measured HHI is high if firms can
rapidly gain or lose share.'').
---------------------------------------------------------------------------

    The U.S. equity markets are characterized by other key features
that contribute to a competitive outcome regardless of concentration
levels. One is the ability of firms quickly to expand their order and
trade processing capacity. As a result, capacity constraints play at
best a minor role in the way that firms compete for order flow, and
competition is driven primarily by pricing strategies rather than
quantity choice. A well established principle of industrial
organization literature is that industries in which price is the main
strategic choice show more competitive outcomes.\278\ Another
characteristic of the U.S. equity markets that promotes competition is
low

switching costs.\279\ Market participants can easily switch their order
flow from one market to another. Indeed, they can participate in many
markets at the same time and simultaneously offer and take liquidity
from multiple limit order books. Finally, promoting competition is an
integral element of the regulatory structure of the U.S. equity
markets. The Commission has adopted numerous regulations over the past
decade, including Regulation ATS, the Order Handling Rules, and
Regulation NMS, that have enabled smaller markets to compete with
larger markets and made it much more difficult for large exchanges to
retain market share should they attempt to exert market power. In sum,
the U.S. equity markets have the hallmarks of an industry in which
concentration is not a very informative measure of the level of
competition.
---------------------------------------------------------------------------

    \278\ See, e.g., Tirole, note 275 above, at 307-314.
    \279\ See, e.g., Paul Klemperer, ``Markets withConsumer
Switching Costs,'' Q.J. Econ. 375-394 (1987).
---------------------------------------------------------------------------

    The calculations in the SLCG Study also grossly overstate the level
of concentration in the U.S. equity markets. First, for Nasdaq, the
SLCG Study combines the volume of trades actually executed by Nasdaq--
its ``matched'' volume--with volume that is executed by non-exchange
trading venues and merely reported to the joint FINRA/Nasdaq TRF. The
non-exchange trades do not reflect liquidity in Nasdaq or in its depth-
of-book data. In June 2008, for example, Nasdaq reported 42.7% matched
volume in Nasdaq-listed stocks, while the Nasdaq/FINRA TRF reported
23.3% volume in Nasdaq-listed stocks.\280\ The SLCG Study thereby
erroneously inflated Nasdaq's market share by more than 50%.
---------------------------------------------------------------------------

    \280\ Source: http://www.nasdaqtrader.com. See also Nasdaq III
at 1-2. SLCG II notes that Nasdaq itself defines ``total market
share'' to include TRF trades. SLCG II at 4. Nasdaq's Form 10-K,
however, specifically distinguishes between ``matched market share''
and ``total market share'' and defines matched market share to
include only transactions that are executed on Nasdaq's systems. See
Nasdaq, Form 10-K for period ending December 31, 2007 (filed
February 25, 2008), at 44-45. Transactions executed by entities
other than Nasdaq and merely reported to the joint FINRA/Nasdaq TRF
are irrelevant when assessing Nasdaq's share of liquidity.
---------------------------------------------------------------------------

    Second, the SLCG statistics combine volume for NYSE and NYSE Arca,
even though they operate separate liquidity pools. As discussed
below,\281\ the Exchange Act precludes anti-competitive tying of the
liquidity pools of separately registered national securities exchanges
even if they are under common control. Accordingly, their separate
liquidity pools eliminate any network externalities between NYSE and
NYSE Arca and undercut much of the SLCG analysis of market
concentration. The SLCG Study does not address how network
externalities could apply across separate, untied, liquidity pools.
---------------------------------------------------------------------------

    \281\ Note 309 below and accompanying text.
---------------------------------------------------------------------------

    Even if the reported market shares of NYSE and NYSE Arca are
combined, however, it would not change the Commission's conclusion that
NYSE Arca faced significant competitive forces in setting the terms for
the ArcaBook data. The combined market share of NYSE and NYSE Arca in
NYSE-listed stocks in June 2008 was 44.6%, down from 53.6% in December
2007, and comparable to the 42.7% market share of Nasdaq in Nasdaq-
listed stocks in June 2008.\282\
---------------------------------------------------------------------------

    \282\ See Table 1, note 210 above and accompanying text.
---------------------------------------------------------------------------

    The third problem with the SLCG Study's calculation of market
concentration is that it fails to examine the quotes of venues other
than NYSE, NYSE Arca, and Nasdaq when measuring displayed liquidity--
particularly the quotes of BATS and Direct Edge, which are the fourth
and fifth largest equity trading centers in the U.S. Both ECNs display
their best quotes in the core data feeds through either the
International Securities Exchange (``ISE'') or National Stock Exchange
(``NSX'') and offer their depth-of-book data directly to customers
without charge. BATS also makes depth-of-book data available to the
public without charge on its Internet Web site.
    The displayed liquidity of venues other than the primary listing
exchanges is quite substantial, resulting in displayed liquidity
concentration that is much less than reported trading volume
concentration. For example, on July 31, 2008, the best displayed
quotations in the core data feeds for the six stocks analyzed in the
SLCG Report were as follows: \283\
---------------------------------------------------------------------------

    \283\ Source: ArcaVision (available at http://
www.arcavision.com). The data combines bids and offers to determine
size and percentage of time at the NBBO. For example, if an exchange
always quoted at both the national best bid and the national best
offer for 500 shares, its size would be 1000 shares and its
percentage would be 100.

                                Table 2--Exchange Quotation Comparison Share Size
                                            [Percent of time at NBBO]
----------------------------------------------------------------------------------------------------------------
                                         NYSE      NYSE Arca         Nasdaq           ISE             NSX
----------------------------------------------------------------------------------------------------------------
C..................................  2,199 (81%)  5,933 (89%)        8,069 (93%)  4,821 (88%)        3,948 (72%)
GE.................................  2,848 (87%)  5,728 (92%)        8,594 (95%)  4,829 (91%)        3,199 (85%)
XOM................................    883 (49%)    606 (77%)          941 (75%)    470 (63%)          576 (22%)
AAPL...............................           NA    250 (52%)          307 (57%)   473 (0.4%)          332 (63%)
GOOG...............................           NA    212 (46%)          194 (48%)   127 (0.1%)          202 (49%)
MSFT...............................           NA  8,149 (95%)       18,311 (97%)   3,848 (8%)       10,822 (95%)
----------------------------------------------------------------------------------------------------------------

    The liquidity offered by the ECNs also is substantial at their
depth-of-book prices outside the best prices that are included in the
core data feeds. For example, snapshots of BATS depth-of-book data on
July 31, 2008 reflect the following liquidity available at its best
prices and within four cents away from its best prices: \284\
---------------------------------------------------------------------------

    \284\ Source: BATS (snapshots taken from http://
www.batstrading.com at approximately 11:53 a.m. on July 31, 2008).

            Table 3--BATS Order Book Liquidity, July 31, 2008
------------------------------------------------------------------------
                                                                Shares
                                                 Shares at   within four
                                                best prices     cents
------------------------------------------------------------------------
C.............................................       12,950       39,036
GE............................................        8,438       37,176
XOM...........................................          800        1,500
AAPL..........................................          400        2,100
GOOG..........................................          300            0
MSFT..........................................       16,200       60,876
------------------------------------------------------------------------

    The SLCG Study erroneously calculated the concentration of
displayed liquidity by extrapolating from the reported trading volume
of BATS and Direct Edge rather than directly examining their quoted
liquidity.\285\ It thereby missed an

essential aspect of assessing liquidity in the current equity markets.
---------------------------------------------------------------------------

    \285\ SLCG Study at 46. The SLCG Study also measured all
liquidity between the reported high and low price for the trading
day (id. at 43), which at any particular time will include liquidity
far away from the inside prices that is of little value to traders.
---------------------------------------------------------------------------

    For its part, the Evans Report recognizes the exceptionally strong
competition for order flow that characterizes the U.S. equities
markets. Indeed, it describes the ongoing price war in transaction fees
and rebates among equity trading centers in their efforts to attract
order flow. The Evans Report concludes, however, that exchanges are
impervious to their compelling need to attract order flow when it comes
to setting the terms for their depth-of-book order data. It finds that
the relationship between order flow competition and depth-of-book data
``is neither strong nor direct.'' \286\
---------------------------------------------------------------------------

    \286\ Evans Report at 13. One commenter asserted that exchanges
do not have an incentive to keep market data fees low because they
rebate market data fees to attract order flow. STA Letter at 3; see
also Evans II at 12. Exchange rebates of market data fees, however,
relate to core data fees, not to the non-core data fees that are the
subject of this filing. Moreover, the exchange rebates of core data
fees apply primarily to trades that are reported to one of the trade
reporting facilities jointly operated by FINRA and different
exchanges. These trades are executed in the OTC market, not on the
exchanges. The exchanges compete to attract reports of these trades
by rebating core market data revenues to the entity that actually
executed the trade. Consequently, the market data fee rebates result
in revenues flowing through the exchanges to the OTC entities that
provided the price discovery.
---------------------------------------------------------------------------

    To support this conclusion, the Evans Report asserts that
transaction fees and rebates are directly related to order flow
competition, while data fees are not.\287\ As noted in the Draft Order,
however, the Exchange Act precludes exchanges from adopting terms for
data distribution that unfairly discriminate by favoring participants
in an exchange's market or penalizing participants in other
markets.\288\ Accordingly, the fact that exchanges do not directly link
their data fees to order flow providers sheds no light on whether order
flow and market data competition are related.
---------------------------------------------------------------------------

    \287\ Evans Report at 15-16.
    \288\ 73 FR at 32762, 32768. See also Ordover/Bamberger
Statement at 17 (``The Commission's proscription of `discriminatory'
fees for market data would constrain any attempt by NYSE Arca or
Nasdaq to price discriminate between different types of customers
(i.e., charge higher prices to customers with relatively inelastic
demand for non-core data.'').
---------------------------------------------------------------------------

    The direct connection between order flow and data competition is
based on ``but-for'' causation--if an exchange does not compete
successfully for order flow from its customers (in part with market
data), it will not generate transactions (or transaction fees) and will
have no market data to sell. The two types of competition therefore are
integrally connected in the dynamic process of operating a securities
exchange. This connection pressures exchanges not to take any action
with respect to market data that might jeopardize its position in the
competition for order flow. To do otherwise would jeopardize the
exchange's own lifeline.
    Charging unreasonably high fees for depth-of-book data would
jeopardize an exchange's order flow in two respects. First, wide
dissemination of an exchange's data is an important tool to attract
order flow.\289\ The Draft Order cited the instructive real-world
example when Island ECN stopped displaying its order book and promptly
lost 50% of its market share.\290\ The Evans Report concedes that ``a
viable trading venue must make some of its market data available,''
\291\ but nevertheless asserts that this competitive force does not
affect the terms on which an exchange must make data available to its
customers. An exchange competing to attract customers is unlikely to be
as sanguine about the effects of an attempt to charge these customers
unreasonably high fees for its data.\292\
---------------------------------------------------------------------------

    \289\ See Thomson Reuters Letter at 3 (``Given the competitive
market for order flow and trade execution, we agree that `an
exchange generally will have strong competitive reasons to price its
depth-of-book order data so that it will be distributed widely to
those most likely to use it to trade.' '') (quoting Draft Order).
    \290\ 73 FR at 32764.
    \291\ Evans Report at 19. Evans II also states that it ``does
not assume that no relationship whatsoever exists between the
pricing of depth-of-book data and the volume of order flow.'' Evans
II at 11. n. 28. For the reasons discussed in this Order, the
Commission agrees that there is such a relationship. The Evans
analysis appears to disagree primarily about the strength of that
relationship and the extent to which it significantly constrains the
exchanges in pricing their depth-of-book data.
    \292\ See Ordover/Bamberger Statement at 9 (``large shifts in
trading volume indicate that traders can, and do, quickly move their
orders from one exchange to another'').
---------------------------------------------------------------------------

    Second, as noted in the Draft Order,\293\ the exchange must market
its data products to many of the same customers to which it must appeal
for order flow. This integral connection between order flow and data
competition is strikingly highlighted by the language of the Evans
Report itself: ``[A]n exchange with substantial liquidity maintains
significant leverage over the consumers of its depth-of-book data. That
dynamic--significant leverage over market data customers and little or
no leverage over providers and takers of liquidity--results in prices
for market data that reflect significant market power and prices for
order flow that reflect competitive conditions.'' \294\ This is a
purely theoretical distinction between customers that does not exist in
the real world in which exchanges must compete. Exchanges must grapple
with the competitive pressures of marketing their data services to many
of the same customers to whom they are marketing their transaction
services.
---------------------------------------------------------------------------

    \293\ 73 FR at 32764.
    \294\ Evans Report at 17-18.
---------------------------------------------------------------------------

b. Substitutes for Depth-of-Book Data
    The two economic assessments conclude that none of the alternatives
for an exchange's depth-of-book data noted in the Draft Order--core
data, depth-of-book data from other trading centers, pinging for
liquidity, and the threat of independent distribution of non-core data
by broker-dealers--significantly constrain the pricing of the
exchange's depth-of-book data. The Evans Report, for example, focuses
on the unique nature of a particular exchange's data and asks whether
there are any substitutes that replicate the exchange's ``unique''
data.\295\ This focus is too narrow, however, and fails capture the
bigger picture of what traders need when they assess liquidity in a
stock and of where an exchange's depth-of-book data fits into this
picture.\296\
---------------------------------------------------------------------------

    \295\ Evans Report at 6-7. Evans II repeats this analysis. Evans
II at 6. The relevant issue, however, is not whether the content of
one exchange's data is a perfect substitute for another exchange's
data. The issue is whether, given all of the available sources of
information for assessing liquidity and trading in today's highly
automated and competitive market structure (which includes both
quoting markets and many dark pools), an exchange's depth-of-book
data is so critically important that the exchange is not
significantly constrained by competitive forces in pricing that
data. For the reasons discussed in this Order, the Commission finds
that NYSE Arca was significantly constrained by competitive forces
when it priced its depth-of-book data at approximately $1.50 per
trading day for market professionals.
    \296\ See Ordover/Bamberger Statement at 7 (``[T]he amount of
available liquidity in depth-of-book data at prices different from
the current [NBBO] is only a fraction of the liquidity that would be
available at any particular price if the market-clearing price
changed. For this reason, the percentage of trading in one or more
stocks accounted for by any particular exchange overstates the
relative importance of depth-of-book market data from that exchange
for identifying liquidity that would be available at prices other
than the current NBBO.'').
---------------------------------------------------------------------------

    The starting point in assessing the value of liquidity information
is to recognize that price matters a great deal to traders. The more
aggressive the price of a bid or offer at a particular size, the more
valuable the information is to traders. Conversely, the less aggressive
the price of a bid or offer, the less valuable the information is to
traders. An exchange's depth-of-book data reflects displayed liquidity
at prices inferior to the quoted NBBO. The value

of the exchange's depth-of-book data therefore does not include: (1)
Undisplayed liquidity at prices better than the NBBO (available at
exchanges, ECNs, non-exchange liquidity pools, and OTC market makers),
which can be accessed by pinging orders and can be tracked (and thereby
usefully predicted) by comparing an exchange's trade reports with its
best quotes, both of which are found in core data; (2) displayed
liquidity at the NBBO, which is provided by the best quotes in core
data; (3) undisplayed liquidity at the NBBO, which, as with undisplayed
liquidity inside the NBBO, can be accessed by pinging orders and
usefully predicted with core data.
    The reason why these alternative sources of liquidity information
are so valuable is that traders in today's markets almost always prefer
to trade at the current NBBO or better, rather than accepting the
inferior prices reflected in an exchange's depth-of-book data. Because
traders naturally prefer to trade at these better prices, an
overwhelming majority of trades on an exchange are executed at prices
superior to the prices available in the exchange's depth-of-book data.
For example, the exchanges' public reports on order execution quality
under Rule 605 show that the following percentages of executed share
volume of marketable orders were at prices equal to or better than the
NBBO in May 2008: Nasdaq--97%, NYSE Arca--92%, and NYSE--90%.\297\
Notably, these percentages remain steady even as order sizes increase
from 100 shares to 9999 shares. Stated another way, more than 90% of
the time, traders do not access the liquidity displayed in an
exchange's depth-of-book order data, even for large orders.
---------------------------------------------------------------------------

    \297\ Source: Rule 605 reports for May 2008 of NYSE and NYSE
Arca (available at http://www.nyse.com) and Nasdaq (available at
http://www.nasdaqtrader.com). Rule 605 reports cover orders with
sizes up to 9999 shares. The average trade size for U.S-listed
stocks currently is less than 300 shares.
---------------------------------------------------------------------------

    Given the inferiority of depth-of-book prices, the competitive
constraints faced by an exchange in marketing its depth-of-book data to
professional traders becomes more understandable. The data is useful
primarily as background information on liquidity outside the best
prices, but professional traders are able to use core data and pinging
orders to assess liquidity and trade effectively at better prices.
Moreover, an exchange that attempted to charge unreasonably high fees
for its depth-of-book data also would have to consider the actions that
many data users might take to avoid paying the exchange's high fees.
One potential alternative would be for firms to ``piggyback'' on the
services of another firm that had purchased the data, rather than
paying the data fee themselves. For example, buy-side institutions
could use the algorithmic order routing services of a broker that had
purchased an exchange's depth-of-book data, rather than buying the
exchange's data and routing orders themselves. The availability of such
alternatives increases the elasticity of demand for an exchange's
depth-of-book data.
    The information preferences of securities professionals are
strongly evidenced by the data they currently choose to purchase. As
noted in the Draft Order, Nasdaq offers its depth-of-book data product
for all U.S.-listed stocks for $76 per month, or approximately $3.50
per trading day. Of the 420,000 professional users who purchase core
data in Nasdaq-listed stocks, only 19,000 professional users purchase
Nasdaq's depth-of-book data product. The Evans Report attempts to
dismiss this fact by claiming that Nasdaq is a ``monopolist'' that has
``set prices above competitive levels so that only those that value its
product highly will purchase the product.'' \298\ Yet Nasdaq has priced
its depth-of-book product at a level that is not much more than the
price of a cup of coffee per trading day. Nasdaq's pricing decision is
much more consistent with the view that Nasdaq faces significant
competitive pressures in attempting to market its depth-of-book data
product to the approximately 400,000 securities professionals that
currently purchase only core data, than the Evans Report view that
Nasdaq is a monopolist coercing the 19,000 securities professionals who
are willing to pay $3.50 for Nasdaq's ``unique'' data.\299\
---------------------------------------------------------------------------

    \298\ Evans Report at 8 n. 24. The Evans Report also incorrectly
cites revenue figures from Nasdaq's 2007 Form 10-K for the
proposition that Nasdaq ``was able to extract more than 50% of its
2007 market data revenue from its sale of unconsolidated data.'' Id.
at 17. This analysis overlooks that Nasdaq separately reports its
consolidated data revenues from non-Nasdaq-listed stocks (known as
Network A and Network B stocks) under a heading called ``Execution
and trade reporting revenues.'' Nasdaq did not disclose the specific
amount of its consolidated data revenues from Network A and Network
B stocks in 2007, but they were substantial. For example, the total
core data revenues allocated to SROs in 2004 were $155 million for
Network A stocks and $100 million in Network B stocks (Regulation
NMS Release, 70 FR at 37558). As shown in Table 1 above, Nasdaq
currently has a 23.9% share of trading in Network A stocks, and its
share of trading in Network B stocks is higher.
    \299\ Nasdaq has priced its depth-of-book data for NYSE-listed
stocks at $6 per month, or approximately 27 cents per trading day.
The SLCG uses this exceptionally low fee as a basis to assert that
Nasdaq's $3.50 fee for Nasdaq-listed stocks is ``1,100 higher'' and
evidence of pricing power for Nasdaq-listed stocks. SLCG Study at
31. Yet Nasdaq's share of trading in NYSE-listed stocks is a very
substantial 23%. Rather than directly reflecting the value of the
data, Nasdaq's extremely low fee for NYSE-listed stocks more likely
evidences Nasdaq's intense efforts to compete for order flow in
NYSE-listed stocks.
---------------------------------------------------------------------------

    In sum, depth-of-book data is most accurately characterized as
useful, but not essential, for professional traders. NYSE Arca has
priced the ArcaBook data for all U.S.-listed stocks at approximately
$1.50 per trading day for professional users. The Commission believes
that this pricing decision cannot reasonably be interpreted as that of
a monopolist able to take advantage of its market power over a small
group of professionals who value the data highly, but rather that of an
exchange facing significant competitive pressures in attempting to sell
its data to a large number of professionals.
    The Draft Order also noted the opportunity for new entrants to the
market for non-core data, specifically noting a comparable initiative
in Europe by a number of major securities firms.\300\ The Evans Report
asserts a myriad of theoretical obstacles to securities firms
sponsoring a non-core data initiative in the U.S.\301\ As noted above,
however, securities firms already have sponsored new equity trading
entrants in the U.S., and DOJ--one of the U.S. antitrust authorities--
cited the existence of these new entrants as support for its finding
that the equity exchange markets are competitive.\302\ If securities
firms truly believe that exchanges are attempting to charge
unreasonably high prices for

their depth-of-book data, participating in an initiative to offer a
competing source of data is a live option. Indeed, Thomson Reuters
noted in its comment on the Draft Order that the ability of broker-
dealers to distribute their own data ``is an undeveloped but important
potential source of market data'' and that it is ``prepared to work
with the broker-dealer community to explore opportunities in the
area.'' \303\
---------------------------------------------------------------------------

    \300\ 73 FR at 32765. SIFMA X repeatedly claims that the
proposed NYSE Arca fees are ``excessive,'' yet also notes that the
London Stock Exchange fee for depth-of-book data is [pound]157.5 per
month for non-members. SIFMA X at 9. This fee is many times higher
than the proposed NYSE Arca fees that would total $30 per month for
both members and non-members (based on a pound/dollar conversion
ratio of 1.502 on November 25, 2008, the London Stock Exchange fee
converts to $236.74 per month). Indeed, the London Stock Exchange
fee is much higher than the fee for any exchange depth-of-book data
product in the U.S., despite the much greater trading volume and
market capitalization of U.S.-listed stocks. The lower data fees
charged by U.S. exchanges is yet one more fact evidencing the
significant competitive forces faced by U.S. exchanges in setting
fees for their depth-of-book data products.
    \301\ Evans Study at 10-12. SIFMA asserted that the European
example is not applicable in the U.S. because European firms are not
required to give their data to exchanges for free. SIFMA IX at 21 n.
69. As discussed in the Draft Order (73 FR at 32766), however, U.S.
firms are not required to provide the great majority of their orders
to any exchange and, for the balance, have a choice among exchanges
and FINRA. Moreover, if U.S. firms provided their non-core data
without charge to a new data enterprise, it is not clear why the new
enterprise would operate at a competitive disadvantage to the
exchanges in distributing an alternative data product.
    \302\ See note 274 above and accompanying text.
    \303\ Thomson Reuters Letter at 3. SIFMA X asserts that broker-
dealers would be unable to create a competitive depth-of-book data
product in the U.S. because, it claims, they are required to provide
their data to the exchanges. SIFMA X at 9. As discussed above (text
accompanying notes 236-240), the great majority of a broker-dealer's
orders need not be provided to any SRO (whether an exchange or
FINRA), and the small subset of a broker-dealer's displayable
customer orders that must be provided to an SRO can be provided to
FINRA, rather than an exchange.
---------------------------------------------------------------------------

    Finally, with respect to retail investors, the SLCG Study asserts
that almost 40% of their orders are for sizes greater than the
displayed size at the NBBO when presented.\304\ It then presumes,
without discussion, that these orders are executed at prices inferior
to the NBBO and that retail investors need depth-of-book data to ``see
the price they are likely to receive for almost 40% of their orders.''
\305\ This analysis evidences a profound misunderstanding of how retail
orders are handled in today's equity markets. In particular, the SLCG
Study fails to consider the very substantial availability of
undisplayed liquidity for executing retail orders at non-exchange
venues, particularly OTC market makers and liquidity pools sponsored by
broker-dealers. This undisplayed liquidity enables retail investors to
receive executions for most of their orders at prices equal to or
better than the NBBO, regardless of the displayed size at the
NBBO.\306\
---------------------------------------------------------------------------

    \304\ SLCG Study at 20-21.
    \305\ SLCG Study at 21.
    \306\ 73 FR at 32770.
---------------------------------------------------------------------------

    For example, Schwab's public disclosures concerning its order
routing practices and order execution quality provide an instructive
picture of how a broker-dealer with a substantial number of retail
customers handles their orders in today's equity markets.\307\ Schwab's
Rule 606 report on order routing for the quarter ending June 30, 2008
reveals that 93% of its customer orders in U.S.-listed equities were
``non-directed''--that is, the customer relied on Schwab to determine
where to route the order. Schwab routed 94% of these customer orders to
non-exchange trading venues, rendering it unlikely that either Schwab
or its customers relied on any exchange's depth-of-book data in making
the routing determination for these orders.\308\ In addition, Schwab
represents that 57.2% of shares in listed stocks and 61.3% of shares in
Nasdaq stocks receive price improvement (an execution price better than
the NBBO), and that the ratio of effective spreads to quoted spreads
for customer orders is 96.5% in listed stocks and 94.7% in Nasdaq
stocks (that is, customers receive prices on average that are better
than the NBBO). In sum, undisplayed liquidity at non-exchange trading
centers enabled Schwab customers to receive executions for their orders
at much superior prices than would be indicated by any exchange's
depth-of-book data. The inferior prices reflected in such data would
provide a very poor basis indeed to assess whether these retail orders
received best execution.
---------------------------------------------------------------------------

    \307\ Schwab's disclosures are available at http://
www.schwab.com.
    \308\ See Nasdaq III at 4 (``Rule 606 data from the second
quarter of 2008 shows that a sample of major broker-dealers routed
just 15% of retail orders in NASDAQ-listed stocks to an
exchange.'').
---------------------------------------------------------------------------

c. Efficacy of Regulatory Alternatives
    A third weakness in the SLCG Study and the Evans Report is their
failure to acknowledge the extent to which the current Exchange Act
regulatory structure effectively promotes competition among the U.S.
equity markets. They nevertheless suggest regulatory approaches that
would be extraordinarily costly and difficult to implement and that
would offer little chance of achieving a more efficient outcome than
the market-based approach set forth in the Draft Order.
    For example, both the SLCG Study and the Evans Report assert that
the market shares of NYSE and NYSE Arca should be combined for purposes
of analyzing market power over depth-of-book data, even though they are
separately registered as national securities exchanges and operate
separate liquidity pools with separate data products and fees. The two
economic assessments note that, because NYSE and NYSE Arca are under
common control, they will have an incentive to coordinate their pricing
and not compete with one another.
    Exchanges under common control clearly have incentives to avoid
competing with each other. Each national securities exchange, however,
is subject to a comprehensive regulatory structure that is designed to
address anti-competitive practices. This regulatory structure limits
the potential for related exchanges to act jointly in ways that would
inappropriately inhibit competition by other exchanges and trading
centers with each related exchange. Section 6 of the Exchange Act
requires that the rules of a national securities exchange be designed
to promote a free and open market. Moreover, it prohibits a national
securities exchange from adopting rules that are designed to permit
unfair discrimination among its customers or that would impose an
unnecessary or inappropriate burden on competition. All of these
requirements are applied at the level of the individual registered
securities exchange, not at the group level of exchanges that are under
common control. In particular, a proposed exchange rule must stand or
fall based, among other things, on the interests of customers, issuers,
broker-dealers, and other persons using the facilities of that
exchange. In sum, an economic analysis of jointly-controlled corporate
behavior that might apply to other less regulated industries is
inapplicable to equity exchanges that are subject to the pro-
competitive Exchange Act regulatory structure.
    For example, section 6 and Exchange Act Rule 603(a) require NYSE
Arca to distribute the ArcaBook data on terms that are not tied to
other products in a way that is unfairly discriminatory or
anticompetitive. Apparently unaware of these regulatory requirements,
the SLCG Study claims that the Commission ``does not consider the
prospect of the NYSE exercising monopoly pricing power through tying
arrangements'' and notes that ``the NYSE has the clear incentive to
force users of a product in which an exchange has monopoly pricing
power to also pay for a product in which the exchange does not have
monopoly pricing power.'' \309\ The SLCG concerns may be applicable to
firms that operate in unregulated markets, but are inapplicable to U.S.
equity exchanges.
---------------------------------------------------------------------------

    \309\ SLCG Study at 32.
---------------------------------------------------------------------------

    The effect of the U.S. regulatory structure is apparent when
examining the respective fees for ArcaBook data and NYSE OpenBook data
for NYSE-listed stocks. The Evans Report asserts that these products
should not be considered as alternatives for one another, but does not
address why this conclusion is valid from the standpoint of individual
users of data when their use of the two products is not tied in any
way. Customers are free to purchase both, either, or neither. Each
product must stand or fall on its own merits. The Evans Report asserts
that the revenues of both products will be retained by the same
corporate entity, yet this point is irrelevant from the standpoint of
customers who might be looking for data alternatives. Indeed, if
customers decide that ArcaBook is a better bargain

than OpenBook, a shift between the two products would lead to a $45 per
month per customer reduction in revenues for NYSE Euronext. If
customers believe that ArcaBook data is overpriced at $15, they can
purchase OpenBook alone and NYSE Euronext will have foregone an
opportunity to earn greater revenues by setting a lower fee for
ArcaBook data.
    Although the SLCG Study and Evans Report fail to acknowledge the
pro-competitive aspects of the Exchange Act regulatory structure, they
nevertheless suggest alternative regulatory approaches that would be
extraordinarily intrusive on competitive forces, as well as quite
costly and difficult to apply in practice. For example, the Evans
Report criticizes the Draft Order for not addressing whether an
exchange could profitably increase the price of its depth-of-book data
by 5-10 percent above a ``competitive'' level,\310\ but offers no
practical guidance for determining this hypothetical competitive level.
Elsewhere, its author has noted that ``it seems obvious that the
ability of competition authorities and courts (or indeed of any
economist) to distinguish between efficient (fair) and inefficient
(unfair) prices in practice is very low.'' \311\
---------------------------------------------------------------------------

    \310\ Evans Report at 4.
    \311\ David S. Evans & A. Jorge Padilla, ``Excessive Prices:
Using Economics to Define Administrable Legal Rules, 1 J.
Competition L. & Econ. 97, 118 (March 2005) (``Evans Article''); see
also id. at 99 (``no pricing rule or benchmark can be used to
distinguish effectively (i.e., without error) between competitive
and excessive prices in practice'').
---------------------------------------------------------------------------

    For its part, the SLCG Study notes that ``obtaining accurate and
precise data on the marginal costs of producing a particular good or
service (e.g., securities market data) is extremely difficult,'' but
nevertheless asserts that ``there are reasonable alternatives for
assessing levels and trends of marginal costs.'' \312\ This statement
ignores a whole host of difficulties in calculating the direct costs
and common costs of market data--an endeavor that the Commission
discussed at length in 1999 and will not repeat here.\313\ Moreover,
the SLCG Study assumes, without discussion, that marginal costs would
be the efficiency-enhancing standard to assess fees for depth-of-book
data. Elsewhere, however, the author of the Evans Report has noted that
in ``dynamic industries, where typically fixed costs are high and
incremental costs are low, the `competitive' price is not given by
marginal costs'' and that ``it is impossible to define `competitive'
prices using only information costs.'' \314\ The exchange industry is
highly dynamic, and exchanges are dependent on their ability to deploy
cutting edge technologies. Moreover, the marginal costs of expanding
the capacity of trading systems are extraordinarily low--for the most
part, a trading center need only add servers and communications lines
to its existing hardware and software systems.\315\
---------------------------------------------------------------------------

    \312\ SLCG Study at 26. SIFMA X asserts that there are numerous
choices for reviewing market data fees other than a strict cost-
based analysis, but then outlines an approach that would require
specialized teams of staff members and administrative hearings to
adjudicate an unspecified ``relationship'' of a proposed fee to
exchange costs. SIFMA X at 11.
    \313\ Market Data Release, 64 FR at 70627-70630. See Ordover/
Bamberger Statement at 3 n. 4 (``It is widely accepted that there is
no meaningful way to allocate `common costs' across different joint
products. For this reason, `cost-based' regulation of the price of
market data would require inherently arbitrary cost allocations.'').
    \314\ Evans Article at 101; see also id. at 99 (``Unfortunately,
it is unclear what the appropriate competitive benchmark is in most
real-life circumstances and, particularly, in dynamic industries
where investment and innovation play a paramount role. Moreover,
even if an appropriate benchmark could be defined, it would still
remain unclear how one could, on the basis of the information
typically available to policy makers and industry analysts,
determine with precision whether prices are above, at, or below the
competitive benchmark in practice.'').
    \315\ See Nasdaq III at 4 (``The business of operating a market
is typified by low marginal cost for additional volume and markets
operating with significant excess capacity'').
---------------------------------------------------------------------------

    In fulfilling its Exchange Act regulatory responsibilities, the
Commission is faced with the pragmatic challenge of determining whether
non-core market data fees are fair and reasonable. It strongly believes
that the current level of competition in the U.S. equity markets
provides a much more useful basis to make this determination than a
regulatory attempt to measure market data costs. Although the market
for distributing depth-of-book data may not meet all of the conditions
for theoretically perfect competition, there clearly are significant
competitive forces operating in the real world that constrain the
exchanges in setting the terms for their data. The Commission therefore
has concluded that the market-based approach outlined in the Draft
Order is the most appropriate means to meet its regulatory mandate when
reviewing non-core data fees.

C. Review of Terms of the Proposal

    As discussed in the preceding section, NYSE Arca was subject to
significant competitive forces in setting the terms of the Proposal.
The Commission therefore will 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 Exchange Act or the rules
thereunder.\316\ An analysis of the Proposal and of the views of
commenters does not provide such a basis.
---------------------------------------------------------------------------

    \316\ The Exchange Act requirements are addressed in the text
accompanying notes 171-175 above.
---------------------------------------------------------------------------

    First, the proposed fees for ArcaBook data will apply equally to
all professional subscribers and equally to all non-professional
subscribers (subject only to the maximum monthly payment for device
fees paid by any broker-dealer for non-professional subscribers). The
fees therefore do not unreasonably discriminate among types of
subscribers, such as by favoring participants in the NYSE Arca market
or penalizing participants in other markets.
    Second, the proposed fees for the ArcaBook data are substantially
less than those charged by other exchanges for depth-of-book order
data. For example, the NYSE charges a $60 per month terminal fee for
depth-of-book order data in NYSE-listed stocks. Similarly, Nasdaq
charges a $76 per month device fee for professional subscribers to
depth-of-book order data on all NMS stocks. By comparison, the NYSE
Arca fee is 75% less than the NYSE fee for data in NYSE-listed stocks,
and more than 60% less than the Nasdaq fee for data in all NMS stocks.
It is reasonable to conclude that competitive pressures led NYSE Arca
to set a substantially lower fee for its depth-of-book order data than
the fees charged by other markets. If, in contrast, NYSE Arca were a
monopoly data provider impervious to competitive pressures, there would
be little reason for it to set significantly lower fees than other
exchanges.\317\
---------------------------------------------------------------------------

    \317\ See Table 1, note 210 above and accompanying text.
---------------------------------------------------------------------------

    Third, NYSE Arca projects that the total revenues generated by the
fee for ArcaBook data initially will amount to less than $8 million per
year,\318\ and that its market data revenue as a percentage of total
revenue is likely to remain close to the 2005 figure, which was
approximately 17%.\319\ Viewed in

the context of NYSE Arca's overall funding, therefore, the fees for
ArcaBook data are projected to represent a small portion of NYSE Arca's
market data revenues and an even smaller portion of NYSE Arca's total
revenues (using NYSE Arca's $8 million estimate, the fees will amount
to less than 12.9% of NYSE Arca's 2005 market data revenues and less
than 1.6% of NYSE Arca's 2005 total revenues). In addition, NYSE Arca
generated approximately $415.4 million in revenue from equity
securities transaction fees in 2005.\320\ These transaction fees are
paid by those who voluntarily choose to submit orders to NYSE Arca for
execution. The fees therefore are subject to intense competitive
pressure because of NYSE Arca's need to attract order flow. In
comparison, the $8 million in projected annual fees for ArcaBook data
do not appear to be inequitable, unfair, or unreasonable.
---------------------------------------------------------------------------

    \318\ NYSE Arca Response III at 12 n. 28. The reasonableness of
this projection is supported by referring to the number of data
users that have subscribed to Nasdaq's proprietary depth-of-book
product for Nasdaq-listed stocks. Nasdaq reports 19,000 professional
users and 12,000 non-professional users as of April 30, 2007. Nasdaq
Letter at 6. If the same number of users purchased ArcaBook data for
all stocks, the total revenue for NYSE Arca would be $8,280,000 per
year. As noted in Table 1, NYSE Arca has a smaller market share than
Nasdaq and therefore may not attract as many subscribers to its
depth-of-book product. On the other hand, NYSE Arca is charging
substantially less for its data and may attract more users. In the
final analysis, market forces will determine the actual revenues
generated by NYSE Arca's pricing decision.
    \319\ NYSE Arca Response III at 12 nn. 28-29. One commenter
noted that the market data revenues of the NYSE Group, which
includes both NYSE and NYSE Arca, had grown by 33.7% from the third
quarter of 2005 to the third quarter of 2006. See section III.A.6
above. Although correct, this figure does not demonstrate any growth
in market data revenues because the 2005 figure only included the
market data revenues of NYSE, while the 2006 figure included the
market data revenues of both the NYSE and NYSE Arca. Using an
``apples-to-apples'' comparison that includes both exchanges for
both time periods, their combined market data revenues declined
slightly from 2005 to 2006. NYSE Arca Response III at 20.
    \320\ NYSE Group, Inc., Form 10-K for period ending December 31,
2005 (filed March 31, 2006), at 19.
---------------------------------------------------------------------------

    One commenter, although agreeing that exchange transaction fees are
subject to intense competitive pressure, asserted that such
``intermarket competition does not constrain the exchanges' pricing of
market data, but it actually creates an incentive for the exchanges to
increase their prices for data.'' \321\ If, however, NYSE Arca were
truly able to exercise monopoly power in pricing its non-core data, it
likely would not choose a fee that generates only a small fraction of
the transaction fees that admittedly are subject to fierce competitive
forces. As discussed above, NYSE Arca was indeed subject to significant
competitive forces in pricing the ArcaBook data.
---------------------------------------------------------------------------

    \321\ SIFMA V at 14-15.
---------------------------------------------------------------------------

    Several commenters expressed concern that the Proposal would
adversely affect market transparency.\322\ They noted that NYSE Arca
previously had distributed the ArcaBook data without charge and
asserted that the new fees could substantially limit the availability
of the data. The Petition, for example, stated that ``the cumulative
impact of [the Proposal] and other pending and recently approved market
data proposals threaten to place critical data, which should be
available to the general public, altogether beyond the reach of the
average retail investor.'' \323\
---------------------------------------------------------------------------

    \322\ Financial Services Roundtable Letter at 3; Schwab Letter
at 5.
    \323\ Petition at 3.
---------------------------------------------------------------------------

    Assuring the wide availability of quotation and trade information
is a primary objective of the national market system.\324\ With respect
to non-professional users, and particularly individual retail
investors, the Commission long has sought to assure that retail
investors have ready access to the data they need to participate
effectively in the equity markets. Indeed, the Commission's 1999 review
of market information was prompted by a concern that retail investors
should have ready access to affordable market data through their on-
line accounts with broker-dealers. The Concept Release on Market
Information noted that, in the course of the 1999 review, the Networks
had reduced by up to 80% the fees for non-professional subscribers to
obtain core data with the best-priced quotations and most recent last
sale prices.\325\ It also emphasized the importance of such affordable
data for retail investors:
---------------------------------------------------------------------------

    \324\ Section 11A(a)(1)(C)(iii) of the Exchange Act.
    \325\ Market Information Concept Release, 64 FR at 70614. Since
1999, the Network data fees applicable to retail investors have
either remained the same or been further reduced. Currently,
nonprofessional investors can obtain unlimited amounts of core data
for no more than $1 per month each for Network A, B, and C stocks.
See SIFMA III, Appendix A.

    One of the most important functions that the Commission can
perform for retail investors is to ensure that they have access to
the information they need to protect and further their own
interests. Communications technology now has progressed to the point
that broad access to real-time market information should be an
affordable option for most retail investors, as it long has been for
professional investors. This information could greatly expand the
ability of retail investors to monitor and control their own
securities transactions, including the quality of execution of their
transactions by broker-dealers. The Commission intends to assure
that market information fees applicable to retail investors do not
restrict their access to market information, in terms of both number
of subscribers and quality of service. In addition, such fees must
not be unreasonably discriminatory when compared with the fees
charged to professional users of market information.\326\
---------------------------------------------------------------------------

    \326\ Market Information Concept Release, 64 FR at 70614.

    The Commission appreciates the efforts of the Petitioner and other
commenters in advocating the particular needs of users of advertiser-
supported Internet Web sites, a great many of whom are likely to be
individual retail investors. The Commission believes that the exchanges
and other entities that distribute securities market information will
find business-justified ways to attend to the needs of individual
investors and, as markets evolve, develop innovative products that meet
the needs of these users and are affordable in light of the users'
economic circumstances. In this respect, it recognizes the exchange
initiatives to distribute new types of data products specifically
designed to meet the needs of Internet users for reference data on
equity prices.\327\
---------------------------------------------------------------------------

    \327\ See note 19 above (NYSE Real-Time Reference Prices and
Nasdaq Last Sale Data Feeds).
---------------------------------------------------------------------------

    The Commission does not believe, however, that the Proposal will
significantly detract from transparency in the equity markets. Of
course, any increase in fees can lower the marginal demand for a
product. To assess an effect on transparency, however, the relevant
question is whether the fees for a particular product deter a
significant number of market participants from obtaining the market
data they need because the fees are not affordable given their economic
circumstances.\328\ Market transparency does not require that the same
products be made available to all users on the same terms and
conditions. Such a one-size-fits-all approach would ignore the
important differences among data users in terms of both their needs and
their economic circumstances. Most importantly, such an approach would
fail to address the particular needs of individual retail investors.
---------------------------------------------------------------------------

    \328\ See Market Information Concept Release, 64 FR at 70630
(``[T]he relevant Exchange Act question is whether the fees for
particular classes of subscribers, given their economic
circumstances and their need for and use of real-time information,
are at a sufficiently high level that a significant number of users
are deterred from obtaining the information or that the quality of
their information services is reduced.'')
---------------------------------------------------------------------------

    With respect to professional data users (i.e., those who earn their
living through the markets), the Commission believes that competitive
forces, combined with the heightened ability of professional users to
advance their own interests, will produce an appropriate level of
availability of non-core data. With respect to non-professional users,
as well, the Commission believes that the ArcaBook fees will not
materially affect their access to the information they need to
participate effectively in the equity markets.\329\ The ArcaBook data
likely is both too narrow and too broad to meet the needs of most
retail

investors. It likely is too narrow for most retail investors when they
make their trading and order-routing decisions. The best prices quoted
for a stock in the ArcaBook data reflect only the NYSE Arca market.
Other markets may be offering substantially better prices. It is for
this reason that Rule 603(c) of Regulation NMS requires broker-dealers
and vendors to provide their customers with a consolidated display of
core data in the context of trading and order-routing decisions. A
consolidated display includes the national best bid and offer for a
stock, as well as the most recent last sale for such stock reported at
any market. This consolidated display thereby gives retail investors a
valuable tool for ascertaining the best prices for a stock.
---------------------------------------------------------------------------

    \329\ See NYSE Arca Response III at 18 (``The overwhelming
majority of retail investors are unaffected by the inter-market
competition over proprietary depth-of-book products. For them, the
consolidated top-of-book data that the markets make available under
the NMS Plans provides adequate information on which they can base
trading decisions.'').
---------------------------------------------------------------------------

    Two commenters stated that the average retail order is 1000 or more
shares and is larger than the size typically reflected in the
consolidated quotation in core data.\330\ This issue was raised,
however, when the Commission was formulating its approach to non-core
data in 2005. It noted that the average execution price for small
market orders (the order type typically used by retail investors) is
very close to, if not better than, the NBBO.\331\ In addition, a study
by the Commission's Office of Economic Analysis of quoting in 2003 in
3,429 Nasdaq stocks found that the average displayed depth of
quotations at the NBBO was 1,833 shares--greater than the size of the
average order cited by commenters.\332\
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    \330\ Schwab Letter at 1-2; SIFMA IV at 14.
    \331\ Regulation NMS Release, 70 FR at 37567. Most retail
investors receive order executions at prices equal to or better than
the NBBO that is disseminated in core data. See also Dissent of
Commissioners Cynthia A. Glassman and Paul S. Atkins to the Adoption
of Regulation NMS, 70 FR 37636 (estimating that between 98% and 99%
of all trades did not trade through better-priced bids or offers).
    \332\ 70 FR at 37511 n. 108.
---------------------------------------------------------------------------

    Some commenters suggested that the core data provided by the
Networks disadvantaged retail investors because it was not distributed
as fast as the depth-of-book order data obtained directly from an
exchange.\333\ The central processors of core data must first obtain
data from each SRO and then consolidate it into a single data feed for
distribution to the public. While exchanges are prohibited from
providing their data to direct recipients any sooner than they provide
it to the Network central processor,\334\ the additional step of
transmitting data to the central processor inevitably means that a
direct data feed can be distributed faster to users than the Network
data feed. The size of this time latency, however, is extremely small
in absolute terms. For example, a technology upgrade by the central
processor for Network A and Network B has reduced the latency of the
core data feed to approximately \3/100\ths of a second.\335\ The
Commission does not believe that such a small latency under current
market conditions disadvantages retail investors in their use of core
data, but rather would be most likely relevant only to the most
sophisticated and active professional traders with state-of-the-art
systems.
---------------------------------------------------------------------------

    \333\ Schwab Letter at 4; SIFMA III at 6 n. 11.
    \334\ Regulation NMS Release, 70 FR at 37567.
    \335\ NYSE Arca Response III at 21. The upgrade was completed in
April 2007. See Securities Industry Automation Corporation, Notice
to CTA Recipients, ``Reminder Notice--CQS Unix Activation--New
Source IP Addresses'' (April 27, 2007) (available at http://
www.nysedata.com). This major upgrade of the CTA data feed runs
contrary to the concern of one commenter on the Draft Order that
exchanges would have little incentive to maintain the quality of
core data. NSX II at 5-6.
---------------------------------------------------------------------------

    Moreover, outside of trading contexts, the ArcaBook data will be
far broader than individual investors typically need. The ArcaBook data
encompasses all quotations for a stock at many prices that are well
away from the current best prices. For retail investors that are not
trading but simply need a useful reference price to track the value of
their portfolio and monitor the market, the enormous volume of data
regarding trading interest outside the best prices is not needed.\336\
---------------------------------------------------------------------------

    \336\ See NYSE Arca Response II at 2 (``during the first ten
months of 2005 the number of messages processed by the Exchange
greatly increased from approximately 9,800 MPS [messages per second]
to 14,100 MPS'').
---------------------------------------------------------------------------

    Some commenters asserted that the Proposal failed to satisfy the
requirements of Exchange Act Rule 19b-4 and Form 19b-4.\337\ Form 19b-4
requires, among other things, that SROs provide a statement of the
purpose of the proposed rule change and its basis under the Exchange
Act. The statement must be sufficiently detailed and specific to
support a finding that the proposed rule change meets the requirements
of the Exchange Act, including that the proposed rule change does not
unduly burden competition or efficiency, does not conflict with the
securities laws, and is not inconsistent with the public interest or
the protection of investors. The NYSE Arca Proposal met these
requirements. Among other things, the Proposal noted that the proposed
fees compared favorably to the fees that other competing markets charge
for similar products, including those of other exchanges that
previously had been approved by the Commission.\338\
---------------------------------------------------------------------------

    \337\ See section III.A.3 above. In their comments on the Draft
Order, commenters claimed that it in effect would amend Rule 19b-4
without following required agency rulemaking procedures.
NetCoalition V at 7; SIFMA IX at 20. Rule 19b-4, however, merely
sets forth requirements for SROs to follow in preparing their
proposed rule changes. It does not address the substantive nature of
Commission review of proposed rule changes, which necessarily will
vary widely depending on the particular issues raised by the SRO
proposal.
    \338\ See Proposal, 71 FR at 33499.
---------------------------------------------------------------------------

    One commenter argued that NYSE Arca should have addressed a number
of specific points that it raised in opposition to the Proposal, such
as including a statement of costs to produce the ArcaBook data.\339\
The purpose of Form 19b-4, however, is to elicit information necessary
for the public to provide meaningful comment on the proposed rule
change and for the Commission to determine whether the proposed rule
change is consistent with the requirements of the Exchange Act and the
rules thereunder.\340\ The Proposal met these objectives. Although Form
19b-4 requires that a proposed rule change be accurate, consistent, and
complete, including the information necessary for the Commission's
review, the Form does not require SROs to anticipate and respond in
advance to each of the points that commenters may raise in opposition
to a proposed rule change. With this Order, the Commission has
determined that the points raised by the commenter do not provide a
basis to decline to approve the Proposal.
---------------------------------------------------------------------------

    \339\ SIFMA III at 11-12.
    \340\ Section B of the General Instructions for Form 19b-4.
---------------------------------------------------------------------------

    Finally, commenters raised concerns regarding the contract terms
that will govern the distribution of ArcaBook data.\341\ In particular,
one notes that NYSE Arca has not filed its vendor distribution
agreement with the Commission for public notice and comment and
Commission approval.\342\
---------------------------------------------------------------------------

    \341\ See section III.A.7 above.
    \342\ SIFMA I at 7. In this regard, the commenter states that,
procedurally, the Exchange ``is amending and adding to the CTA
vendor agreement without first submitting its contractual changes
through the CTA's processes, which are subject to industry input
through the new Advisory Committee mandated by Regulation NMS.''
SIFMA I at 8.
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    NYSE Arca has stated, however, that it plans to use the vendor and
subscriber agreements used by CTA and CQ Plan Participants (the ``CTA/
CQ Vendor and Subscriber Agreements'') to govern the distribution of
NYSE Arca Data. According to the Exchange, the CTA/CQ Vendor and
Subscriber Agreements ``are drafted as generic one-size-fits-all
agreements and explicitly apply to the receipt and use of certain
market data that individual exchanges make available in the same way
that they apply to data made available under the

CTA and CQ Plans,'' and the contracts need not be amended to cause them
to govern the receipt and use of the Exchange's data.\343\ The Exchange
maintains that because ``the terms and conditions of the CTA/CQ
contracts do not change in any way with the addition of the Exchange's
market data * * * there are no changes for the industry or Commission
to review.'' \344\
---------------------------------------------------------------------------

    \343\ NYSE Arca Response I at 3.
    \344\ NYSE Arca Response I at 3 (emphasis in original).
---------------------------------------------------------------------------

    The Commission believes that the Exchange may use the CTA/CQ Vendor
and Subscriber Agreements to govern the distribution of NYSE Arca
Data.\345\ It notes that the NYSE used the CTA Vendor Agreement to
govern the distribution of its OpenBook and Liquidity Quote market data
products.\346\ Moreover, the Exchange represents that, following
consultations with vendors and end-users, and in response to client
demand:
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    \345\ The Commission is not approving the CTA/CQ Vendor and
Subscriber Agreements, which the CTA and CQ Plan Participants filed
with the Commission as amendments to the CTA and CQ Plans that were
effective on filing with the Commission pursuant to Rule
608(b)(3)(iii) of Regulation NMS (previously designated as Exchange
Act Rule 11Aa3-2(c)(3)(iii)). See, e.g., Securities Exchange Act
Release No. 28407 (September 6, 1990), 55 FR 37276 (September 10,
1990) (File No. 4-2811) (notice of filing and immediate
effectiveness of amendments to the CTA Plan and the CQ Plan). Rule
608(b)(3)(iii) of Regulation NMS (previously designated as Exchange
Act Rule 11Aa3-2(c)(3)(iii)) allows a proposed amendment to a
national market system plan to be put into effect upon filing with
the Commission if the plan sponsors designate the proposed amendment
as involving solely technical or ministerial matters.
    \346\ Securities Exchange Act Release Nos. 53585 (March 31,
2006), 71 FR 17934 (April 7, 2006) (order approving File Nos. SR-
NYSE-2004-43 and NYSE-2005-32) (relating to OpenBook); and 51438
(March 28, 2005), 70 FR 17137 (April 4, 2005) (order approving File
No. SR-NYSE-2004-32) (relating to Liquidity Quote). For the both the
OpenBook and Liquidity Quote products, the NYSE attached to the CTA
Vendor Agreement an Exhibit C containing additional terms governing
the distribution of those products, which the Commission
specifically approved. NYSE Arca is not including additional
contract terms in the Proposal.

    [The Exchange] chose to fold itself into an existing contract
and administration system rather than to burden clients with another
set of market data agreements and another market data reporting
system, both of which would require clients to commit additional
legal and technical resources to support the Exchange's data
products.\347\
---------------------------------------------------------------------------

    \347\ NYSE Arca Response I at 4.

    In addition, the Exchange has represented that it is ``not imposing
restrictions on the use or display of its data beyond those set forth''
in the existing CTA/CQ Vendor and Subscriber Agreements.\348\ The
Commission therefore does not believe that the Exchange is amending or
adding to such agreements.
---------------------------------------------------------------------------

    \348\ NYSE Arca Response I at 3.
---------------------------------------------------------------------------

    A commenter also stated that the Exchange has not recognized the
rights of a broker or dealer, established in Regulation NMS, to
distribute its order information, subject to the condition that it does
so on terms that are fair and reasonable and not unreasonably
discriminatory.\349\ In response, the Exchange states that the CTA/CQ
Vendor and Subscriber Agreements do not prohibit a broker-dealer member
of an SRO participant in a Plan from making available to the public
information relating to the orders and transaction reports that it
provides to the SRO participant.\350\ Accordingly, the Commission
believes that the Exchange has acknowledged the rights of a broker or
dealer to distribute its market information, subject to the
requirements of Rule 603(a) of Regulation NMS.
---------------------------------------------------------------------------

    \349\ SIFMA I at 7.
    \350\ NYSE Arca Response I at 4.
---------------------------------------------------------------------------

    A commenter also stated that the Exchange has failed to consider
the administrative burdens that the proposal would impose, including
the need for broker-dealers to develop system controls to track
ArcaBook access and usage.\351\ In response, the Exchange represents
that it has communicated with its customers to ensure system readiness
and is using ``a long-standing, well-known, broadly-used administrative
system'' to minimize the amount of development effort required to meet
the administrative requirements associated with the proposal.\352\
Accordingly, the Commission believes that NYSE Arca has reasonably
addressed the administrative requirements associated with the Proposal.
---------------------------------------------------------------------------

    \351\ SIFMA I at 8.
    \352\ NYSE Arca Response I at 4-5.
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VII. Conclusion

    It is therefore ordered that the earlier action taken by delegated
authority, Securities Exchange Act Release No. 54597 (October 12, 2006)
71 FR 62029 (October 20, 2006), is set aside and, pursuant to section
19(b)(2) of the Exchange Act, the Proposal (SR-NYSEArca-2006-21) is
approved.

    By the Commission.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-28908 Filed 12-8-08; 8:45 am]

BILLING CODE 8011-01-P