SECURITIES AND EXCHANGE COMMISSION
In the Matter of
For Review of Action Taken by the
NEW YORK STOCK EXCHANGE, INC.
Exchange imposed contractual restrictions on vendors' use of market quotation data disseminated by the Exchange, and rejected certain of vendor's proposed displays of such data based on restrictions, without a valid rule permitting it to do so. Held, that the Exchange's action in denying access based on those restrictions is set aside.
Roger D. Blanc, Thomas H. Golden, and Edward J. Ferraro, of Willkie Farr & Gallagher, for Bloomberg L.P.
David S. Neill, John F. Savarese, Alexander Shaknes, and Nelson O. Fitts, of Wachtell, Lipton, Rosen & Katz, and Steven J. Abrams and Dean G. Yuzek, of Ingram Yuzek Gainen Carroll & Bertolotti, LLP, for the New York Stock Exchange, Inc.
Appeal filed: May 14, 2003
Last Brief Received: July 16, 2003
Bloomberg L.P., a vendor of quotation information, appeals from action taken by the New York Stock Exchange, Inc. (the "NYSE" or "Exchange"), which Bloomberg contends constitutes a denial of access to services under Sections 19(d) and 19(f) of the Securities Exchange Act of 1934.1
A contract between Bloomberg and the NYSE governs Bloomberg's receipt and dissemination of Exchange market data. The Exchange amended this contract to impose restrictions on Bloomberg's dissemination of "Liquidity Quote" data. Based on these restrictions, the Exchange rejected certain computer "screen shots" proposed by Bloomberg to display Liquidity Quote and other quotation data from the NYSE and other market centers. The NYSE thereby denied Bloomberg the right to transmit Liquidity Quote data to its customers in these formats. We base our findings on an independent review of the record.
On April 2, 2003, we issued an order (the "April Order") that approved Exchange rules to permit the display and use of quotations in stocks traded on the NYSE to show additional depth in the market for those stocks, i.e., Liquidity Quotes.2 For selected securities, the Exchange's Liquidity Quote Service disseminates a "liquidity bid" and a "liquidity offer," reflecting aggregated Exchange trading interest at a specific price interval below the best bid (in the case of a liquidity bid) or at a specific price interval above the best offer (in the case of a liquidity offer).3 The Liquidity Quote Service is part of the NYSE's "OpenBook" service.4
Our April Order conditioned approval of the proposed rule change on the Exchange's agreement to remove from agreements it had with its data vendors (the "Vendor Agreements") any prohibition against data feed recipients integrating Liquidity Quote data with data from other markets. We stated, however, that the NYSE could require that vendors (i) "provide the NYSE attribution in any display that includes Liquidity Quote" and (ii) "make Liquidity Quote available to their customers as a separate branded package."5 We further stated, in the April Order, that the Exchange could not implement the Liquidity Quote Service until the prohibition against integrating Liquidity Quote data was removed from the Vendor Agreements.6
On April 9, 2003, the NYSE informed the Commission that it agreed to the conditions in the April Order. The Exchange also subsequently revised Exhibit C to the Vendor Agreements by, among other things, adding the following restrictions relating to the dissemination by vendors of Liquidity Quote data (the "April Restrictions"):7
Exhibit C also requires that vendors "associate the identifier 'NYSE Liquidity Quote' or 'NYLQ' with each element or line of Liquidity Quote Information that it includes in an Aggregated Display, Montage or other integrated display." Bloomberg does not appear to challenge this requirement or, more generally, the Exchange's authority to require vendors to provide attribution when disseminating Liquidity Quote data.
The Exchange acknowledges that, where a vendor provides the Liquidity Quote data feed to end-users without controlling the end-users' displays or where end-users receive the data feed directly from the Exchange, the April Restrictions do not apply. The Exchange further acknowledges that the April Restrictions do not apply to software that an end-user "develops for itself" either by hiring a "software developer [to] create applications for it" or by buying "off-the-shelf applications from a vendor or other third party." The April Restrictions apply only if the vendor, rather than the end-user, controls the data display.9
On May 14, 2003, Bloomberg requested that we set aside the April Restrictions.10 The Exchange began operating the Liquidity Quote Service on June 13, 2003.
Bloomberg argues that the April Restrictions, which it agreed to be bound by "under explicit protest and with full reservation of rights," deny Bloomberg access to Exchange services. The NYSE and Bloomberg agree that the Exchange has demanded prior approval of all of Bloomberg's (and other vendors') proposed screen shots displaying Liquidity Quote data. The parties further agree that the Exchange has "formally" rejected one screen shot that had been proposed for use by Bloomberg's Tradebook ECN, and earlier had "informally" rejected two of Bloomberg's screen shots.11 In our view, the Exchange's imposition and enforcement of the April Restrictions effected a denial of access to Bloomberg of Exchange services, i.e., the Exchange would not provide Bloomberg access to Liquidity Quote data unless it disseminated and continues to disseminate the data in accordance with the April Restrictions.
Where action of a self-regulatory organization ("SRO"), such as the Exchange, constitutes a denial of access to services, the action is subject to review under Exchange Act Section 19(f).12 Section 19(f) requires that such action be set aside unless (i) the specific grounds on which the challenged action is based exist in fact; (ii) such action was taken in accordance with the rules of the SRO as approved by the Commission (or subject to an exception to such approval); and (iii) such rules are and were applied in a manner that is consistent with the purposes of the Exchange Act. Section 19(f) further requires that we set aside SRO action if it "imposes any burden on competition not necessary or appropriate in furtherance of the purposes" of the Exchange Act.13 We have determined that the NYSE's action was not taken in accordance with the Exchange's rules and, therefore, should be set aside under Section 19(f).14
The April Restrictions constitute "rules" of the Exchange as that term has been defined in the Exchange Act. Exchange rules include "such of the stated policies, practices, and interpretations of such exchange"15 that relate to:
The April Restrictions come within this definition in two ways. They relate to a "material aspect" of the Exchange's operation of its market data distribution facilities, and determine whether a vendor will gain access to such facilities. The April Restrictions also are an express statement made to persons seeking access to facilities of the Exchange, i.e., the vendors who want to receive from the NYSE and then redistribute Liquidity Quote data to their customers, that "establishes a standard, limit, or guideline" with respect to the "rights, obligations, or privileges" of the vendors.
As rules, the April Restrictions can provide the basis for Exchange action only if they (i) have been approved pursuant to Exchange Act Section 19(b) or (ii) come within one of the two exceptions to the rule filing requirement contained in Exchange Act Rule 19b-4(c).17 Because it is undisputed that the April Restrictions were never filed by the Exchange as proposed rule changes under Section 19(b), they must come within one of the two filing exceptions to provide a basis for Exchange action.
Pursuant to Rule 19b-4(c), a stated policy, practice, or interpretation is a proposed rule change that must be filed pursuant to Exchange Act Section 19(b) unless it "(i) is 'reasonably and fairly implied' by an existing SRO rule, or (ii) is 'concerned solely with the administration' of the SRO and 'is not a stated policy, practice, or interpretation with respect to the meaning, administration, or enforcement of an existing [SRO] rule.'"18
Although we have stated that the "limits" of the "reasonably and fairly implied" exception will be determined on a case-by-case basis, we have warned that "a stated policy, practice, or interpretation that prescribes extensive and specific limitations on particular types of transactions or conduct that are not apparent from the face of the existing rule is not 'reasonably and fairly implied' by the rule."19 We also have explained that the "concerned solely with the administration" exception applies to "policies, practices, or interpretations that deal solely with 'housekeeping' matters."20 In our view, neither of the Rule 19b-4(c) exceptions applies here.
The Exchange suggests that the April Restrictions are implied by our April Order.21 According to the Exchange, the April Restrictions "were the logical outgrowth of the condition established [by the April Order and] represent the minimum specifications necessary to implement Liquidity Quote in an manner consistent with the Exchange Act's purposes."22 The issue remains, however, whether the Exchange was permitted to implement the Liquidity Quote Service in this way without first submitting the April Restrictions to us as a proposed rule change.23 We conclude that it was not so permitted.24
We acknowledge that three of the April Restrictions -- i.e., those that require (i) differentiation of Liquidity Quote data from best bid and offer data; (ii) indication of the number of shares attributable to the Liquidity Quote when Liquidity Quote data is integrated with other quotation data; and (iii) inclusion of a specific footnote that differentiates Liquidity Quote data from best bid and offer data when such data is included in a montage -- arguably relate to the issue of attribution addressed in the April Order.25 However, these restrictions "prescribe extensive and specific limitations on particular types of . . . conduct that are not apparent from the face of the existing rule," the conditionally approved Liquidity Quote Service.26 Because these restrictions extend well beyond the attribution permitted by the April Order, they are not "fairly implied" by the April Order's approval of the Liquidity Quote Service and thus do not come within that exception.27 The remaining two restrictions -- that require vendors both to obtain the Exchange's prior approval for each proposed display of Liquidity Quote data and to obtain prior approval of all display changes -- are in no way implied by our approval of the Liquidity Quote Service, and clearly do not come within this exception.
None of the April Restrictions is concerned solely with Exchange administration. The restrictions involve far more than, and have policy implications that extend beyond, mere "housekeeping" matters.
As a result, we conclude that the April Restrictions constitute Exchange rules that were required to be filed and approved pursuant to Exchange Act Section 19(b). Because they were not so filed and approved, and do not fall within either of the two exceptions contained in Rule 19b-4(c), they cannot provide a basis for the Exchange's denial of access to Liquidity Quote data.28 Under the circumstances, therefore, we have determined to set aside the NYSE's action in denying Bloomberg access to that data.29
An appropriate order will issue.30
By the Commission (Chairman DONALDSON and Commissioners GLASSMAN, GOLDSCHMID, ATKINS and CAMPOS).
Jonathan G. Katz
In the Matter of
For Review of Action Taken by the
NEW YORK STOCK EXCHANGE, INC.
On the basis of the Commission's opinion issued this day, it is
ORDERED that the action of the New York Stock Exchange, Inc. in denying access to Bloomberg L.P. to Exchange services relating to the receipt and dissemination of "Liquidity Quote" data based on provisions in vendor agreements -- provisions that: require the use of highlighting or other techniques to differentiate visually Liquidity Quote data from "best bid and offer" data; require, in the case of any display of an integrated quote that incorporates Liquidity Quote data with best bid and offer data, that the quote's display indicate the number of shares attributable to Liquidity Quote data; require montages to include a footnote that differentiates Liquidity Quote data from best bid and offer data; require vendors to obtain the Exchange's prior approval for each manner in which the vendors will display Liquidity Quote data; and thereafter require vendors to obtain the Exchange's prior approval of all changes, whether trivial or otherwise, to any such displays -- be, and it hereby is, set aside.
By the Commission.
Jonathan G. Katz
The NYSE did not file the Vendor Agreements themselves with the Commission as a proposed rule change. In the April Order, we observed that, "[b]ecause of the manner in which the Commission is disposing of this matter, the Commission need not decide whether the NYSE agreements at issue . . . should be filed [as a rule change] under Section 19(b)(2) of the Act." 79 SEC Docket at 3590 n.39. We added that, in issuing the April Order, we had considered comments submitted by various parties regarding the Vendor Agreements. Id.
When it filed its appeal, Bloomberg asked for a stay of either the launch of the Liquidity Quote Service (which was scheduled for May 21, 2003) or, in the alternative, of implementation by the NYSE of the April Restrictions. On May 20, 2003, we stayed implementation of the Liquidity Quote Service until June 6, 2003. See Bloomberg L.P., Exchange Act Rel. No. 47891 (May 20, 2003), 80 SEC Docket 920.
On June 6, 2003, after reviewing briefs submitted by the parties regarding Bloomberg's application and stay request, we declined to extend the interim stay. See Bloomberg L.P., Exchange Act Rel. No. 47999 (June 6, 2003), 80 SEC Docket 1478. Although we determined not to extend the stay, we stated that we were "nevertheless troubled by [Bloomberg's] allegations." See 80 SEC Docket at 1483.
Although investor protection is a critical objective under the Exchange Act, the NYSE offers no evidence that users of the vendor displays at issue are likely to be confused unless the April Restrictions are enforced. Nothing in the record indicates that Bloomberg's customers will be unable to distinguish Liquidity Quote data from other data. Moreover, the Exchange's failure to impose the April Restrictions (or any comparable limitations) on raw datafeed end users or on vendors who sell to their customers both the raw data feed and separate programs to analyze such data appears, as Bloomberg asserts, inconsistent with the Exchange's purported concern about potential investor confusion. The Exchange has failed adequately to explain why only certain market participants must be protected against potential confusion regarding Liquidity Quote data.
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