Privacy Breaches and Big Data: Solutions and Suggestions in India’s Context

By: Navreet Kaur[+]

This article discusses the unprecedented rate at which data is growing and the various possibilities of privacy infringements.  It views the problem in the context of a developing nation, India, because India has formed a committee last year to devise and regulate regulations for data protection.  The article also discusses the approaches adopted by various other countries so that India can meet global standard when formulating policies for data protection.  The features of the Data Protection Bill that the committee has recently submitted to the Ministry of Electronics and Information Technology, Government of India are also discussed.

Continue reading “Privacy Breaches and Big Data: Solutions and Suggestions in India’s Context”

SEC to Increase Oversight of High Frequency Trading Firms Under a Proposed Amendment to Rule 15b9-1

By Samuel Branum*

I. Introduction

As the result of ever faster and more powerful computers, high frequency trading (HFT) has become a significant presence in the market, with some estimates showing that HFT accounts for 73% of the total daily trading volume in the U.S. securities markets.[1]  While regulatory bodies struggle to keep up with technology, HFT is moving ahead at lightning fast speeds where milliseconds—and even nanoseconds—matter.[2]  Humans may program the HFT machines, but the machines collect the data, analyze it, detect patterns in the market, interact with other traders, and buy and sell shares of stock.[3]  With some HFT firms having more than 100 teraflops of power and being able to process more than 100 trillion calculations per second, competitive trading in stocks is no longer available to human traders, or even those using less-sophisticated computers.[4]

As reflected in pop culture films, such as The Terminator and Battlestar Galactica, the fear of machines taking over the world (or universe) is deeply rooted in our national psyche. In the securities market, HFT computers and algorithms have taken over the function of providing liquidity to investors, which many see as a benefit. The “Flash Crash” of May 6, 2010[5] and various other mini-flash crashes,[6]  however, have stoked investors’ concerns that technology going berserk is a real threat to the securities markets. Perhaps it may be a long time before HFT computers take over the world, but their existence for now, whether justified or not, has eroded investor confidence in the markets.[7]

In addition to the cautiousness underlying the use of autonomous technology, people also become angry, and rightfully so, when they feel that the markets are set up to benefit a select few at the expense of others, and that HFT traders can game the system to their advantage. Again, regardless of whether there is any truth to this, these perceptions erode investor confidence.

This combination of “fear of the machines” and “fear of a rigged market”[8]  is a powerful combination that will continue to erode investor confidence unless steps are taken to address these fears. This can be done by either: (1) showing that the markets are not, in fact, rigged by HFT; or (2) showing that steps are being taken to mitigate any harmful effects of HFT through effective regulation. Or, through a combination of the two.

One step that the Securities and Exchange Commission (SEC) is taking to address HFT is to require proprietary trading firms that trade in the off-exchange market, which includes many HFT firms, to register with the Financial Industry Regulatory Authority (FINRA).[9]  As of now, these firms are exempt from registration because of Rule 15b9-1 (“Rule”), a rule originally intended to exempt a targeted class of floor brokers.[10]  Since these proprietary trading firms are using the Rule in a way it was not intended, the SEC has proposed an amendment to the Rule that would effectively eliminate the exemption for these firms, thus making them subject to FINRA oversight.[11]

II. Overview of High Frequency Trading

The SEC has yet to give HFT a precise definition. It is broadly identified, though, as a trading strategy employed by proprietary trading firms that uses computer algorithms to rapidly enter and exit positions in very short time frames, and that generate a large number of daily trades.[12]

It is important to realize, though, that HFT is not a homogenous form of trading.[13]  The debate is usually oversimplified into whether HFT, as a whole, is good or bad for investors.[14]  It is not HFT, however, but the particular strategies that HFT firms employ that can be either beneficial or harmful to the market and investors.[15]  Some of these strategies include liquidity provision (market making), statistical arbitrage, latency arbitrage, and certain already illegal strategies, including momentum ignition strategies such as spoofing, layering, and quote stuffing.[16]

Traditionally, specialists trading on the floor of exchanges were the main providers of liquidity.[17]  As market makers, they would stand ready and willing to buy and sell shares whenever they received orders.[18]  Today, though, due to the advancement in technology, HFT traders are the principal liquidity providers for the markets.[19]  This liquidity provision (market making) strategy constitutes the “lion’s share” of HFT activity, with estimates ranging from 65%–71% of total HFT trading volume.[20]  Generally, this strategy is beneficial to investors, as HFT firms employing this strategy are essentially assuming the role traditionally filled by human market makers.[21]  Nonetheless, a common criticism concerning this strategy is that HFT traders provide phantom liquidity, supplying it when it is abundant and withdrawing it when it is needed.[22]  Moreover, because they are able to withdraw liquidity at lightning fast speeds, they can exacerbate flash crashes, even if they are not the cause of flash crashes.[23]  Related to this criticism is that HFT traders increase volatility in the markets.[24]

Another common HFT strategy is statistical arbitrage, which generates profits by taking advantage of price discrepancies between correlated stocks.[25]  For example, the price of an exchange-traded fund (ETF) may be lower or higher than the underlying basket of stocks.[26]  An HFT trader will then either buy or sell the ETF or underlying stocks when one is cheaper or more expensive in relation to the other, anticipating that the prices will eventually converge.[27]  The HFT trader can then turn around and sell or buy the same ETF or stocks at a profit.[28]  This form of arbitrage is considered to be beneficial as it equilibrates prices between markets and so improves price efficiency.[29]

Another form of arbitrage, latency arbitrage, is perhaps the most controversial of all and is considered to have little to no social utility.[30]  Some describe the strategy as predatory.[31]  It was criticized in Michael Lewis’s Flash Boys and has been the basis for litigation.[32]  In this form of arbitrage, the HFT trader uses its access to the direct feeds of an exchange, through its co-located servers, to profit from timing discrepancies.[33]  Since it takes time for the Securities Information Processor (SIP) to process information from the trading centers before it appears on the consolidated feed, the HFT trader (i.e., the HFT algorithm) can act on price changes in quotes before other traders are even aware of them.[34]  However, some argue that this strategy cannot prey on others’ orders because by the time the HFT trader sees the order, the order is already in the queue.[35]  So, while the HFT trader can see the order before it is made available on the consolidated feed, it cannot see the order before it happens.[36]  Thus, it cannot prey on the order; instead, it only has a competitive advantage in being able to respond quickly to changes—a competitive advantage available to anyone willing to pay for it.[37]  Other strategies include those that are already illegal and that traders have been using for decades to manipulate the market, such as spoofing, layering, and quote stuffing.[38]  These strategies may be harder to detect, though, when employed by HFT firms, given the sophistication of some of their algorithms[39]  These prohibited strategies have no real economic benefit and do not contribute to price discovery or market liquidity.[40]

III. Current Rule 15b9-1

The SEC relies on self-regulatory organizations (SROs) to oversee the securities market.[41]  These SROs include the national securities exchanges, registered securities associations, and registered clearing agencies.[42]  The national securities exchanges include those commonly thought of such as the New York Stock Exchange and NADSAQ.[43]  The national securities associations regulate the off-exchange market;[44]  currently, the only registered securities association (“Association”) is FINRA.[45]  Clearing agencies settle trades, hold securities certificates, and maintain ownership records.[46]  Over the years, the SEC has become increasingly reliant on SROs to regulate the securities market.[47]

FINRA is the regulatory agency currently in the best position to regulate broker-dealers who trade on the off-exchange markets. Each exchange (as an SRO) can only effectively monitor and regulate the transactions of its member broker-dealers that are transacted on their own exchange.[48]  In order to effectively regulate off-exchange transactions, then, Section 15(b)(8) of the Securities and Exchange Act (“Act”) requires all broker-dealers to become a member of an Association (currently only FINRA), unless it effects transactions solely on an exchange of which it is a member.[49]

Nonetheless, some broker-dealers who effect transactions off-exchange are not required to become a member of, and so are not regulated by, FINRA. Under Section 15(b)(9) of the Act, Congress authorized the SEC to exempt any broker-dealer from becoming a member of an Association if the exemption would be consistent with the public interest and the protection of investors.[50]  Pursuant to this authority, the SEC adopted Rule 15b9-1, which exempts broker-dealers from having to become a member of an Association if it is a member of a national securities exchange and carries no customer accounts.[51]  Additionally, the broker-dealer must not have an annual gross income of more than $1,000 that is derived from securities transactions effected off the exchange of which it is a member (“de minimis allowance”).[52]  Importantly, though, there are two exemptions: income derived from transactions for the dealer’s own account or through another broker-dealer do not count toward the de minimis allowance.[53]  Consequently, so long as a broker-dealer trades off-exchange for its own account, it is not required to become a member of FINRA.

Originally, the purpose of the de minimis allowance was to accommodate broker-dealers trading on the floor of an exchange.[54]  It allowed them to share in occasional commissions related to off-exchange transactions and to hedge their risks through off-exchange trades without triggering the requirement to become a member of an Association.[55]  Today, though, many proprietary trading firms, including many that engage in HFT strategies, are relying on the Rule to avoid having to become a member of FINRA, even though they transact a substantial volume of trading off-exchange.[56]  Due to the changes in the structure of the market and the increased use of technology in trading securities, these proprietary trading firms are substantially involved in today’s markets.[57]  The SEC estimates that about 125 broker-dealers are exempt from Association membership under Rule 15b9-1.[58]  Together, these broker-dealers represent about 48% of the orders sent directly to the off-exchange market in 2014.[59]

Consequently, FINRA has no jurisdiction over these broker-dealers and so is unable to directly enforce compliance with federal securities laws and rules.[60]  FINRA is also unable to adequately monitor these firms’ use of HFT strategies, and as a result, it is much more difficult for FINRA to detect manipulative behavior by these firms or the systemic risk posed by HFT.[61]  These firms are members of the exchanges they trade on, but the exchanges are not in a position to regulate off-exchange activity as typically they only have access to the data for trades transacted on their own exchange.[62]

IV. Proposed Amendment to Rule 15b9-1

Since proprietary trading firms are using the exemption in a manner it was not intended, the SEC has proposed an amendment to Rule 15b9-1 to better align the Rule with its original purpose, which was to accommodate the limited off-exchange activities of broker-dealers with a floor-based business.[63]  The proposed amendment keeps the current requirements that a broker-dealer must be a member of a national securities exchange and carry no customer accounts to be exempt from Association (i.e., FINRA) membership.[64]  The proposed amendment, however, would eliminate the de minimis allowance in its entirety, including the two exemptions to the allowance. In its place would be a requirement that broker-dealers must effect transactions solely on the exchange of which it is a member to be exempt from Association membership.[65]

This requirement, though, would then be subject to two, more targeted exemptions.[66]  Both exemptions are directed at broker-dealers that operate exclusively on the physical floor of a national securities exchange.[67]  The first exemption would allow broker-dealers to effect transactions off-exchange so long as the transactions are done solely for the purpose of hedging the risks of their floor-based activities.[68]  This targeted exemption better addresses the type of activity the Rule was originally designed to permit without triggering the need for a broker-dealer to become a member of an Association.[69]  The second exemption would allow broker-dealers to route orders off-exchange to prevent the trade-through of a protected quote on another trading center.[70]  As current regulations require trading centers to protect the best bid and offer and to prevent trade-throughs, this exemption allows broker-dealers to comply with regulatory requirements without it triggering the need for them to become a member of an Association.[71]

If the SEC adopts the proposed amendment, many of the estimated 125 broker-dealers currently exempt from Association membership would be required to become a member of FINRA, as they would not fit within the new limited exemptions.[72]  These firms would then be subject to FINRA’s rules.[73]  With these broker-dealers as members, FINRA would have a more complete picture of off-exchange trading activity.[74]  As the SEC relies on FINRA for information about off-exchange trading activity, the SEC would also be in a better position to regulate the securities market.[75]  Additionally, current members of FINRA would benefit, as there would be a level playing field in terms of regulation among market participants.[76]

V. Recommendations

In assessing any new regulations related to propriety trading firms and high frequency trading, it is important to keep in mind the reason why a well-functioning secondary market is important in the first place: it assures investors who purchase new securities in the primary market that they will be able to sell them easily whenever they choose.[77]  This assurance makes investors more willing to purchase securities in the primary market, which in turn, strengthens the economy by giving businesses access to capital in order to expand their operations, invest in research and development, and hire additional employees.[78]  Therefore, as the SEC recognizes, “The secondary markets exist for investors and public companies, and their interests must be paramount.”[79]  The regulatory framework of the securities market, then, must be evaluated by asking what is in the best interest of investors and whether it facilitates the formation of capital for businesses.[80] Where the interests of short-term traders conflict with long-term investors, the interests of investors should take precedence.[81]  The proposed amendment to Rule 15b9-1 is a good place to start. In order for HFT to be properly regulated, HFT firms trading off-exchange must be under the supervision of FINRA. Exchanges cannot be effective regulators of the off-exchange market because of limited access to cross-exchange trades[82]  FINRA is the regulatory body charged with direct oversight of the off-exchange market, and it has specialized trading rules specifically focused on the potential abuses of HFT.[83]  The SEC then oversees FINRA.[84] Research shows that enhanced surveillance of the market increases investor confidence.[85]  Therefore, by just knowing that propriety HFT firms will be under the supervision of FINRA, investors will be more confident that HFT is being properly regulated. Of course, FINRA must also implement substantive regulations addressing HFT, but it has already been making progress on this front by regulating its members’ use of HFT algorithms.[86]  It will need to continue tailoring specialized regulations for HFT, though, in order to reduce market manipulation and address any volatility that HFT adds to the market.

In order for FINRA, the SEC, and the exchanges to properly regulate HFT, however, they must also have access to comprehensive and precise data concerning how HFT affects ordinary investors and the securities markets. Currently, there is not a comprehensive audit trail that is easily available that can provide regulators with sufficiently accurate information to fully analyze HFT.[87]  As a result, it really is not known to what extent HFT firms are engaging in manipulative or predatory strategies or to what extent HFT adds unacceptable volatility to the market or contributes to flash crashes.[88]  The SEC, then, must work on implementing the comprehensive audit trail (CAT) plan as soon as possible.[89]  The CAT will give regulators the data they need to model and reconstruct trading activity in order to study the effects of HFT and to investigate traders who manipulate the market using sophisticated computer algorithms.[90]

Once regulators have a better understanding of the effects of HFT strategies, they should put in place regulations that restore investor confidence. In drafting new regulations for HFT, though, regulators must keep in mind that HFT is not a homogenous group of trading strategies. With around 65%–71% of HFT trading volume consisting of liquidity providing trading strategies,[91] regulations should be specifically tailored to combat predatory practices instead of being painted with a broad brush. Proposed taxes for order cancellations is one example of a regulation that is too broad to address the harmful effects of HFT.[92]  Taxing order cancellations might make predatory HFT less profitable, but it would also make beneficial HFT, such as market making, less profitable as well. This would only increase investors’ costs and reduce liquidity in the markets, having a negative effect on the overall economy.[93]

Setting aside market-making strategies, which are beneficial, and manipulative strategies, which are already illegal, what remains are mostly criticisms concerning latency arbitrage. This form of arbitrage merely takes advantage of timing discrepancies through the use of co-located servers and direct feeds to the exchanges and is generally seen as consuming resources, increasing costs, and decreasing market efficiency.[94]  Additionally, there is the criticism that the HFT “arms race” to speeds approaching the speed of light has no social value and, in fact, wastes societal resources that could be better utilized elsewhere. To address both the concerns over latency arbitrage and the HFT arms race, the SEC should seriously think about implementing frequent batch auctions across trading centers.[95]

As an initial step, however, proprietary HFT firms trading on the off-exchange markets must be under FINRA oversight. Therefore, the SEC should begin by adopting the proposed amendment to Rule 15b9-1.


*Samuel Branum. University of Illinois College of Law, J.D. candidate, Class of 2017

[1] Tom Bailey, Flash and Burn: High Frequency Traders Menace Financial Markets, World Fin. (July 3, 2015),

[2] On a “Rigged” Wall Street, Milliseconds Make All the Difference, NPR (Apr. 1, 2014, 1:28 PM),

[3] Bradley Hope, How Computers Trawl a Sea of Data for Stock Picks, Wall St. J. (Apr. 1, 2015, 10:30 PM),

[4] Id.

[5] Matt Egan, Flash Crash: Could It Happen Again?, CNN Money (May 6, 2014, 3:58 PM),

[6] Todd C. Frankel, Mini Flash Crash? Trading Anomalies on Manic Monday Hit Small Investors, Wash. Post (Aug. 26, 2015),

[7] Gary Shorter & Rena S. Miller, Cong. Research Serv., High-Frequency Trading: Background, Concerns, and Regulatory Developments 27 (June 19, 2014).

[8] See Michael Lewis, Flash Boys: A Wall Street Revolt 40 (2014) (“[T]he markets are rigged.”).

[9] Exemption for Certain Exchange Members, Exchange Act Release No. 74,581, 80 Fed. Reg. 18,036, 18,036 (proposed Apr. 2, 2015) (to be codified at 17 C.F.R. pt. 240).

[10] Id.

[11] Id.

[12] Concept Release Concerning Equity Market Structure, Exchange Act Release No. 61,358, 75 Fed. Reg. 3594, 3606 (Jan. 21, 2010). The SEC describes HFT as having the following characteristics: (1) “professional traders acting in a proprietary capacity that engage in strategies that generate a large number of trades on a daily basis”; (2) “the use of extraordinarily high-speed and sophisticated computer programs for generating, routing, and executing orders”; (3) “use of co-location services and individual data feeds offered by exchanges and others to minimize network and other types of latencies”; (4) “very short time-frames for establishing and liquidating positions”; (5) “the submission of numerous orders that are cancelled shortly after submission”; and (6) “ending the trading day in as close to a flat position as possible.” Id

[13] Andrew J. Keller, Robocops: Regulating High Frequency Trading After the Flash Crash of 2010, 73 Ohio St. L.J. 1457, 1477 (2012).

[14] Id.

[15] Id.

[16] Steven R. McNamara, The Law and Ethics of High-Frequency Trading, 17 Minn. J.L. Sci. & Tech. 71, 114–16 (2016).

[17] Stanislav Dolgopolov, Regulating Merchants of Liquidity: Market Making from Crowded Floors to High-Frequency Trading, 18 J. Bus. L. 651, 653–54 (2016). Liquidity is the immediate availability of shares that can be bought or sold at a fair price. Rishi K Narang, Inside the Black Box: A Simple Guide to Quantitative and High-Frequency Trading 247 (2d ed. 2013). Liquidity is related to the depth of the order book (the number of shares available to be bought or sold at a certain price) and the bid-ask spread (the difference in price between the national best bid and the national best offer). Id. at 224.

[18] Market Maker, SEC, (last visited Jan. 15, 2017).

[19] Richard Finger, High Frequency Trading: Is It a Dark Force Against Ordinary Human Traders and Investors?, Forbes (Sept. 30, 2013, 8:41 AM),

[20] Björn Hagströmern & Lars Nordén, The Diversity of High-Frequency Traders, 16 J. Fin. Markets 741, 756 (2013).

[21] Staff of the Division of Trading and Markets, SEC, Equity Market Structure Literature Review Part II: High Frequency Trading 9 (Mar. 18, 2014) [hereinafter HFT Literature Review],

[22] Shorter & Miller, supra note 7, at 19.

[23] HFT Literature Review, supra note 21, at 33.

[24] Id. at 23–28.

[25] George J. Miao, High Frequency and Dynamic Pairs Trading Based on Statistical Arbitrage Using a Two-Stage Correlation and Cointegration Approach, 6 Int’l J. Econs. & Fin. 96, 96–97 (2014).

[26] Concept Release Concerning Equity Market Structure, Exchange Act Release No. 61,358, 75 Fed. Reg. 3594, 3608 (Jan. 21, 2010).

[27] Id.

[28] Id.

[29] Merritt B. Fox et al., The New Stock Market: Sense and Nonsense, 65 Duke L.J. 191, 241 (2015).

[30] Id. at 238–42.

[31] Sal Arnuk & Joseph Saluzzi, Themis Trading LLC, Latency Arbitrage: The Real Power Behind Predatory High Frequency Trading (Dec. 4, 2009),

[32] Fox et al., supra note 29, at 238.

[33] Id. at 239.

[34] Id.

[35] Narang, supra note 17, at 285.

[36] Id.

[37] Id.

[38] Charles R. Korsmo, High-Frequency Trading: A Regulatory Strategy, 48 U. Rich. L. Rev. 523, 548 (2014).

[39] Id. “Spoofing” is placing a bid or offer for shares just to manipulate other traders into raising or lowering their bid or offer. McNamara, supra note 16, at 114. “Layering” is similar to spoofing except that bids or offers are entered in successively higher (or lower) increments to simulate a pattern in the market. Id. at 115–16. “Quote stuffing” is the rapid-fire placing of bids or offers to overwhelm the capacity of exchange servers and slow them down in order to gain an advantage over other traders. Id. at 116.

[40] François-Serge Lhabitant & Greg N. Gregoriou, High-Frequency Trading: Past, Present, and Future, in The Handbook of High Frequency Trading 155, 161–62 (Greg N. Gregoriou ed., 2015).

[41] Boston Consulting Group, Inc., U.S. Securities and Exchange Commission Organizational Study and Reform 20 (Mar. 10, 2011).

[42] 15 U.S.C. 78c(a)(26) (2012).

[43] Exchanges, SEC, (last visited Jan. 15, 2017).

[44] Exemption for Certain Exchange Members, Exchange Act Release No. 74,581, 80 Fed. Reg. 18,036, 18,039 (proposed Apr. 2, 2015) (to be codified at 17 C.F.R. pt. 240).

[45] Self-Regulatory Organization Rulemaking, SEC, (last visited Jan. 15, 2017).

[46] Clearing Agencies, SEC, (last visited Jan. 15, 2017).

[47] Boston Consulting Group, Inc., supra note 41, at 25.

[48] Concept Release Concerning Equity Market Structure, Exchange Act Release No. 61,358, 75 Fed. Reg. 3594, 3599 (Jan. 21, 2010).

[49] 15 U.S.C. § 78o(b)(8) (2012).

[50] Id. § 78o(b)(9).

[51] Exemption for Certain Exchange Members, Exchange Act Release No. 74,581, 80 Fed. Reg. 18,036, 18,037 (proposed Apr. 2, 2015) (to be codified at 17 C.F.R. pt. 240).

[52] Id.

[53] Id.

[54] Id.

[55] Id.

[56] Id.

[57] Id.

[58] Id. at 18,042.

[59] Id.

[60] Id. at 18,043.

[61] Id.

[62] Id. 

[63] Id. at 18,038, 18,043.

[64] Id. at 18,070.

[65] Id. at 18,046.

[66] Id.

[67] Id. at 18,046, 18,049.

[68] Id. at 18,046.

[69] Id. at 18,047.

[70] Id. at 18,049.

[71] Id.

[72] Exemption for Certain Exchange Members, Exchange Act Release No. 74,581, 80 Fed. Reg. 18,036, 18,042 (proposed Apr. 2, 2015) (to be codified at 17 C.F.R. pt. 240).

[73] 15 U.S.C. § 78o-3(b) (2012).

[74] Exemption for Certain Exchange Members, 80 Fed. Reg. at 18,059.

[75] Id.

[76] Id.

[77] Charles P. Jones, Investments: Analysis and Management 82 (11th ed. 2009).

[78] Id.

[79] Mary Jo White, Chairwoman, SEC, Speech at the Sandler O’Neill & Partners, L.P. Global Exchange and Brokerage Conference: Enhancing Our Equity Market Structure (June 5, 2014),

[80] Id.

[81] See Regulation NMS, Exchange Act Release No. 51,808, 70 Fed. Reg. 37,496, 37,603 (June 29, 2005) (to be codified at 17 C.F.R. pts. 200, 201, 230, 240, 242, 249, 270) (“[T]he interests of long-term investors and short-term traders in fair and efficient markets coincide most of the time. In those few contexts where the interests of long-term investors directly conflict with short-term trading strategies, we believe that, in implementing regulatory structure reform, the Commission has both the authority and the responsibility to further the interests of long-term investors, and that the record provides substantial support for the Commission’s determination to further their interests.”).

[82] High Frequency Trading’s Impact on the Economy: Hearing Before the Subcomm. on Securities, Insurance, and Investment of the S. Comm. on Banking, Housing, and Urban Affairs, 113th Cong. 9 (June 18, 2014) (statement of Andrew M. Brooks, Vice President and Head of U.S. Equity Trading, T. Rowe Price Assoc., Inc.).

[83] Exemption for Certain Exchange Members, Exchange Act Release No. 74,581, 80 Fed. Reg. 18,036, 18,038 (proposed Apr. 2, 2015) (to be codified at 17 C.F.R. pt. 240).

[84] Id.

[85] Limited Liability Company Agreement of CAT NMS, LLC, app. C, at 56 (Dec. 23, 2015 amend.).

[86] See, e.g., FINRA Regulatory Notice 15-09, Equity Trading Initiatives: Supervision and Control Practices for Algorithmic Trading Strategies, at 2 (Mar. 2015), (requiring its member firms to have reasonable supervision mechanisms in place for monitoring the use of algorithmic trading).

[87] Consolidated Audit Trail, Exchange Act Release No. 67,457, 77 Fed. Reg. 45,722, 45,729–30 (to be codified at 17 C.F.R. pt. 242) (“[S]taff at the Commission working on the analysis of the May 6, 2010 ‘Flash-Crash’ found it was not possible to use the data from existing audit trails to accurately or comprehensively reconstruct exchange and ATS equity limit order books for NMS securities as required to fully analyze the events of that day.”).

[88] Id.

[89] Consolidated Audit Trail (CAT) Resource Center, SIFMA,,-compliance-and-administration/consolidated-audit-trail-(cat)/overview/ (last visited Jan. 15, 2017).

[90] Id.

[91] Hagströmern & Nordén, supra note 20, at 756.

[92] Matt Levine, Why Do High-Frequency Traders Cancel So Many Orders?, Bloomberg View (Oct. 8, 2015, 6:06 PM),

[93] Douglas J. Elliott, Brookings Inst., Market Liquidity: A Primer (June 2015),

[94] Fox et al., supra note 29, at 242.

[95] See generally Budish et al., The High-Frequency Trading Arms Race: Frequent Batch Auctions as a Market Design Response, 130 Q. J. Econ. 1547 (2015); see also Sviatoslav Rosov, Are Frequent Batch Auctions a Solution to HFT Latency Arbitrage?, CFA Inst. (Nov. 10, 2014), Currently, exchanges operate in continuous time, so that even if a trader is one nanosecond faster than another trader, that trader will have his orders prioritized over the other trader. Rosov, supra. The fastest traders are placed at the top of the book and can snipe stale quotes, or cancel their quotes before they are sniped by others. Id. This sets up the incentive for HFT traders to continuously seek out the fastest transmission speeds. Id. In a batch auction, though, instead of processing orders as they come in, auctions are held at discrete intervals, such as every 100 milliseconds. Id. Thus, so long as HFT traders get their orders in within the 100-millisecond window, they will all be processed at the same time. Id. As a result, there is no longer an advantage for being a nanosecond faster, and the HFT arms race will be over. Id. In this sense, frequent batch auctions are analogous to Rule 612 of Regulation NMS, which sets the minimum quoting increment of shares at a penny. If there were no minimum quoting increment, a trader could prioritize his or her order simply by entering a bid or offer that is $.001 (or even $0.000001) higher or lower than the quoted price. This is similar to a HFT trader jumping to the top of the book by being a nanosecond faster. If miniscule differences in price should not prioritize a trader’s order, neither should miniscule differences in time.

Net Neutrality: An Overview and Current Developments

By Martin Vigodnier*


The Internet plays a prominent role in our daily lives.[1]  Recently, news regarding the importance of the Internet’s influence has been tailored around network neutrality (“net-neutrality”) and the ongoing debate with respect to the government’s role in regulating the Internet.  This article will provide the reader with three things: a primer on net-neutrality, analysis of arguments for and against net-neutrality, and where net-neutrality stands today.


A. What is Net-Neutrality?

The term net-neutrality was first coined by Professor Tim Wu[2] in 2003[3] and is a theory that holds that broadband providers should treat all Internet traffic equally, regardless of source.[4]  “Source” is essential to understanding net-neutrality, because data can come from multiple sources and in various forms.[5]  For example, data can come in the form of an email attachment, and video streaming data can identify Netflix as its source.[6]  Since broadband providers supply consumers with Internet access, they have the prerogative to either “block” certain data from reaching the consumer, or “throttle” the speed at which data reaches consumers.  Under a net-neutrality regulatory regime, however, broadband providers are forced to remain data-neutral when servicing their customers: i.e., they cannot discriminate based on the type of data[7] or the identity of its transmitter or recipient.[8]

B. The Government’s Role

The Federal Communications Commission (“FCC”) has attempted to regulate the Internet for about thirty years[9] and has asserted its legal authority to do so under the Communications Act of 1934[10] and the Telecommunications Act of 1996.[11]

The FCC’s role in net-neutrality began in their 1980s Second Computer Inquiry decision.[12]  In Second Computer Inquiry, the FCC created a regulatory regime[13] that divided services into “basic” and “enhanced.”[14]  The difference between the two was the extent to which they involved processing information, rather than simply transmitting it.[15]  Basically, the easier it was for the service to process or transmit information, the more likely the service would be classified as basic.[16]  Services that involved “computer processing applications . . . used to act on the content, code, protocol, and other aspects of the subscriber’s information,”[17] however, were classified as enhanced.[18]  If a service is classified as basic, then it is subject to FCC regulation under Title II of the Communications Act of 1934 as a “common carrier”[19]—which has the duty to “furnish . . . communication service upon reasonable request,”[20] engage in no “unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services,”[21] and charge “just and reasonable” rates.[22]  If classified as enhanced, it would be exempt from Title II regulation.[23]  The FCC did, however, impose certain limitations upon enhanced services, such as requiring enhanced service providers to offer their transmissions facilities to other enhanced service providers on a common carrier basis.[24]

In determining whether the Internet constituted a basic or enhanced service, the FCC eventually ruled that the services needed to connect an end-user—a consumer—to the Internet constituted enhanced services,[25] and were thus exempted from Title II regulation.  The FCC applied this regime to Internet services offered over telephone lines—predominantly through 56K modem[26]—for over twenty years.[27]

Notwithstanding the Internet’s Title II exemption, the FCC still imposed its enhanced services regulations on the Internet.  For example, telephone companies that provided the wireline facilities that transmitted data to and from consumers were limited in how they could provide the enhanced services necessary for consumers to access the Internet,[28] and were also required to permit third-party Internet Service Providers (“ISPs”), such as America Online, to access their wireline transmission facilities on a common carrier basis.[29]

It was against this background that Congress passed the Telecommunications Act of 1996.[30]  Similar to the Second Computer Inquiry regime, the Telecommunications Act of 1996 defined two categories: telecommunications carriers—the equivalent of basic services—and ISPs—the equivalent of enhanced services.[31]  Similar to the Second Computer Inquiry regime, telecommunications carriers were subjected to Title II regulations[32] while ISPs were exempt.[33]

The FCC subsequently classified Digital Subscriber Line (“DSL”) broadband Internet services[34] as telecommunications services[35] subject to Title II regulation,[36] while ruling that broadband Internet provided by cable companies (“cable-modem”) were ISPs[37] exempted from Title II regulation.[38]  This ruling was eventually upheld by the Supreme Court in Brand X.[39]  After Brand X, the FCC changed its course on DSL and not only re-classified DSL as ISPs,[40] but classified “mobile” broadband[41] as ISPs as well.[42]

Nevertheless, the FCC has a history of imposing regulations on ISPs.  In 2008, for example, upon discovering that Comcast was throttling the data traffic of cable-modem subscribers attempting to use certain “peer-to-peer” networking applications,[43] the FCC issued its Comcast Order decision, demanding Comcast adhere to several disclosure and compliance requirements.[44]  Comcast Order was later vacated by the D.C. Circuit because the FCC failed to demonstrate that it possessed statutory authority to regulate broadband providers’ network management practices.[45]

In response to the D.C. Circuit’s decision, the FCC adopted the Open Internet Order,[46] which established rules requiring transparency and prohibiting broadband providers from blocking or discriminating against data due to its form or source,[47] each of which lies at the heart of net-neutrality theory.[48]

This too was subsequently vacated by the D.C. Circuit, because the FCC imposed impermissible per se common carrier obligations, even though the FCC did not classify them as such.[49]  The D.C. Circuit did, however, provide the FCC with some flexibility by agreeing that Section 706 of the Telecommunications Act of 1996[50] “empower[s] [the FCC] to promulgate rules governing broadband providers’ treatment of Internet traffic”[51] in order to “preserve and facilitate the . . . innovation that has driven the explosive growth of the Internet[,]”[52] so long as the rules justified by Section 706 are not identical to common carrier rules.[53]


A. Those Who Say Yes

The arguments in favor of net-neutrality can be boiled down to three main concerns: innovation, competition, and consumer protection.

1. Net-Neutrality Fosters Innovation

A network that is as neutral as possible is predictable: all applications are treated alike.[54]  Since the FCC has it as their objective to maximize the incentives to invest in broadband applications,[55] proponents of net-neutrality argue the FCC should act to eliminate the unpredictability created by potential future restrictions on network usage.[56]

An example of this unpredictability and its hindrance on innovation can be seen in the bans over Virtual Private Networks (“VPNs”) that cable companies enacted some years ago.  Generally speaking, VPNs are a type of productivity-enhancing application that allows employees to work more efficiently from home.[57]  Indeed, VPNs are a good illustration of the kind of innovation that broadband application makes possible.[58]  However, when ISPs became aware of the usage of VPNs, the results were messy.[59]  Some ISPs decided to ban their usage outright, or demand additional fees, others banned them without any enforcement, and some allowed VPNs without comment.[60]  The unpredictability and variance in these restrictions was expensive as it imposed unnecessary costs on innovators of VPN technology—i.e., the developers of VPN technology and the companies who might benefit from VPN technology—in addition to placing costs on the employers of those employees toward whom the usage of VPN was targeted.[61]

Thus, this VPN episode is generally indicative of a problematic tendency: the restriction of new and innovative applications that ISPs see as unimportant, a competitive threat, or a chance to make money.[62]  The effects of these usage restrictions fall hardest on small and startup developers, who already have diminished resources.[63]  By definition, startup application developers push the envelope of what is possible under the Internet’s current architecture.[64]  Their funding depends on the existence of a stable, addressable market for their products.[65]  Such developers would benefit the most from knowing that they can rely on a broadband network that is consistent—that is, neutral—throughout homes and businesses.[66]

2. Net-Neutrality Fosters Competition

As a corollary to the innovation arguments illustrated above[67], proponents argue net-neutrality promotes innovation through competition.[68]

i. The Evolutionary Model of Innovation

The arguments in favor of net-neutrality as a means to foster competition are best understood as a theory of competition whereby innovation is its primary objective.[69]  Though this theory goes by many names[70], it is commonly known as the “evolutionary model”[71] of innovation.[72]

   a. Definition of Evolutionary Model of Innovation

Adherents to the evolutionary model view the innovation process as a survival-of-the-fittest competition between developers of new technologies and are suspicious of models of development that might vest power—namely, the power to direct the optimal path of innovation—in any initial prospect-holder, private or public, because they may have an incentive to minimize the degree of innovative competition.[73]  The suspicion arises from the belief that the most promising path of development is difficult to predict in advance and that any single prospect holder will suffer from cognitive biases,[74] preventing him or her from coming to the right decisions, even if he or she means well.[75]

   b. The Evolutionary Model of Innovation as it Relates to Net-Neutrality

The Internet can be seen as a platform for a competition among application developers.[76]  Indeed, email and streaming applications like Netflix, for example, battle for the attention and interest of consumers.[77]  Thus, to these “Internet Darwinians,”[78] it is important that the platform be neutral “to ensure the competition remains meritocratic.”[79]

For these reasons, Internet Darwinians argue that their innovation theory is embodied in the “end-to-end” design argument: “The End-to-End argument says ‘don’t force any service, feature, or restriction on the end-user; his application knows best what features it needs, and whether or not to provide those features itself.’”[80]  In other words, the Internet should be controlled by the producer and the end-user, not the intermediary network provider that provides them with access to it.[81]  Further, backers of the evolutionary approach to innovation take the Internet itself and the creativity that entailed its invention as examples of the superiority of a system designed along their evolutionary principles.[82]

Moreover, this theory of innovation through competition is a policy that the FCC has repeatedly endorsed.[83]  For example, in the FCC’s broadband infrastructure inquiries, the FCC has favored “multiple platform competition,” promoting a fair fight between DSL, cable, and other broadband access infrastructures.[84]  Proponents, thus, argue the same underlying principles—namely, an evolutionary model of technological innovation—favor the promotion of net-neutrality today.[85]

ii. Net-Neutrality Fosters Competition in the Global Economy

Proponents also argue that net-neutrality is critical to our nation’s competitiveness.  Indeed, as Google Vice President, Vinton Cerf, stated, “in places like Japan, Korea, Singapore, and the United Kingdom, higher-bandwidth and neutral broadband platforms are unleashing waves of innovation that threaten to leave the [United States] further and further behind in the global economy” because those nations have endorsed net-neutrality and their regulations reflect it.[86]

3. Net-Neutrality Protects Consumers

Finally, proponents argue net-neutrality is critical for consumers.  For example, most Americans today have few choices for broadband service.  Indeed, the FCC’s 2014 Report on consumer fixed broadband performance[87] notes that, of the four ISP broadband technologies examined[88], the fourteen largest broadband providers account for over eighty percent of the market.[89]  Further, the seventeen largest phone and cable operators control ninety-three percent of the broadband market[90], and only about half of consumers actually have a choice between even two providers.[91]  Unfortunately, there appears to be little near-term prospect for meaningful competition from alternative platforms and, as a result, the incumbent broadband providers are in a position to dictate how consumers and producers can use the on-ramps to the Internet.[92]

Further, as it relates to the innovation theory above, proponents stand for the principle that consumers “should be able to use the Internet connections that they pay for the way that they want.”[93]  Indeed, this principle—that users pick winners and losers in the Internet marketplace, not carriers—is an architectural and policy choice critical to innovation online.[94]  In the absence of any meaningful competition in the consumer broadband market, and without the net-neutrality tailored safeguards, one would expect carriers to have an economic incentive—and the opportunity—to control users’ online activity, thereby diminishing competition due to lack of consumer free choice.[95]

B. Those Who Say No

Opponents, on the other hand, argue that net-neutrality is not desirable based on a deep-seeded suspicion parallel to that held by proponents to the evolutionary model of innovation—namely, suspicious of the government’s general aptitude, or, rather, inaptitude, when it comes to regulating economic markets.  In general, opponents argue that the solution is not not-neutrality, which unacceptably entails promulgation of a new regulatory regime, but, instead, to do nothing and stick to the oft-repeated libertarian maxim: “let the free markets decide.”[96]

1. Net-Neutrality Hinders Competition, Innovation, and Consumer Welfare

Opponents argue that, in reality, net-neutrality hinders competition because the government has repeatedly shown that it is, one, inherently inefficient in regulating private economic markets[97], two, open to corruption,[98] and, three, regulations are more costly than an economic system premised on competitive markets, even when regulation’s aims are venerable.[99]

i. The Government is Inherently Inefficient in Regulating Private Economic Markets

Proponents say net-neutrality is essential because broadband providers, currently, enjoy too much power.[100]  Opponents like, Joshua Steimle, a self-described “tech-addicted entrepreneur,”[101] agree, noting that the power they enjoy is almost monopoly-level and that he would prefer a system with more competition in place.[102]  However, he disagrees with proponents in that the best way to ensure net-neutrality is through the FCC—i.e., the government—because the government is “the largest, most powerful monopoly in the world[.]”[103]  Thus, it is implied that Steimle is arguing that the case for net-neutrality seems hypocritical since proponents desire to eliminate monopolistic broadband providers by seeking the aid of what he calls the largest monopoly in the world: the government.

Further, Steimle also argues that the government’s history of regulating economic markets has been, and continues to be, markedly unsuccessful,[104] and, as such, is destined to fail when it comes to promulgating net-neutrality regulations.  Steimle adds that the same result is to be expected when it comes to the government promulgating regulations to ensure net-neutrality because, “This is by design.”

ii. The Threat of “Crony-Capitalism”

Furthermore, opponents argue that the current political climate regarding governmental regulations can be summarized as corrupt and an illustration of the modern trend known as “crony-capitalism.”[105]  As it applies to net-neutrality, opponents argue that this corrupt crony-capitalism would manifest itself in net-neutrality regulations and, consequently, hinder competition because most government regulations are written by large corporate interest, in collusion with officials in government, and are “designed to prevent small entrepreneurs from becoming real threats to large corporations.”[106]  Thus, as Steimle notes, “If [net-neutrality] comes to pass how can we trust it will not be written in a way that will make it harder for new companies to offer Internet services?  If anything, we’re likely to end up even more beholden to the large [broadband providers] than before.”[107]

iii. The Costs of Governmental Regulations are Unacceptably Large

Opponents also argue that even if the government’s goal is a well-intentioned one, such as preventing monopolies from forming, the use of regulations as a means to achieve that goal is more costly than a system that makes no pretense of putting in place the elaborate scheme of regulation that now applies to common carriers.[108]  Indeed, as noted opponent Professor Richard Epstein notes, the promulgation of a regulatory regime to ensure net-neutrality not only “leaves too much space for destructive political manipulation,”[109] but the FCC’s efforts in reclassifying broadband providers as common carriers may result in “millions of dollars [being] wasted in trying to shift . . . from one regime to another.”[110]

In order to prevent the costs associated with FCC regulations reclassifying broadband providers as common carriers, Professor Epstein argues the FCC should instead promulgate regulations premised on a strong system of property rights.[111]  The advantage of this property rights regime is that the concerns over political manipulation and costs associated with regulations are minimized because the government’s role is “limited to enforcing the exclusivity of the property rights, so that millions of dollars are not wasted in trying to shift ceaselessly from one regime to another.”[112]  More specifically, the property regime that Professor Epstein argues in favor for is based upon common law principles of common carrier regulation.[113]

Ideally, consumers would have a choice between broadband providers: “In competitive markets, a refusal to deal is what makes the economy work, because it prevents any forced interactions that could prove disastrous for one side or the other—hence the sensible rule that the customer who was refused service from one merchant could just do business with another.”[114]  But, if the market is not competitive but rather dominated by monopolies, similar to those seen in the net-neutrality context, then, under the common law principles of common carrier regulation, rate regulations would apply because “there is no other rival merchant next door.”[115]  Indeed, rate regulations in this context are promulgated in order to reduce monopoly rates to competitive levels.[116]

There are, nevertheless, risks associated with these common law rate regulations in the monopoly context.  Indeed, the enterprise of rate regulations in the monopoly setting “poses serious compensation risks [such that courts have,] for close to 125 years, imposed judicial review to see that the rates imposed allow the merchant in question to make a reasonable return on invested capital.”[117]  Thus, to ameliorate such concerns, Professor Epstein argues that “with the first whiff of competition[,] a strong case arises for dispensing with the rate regulation process altogether.”[118]  Professor Epstein admits that, in the short run, this might lead to higher rates, but in the long-run, “innovation from new entrants will tend to drive rates down to a competitive level that is likely unattainable under sclerotic rate regulation systems.”[119]

As this rule applies to net-neutrality, Professor Epstein argues the following:

So in the end, the key substantive decision should not turn on whether broadband providers: transmit or create information.  It should turn on whether or not they can exert any form of monopoly power in some relevant market.  As a general matter, the faster the technological transformation, the less desirable the monopoly regulation.  Firms like AOL and Blackberry, once thought to possess monopoly power are now footnotes in modern policy debates.  The great danger of regulation is that those intended to foster competition will further entrench the position of incumbent players.
. . . .


After much public debate and political discourse, on February 26, 2015, the FCC sided with the proponents of net-neutrality by reclassifying broadband providers as common carriers such that Title II regulations apply.[120]  In general, the FCC now prohibits blocking, throttling, and paid prioritization[121] to both fixed and mobile broadband for smartphones.[122]  Further, the FCC will not get involved in pricing decisions or the engineering decisions companies make in managing their networks.[123]

In response, however, both USTelecom—a group that includes some of the nation’s largest Internet providers—and Alamo Broadband sued the FCC in the D.C. Circuit and Fifth Circuit, respectively, challenging the FCC’s authority to pass their net-neutrality rules.[124]  Both lawsuits were recently filed in March 23, 2015,[125] so time will only tell what happens next to the future of net-neutrality.


*Martin Vigodnier. University of Illinois College of Law, Class of 2015. Incoming Associate Attorney at Littler Mendelson, P.C., San Francisco, CA. Special thanks to my family: Stella, Norberto, David, and Dale Canalla. Many thanks also to JLTP Editors Iman Naim (Class of 2016) and Andrew Lewis (Class of 2015) for their help and guidance.

[1] See, e.g., Larry Magid, Ubiquitous Internet Approaching but Not Here Yet, Huffington Post (July 6, 2010, 12:34 AM), (“The era of ubiquitous Internet access is fast approaching . . . . [For example,] I’m writing this column from 35,000 feet on a flight from Washington, D.C., to San Francisco aboard Virgin America, which has Gogo Internet access on all of its flights.”).

[2] Tim Wu, Network Neutrality, Broadband Discrimination, 2 J. on Telecomm & High Tech. L. 141 (2003). See also Jeff Sommer, Defending the Open Internet, N.Y. Times (May 10, 2014), business/defending-the-open-internet.html?_r=0 (“A dozen years ago, . . . Mr. Wu developed a concept . . . [c]alled “net neutrality,” short for network neutrality, [and] it is essentially this: The cable and telephone companies that control important parts of the plumbing of the Internet shouldn’t restrict how the rest of us use it.”).

[3] Sommer, supra note 2.

[4] See Verizon v. FCC, 740 F.3d 623, 628 (D.C. Cir 2014) (noting the FCC’s “effort to compel broadband providers to treat all Internet traffic the same regardless of source—or to require . . . ‘net neutrality.’”).

[5] See, e.g., Wu, Network Neutrality, Broadband Discrimination, supra note 2, at 145 (“So what is attractive about a neutral network—that is, an Internet that does not favor one application (say, the world wide web), over others (say, email)?”); Brian Bergstein, Q&A: Lawrence Lessig, MIT Tech. Rev. (Oct. 27, 2010) http://www.technologyreview. com/qa/421384/qa-lawrence-lessig/ (noting that, under net-neutrality, “the networks that deliver the Internet to consumers must be equally open to all data packets, no matter whether these are part of an e-mail from your mother or a video from Hulu.”).

[6] Id.

[7] For example, blocking data via online video games, but allowing data via email attachment.

[8] See, e.g., Richard A. Epstein, The Problem With Net Neutrality, Hoover Institution (Jan. 20, 2014), (“Many proponents of net neutrality argue that the power to exclude is fraught with the risk of abuse. Writing on Slate, Marvin Ammori raises this concern to a fever pitch, by insisting that only net neutrality prevents Comcast from blocking Facebook or Bing, or Verizon from offering better terms of service to the Huffington Post than Slate.” (citing Marvin Ammori, The Net Neutrality Battle Has Been Lost, Slate (Jan. 14, 2014 2:45 PM), net_neutrality_d_c_circuit_court_ruling_the_battle_s_been_lost_but_we_can.html)).

[9] See Verizon v. FCC, 740 F.3d 623, 629 (D.C. Cir 2014) (noting that one of the FCC’s early efforts to regulate the internet “occurred in 1980, when it adopted what is known as the Computer II regime.”).

[10] Communications Act of 1934, Pub.L. 73–416, 48 Stat. 1064.

[11] Telecommunications Act of 1996, Pub. L. 104–104, 110 Stat. 56.

[12] In re Amendment of Section 64.702 of the Comm’ns Rules & Regulations, 77 F.C.C.2d 384 (1980) (“Second Computer Inquiry”).

[13] Verizon, 740 F.3d at 630 (citing Second Computer Inquiry, 77 F.C.C.2d at 420).

[14] Second Computer Inquiry, 77 F.C.C.2d at 387 ¶ 5 (“Based on the voluminous record compiled in this proceeding, we adopt a regulatory scheme that distinguishes between the common carrier offering of basic transmission services and the offering of enhanced services.”).

[15] Verizon, 740 F.3d at 629.

[16] See, e.g., id. (“For example, the FCC characterized telephone service as a ‘basic’ service . . . because it involved a ‘pure’ transmission that was ‘virtually transparent in terms of its interaction with customer supplied information.’”) (citing Second Computer Inquiry, 77 F.C.C.2d at 419–20).

[17] Second Computer Inquiry, 77 F.C.C.2d at 420 ¶ 97.

[18] Id.

[19] Verizon, 740 F.3d at 629.

[20] 47 U.S.C. § 201(a) (2012).

[21] Id. at § 202(a)

[22] Id. at § 201(b).

[23] Id.

[24] Verizon, 740 F.3d at 630. (citing Second Computer Inquiry, 77 F.C.C.2d at 473–74).

[25] Id.

[26] Nat’l Cable & Telecomm. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 976–77 (2005) (“Consumers traditionally access the Internet through ‘dial-up’ connections provided via local telephone lines. Internet service providers (ISPs), in turn, link those calls to the Internet network, not only by providing a physical connection, but also by offering consumers the ability to translate raw data into information they may both view on their own computers and transmit to others connected to the Internet.”).

[27] Verizon, 740 F.3d at 630.

[28] Id. (citing Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, 17 F.C.C.R. 3019, 3040 (2002)).

[29] Id.

[30] Verizon, 740 F.3d at 630.

[31] 47 U.S.C. §§ 153(24), (50), (51), (53) (2012). See also Brand X, 545 U.S. at 976–77 (reviewing the FCC’s declaratory ruling that cable companies providing broadband Internet access did not provide “telecommunications service,” and hence were exempt from mandatory regulation under Title II of the Communications Act and holding that the FCC’s ruling was lawful construction of Communications Act under Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), and the FCC’s ruling was not arbitrary or capricious under the Administrative Procedure Act of 1946, Pub.L. 79–404, 60 Stat. 237).

[32] 47 U.S.C. § 153(53) (2012).

[33] Brand X, 545 U.S. at 975–76.

[34] There are various forms of broadband Internet services. DSL is a form of broadband Internet service that is furnished over telephone lines. Verizon, 740 F.3d at 630. Other pre-dominant broadband Internet services include cable-modem, satellite, and fiber. Fed. Commc’n Comm., 2014 Measuring Broadband America Fixed Broadband Report 5 (2014), available at download/measuring-broadband-america/2014/2014-Fixed-Measuring-Broadband-America-Report.pdf. See also Press Release, Fed. Commc’ns Comm’n, FCC Finds U.S. Broadband Deployment Not Keeping Pace (Jan. 29, 2015), available at https://apps.fcc. gov/edocs_public/attachmatch/DOC-331760A1.pdf (defining broadband Internet as “benchmark speeds [of at least] 25 megabits per second (Mbps) for downloads and 3 Mbps for uploads.”).

[35] Deployment of Wireline Servs. Offering Advanced Telecomms. Capability, 13 F.C.C.R. 24012, 24014, 24029–30 (1998) (“Advanced Services Order”) (classifying DSL as telecommunications carriers because they involved pure transmission technologies).

[36] Id. at 24030–31.

[37] Inquiry Concerning High–Speed Access to the Internet over Cable and Other Facilities, 17 F.C.C.R. 4798, 4824 (2002) (“Cable Broadband Order”) (classifying cable-modems as ISPs because cable-modem providers provide a “single, integrated information service.”).

[38] Id. at 4802 ¶ 7.

[39] Brand X, 545 U.S. at 991–92.

[40] Marguerite Reardon, FCC Changes DSL Classification, CNET (Aug. 5, 2005, 12:54 PM), FCC-changes-DSL-classification/2100-1034_3-5820713.html (“The [FCC] . . . voted to reclassify DSL broadband service, thus freeing phone companies of regulations that require them to share their infrastructure with Internet service providers. DSL will now be considered an [ISP] instead of a ‘telecommunications service,’ a distinction that puts DSL in line with the classification of cable modem services.”).

[41] I.e., those serving end-users—consumers—using mobile cellular phone stations to access the Internet, such as smart phones. Definition of: Wireless Broadband, PCMag, wireless-broadband (last visited Mar. 30, 2015).

[42] Verizon, 740 F.3d at 631 (citing Appropriate Framework for Broadband Access to the Internet Over Wireline Facilities, 20 F.C.C.R. 14853, 14862 (2005) (“2005 Wireline Broadband Order”); Appropriate Regulatory Treatment for Broadband Access to the Internet Over Wireless Networks, 22 F.C.C.R. 5901, 5901–02 (2007) (“Wireless Broadband Order”); United Power Line Council’s Petition for Declaratory Ruling, 21 F.C.C.R. 13281, 13281 (2006)).

More specifically, the peer-to-peer networking applications in question were file-sharing applications such as BitTorrent and Gnutella. Brad Stone, Comcast: We’re Delaying, Not Blocking, BitTorrent Traffic, N.Y. Times (Oct. 22, 2007, 9:41 PM), &_type=blogs&_r=0. These applications are often used, perhaps notoriously, for downloading illegally pirated material.See, e.g., BitTorrent Combats Piracy Shadow with Coder Tools, SFGate (Nov. 5, 2013 9:36 AM), http://www. (“When most people hear the word “bittorrent” they think of illegal downloads, which is not a great situation for BitTorrent, the San Francisco company that launched the movement.”).

[44] Formal Complaint of Free Press and Public Knowledge Against Comcast Corp. for Secretly Degrading Peer–to–Peer Applications, 23 F.C.C.R. 13028, 13052–60 (2008) (“Comcast Order”) (finding that Comcast’s impairment of these applications “contravene[d] . . . federal policy,” and ordering Comcast to submit the following disclosure and compliance forms “(1) disclose to the [FCC] the precise contours of the network management practices at issue here, including what equipment has been utilized, when it began to be employed, when and under what circumstances it has been used, how it has been configured, what protocols have been affected, and where it has been deployed; (2) submit a compliance plan to the [FCC] with interim benchmarks that describes how it intends to transition from discriminatory to nondiscriminatory network management practices by the end of the year; and (3) disclose to the [FCC] and the public the details of the network management practices that it intends to deploy following the termination of its current practices, including the thresholds that will trigger any limits on customers’ access to bandwidth.”).

[45] Comcast Corp. v. FCC, 600 F.3d 642, 644, 661 (D.C. Cir. 2010) (holding that the FCC had identified no grant of statutory authority to which the Comcast Order, 23 F.C.C.R. at 13028, was reasonably ancillary).

[46] Preserving the Open Internet, 25 F.C.C.R. 17905 (2010) (“Open Internet Order”).

[47] See id. at 17906 (“i. Transparency. Fixed and mobile broadband providers must disclose the network management practices, performance characteristics, and terms and conditions of their broadband services; ii. No blocking. Fixed broadband providers may not block lawful content, applications, services, or non-harmful devices; mobile broadband providers may not block lawful websites, or block applications that compete with their voice or video telephony services; and iii. No unreasonable discrimination. Fixed broadband providers may not unreasonably discriminate in transmitting lawful network traffic.”). However, while all three of the rules applied to “fixed” broadband providers—i.e., those furnishing residential broadband service and, more generally, Internet access to end users “primarily at fixed end points using stationary equipment”—only two applied to mobile broadband providers—i.e., those “serv[ing] end users primarily using mobile stations,” such as smart phones. Id. at 17934.

[48] See Section II.a., supra.

[49] See Verizon v. FCC, 740 F.3d 623, 628 (D.C. Cir 2014) (“Because the [FCC] has failed to establish that the anti-discrimination and anti-blocking rules do not impose per se common carrier obligations, we vacate those portions of the Open Internet Order[.] [25 F.C.C.R. at 17906].”); id. (“Given that the [FCC] has chosen to classify broadband providers in a manner that exempts them from treatment as common carriers, the Communications Act [of 1934] expressly prohibits the commission from nonetheless regulating them as such.”).

[50] See 5 U.S.C. § 706 (2012).

[51] Verizon, 740 F.3d at 628.

[52] Id.

[53] See Jon Brodkin, FCC Won’t Appeal Verizon Ruling, Will Regulate ’Net on “Case-By-Case Basis,” Ars Technica (Feb. 19, 2014, 11:44 AM), (“[T]he court decision affirmed the [FCC’s] belief that Section 706 of the Telecommunications Act of 1996 should ‘empower it to promulgate rules governing broadband providers’ treatment of Internet traffic.’ However, rules justified by Section 706 can’t be identical to common carriage rules.”).

[54] Letter from Tim Wu, Assoc. Professor, Univ. of Va. Sch. of Law, & Lawrence Lessig, Professor of Law, Stanford Law Sch., FCC Ex Parte Letter, to Marlene H. Dortch, Sec’y, Fed. Commc’n Comm’n 3 (Aug. 23, 2003), available at

[55] Id. Again, in this context, “applications” means, for example, the world wide web, email, or mass online gaming. Id. at 2–3.

[56] Id. at 3.

[57] Id. at 4.

[58] Id.

[59] Id.

[60] Id.

[61] Id.

[62] Id. See also Wu, Network Neutrality, Broadband Discrimination, supra note 2, at 153 (listing the competitive reasons why ISPs would price discriminate on VPNs).

[63] Wu & Lessig, supra note 54, at 4.

[64] Id. (citing Clay Christiansen, The Innovator’s Dilemma (reprt. ed. 2011) (suggesting that large firms, focused on consumers’ present needs, will be unlikely to develop the products of the future)).

[65] Wu & Lessig, supra note 54, at 4.

[66] Id. See also Network Neutrality: Hearing on “Network Neutrality” Before the S. Comm. on Commerce, Sci, & Transp., 109th Cong. 1 (2006) (statement of Vinton G. Cerf, Vice President and Chief Internet Evangelist, Google Inc.) [hereinafter Cerf Statement] (“The Internet’s open, neutral architecture has proven to be an enormous engine for market innovation, economic growth, social discourse, and the free flow of ideas . . . . This ‘neutral’ network has supported an explosion of innovation at the edges of the network, and the growth of companies like Google, Yahoo, eBay, Amazon, and many others. Because the network is neutral, the creators of new Internet content and services need not seek permission from carriers or pay special fees to be seen online. As a result, we have seen an array of unpredictable new offerings – from Voice-over-IP to wireless home networks to blogging – that might never have evolved had central control of the network been required by design . . . . Google looks forward to working with this Committee to fashion carefully-tailored legislative language that protects the legitimate interests of America’s Internet users. And that includes the future interests of the next Google, just waiting to be born in someone’s dorm room or garage.”) (emphasis added).

[67] See Section III.a.i. titled “Innovation,” supra.

[68] Wu, Network Neutrality, Broadband Discrimination, supra note 2, at 145.

[69] Id.

[70] As Professor Wu stated, “a full treatment of the names given to evolutionary theories of innovation is beyond the scope of this [article].” Id. at 145, n.10. Nevertheless, “[s]ome adherents would ascribe such theories to economist Joseph Schumpeter, while in recent legal work the argument is stated as an argument over what should be owned and what should be free.” Id. at 145, n.10 (citing Lawrence Lessig, The Future of Ideas 3-17 (2001)).

[71] See, e.g., Joel Mokyr, Evolution and Technological Change: A New Metaphor for Economic History?, in Technological Change 63, 64 (Robert Fox, ed., 1996) (“The evolutionary method in technological change is not so much an analogy with biology as another application of Darwininan logic . . . .”) (emphasis in original).

[72] Wu, Network Neutrality, Broadband Discrimination, supra note 2, at 145.

[73] Id. at 146.

[74] For example, a predisposition to continue with current ways of doing business. Id.

[75] Id.

[76] Id.

[77] Id.

[78] Id.

[79] Id.

[80] Jerome H. Salinger, “Open Access” is Just the Tip of the Iceberg, Mass. Inst. Tech. (Oct. 22, 1999), http://web. For a more in-depth discussion on what end-to-end arguments entail, see generally Jerome H. Salinger, David Reed, & David Clark, End-To-End Arguments in System Design, 2 ACM Transactions Computer Sys. 277 (1984). Additionally, the Internet Protocol suite (“IP”) upon which the Internet is founded was designed to follow the end-to-end principle, and is famously indifferent both to the physical communications medium “below” it, and the applications running “above” it. Cerf Statement, supra note 66 at 2 (“The use of . . . end-to-end design . . . and the ubiquitous Internet Protocol standard . . . together allow for the decentralized and open Internet that we have come to expect.”) (emphasis added). As Professor Wu states, “The metaphors of ‘above’ and ‘below’ come from the fact that in a layered model of the Internet’s design[:] the application layers are ‘above’ the TCP/IP layers, while the physical layers are ‘below.’” Wu, Network Neutrality, Broadband Discrimination, supra note 2, at 146 n.15. Data from the Internet runs over glass and copper, ATM and Ethernet, carrying, for example, .mp3 files, bits of web pages, and snippets of emails from one end (for example, a content provider such as a website) to the end-user (for example, a visitor on a website). Wu, Network Neutrality, Broadband Discrimination, supra note 2, at 146. As an explanatory note, ATM stands for “Asynchronous Transfer Mode,” Asynchronous Transfer Mode, Wikipedia, http://en.wikipedia. org/wiki/Asynchronous_Transfer_Mode (last visited Mar. 24, 2015), and, generally speaking, “is a cell-switching and multiplexing technology which combines the benefits of circuit-switching and packet-switching.” Tomi Mickelsson, ATM Versus Ethernet, Dep’t Electrical & Comm. Engineering, Helsinki Univ. Tech. (May 18, 1999),

[81] Ray Lin, Network Neutrality, Univ. Cal. Berkeley, (last visited Mar. 24, 2015). See also Arshad Mohammed, Verizon Executive Calls for End to Google’s “Free Lunch”, Wash. Post (Feb. 7, 2006), AR2006020601624.html (“Vinton G. Cerf, a vice president . . . at Google, said in an interview that his company is worried that if net neutrality protections are not enacted, the Internet’s freedom could be compromised, limiting consumer choice, economic growth, technological innovation and U.S. global competitiveness. ‘In the Internet world, both ends essentially pay for access to the Internet system, and so the providers of access get compensated by the users at each end,’ said Cerf, who helped develop the Internet’s basic communications protocol. ‘My big concern is that suddenly access providers want to step in the middle and create a toll road to limit customers’ ability to get access to services of their choice even though they have paid for access to the network in the first place.’”).

[82] Id. at 146–47. See also Lessig, supra note 70, at 14–15 (“No modern phenomenon better demonstrates the importance of free resources to innovation and creativity than the Internet. To those who argue that control is necessary if innovation is to occur, and that more control will yield more innovation, the Internet is the simplest and most direct reply . . . . [T]he defining feature of the Internet is that it leaves resources free. The Internet has provided for much of the world the greatest demonstration of the power of freedom—and its lesson is one we must learn if its benefits are to be preserved.”).

[83] Wu & Lessig, supra note 54, at 5.

[84] Id. (citing Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, Universal Service Obligations of Broadband Providers, CC Docket No. 02-33, Notice of Proposed Rulemaking (“Wireline Broadband NPRM”) ¶ 4 (rel. Feb. 15, 2002)). Additionally, as Professors Wu and Lawrence Lessig note, academic literature also provides evidence that the FCC has endorsed the evolutionary model of innovation. Wu & Lessig, supra note 54, at 5 (citing John Ziman, Evolutionary Models for Technological Change, in Technological Innovation as an Evolutionary Process 3 (John Ziman ed., 2000); Richard Nelson, Understanding Technical Change as an Evolutionary Process (1987)).

[85] Wu & Lessig, supra note 54, at 5.

[86] Cerf Statement, supra note 66, at 1, 6–7 (“[W]e would do well to take important lessons from other countries. Whatever metric one uses, the United States lags behind other developed countries in the deployment and use of high-speed connections to the Internet. Ironically, many such countries employ the same principles of network openness and nondiscrimination that helped shape our own experience of the Internet. Certainly the incumbent providers in those countries do not appear to suffer from any lack of incentives under those principles. For example, in the United Kingdom, British Telecom has agreed to split itself into a retail arm and a wholesale business, with a fundamental policy of nondiscriminatory treatment governing the relationship between them and other providers. In a number of Asian countries, both incumbent and competitive providers operating in an unbundled environment sell huge amounts of bandwidth—100 Megabits or more per second—at a fraction of U.S. prices. By abandoning the principles that helped foster user choice and innovation, the United States risks falling further behind in the global economy.”).

[87] Fed. Commc’n Comm., supra note 34.

[88] That is, DSL, cable, fiber, and satellite.

[89] Id. at 5, 63 n.9 (listing the fourteen participating ISPs as the following: AT&T (DSL); Cablevision (cable); CenturyLink (DSL); Charter (cable); Comcast (cable); Cox (cable); Frontier (DSL/fiber); Insight (cable); Mediacom (cable); Qwest (DSL); TimeWarner Cable (TWC) (cable); Verizon (DSL and fiber-to-thehome); Windstream (DSL); and ViaSat (satellite)).

[90] Leichtman Research Grp., Nearly 1.2 Million Add Broadband in the First Quarter of 2014 1 (2014), available at See also Leichtman Research Grp., 2.6 Million Added Broadband from Top Cable and Telephone Companies in 2013 1 (2014), available at (noting that the phone companies “AT&T and Verizon added 3.3 million fiber [broadband] subscribers (via U-verse and FiOS) in 2013 . . . .”) (emphasis added).

[91] Cerf Statement, supra note 66, at 2.

[92] Id.

[93] Id.

[94] Id.

[95] See id. at 5 (“Not surprisingly, this incentive is already manifesting itself. [For example, during the] spring [of 2005], the FCC found that the Madison River Telephone Company was blocking ports used by its DSL customers to access competing [Voice Over Internet Protocol (“VoIP”)] services . . . . More revealingly, . . . senior executives of major U.S. carriers have indicated publicly that they intend to force competing services and content providers to pay to be seen online. Together, these examples show that carrier discrimination is not a hypothetical concern.”) (citing Madison River Comm’cn, 20 FCC Rcd. 4295 (2005) (order adopting consent decree)). See also Cerf Statement, supra note 66, at 5 n.3 (“Just three months ago, AT&T CEO Edward Whitacre observed that only telephone carriers and cable companies have broadband pipes to customers. He insisted that Google and other companies ‘use my lines for free, and that’s bull.’ He then warned that ‘I ain’t going to let them do that’ because ‘there’s going to have to be some mechanism for these people who use these pipes to pay for the portion they’re using.’” (citing Spencer E. Ante & Roger O. Crockett, Rewired and Ready for Combat, Bloomberg Bus. (Nov. 6, 2005), com/bw/stories/2005-11-06/rewired-and-ready-for-combat; Online Extra: At SBC, It’s All About “Scale and Scope”, Bloomberg Bus. (Nov. 6, 2005),

[96] See, e.g., Joshua Steimle, Am I The Only Techie Against Net Neutrality?, Forbes (May 14, 2014 10:09 AM), (“Internet bandwidth is, at least currently, a finite resource and has to be allocated somehow. We can let politicians decide, or we can let you and me decide by leaving it up to the free market. If we choose politicians, we will see the Internet become another mismanaged public monopoly, subject to political whims . . . . If we leave it up to the free market we will, in time, receive more of what we want at a lower price. It may not be a perfect process, but it will be better than the alternative.”).

[97] Id. (“The U.S. government has shown time after time that it is ineffective at managing much of anything. This is by design. The Founders intentionally created a government that was slow, inefficient, and plagued by gridlock, because they knew the greatest danger to individual freedom came from a government that could move quickly–too quickly for the people to react in time to protect themselves. If we value our freedom, we need government to be slow. But if government is slow, we shouldn’t rely on it to provide us with products and services we want in a timely manner at a high level of quality. The [broadband providers] may be bad, but everything that makes them bad is what the government is by definition.”).

[98] Id.

[99] Epstein, supra note 8 (“But in the monopoly setting, there is no other rival merchant next door; rate regulation was intended to reduce monopoly rates to competitive levels.”).

[100] See, e.g., Cerf Statement, supra note 66, at 5 (noting that net-neutrality is essential “In the absence of any meaningful competition in the consumer broadband market[.]”).

[101] Steimle, supra note 96.

[102] Id. (“Proponents of Net Neutrality say the [broadband providers] have too much power. I agree. Everyone seems to agree that monopolies are bad and competition is good, and just like you, I would like to see more competition.”).

[103] Id.

[104] Id. (“We’re talking about the same organization that spent an amount equal to Facebook’s first six years of operating costs to build a health care website that doesn’t work, the same organization that can’t keep the country’s bridges from falling down, and the same organization that spends 320 times what private industry spends to send a rocket into space. Think of an industry that has major problems. Public schools? Health care? How about higher education, student loans, housing, banking, physical infrastructure, immigration, the space program, the military, the police, or the post office? What do all these industries and/or organizations have in common? They are all heavily regulated or controlled by the government. On the other hand we see that where deregulation has occurred, innovation has bloomed, such as with telephony services. Do you think we’d all be walking around with smartphones today if the government still ran the phone system?”) (citing Andrew Couts, We Paid over $500 Million for the Obamacare Sites and All We Got Was This Lousy 404, Digital Trends (Oct. 8, 2013),; Mike Baker & Joan Lowy, Bridge Safety: Many U.S. Spans Are Old, Risky And Rundown, Associated Press (Sep. 16, 2013, 5:56 AM), available at; Phoenix McLaughlin, SpaceX Spends 320 Times Less on Building the Dragon than NASA Does on the Orion, Mic (July 19, 2012), Steimle further adds that the same result is to be expected when it comes to the government promulgating regulations to ensure net-neutrality because “This is by design”: “The Founders intentionally created a government that was slow, inefficient, and plagued by gridlock, because they knew the greatest danger to individual freedom came from a government that could move quickly–too quickly for the people to react in time to protect themselves. If we value our freedom, we need government to be slow. But if government is slow, we shouldn’t rely on it to provide us with products and services we want in a timely manner at a high level of quality. The [broadband providers] may be bad, but everything that makes them bad is what the government is by definition. Can we put ‘bad’ and ‘worse’ together and end up with ‘better’?” Steimle, supra note 96.

[105] Id. (“Government regulations are written by large corporate interests which collude with officials in government. The image of government being full of people on a mission to protect the little guy from predatory corporate behemoths is an illusion fostered by politicians and corporate interests alike. [Thus,] [m]any, if not most, government regulations are the product of crony capitalism . . . .”).

[106] Id. See also Epstein, supra note 8 (noting that the FCC’s prerogative on whether to classify broadband providers as common carriers subject to Title II regulation is ripe for political manipulation: “[P]olitical pressures currently are mounting on all sides of [the FCC’s] reclassification effort . . . . This unfolding spectacle is in itself a strong condemnation of the entire system of telecom regulation, which leaves too much space for destructive political manipulation.”) (emphasis added).

[107] Steimle, supra note 96.

[108] Epstein, supra note 8.

[109] Id.

[110] Id.

[111] Id.

[112] Id.

[113] Id. (“Under the banner of businesses ‘affected with the public interest,’ [the] venerable [common law] authorities held that a requirement that a party provide services, to use the modern phrase, on reasonable and nondiscriminatory terms, worked as an offset to monopoly power that arose for some ‘essential facility’ that has no close substitutes.”) (emphasis added) (citing Allnut v. Inglis, 104 E. R. 206, 209 (K.B. 1810) (relying on the earlier work of Sir Matthew Hale, De Portis Maribus, cited therein)).

[114] Epstein, supra note 8 (emphasis added).

[115] Id.

[116] Id.

[117] Id. (citing Fed. Power Comm’n v. Hope Nat. Gas Co., 320 U.S. 591 (1944)).

[118] Epstein, supra note 8.

[119] Id.

[120] Protecting and Promoting the Open Internet, GN Docket No. 14-28, FCC 15-24 (Feb. 26, 2015), available at

[121] Id. at 7 ¶ 14. See id. at ¶ 15 (listing the anti-blocking order as follows: “A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not block lawful content, applications, services, or nonharmful devices, subject to reasonable network management.”); id. at ¶ 16 (listing the anti-throttling order as follows: “A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not impair or degrade lawful Internet traffic on the basis of Internet content, application, or service, or use of a non-harmful device, subject to reasonable network management.”); id. at 7–8 ¶ 18 (listing the anti-paid prioritization order as follows: “A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not engage in paid prioritization. ‘Paid prioritization’ refers to the management of a broadband provider’s network to directly or indirectly favor some traffic over other traffic, including through use of techniques such as traffic shaping, prioritization, resource reservation, or other forms of preferential traffic management, either (a) in exchange for consideration (monetary or otherwise) from a third party, or (b) to benefit an affiliated entity.”). See also id. at 8 n.18 (“Unlike the no-blocking and no-throttling rules, there is no “reasonable network management” exception to the paid prioritization rule because paid prioritization is inherently a business practice rather than a network management practice.”).

[122] Id. at 9 ¶ 25 (“The open Internet rules described above apply to both fixed and mobile broadband Internet access service.”) (emphasis added).

[123] Rebecca R. Ruiz & Steve Lohr, F.C.C. Approves Net Neutrality Rules, Classifying Broadband Internet Service as a Utility, N.Y. Times (Feb. 26, 2015),

[124] Brian Fung, Here Are the First Lawsuits to Challenge the FCC’s Net Neutrality Rules, Wash. Post (Mar. 23, 2015),

[125] Id.