Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Revise an Optional Depth Data Enterprise License Fee for Broker-Dealer Distribution of Depth-of-Book Data, 9391-9395 [2011-3583]

Download as PDF Federal Register / Vol. 76, No. 33 / Thursday, February 17, 2011 / Notices available publicly. All submissions should refer to File Number SR–FINRA– 2009–090 and should be submitted on or before March 10, 2011. VI. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,56 that the proposed rule change (SR–FINRA– 2009–090), as modified by Amendment No. 1, be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.57 Elizabeth M. Murphy, Secretary. [FR Doc. 2011–3581 Filed 2–16–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–63892; File No. SR– NASDAQ–2011–021] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Revise an Optional Depth Data Enterprise License Fee for Broker-Dealer Distribution of Depth-of-Book Data February 11, 2011. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that, on February 1, 2011, The NASDAQ Stock Market LLC (‘‘NASDAQ’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by NASDAQ. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. jlentini on DSKJ8SOYB1PROD with NOTICES I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change NASDAQ proposes to revise an optional Depth Data Enterprise License Fee for broker-dealer distribution of depth-of-book data to non-professional users with which the firm has a brokerage relationship. The text of the proposed rule change is below. Proposed new language is U.S.C. 78s(b)(2). CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. italicized; proposed deletions are in [brackets].3 * * * * * 7023. NASDAQ TotalView (a) TotalView Entitlement. The TotalView entitlement allows a subscriber to see all individual NASDAQ Market Center participant orders and quotes displayed in the system as well as the aggregate size of such orders and quotes at each price level in the execution functionality of the NASDAQ Market Center, including the NQDS feed. (1) (A)–(D) No change. (E) For a pilot period ending April 30, 2011, as an alternative to (a)(1)(A), (B), and (C), a broker-dealer distributor may purchase an enterprise license at a rate of $325,000 for non-professional subscribers. The enterprise license entitles a distributor to provide NQDS (as set forth in Rule 7017), TotalView and OpenView to an unlimited number of nonprofessional subscribers with whom the firm has a brokerage relationship. The enterprise license shall not apply to relevant Level 1 fees. The enterprise license shall not apply to Depth Distributor Fees. (2) 30-Day Free-Trial Offer. NASDAQ shall offer all new individual subscribers and potential new individual subscribers a 30day waiver of the user fees for TotalView. This waiver shall not include the incremental fees assessed for the NQDS-only service, which are $30 for professional users and $9 for non-professional users per month. This fee waiver period shall be applied on a rolling basis, determined by the date on which a new individual subscriber or potential individual subscriber is first entitled by a distributor to receive access to TotalView. A distributor may only provide this waiver to a specific individual subscriber once. For the period of the offer, the TotalView fee of $40 per professional user and $5 per non-professional user per month shall be waived. (b) No change. (c) No change. (d) No change. * * * * * II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, NASDAQ included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. NASDAQ has prepared summaries, set forth in Sections A, B, and C below, of the most significant aspects of such statements. 56 15 57 17 VerDate Mar<15>2010 16:38 Feb 16, 2011 3 Changes are marked to the rules of The NASDAQ Stock Market LLC found at http:// nasdaq.cchwallstreet.com. Jkt 223001 PO 00000 Frm 00073 Fmt 4703 Sfmt 4703 9391 A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose Current Proposal. Effective February 1, 2011, NASDAQ will begin offering a voluntary Enterprise License for nonprofessional usage of the National Quotation Dissemination Service or NQDS (Rule 7017) and TotalView and OpenView (Rule 7023) (collectively, ‘‘NASDAQ Depth Data’’). The Depth Enterprise License will be identical to the program offered previously under SR–NASDAQ–2010–125 in that it will cost $325,000 per month and offer the same market data entitlement.4 The Depth Data Enterprise License is available only to broker-dealers registered under the Securities Exchange Act of 1934, and it covers all non professional usage fees to customers with whom the firm has a brokerage relationship with an allowance to distribute data to external professional subscribers with which the firm has a brokerage relationship. This Depth Data Enterprise License Fee includes nonprofessional usage fees, but does not include distributor fees. The Depth Enterprise License is a pilot program that will automatically sunset on April 30, 2011. Background. NASDAQ disseminates market data feeds in two capacities. First, NASDAQ disseminates consolidated or ‘‘core’’ data in its capacity as Securities Information Processor (‘‘SIP’’) for the national market system plan governing securities listed on NASDAQ as a national securities exchange (‘‘NASDAQ UTP Plan’’).5 Second, NASDAQ separately disseminates proprietary or ‘‘non-core’’ data in its capacity as a registered national securities exchange. Non-core data is any data generated by the NASDAQ Market Center Execution System that is voluntarily disseminated by NASDAQ separate and apart from the consolidated data.6 NASDAQ has numerous proprietary data products, such as NASDAQ TotalView, NASDAQ Last Sale, and NASDAQ Basic. NASDAQ continues to seek broader distribution of non-core data and to reduce the cost of providing non-core data to larger numbers of investors. In the past, NASDAQ has accomplished 4 See Securities Exchange Act Release No. 63084 (Oct. 13, 2010); 75 FR 64379 (Oct. 19, 20101) (SR– NASDAQ–2010–125). See also Securities Exchange Act Release No. 62908 (Sept. 14, 2010); 75 FR 57321 (Sept. 20, 20101) (SR–NASDAQ–2010–111). 5 See Securities Exchange Act Release No. 59039 (Dec. 2, 2008) at p. 41. 6 Id. E:\FR\FM\17FEN1.SGM 17FEN1 9392 Federal Register / Vol. 76, No. 33 / Thursday, February 17, 2011 / Notices jlentini on DSKJ8SOYB1PROD with NOTICES this goal in part by offering similar enterprise licenses for professional and non-professional usage of TotalView which contains the full depth of book data for the NASDAQ Market Center Execution System. NASDAQ believes that the adoption of enterprise licenses has led to greater distribution of market data, particularly among nonprofessional users. Based on input from market participants, NASDAQ believes that this increase in distribution is attributable in part to the relief it provides distributors from the NASDAQ requirement that distributors count and report each nonprofessional user of NASDAQ proprietary data. In addition to increased administrative flexibility, enterprise licenses also encourage broader distribution by firms that are currently over the fee cap as well as those that are approaching the cap and wish to take advantage of the benefits of the program. Further, NASDAQ believes that capping fees in this manner creates goodwill with broker-dealers and increases transparency for retail investors. Accordingly, effective February 1, 2011, NASDAQ is establishing the Depth Data Enterprise License Fee under NASDAQ Rule 7023(a)(1)(E), an optional non-professional enterprise license for distributors of any NASDQ depth-of-book data product including the National Quotation Dissemination Service or NQDS (Rule 7017) and TotalView and OpenView (Rule 7023) (collectively, ‘‘NASDAQ Depth Data’’). This Depth Data Enterprise License Fee includes non-professional usage fees, but does not include distributor fees.7 This program is available only to brokerdealers registered under the Securities Exchange Act of 1934, and would cover all non professional usage fees to customers with whom the firm has a brokerage relationship with an allowance to distribute data to external professional subscribers with which the firm has a brokerage relationship. Nonbroker-dealer vendors and application service providers would not be eligible for the enterprise license; such firms typically pass through the cost of market data user fees to their customers.8 The Depth Data Enterprise License Fee covers usage fees for NASDAQ 7 Distributors who utilize the enterprise license would still be liable for the applicable distributor fees. 8 NASDAQ relies on distributor self-reporting of usage rather than on individual contact with each end-user customer. NASDAQ permits distributors to designate an entire user population as ‘‘nonprofessional’’ provided that the number of professional subscribers within that user population does not exceed ten percent (10%) of the total population. VerDate Mar<15>2010 16:38 Feb 16, 2011 Jkt 223001 Depth Data received directly from NASDAQ as well as data received from third-party vendors (e.g., Bloomberg, Thomson-Reuters, etc.). Upon joining the program, firms may inform thirdparty market data vendors they utilize (through a NASDAQ-provided form) that, going forward, depth data usage by the broker-dealer may be reported to NASDAQ on a non-billable basis. Such a structure attempts to address a longstanding concern that broker-dealers are over-billed for market data consumed by one person through multiple marketdata display devices. At the same time, the proposed billing structure will continue to provide NASDAQ with accurate reporting information for purposes of usage monitoring and auditing. The proposed Depth Data Enterprise License Fee is completely optional and does not replace existing enterprise license fee alternatives set forth in Rule 7023. Additionally, the proposal does not impact individual usage fees for any product or in any way raise the costs of any user of any NASDAQ data product. To the contrary, it provides brokerdealers with an additional approach to providing more NASDAQ data at a lower cost. 2. Statutory Basis NASDAQ believes that the proposed rule change is consistent with the provisions of Section 6 of the Act,9 in general, and with Section 6(b)(4) of the Act,10 in particular, in that it provides an equitable allocation of reasonable fees among users and recipients of NASDAQ data. In adopting Regulation NMS, the Commission granted selfregulatory organizations and brokerdealers increased authority and flexibility to offer new and unique market data to the public. It was believed that this authority would expand the amount of data available to consumers, and also spur innovation and competition for the provision of market data. The Commission concluded that Regulation NMS—by deregulating the market in proprietary data—would itself further the Act’s goals of facilitating efficiency and competition: [E]fficiency is promoted when brokerdealers who do not need the data beyond the prices, sizes, market center identifications of the NBBO and consolidated last sale information are not required to receive (and pay for) such data. The Commission also believes that efficiency is promoted when broker-dealers may choose to receive (and pay for) additional market data based on their U.S.C. 78f. 10 15 U.S.C. 78f(b)(4). Frm 00074 Fmt 4703 By removing ‘‘unnecessary regulatory restrictions’’ on the ability of exchanges to sell their own data, Regulation NMS advanced the goals of the Act and the principles reflected in its legislative history. If the free market should determine whether proprietary data is sold to broker-dealers at all, it follows that the price at which such data is sold should be set by the market as well. NQDS, TotalView and OpenView are precisely the sort of market data product that the Commission envisioned when it adopted Regulation NMS. On July 21, 2010, President Barack [sic] Obama signed into law H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (‘‘Dodd-Frank Act’’), which amended Section 19 of the Act. Among other things, Section 916 of the Dodd-Frank Act amended paragraph (A) of Section 19(b)(3) of the Act by inserting the phrase ‘‘on any person, whether or not the person is a member of the selfregulatory organization’’ after ‘‘due, fee or other charge imposed by the selfregulatory organization.’’ As a result, all SRO rule proposals establishing or changing dues, fees, or other charges are immediately effective upon filing regardless of whether such dues, fees, or other charges are imposed on members of the SRO, non-members, or both. Section 916 further amended paragraph (C) of Section 19(b)(3) of the Exchange Act to read, in pertinent part, ‘‘At any time within the 60-day period beginning on the date of filing of such a proposed rule change in accordance with the provisions of paragraph (1) [of Section 19(b)], the Commission summarily may temporarily suspend the change in the rules of the self-regulatory organization made thereby, if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title. If the Commission takes such action, the Commission shall institute proceedings under paragraph (2)(B) [of Section 19(b)] to determine whether the proposed rule should be approved or disapproved.’’ The recent decision of the United States Court of Appeals for the District of Columbia Circuit in NetCoaliton [sic] v. SEC, No. 09–1042 (DC Cir. 2010), although reviewing a Commission decision made prior to the effective date of the Dodd-Frank Act, upheld the Commission’s reliance upon 11 Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005). 9 15 PO 00000 own internal analysis of the need for such data.11 Sfmt 4703 E:\FR\FM\17FEN1.SGM 17FEN1 Federal Register / Vol. 76, No. 33 / Thursday, February 17, 2011 / Notices jlentini on DSKJ8SOYB1PROD with NOTICES competitive markets to set reasonable and equitably allocated fees for market data. ‘‘In fact, the legislative history indicates that the Congress intended that the market system ‘evolve through the interplay of competitive forces as unnecessary regulatory restrictions are removed’ and that the SEC wield its regulatory power ‘in those situations where competition may not be sufficient,’ such as in the creation of a ‘consolidated transactional reporting system.’ ’’ NetCoaltion [sic], at 15 (quoting H.R. Rep. No. 94–229, at 92 (1975), as reprinted in 1975 U.S.C.C.A.N. 321, 323). The court’s conclusions about Congressional intent are therefore reinforced by the DoddFrank Act amendments, which create a presumption that exchange fees, including market data fees, may take effect immediately, without prior Commission approval, and that the Commission should take action to suspend a fee change and institute a proceeding to determine whether the fee change should be approved or disapproved only where the Commission has concerns that the change may not be consistent with the Act. B. Self-Regulatory Organization’s Statement on Burden on Competition NASDAQ does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act, as amended. Notwithstanding its determination that the Commission may rely upon competition to establish fair and equitably allocated fees for market data, the NetCoaltion [sic] court found that the Commission had not, in that case, compiled a record that adequately supported its conclusion that the market for the data at issue in the case was competitive. NASDAQ believes that a record may readily be established to demonstrate the competitive nature of the market in question. There is intense competition between trading platforms that provide transaction execution and routing services and proprietary data products. Transaction execution and proprietary data products are complementary in that market data is both an input and a byproduct of the execution service. In fact, market data and trade execution are a paradigmatic example of joint products with joint costs. The decision whether and on which platform to post an order will depend on the attributes of the platform where the order can be posted, including the execution fees, data quality and price and distribution of its data products. Without the VerDate Mar<15>2010 16:38 Feb 16, 2011 Jkt 223001 prospect of a taking order seeing and reacting to a posted order on a particular platform, the posting of the order would accomplish little. Without trade executions, exchange data products cannot exist. Data products are valuable to many end users only insofar as they provide information that end users expect will assist them or their customers in making trading decisions. The costs of producing market data include not only the costs of the data distribution infrastructure, but also the costs of designing, maintaining, and operating the exchange’s transaction execution platform and the cost of regulating the exchange to ensure its fair operation and maintain investor confidence. The total return that a trading platform earns reflects the revenues it receives from both products and the joint costs it incurs. Moreover, an exchange’s customers view the costs of transaction executions and of data as a unified cost of doing business with the exchange. A broker-dealer will direct orders to a particular exchange only if the expected revenues from executing trades on the exchange exceed net transaction execution costs and the cost of data that the broker-dealer chooses to buy to support its trading decisions (or those of its customers). The choice of data products is, in turn, a product of the value of the products in making profitable trading decisions. If the cost of the product exceeds its expected value, the broker-dealer will choose not to buy it. Moreover, as a broker-dealer chooses to direct fewer orders to a particular exchange, the value of the product to that broker-dealer decreases, for two reasons. First, the product will contain less information, because executions of the broker-dealer’s orders will not be reflected in it. Second, and perhaps more important, the product will be less valuable to that brokerdealer because it does not provide information about the venue to which it is directing its orders. Data from the competing venue to which the brokerdealer is directing orders will become correspondingly more valuable. Thus, a super-competitive increase in the fees charged for either transactions or data has the potential to impair revenues from both products. ‘‘No one disputes that competition for order flow is ‘fierce’.’’ NetCoalition at 24. However, the existence of fierce competition for order flow implies a high degree of price sensitivity on the part of broker-dealers with order flow, since they may readily reduce costs by directing orders toward the lowest-cost trading venues. A broker-dealer that shifted its order flow from one platform to another in response to order execution price PO 00000 Frm 00075 Fmt 4703 Sfmt 4703 9393 differentials would both reduce the value of that platform’s market data and reduce its own need to consume data from the disfavored platform. Similarly, if a platform increases its market data fees, the change will affect the overall cost of doing business with the platform, and affected broker-dealers will assess whether they can lower their trading costs by directing orders elsewhere and thereby lessening the need for the more expensive data. Analyzing the cost of market data distribution in isolation from the cost of all of the inputs supporting the creation of market data will inevitably underestimate the cost of the data. Thus, because it is impossible to create data without a fast, technologically robust, and well-regulated execution system, system costs and regulatory costs affect the price of market data. It would be equally misleading, however, to attribute all of the exchange’s costs to the market data portion of an exchange’s joint product. Rather, all of the exchange’s costs are incurred for the unified purposes of attracting order flow, executing and/or routing orders, and generating and selling data about market activity. The total return that an exchange earns reflects the revenues it receives from the joint products and the total costs of the joint products. Competition among trading platforms can be expected to constrain the aggregate return each platform earns from the sale of its joint products, but different platforms may choose from a range of possible, and equally reasonable, pricing strategies as the means of recovering total costs. For example, some platforms may choose to pay rebates to attract orders, charge relatively low prices for market information (or provide information free of charge) and charge relatively high prices for accessing posted liquidity. Other platforms may choose a strategy of paying lower rebates (or no rebates) to attract orders, setting relatively high prices for market information, and setting relatively low prices for accessing posted liquidity. In this environment, there is no economic basis for regulating maximum prices for one of the joint products in an industry in which suppliers face competitive constraints with regard to the joint offering. This would be akin to strictly regulating the price that an automobile manufacturer can charge for car sound systems despite the existence of a highly competitive market for cars and the availability of after-market alternatives to the manufacturer-supplied system. The market for market data products is competitive and inherently contestable because there is fierce E:\FR\FM\17FEN1.SGM 17FEN1 jlentini on DSKJ8SOYB1PROD with NOTICES 9394 Federal Register / Vol. 76, No. 33 / Thursday, February 17, 2011 / Notices competition for the inputs necessary to the creation of proprietary data and strict pricing discipline for the proprietary products themselves. Numerous exchanges compete with each other for listings, trades, and market data itself, providing virtually limitless opportunities for entrepreneurs who wish to produce and distribute their own market data. This proprietary data is produced by each individual exchange, as well as other entities, in a vigorously competitive market. Broker-dealers currently have numerous alternative venues for their order flow, including ten self-regulatory organization (‘‘SRO’’) markets, as well as internalizing broker-dealers (‘‘BDs’’) and various forms of alternative trading systems (‘‘ATSs’’), including dark pools and electronic communication networks (‘‘ECNs’’). Each SRO market competes to produce transaction reports via trade executions, and two FINRA-regulated Trade Reporting Facilities (‘‘TRFs’’) compete to attract internalized transaction reports. Competitive markets for order flow, executions, and transaction reports provide pricing discipline for the inputs of proprietary data products. The large number of SROs, TRFs, BDs, and ATSs that currently produce proprietary data or are currently capable of producing it provides further pricing discipline for proprietary data products. Each SRO, TRF, ATS, and BD is currently permitted to produce proprietary data products, and many currently do or have announced plans to do so, including NASDAQ, NYSE, NYSE Amex, NYSEArca, and BATS. Any ATS or BD can combine with any other ATS, BD, or multiple ATSs or BDs to produce joint proprietary data products. Additionally, order routers and market data vendors can facilitate single or multiple broker-dealers’ production of proprietary data products. The potential sources of proprietary products are virtually limitless. The fact that proprietary data from ATSs, BDs, and vendors can by-pass SROs is significant in two respects. First, non-SROs can compete directly with SROs for the production and sale of proprietary data products, as BATS and Arca did before registering as exchanges by publishing proprietary book data on the Internet. Second, because a single order or transaction report can appear in an SRO proprietary product, a non-SRO proprietary product, or both, the data available in proprietary products is exponentially greater than the actual number of orders and transaction reports that exist in the marketplace. VerDate Mar<15>2010 16:38 Feb 16, 2011 Jkt 223001 Market data vendors provide another form of price discipline for proprietary data products because they control the primary means of access to end users. Vendors impose price restraints based upon their business models. For example, vendors such as Bloomberg and Reuters that assess a surcharge on data they sell may refuse to offer proprietary products that end users will not purchase in sufficient numbers. Internet portals, such as Yahoo, impose a discipline by providing only data that will enable them to attract ‘‘eyeballs’’ that contribute to their advertising revenue. Retail broker-dealers, such as Schwab and Fidelity, offer their customers proprietary data only if it promotes trading and generates sufficient commission revenue. Although the business models may differ, these vendors’ pricing discipline is the same: they can simply refuse to purchase any proprietary data product that fails to provide sufficient value. NASDAQ and other producers of proprietary data products must understand and respond to these varying business models and pricing disciplines in order to market proprietary data products successfully. In addition to the competition and price discipline described above, the market for proprietary data products is also highly contestable because market entry is rapid, inexpensive, and profitable. The history of electronic trading is replete with examples of entrants that swiftly grew into some of the largest electronic trading platforms and proprietary data producers: Archipelago, Bloomberg Tradebook, Island, RediBook, Attain, TracECN, BATS Trading and Direct Edge. A proliferation of dark pools and other ATSs operate profitably with fragmentary shares of consolidated market volume. Regulation NMS, by deregulating the market for proprietary data, has increased the contestability of that market. While broker-dealers have previously published their proprietary data individually, Regulation NMS encourages market data vendors and broker-dealers to produce proprietary products cooperatively in a manner never before possible. Multiple market data vendors already have the capability to aggregate data and disseminate it on a profitable scale, including Bloomberg, and Thomson-Reuters. The court in NetCoalition concluded that the Commission had failed to demonstrate that the market for market data was competitive based on the reasoning of the Commission’s NetCoalition order because, in the court’s view, the Commission had not PO 00000 Frm 00076 Fmt 4703 Sfmt 4703 adequately demonstrated that the depthof-book data at issue in the case is used to attract order flow. NASDAQ believes, however, that evidence not before the court clearly demonstrates that availability of depth data attracts order flow. For example, NASDAQ submits that in and of itself, NASDAQ’s decision voluntarily to cap fees on existing products, as is the effect of an enterprise license, is evidence of market forces at work. In fact, the instant proposal creates a second enterprise license for non-professional usage of depth data to complement the existing enterprise license set forth at NASDAQ Rule 7023(a)(1)(C). The court in NetCoalition did cite favorably an economic study by Ordover and Bamberger which concluded that ‘‘[a]lthough an exchange may price its trade execution fees higher and its market data fees lower (or vice versa), because of ‘‘platform’’ competition the exchange nonetheless receives the same return from the two ‘‘joint products’’ in the aggregate.’’ 12 Accordingly, NASDAQ hereby incorporates in this filing as Exhibit 3, additional comments from Ordover and Bamberger expanding upon the impact of platform competition.13 Among the conclusions that Ordover and Bamberger reach are: NASDAQ is subject to significant competitive forces in setting the prices and other terms of execution services and proprietary data products. Competition among trading platforms can be expected to constrain the aggregate return each platform earns from the sale of the array of its products, including the joint products at issue here. In particular, cross-platform competition, and the adverse effects from overpricing proprietary information on the volume of trading on the platform, constrain the pricing of proprietary information. Competitive forces constrain the prices that platforms can charge for noncore market information. A trading platform cannot generate market information unless it receives trade orders. For this reason, a platform can be expected to use its market data product as a tool for attracting liquidity and trading to its exchange. While, by definition, information that is proprietary to an exchange cannot be obtained elsewhere, this does not enable the owner of such information to exercise monopoly power over that ` information vis-a-vis firms with the need for such information. Even though 12 See NetCoalition at fn. 16. Exchange Act Release No. 63745 (Jan. 20, 2011); 76 FR 4970 (Jan. 27, 2011) (attached to original filing as Exhibit 3). 13 Securities E:\FR\FM\17FEN1.SGM 17FEN1 jlentini on DSKJ8SOYB1PROD with NOTICES Federal Register / Vol. 76, No. 33 / Thursday, February 17, 2011 / Notices market information from one platform may not be a perfect substitute for market information from one or more other platforms, the existence of alternative sources of information can be expected to constrain the prices platforms charge for market data. Besides the fact that similar information can be obtained elsewhere, the feasibility of supra-competitive pricing is constrained by the traders’ ability to shift their trades elsewhere, which lowers the activity on the exchange and so in the long run reduces the quality of the information generated by the exchange. Competition among platforms has driven NASDAQ continually to improve its platform data offerings and to cater to customers’ data needs. For example, NASDAQ has developed and maintained multiple delivery mechanisms (IP, multi-cast, and compression) that enable customers to receive data in the form and manner they prefer and at the lowest cost to them. NASDAQ offers front end applications such as its ‘‘Bookviewer’’ to help customers utilize data. NASDAQ has created new products like TotalView Aggregate to complement TotalView ITCH and Level 2, because offering data in multiple formatting allows NASDAQ to better fit customer needs. NASDAQ offers data via multiple extranet providers, thereby helping to reduce network and total cost for its data products. NASDAQ has developed an online administrative system to provide customers transparency into their data feed requests and streamline data usage reporting. NASDAQ has also expanded its Enterprise License options that reduce the administrative burden and costs to firms that purchase market data. Despite these enhancements and a dramatic increase in message traffic, NASDAQ’s fees for depth-of-book data have remained flat. In fact, as a percent of total customer costs, NASDAQ data fees have fallen relative to other data usage costs—including bandwidth, programming, and infrastructure—that have risen. The same holds true for execution services; despite numerous enhancements to NASDAQ’s trading platform, absolute and relative trading costs have declined. Platform competition has intensified as new entrants have emerged, constraining prices for both executions and for data. Additional evidence cited by NYSE Arca in SR–NYSE Arca–2010–097 14 which was not before the NetCoalition court also demonstrates that availability Securities Exchange Act Release No. 63291 (Nov. 9, 2010). of depth data attracts order flow and that competition for order flow can constrain the price of market data: 1. Terrence Hendershott & Charles M. Jones, Island Goes Dark: Transparence, Fragmentation, and Regulation, 18 Review of Financial Studies 743 (2005); 2. Charts and Tables referenced in Exhibit 3B to that filing; 3. PHB Hagler Bailly, Inc., ‘‘Issues Surrounding Cost-Based Regulation of Market Data Prices;’’ and 4. PHB Hagler Bailly, Inc., ‘‘The Economic Perspective on Regulation of Market Data.’’ C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Written comments were neither solicited nor received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act.15 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NASDAQ–2011–021 on the subject line. 16:38 Feb 16, 2011 Jkt 223001 All submissions should refer to File Number SR–NASDAQ–2011–021. This file number should be included on the subject line if e-mail is used. To help the Commission process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s Internet Web site (http://www.sec.gov/ rules/sro.shtml). Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filed with the Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street, NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR– NASDAQ–2011–021 and should be submitted on or before March 10, 2011. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.16 Cathy H. Ahn, Deputy Secretary. [FR Doc. 2011–3583 Filed 2–16–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–63893; File No. SR– NASDAQ–2011–023] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Add Routing Option SOLV and Corresponding Fees Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. February 11, 2011. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 16 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 14 See VerDate Mar<15>2010 9395 15 15 PO 00000 U.S.C. 78s(b)(3)(a)(ii). Frm 00077 Fmt 4703 Sfmt 4703 E:\FR\FM\17FEN1.SGM 17FEN1

Agencies

[Federal Register Volume 76, Number 33 (Thursday, February 17, 2011)]
[Notices]
[Pages 9391-9395]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-3583]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63892; File No. SR-NASDAQ-2011-021]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Revise an Optional Depth Data Enterprise License Fee for Broker-Dealer 
Distribution of Depth-of-Book Data

February 11, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on February 1, 2011, The NASDAQ Stock Market LLC (``NASDAQ'') 
filed with the Securities and Exchange Commission (the ``Commission'') 
the proposed rule change as described in Items I, II, and III below, 
which Items have been prepared by NASDAQ. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ proposes to revise an optional Depth Data Enterprise License 
Fee for broker-dealer distribution of depth-of-book data to non-
professional users with which the firm has a brokerage relationship.
    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in [brackets].\3\
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    \3\ Changes are marked to the rules of The NASDAQ Stock Market 
LLC found at http://nasdaq.cchwallstreet.com.
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* * * * *

7023. NASDAQ TotalView

    (a) TotalView Entitlement.
    The TotalView entitlement allows a subscriber to see all 
individual NASDAQ Market Center participant orders and quotes 
displayed in the system as well as the aggregate size of such orders 
and quotes at each price level in the execution functionality of the 
NASDAQ Market Center, including the NQDS feed.
    (1)
    (A)-(D) No change.
    (E) For a pilot period ending April 30, 2011, as an alternative 
to (a)(1)(A), (B), and (C), a broker-dealer distributor may purchase 
an enterprise license at a rate of $325,000 for non-professional 
subscribers. The enterprise license entitles a distributor to 
provide NQDS (as set forth in Rule 7017), TotalView and OpenView to 
an unlimited number of non-professional subscribers with whom the 
firm has a brokerage relationship. The enterprise license shall not 
apply to relevant Level 1 fees. The enterprise license shall not 
apply to Depth Distributor Fees.
    (2) 30-Day Free-Trial Offer. NASDAQ shall offer all new 
individual subscribers and potential new individual subscribers a 
30-day waiver of the user fees for TotalView. This waiver shall not 
include the incremental fees assessed for the NQDS-only service, 
which are $30 for professional users and $9 for non-professional 
users per month. This fee waiver period shall be applied on a 
rolling basis, determined by the date on which a new individual 
subscriber or potential individual subscriber is first entitled by a 
distributor to receive access to TotalView. A distributor may only 
provide this waiver to a specific individual subscriber once.
    For the period of the offer, the TotalView fee of $40 per 
professional user and $5 per non-professional user per month shall 
be waived.
    (b) No change.
    (c) No change.
    (d) No change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, NASDAQ included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NASDAQ has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Current Proposal. Effective February 1, 2011, NASDAQ will begin 
offering a voluntary Enterprise License for non-professional usage of 
the National Quotation Dissemination Service or NQDS (Rule 7017) and 
TotalView and OpenView (Rule 7023) (collectively, ``NASDAQ Depth 
Data''). The Depth Enterprise License will be identical to the program 
offered previously under SR-NASDAQ-2010-125 in that it will cost 
$325,000 per month and offer the same market data entitlement.\4\ The 
Depth Data Enterprise License is available only to broker-dealers 
registered under the Securities Exchange Act of 1934, and it covers all 
non professional usage fees to customers with whom the firm has a 
brokerage relationship with an allowance to distribute data to external 
professional subscribers with which the firm has a brokerage 
relationship. This Depth Data Enterprise License Fee includes non-
professional usage fees, but does not include distributor fees. The 
Depth Enterprise License is a pilot program that will automatically 
sunset on April 30, 2011.
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    \4\ See Securities Exchange Act Release No. 63084 (Oct. 13, 
2010); 75 FR 64379 (Oct. 19, 20101) (SR-NASDAQ-2010-125). See also 
Securities Exchange Act Release No. 62908 (Sept. 14, 2010); 75 FR 
57321 (Sept. 20, 20101) (SR-NASDAQ-2010-111).
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    Background. NASDAQ disseminates market data feeds in two 
capacities. First, NASDAQ disseminates consolidated or ``core'' data in 
its capacity as Securities Information Processor (``SIP'') for the 
national market system plan governing securities listed on NASDAQ as a 
national securities exchange (``NASDAQ UTP Plan'').\5\ Second, NASDAQ 
separately disseminates proprietary or ``non-core'' data in its 
capacity as a registered national securities exchange. Non-core data is 
any data generated by the NASDAQ Market Center Execution System that is 
voluntarily disseminated by NASDAQ separate and apart from the 
consolidated data.\6\ NASDAQ has numerous proprietary data products, 
such as NASDAQ TotalView, NASDAQ Last Sale, and NASDAQ Basic.
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    \5\ See Securities Exchange Act Release No. 59039 (Dec. 2, 2008) 
at p. 41.
    \6\ Id.
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    NASDAQ continues to seek broader distribution of non-core data and 
to reduce the cost of providing non-core data to larger numbers of 
investors. In the past, NASDAQ has accomplished

[[Page 9392]]

this goal in part by offering similar enterprise licenses for 
professional and non-professional usage of TotalView which contains the 
full depth of book data for the NASDAQ Market Center Execution System. 
NASDAQ believes that the adoption of enterprise licenses has led to 
greater distribution of market data, particularly among non-
professional users.
    Based on input from market participants, NASDAQ believes that this 
increase in distribution is attributable in part to the relief it 
provides distributors from the NASDAQ requirement that distributors 
count and report each non-professional user of NASDAQ proprietary data. 
In addition to increased administrative flexibility, enterprise 
licenses also encourage broader distribution by firms that are 
currently over the fee cap as well as those that are approaching the 
cap and wish to take advantage of the benefits of the program. Further, 
NASDAQ believes that capping fees in this manner creates goodwill with 
broker-dealers and increases transparency for retail investors.
    Accordingly, effective February 1, 2011, NASDAQ is establishing the 
Depth Data Enterprise License Fee under NASDAQ Rule 7023(a)(1)(E), an 
optional non-professional enterprise license for distributors of any 
NASDQ depth-of-book data product including the National Quotation 
Dissemination Service or NQDS (Rule 7017) and TotalView and OpenView 
(Rule 7023) (collectively, ``NASDAQ Depth Data''). This Depth Data 
Enterprise License Fee includes non-professional usage fees, but does 
not include distributor fees.\7\ This program is available only to 
broker-dealers registered under the Securities Exchange Act of 1934, 
and would cover all non professional usage fees to customers with whom 
the firm has a brokerage relationship with an allowance to distribute 
data to external professional subscribers with which the firm has a 
brokerage relationship. Non-broker-dealer vendors and application 
service providers would not be eligible for the enterprise license; 
such firms typically pass through the cost of market data user fees to 
their customers.\8\
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    \7\ Distributors who utilize the enterprise license would still 
be liable for the applicable distributor fees.
    \8\ NASDAQ relies on distributor self-reporting of usage rather 
than on individual contact with each end-user customer. NASDAQ 
permits distributors to designate an entire user population as 
``non-professional'' provided that the number of professional 
subscribers within that user population does not exceed ten percent 
(10%) of the total population.
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    The Depth Data Enterprise License Fee covers usage fees for NASDAQ 
Depth Data received directly from NASDAQ as well as data received from 
third-party vendors (e.g., Bloomberg, Thomson-Reuters, etc.). Upon 
joining the program, firms may inform third-party market data vendors 
they utilize (through a NASDAQ-provided form) that, going forward, 
depth data usage by the broker-dealer may be reported to NASDAQ on a 
non-billable basis. Such a structure attempts to address a long-
standing concern that broker-dealers are over-billed for market data 
consumed by one person through multiple market-data display devices. At 
the same time, the proposed billing structure will continue to provide 
NASDAQ with accurate reporting information for purposes of usage 
monitoring and auditing.
    The proposed Depth Data Enterprise License Fee is completely 
optional and does not replace existing enterprise license fee 
alternatives set forth in Rule 7023. Additionally, the proposal does 
not impact individual usage fees for any product or in any way raise 
the costs of any user of any NASDAQ data product. To the contrary, it 
provides broker-dealers with an additional approach to providing more 
NASDAQ data at a lower cost.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\9\ in general, and with Section 
6(b)(4) of the Act,\10\ in particular, in that it provides an equitable 
allocation of reasonable fees among users and recipients of NASDAQ 
data. In adopting Regulation NMS, the Commission granted self-
regulatory organizations and broker-dealers increased authority and 
flexibility to offer new and unique market data to the public. It was 
believed that this authority would expand the amount of data available 
to consumers, and also spur innovation and competition for the 
provision of market data.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(4).
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    The Commission concluded that Regulation NMS--by deregulating the 
market in proprietary data--would itself further the Act's goals of 
facilitating efficiency and competition:

    [E]fficiency is promoted when broker-dealers who do not need the 
data beyond the prices, sizes, market center identifications of the 
NBBO and consolidated last sale information are not required to 
receive (and pay for) such data. The Commission also believes that 
efficiency is promoted when broker-dealers may choose to receive 
(and pay for) additional market data based on their own internal 
analysis of the need for such data.\11\
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    \11\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496 (June 29,
    2005).

    By removing ``unnecessary regulatory restrictions'' on the ability 
of exchanges to sell their own data, Regulation NMS advanced the goals 
of the Act and the principles reflected in its legislative history. If 
the free market should determine whether proprietary data is sold to 
broker-dealers at all, it follows that the price at which such data is 
sold should be set by the market as well. NQDS, TotalView and OpenView 
are precisely the sort of market data product that the Commission 
envisioned when it adopted Regulation NMS.
    On July 21, 2010, President Barack [sic] Obama signed into law H.R. 
4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 
2010 (``Dodd-Frank Act''), which amended Section 19 of the Act. Among 
other things, Section 916 of the Dodd-Frank Act amended paragraph (A) 
of Section 19(b)(3) of the Act by inserting the phrase ``on any person, 
whether or not the person is a member of the self-regulatory 
organization'' after ``due, fee or other charge imposed by the self-
regulatory organization.'' As a result, all SRO rule proposals 
establishing or changing dues, fees, or other charges are immediately 
effective upon filing regardless of whether such dues, fees, or other 
charges are imposed on members of the SRO, non-members, or both. 
Section 916 further amended paragraph (C) of Section 19(b)(3) of the 
Exchange Act to read, in pertinent part, ``At any time within the 60-
day period beginning on the date of filing of such a proposed rule 
change in accordance with the provisions of paragraph (1) [of Section 
19(b)], the Commission summarily may temporarily suspend the change in 
the rules of the self-regulatory organization made thereby, if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of this title. If the Commission takes 
such action, the Commission shall institute proceedings under paragraph 
(2)(B) [of Section 19(b)] to determine whether the proposed rule should 
be approved or disapproved.''
    The recent decision of the United States Court of Appeals for the 
District of Columbia Circuit in NetCoaliton [sic] v. SEC, No. 09-1042 
(DC Cir. 2010), although reviewing a Commission decision made prior to 
the effective date of the Dodd-Frank Act, upheld the Commission's 
reliance upon

[[Page 9393]]

competitive markets to set reasonable and equitably allocated fees for 
market data. ``In fact, the legislative history indicates that the 
Congress intended that the market system `evolve through the interplay 
of competitive forces as unnecessary regulatory restrictions are 
removed' and that the SEC wield its regulatory power `in those 
situations where competition may not be sufficient,' such as in the 
creation of a `consolidated transactional reporting system.' '' 
NetCoaltion [sic], at 15 (quoting H.R. Rep. No. 94-229, at 92 (1975), 
as reprinted in 1975 U.S.C.C.A.N. 321, 323). The court's conclusions 
about Congressional intent are therefore reinforced by the Dodd-Frank 
Act amendments, which create a presumption that exchange fees, 
including market data fees, may take effect immediately, without prior 
Commission approval, and that the Commission should take action to 
suspend a fee change and institute a proceeding to determine whether 
the fee change should be approved or disapproved only where the 
Commission has concerns that the change may not be consistent with the 
Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    NASDAQ does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. Notwithstanding its 
determination that the Commission may rely upon competition to 
establish fair and equitably allocated fees for market data, the 
NetCoaltion [sic] court found that the Commission had not, in that 
case, compiled a record that adequately supported its conclusion that 
the market for the data at issue in the case was competitive. NASDAQ 
believes that a record may readily be established to demonstrate the 
competitive nature of the market in question.
    There is intense competition between trading platforms that provide 
transaction execution and routing services and proprietary data 
products. Transaction execution and proprietary data products are 
complementary in that market data is both an input and a byproduct of 
the execution service. In fact, market data and trade execution are a 
paradigmatic example of joint products with joint costs. The decision 
whether and on which platform to post an order will depend on the 
attributes of the platform where the order can be posted, including the 
execution fees, data quality and price and distribution of its data 
products. Without the prospect of a taking order seeing and reacting to 
a posted order on a particular platform, the posting of the order would 
accomplish little. Without trade executions, exchange data products 
cannot exist. Data products are valuable to many end users only insofar 
as they provide information that end users expect will assist them or 
their customers in making trading decisions.
    The costs of producing market data include not only the costs of 
the data distribution infrastructure, but also the costs of designing, 
maintaining, and operating the exchange's transaction execution 
platform and the cost of regulating the exchange to ensure its fair 
operation and maintain investor confidence. The total return that a 
trading platform earns reflects the revenues it receives from both 
products and the joint costs it incurs. Moreover, an exchange's 
customers view the costs of transaction executions and of data as a 
unified cost of doing business with the exchange. A broker-dealer will 
direct orders to a particular exchange only if the expected revenues 
from executing trades on the exchange exceed net transaction execution 
costs and the cost of data that the broker-dealer chooses to buy to 
support its trading decisions (or those of its customers). The choice 
of data products is, in turn, a product of the value of the products in 
making profitable trading decisions. If the cost of the product exceeds 
its expected value, the broker-dealer will choose not to buy it. 
Moreover, as a broker-dealer chooses to direct fewer orders to a 
particular exchange, the value of the product to that broker-dealer 
decreases, for two reasons. First, the product will contain less 
information, because executions of the broker-dealer's orders will not 
be reflected in it. Second, and perhaps more important, the product 
will be less valuable to that broker-dealer because it does not provide 
information about the venue to which it is directing its orders. Data 
from the competing venue to which the broker-dealer is directing orders 
will become correspondingly more valuable.
    Thus, a super-competitive increase in the fees charged for either 
transactions or data has the potential to impair revenues from both 
products. ``No one disputes that competition for order flow is 
`fierce'.'' NetCoalition at 24. However, the existence of fierce 
competition for order flow implies a high degree of price sensitivity 
on the part of broker-dealers with order flow, since they may readily 
reduce costs by directing orders toward the lowest-cost trading venues. 
A broker-dealer that shifted its order flow from one platform to 
another in response to order execution price differentials would both 
reduce the value of that platform's market data and reduce its own need 
to consume data from the disfavored platform. Similarly, if a platform 
increases its market data fees, the change will affect the overall cost 
of doing business with the platform, and affected broker-dealers will 
assess whether they can lower their trading costs by directing orders 
elsewhere and thereby lessening the need for the more expensive data.
    Analyzing the cost of market data distribution in isolation from 
the cost of all of the inputs supporting the creation of market data 
will inevitably underestimate the cost of the data. Thus, because it is 
impossible to create data without a fast, technologically robust, and 
well-regulated execution system, system costs and regulatory costs 
affect the price of market data. It would be equally misleading, 
however, to attribute all of the exchange's costs to the market data 
portion of an exchange's joint product. Rather, all of the exchange's 
costs are incurred for the unified purposes of attracting order flow, 
executing and/or routing orders, and generating and selling data about 
market activity. The total return that an exchange earns reflects the 
revenues it receives from the joint products and the total costs of the 
joint products.
    Competition among trading platforms can be expected to constrain 
the aggregate return each platform earns from the sale of its joint 
products, but different platforms may choose from a range of possible, 
and equally reasonable, pricing strategies as the means of recovering 
total costs. For example, some platforms may choose to pay rebates to 
attract orders, charge relatively low prices for market information (or 
provide information free of charge) and charge relatively high prices 
for accessing posted liquidity. Other platforms may choose a strategy 
of paying lower rebates (or no rebates) to attract orders, setting 
relatively high prices for market information, and setting relatively 
low prices for accessing posted liquidity. In this environment, there 
is no economic basis for regulating maximum prices for one of the joint 
products in an industry in which suppliers face competitive constraints 
with regard to the joint offering. This would be akin to strictly 
regulating the price that an automobile manufacturer can charge for car 
sound systems despite the existence of a highly competitive market for 
cars and the availability of after-market alternatives to the 
manufacturer-supplied system.
    The market for market data products is competitive and inherently 
contestable because there is fierce

[[Page 9394]]

competition for the inputs necessary to the creation of proprietary 
data and strict pricing discipline for the proprietary products 
themselves. Numerous exchanges compete with each other for listings, 
trades, and market data itself, providing virtually limitless 
opportunities for entrepreneurs who wish to produce and distribute 
their own market data. This proprietary data is produced by each 
individual exchange, as well as other entities, in a vigorously 
competitive market.
    Broker-dealers currently have numerous alternative venues for their 
order flow, including ten self-regulatory organization (``SRO'') 
markets, as well as internalizing broker-dealers (``BDs'') and various 
forms of alternative trading systems (``ATSs''), including dark pools 
and electronic communication networks (``ECNs''). Each SRO market 
competes to produce transaction reports via trade executions, and two 
FINRA-regulated Trade Reporting Facilities (``TRFs'') compete to 
attract internalized transaction reports. Competitive markets for order 
flow, executions, and transaction reports provide pricing discipline 
for the inputs of proprietary data products.
    The large number of SROs, TRFs, BDs, and ATSs that currently 
produce proprietary data or are currently capable of producing it 
provides further pricing discipline for proprietary data products. Each 
SRO, TRF, ATS, and BD is currently permitted to produce proprietary 
data products, and many currently do or have announced plans to do so, 
including NASDAQ, NYSE, NYSE Amex, NYSEArca, and BATS.
    Any ATS or BD can combine with any other ATS, BD, or multiple ATSs 
or BDs to produce joint proprietary data products. Additionally, order 
routers and market data vendors can facilitate single or multiple 
broker-dealers' production of proprietary data products. The potential 
sources of proprietary products are virtually limitless.
    The fact that proprietary data from ATSs, BDs, and vendors can by-
pass SROs is significant in two respects. First, non-SROs can compete 
directly with SROs for the production and sale of proprietary data 
products, as BATS and Arca did before registering as exchanges by 
publishing proprietary book data on the Internet. Second, because a 
single order or transaction report can appear in an SRO proprietary 
product, a non-SRO proprietary product, or both, the data available in 
proprietary products is exponentially greater than the actual number of 
orders and transaction reports that exist in the marketplace.
    Market data vendors provide another form of price discipline for 
proprietary data products because they control the primary means of 
access to end users. Vendors impose price restraints based upon their 
business models. For example, vendors such as Bloomberg and Reuters 
that assess a surcharge on data they sell may refuse to offer 
proprietary products that end users will not purchase in sufficient 
numbers. Internet portals, such as Yahoo, impose a discipline by 
providing only data that will enable them to attract ``eyeballs'' that 
contribute to their advertising revenue. Retail broker-dealers, such as 
Schwab and Fidelity, offer their customers proprietary data only if it 
promotes trading and generates sufficient commission revenue. Although 
the business models may differ, these vendors' pricing discipline is 
the same: they can simply refuse to purchase any proprietary data 
product that fails to provide sufficient value. NASDAQ and other 
producers of proprietary data products must understand and respond to 
these varying business models and pricing disciplines in order to 
market proprietary data products successfully.
    In addition to the competition and price discipline described 
above, the market for proprietary data products is also highly 
contestable because market entry is rapid, inexpensive, and profitable. 
The history of electronic trading is replete with examples of entrants 
that swiftly grew into some of the largest electronic trading platforms 
and proprietary data producers: Archipelago, Bloomberg Tradebook, 
Island, RediBook, Attain, TracECN, BATS Trading and Direct Edge. A 
proliferation of dark pools and other ATSs operate profitably with 
fragmentary shares of consolidated market volume.
    Regulation NMS, by deregulating the market for proprietary data, 
has increased the contestability of that market. While broker-dealers 
have previously published their proprietary data individually, 
Regulation NMS encourages market data vendors and broker-dealers to 
produce proprietary products cooperatively in a manner never before 
possible. Multiple market data vendors already have the capability to 
aggregate data and disseminate it on a profitable scale, including 
Bloomberg, and Thomson-Reuters.
    The court in NetCoalition concluded that the Commission had failed 
to demonstrate that the market for market data was competitive based on 
the reasoning of the Commission's NetCoalition order because, in the 
court's view, the Commission had not adequately demonstrated that the 
depth-of-book data at issue in the case is used to attract order flow. 
NASDAQ believes, however, that evidence not before the court clearly 
demonstrates that availability of depth data attracts order flow. For 
example, NASDAQ submits that in and of itself, NASDAQ's decision 
voluntarily to cap fees on existing products, as is the effect of an 
enterprise license, is evidence of market forces at work. In fact, the 
instant proposal creates a second enterprise license for non-
professional usage of depth data to complement the existing enterprise 
license set forth at NASDAQ Rule 7023(a)(1)(C).
    The court in NetCoalition did cite favorably an economic study by 
Ordover and Bamberger which concluded that ``[a]lthough an exchange may 
price its trade execution fees higher and its market data fees lower 
(or vice versa), because of ``platform'' competition the exchange 
nonetheless receives the same return from the two ``joint products'' in 
the aggregate.'' \12\ Accordingly, NASDAQ hereby incorporates in this 
filing as Exhibit 3, additional comments from Ordover and Bamberger 
expanding upon the impact of platform competition.\13\ Among the 
conclusions that Ordover and Bamberger reach are: NASDAQ is subject to 
significant competitive forces in setting the prices and other terms of 
execution services and proprietary data products.
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    \12\ See NetCoalition at fn. 16.
    \13\ Securities Exchange Act Release No. 63745 (Jan. 20, 2011); 
76 FR 4970 (Jan. 27, 2011) (attached to original filing as Exhibit 
3).
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    Competition among trading platforms can be expected to constrain 
the aggregate return each platform earns from the sale of the array of 
its products, including the joint products at issue here. In 
particular, cross-platform competition, and the adverse effects from 
overpricing proprietary information on the volume of trading on the 
platform, constrain the pricing of proprietary information.
    Competitive forces constrain the prices that platforms can charge 
for non-core market information. A trading platform cannot generate 
market information unless it receives trade orders. For this reason, a 
platform can be expected to use its market data product as a tool for 
attracting liquidity and trading to its exchange.
    While, by definition, information that is proprietary to an 
exchange cannot be obtained elsewhere, this does not enable the owner 
of such information to exercise monopoly power over that information 
vis-[agrave]-vis firms with the need for such information. Even though

[[Page 9395]]

market information from one platform may not be a perfect substitute 
for market information from one or more other platforms, the existence 
of alternative sources of information can be expected to constrain the 
prices platforms charge for market data.
    Besides the fact that similar information can be obtained 
elsewhere, the feasibility of supra-competitive pricing is constrained 
by the traders' ability to shift their trades elsewhere, which lowers 
the activity on the exchange and so in the long run reduces the quality 
of the information generated by the exchange.
    Competition among platforms has driven NASDAQ continually to 
improve its platform data offerings and to cater to customers' data 
needs. For example, NASDAQ has developed and maintained multiple 
delivery mechanisms (IP, multi-cast, and compression) that enable 
customers to receive data in the form and manner they prefer and at the 
lowest cost to them. NASDAQ offers front end applications such as its 
``Bookviewer'' to help customers utilize data. NASDAQ has created new 
products like TotalView Aggregate to complement TotalView ITCH and 
Level 2, because offering data in multiple formatting allows NASDAQ to 
better fit customer needs. NASDAQ offers data via multiple extranet 
providers, thereby helping to reduce network and total cost for its 
data products. NASDAQ has developed an online administrative system to 
provide customers transparency into their data feed requests and 
streamline data usage reporting. NASDAQ has also expanded its 
Enterprise License options that reduce the administrative burden and 
costs to firms that purchase market data.
    Despite these enhancements and a dramatic increase in message 
traffic, NASDAQ's fees for depth-of-book data have remained flat. In 
fact, as a percent of total customer costs, NASDAQ data fees have 
fallen relative to other data usage costs--including bandwidth, 
programming, and infrastructure--that have risen. The same holds true 
for execution services; despite numerous enhancements to NASDAQ's 
trading platform, absolute and relative trading costs have declined. 
Platform competition has intensified as new entrants have emerged, 
constraining prices for both executions and for data.
    Additional evidence cited by NYSE Arca in SR-NYSE Arca-2010-097 
\14\ which was not before the NetCoalition court also demonstrates that 
availability of depth data attracts order flow and that competition for 
order flow can constrain the price of market data:
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    \14\ See Securities Exchange Act Release No. 63291 (Nov. 9, 
2010).
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    1. Terrence Hendershott & Charles M. Jones, Island Goes Dark: 
Transparence, Fragmentation, and Regulation, 18 Review of Financial 
Studies 743 (2005);
    2. Charts and Tables referenced in Exhibit 3B to that filing;
    3. PHB Hagler Bailly, Inc., ``Issues Surrounding Cost-Based 
Regulation of Market Data Prices;'' and
    4. PHB Hagler Bailly, Inc., ``The Economic Perspective on 
Regulation of Market Data.''

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\15\ At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.
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    \15\ 15 U.S.C. 78s(b)(3)(a)(ii).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2011-021 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2011-021. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 p.m. Copies of the filing also will be 
available for inspection and copying at the principal office of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NASDAQ-2011-021 and should be submitted on or before March 10, 2011.
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    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-3583 Filed 2-16-11; 8:45 am]
BILLING CODE 8011-01-P