Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Regarding BONO SM, 35498-35503 [2011-15015]
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35498
Federal Register / Vol. 76, No. 117 / Friday, June 17, 2011 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–64652; File No. SR–
NASDAQ–2011–075]
1. Purpose
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change Regarding
BONO SM and ITTO Market Data
June 13, 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 May 31,
2011, The NASDAQ Stock Market LLC
(‘‘NASDAQ’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
‘‘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.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
NASDAQ proposes changes to add
new Rule 7054 (NASDAQ Options
Market Data Distributor Fees) setting
forth the fees for options market data
feeds known as Best of NASDAQ
Options and NASDAQ ITCH to Trade
Options.
While the proposed fee changes are
effective upon filing, the Exchange has
designated these changes to be operative
on July 1, 2011.
The text of the proposed rule change
is available at https://
www.nasdaq.cchwallstreet.com, at
NASDAQ’s principal office, and at the
Commission’s Public Reference Room.
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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.
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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The Exchange proposes to add new
Rule 7054 setting forth the fees for
options market data feeds known as Best
of NASDAQ Options (‘‘BONO SM’’) and
NASDAQ ITCH to Trade Options
(‘‘ITTO’’).
Background
The Exchange recently modified
Chapter VI, Section 1(a)(3) of the
NASDAQ Options Market (‘‘NOM’’)
Rules to specify the names and content
of the two data feeds that are the subject
of this filing, BONO SM and ITTO.3
ITTO is currently described in the
Exchange’s option rules at subsection
(a)(3)(B) of Chapter VI, Section 1 as a
data feed that provides quotation
information for individual orders on the
NOM book, last sale information for
trades executed on NOM, and Order
Imbalance Information as set forth in
NOM Rules Chapter VI, Section 8. ITTO
is the options equivalent of the
NASDAQ TotalView/ITCH data feed
that NASDAQ offers under NASDAQ
Rule 7023 with respect to equities
traded on NASDAQ. As with TotalView,
members use ITTO to ‘‘build’’ their view
of the NOM book by adding individual
orders that appear on the feed, and
subtracting individual orders that are
executed.
BONO SM is currently described in
subsection (a)(3)(A) of Chapter VI,
Section 1 as a data feed that provides
the NOM Best Bid and Offer (‘‘NBBO’’)
and last sale information for trades
executed on NOM. The NBBO and last
sale information are identical to the
information that NOM sends the
Options Price Regulatory Authority
(‘‘OPRA’’) and which OPRA
disseminates via the consolidated data
feed for options. BONO is the options
equivalent of the NASDAQ Basic data
feed offered for equities under NASDAQ
Rule 7047.
3 Securities Exchange Act Release No. 63983
(February 25, 2011), 76 FR 12178 (March 4, 2011)
(SR–NASDAQ–2011–032) (notice of filing and
immediate effectiveness to offer, among other
things, BONO SM and ITTO market data for free).
The filing also offered NASDAQ Options Depth at
Price (DAP) and NASDAQ Options Net Order
Imbalance (NOIView) for free; this proposal does
not affect the DAP and NOIView data feeds. Chapter
VI, Section 1(a)(3) states generally that the NOM
trading system includes data feeds that can be used
to display without attribution to Participants’
MPIDs Displayed Orders on both the bid and offer
side of the market for price levels then within the
NASDAQ Options Market using the minimum price
variation applicable to that security.
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The Proposal
The Exchange has been offering the
BONO SM and ITTO options market data
feeds free of charge. The Exchange now
proposes to institute Rule 7054 setting
forth fees for recipients of BONO SM and
ITTO data, with a free trial offer for
certain data recipients.
The definitions of BONO SM and ITTO
are established in new Rule 7054.
Proposed Rule 7054(d) states that
BONO SM is a data feed that provides the
NBBO and last sale information for
trades executed on NOM. Proposed Rule
7054(e) states that ITTO is a data feed
that provides quotation information for
individual orders on the NOM book, last
sale information for trades executed on
NOM, and Order Imbalance Information
as set forth in NOM Rules Chapter VI,
Section 8.4
Using elements of the current fee
structure for recipients of NASDAQ
TotalView and NASDAQ Basic,5 which
are similar on the equities side to
BONO SM and ITTO, the Exchange
proposes to charge monthly fees for
firms that are distributors of BONO SM
and ITTO market data. Proposed Rule
7054(b) states that a ‘‘distributor’’ of
NASDAQ options market data is any
entity that receives a feed or data file of
NASDAQ data directly from NASDAQ
or indirectly through another entity and
then distributes the data either
internally (within that entity) or
externally (outside that entity).
Proposed subsection (b) also states that
all distributors would be required to
execute a NASDAQ distributor
agreement. The amount of the monthly
fees would depend on whether a
distributor is an ‘‘Internal Distributor’’
or ‘‘External Distributor.’’ 6
An Internal Distributor is a firm that
is permitted by agreement with the
Exchange to provide BONO SM and ITTO
data to internal users (i.e., users within
their own organization). Under the
proposal, Internal Distributors of
BONO SM and ITTO data would be
charged a monthly fee of $1,500 per
firm.
An External Distributor is a firm that
is permitted by agreement with the
Exchange to provide BONO SM and ITTO
data to both internal users and to
external users (i.e., users outside of their
own organization). External Distributors
would be charged a monthly fee of
$2,000 per firm. The fee paid by an
4 The language of subsections (d) and (e) within
Rule 7054 is identical to the language that describes
BONO SM and ITTO in NOM option rules at Chapter
VI, Section 1(a)(3)(A) and (B).
5 See Rules 7023 and 7047.
6 Thus, a distributor may pay either ‘‘Internal
Distributor’’ or ‘‘External Distributor’’ fees.
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External Distributor includes the
Internal Distributor Fee. The fee paid by
an Internal Distributor or an External
Distributor would allow access to both
the BONO SM and ITTO data feeds.
The Exchange also proposes to assess
user fees for BONO SM and ITTO data on
a per-user basis.7 These fees would vary
based on whether they are for
Professional users or Non-Professional
users. Proposed Rule 7054 (f) states that
the term ‘‘Non-Professional’’ shall have
the same meaning as in NASDAQ Rule
7011(b)(2). Rule 7011(b)(2) defines a
‘‘Non-Professional’’ as a natural person
who is neither: (A) Registered or
qualified in any capacity with the
Commission, the Commodities Futures
Trading Commission, any state
securities agency, any securities
exchange or association, or any
commodities or futures contract market
or association; (B) engaged as an
‘‘investment adviser’’ as that term is
defined in Section 201(11) of the
Investment Advisors Act of 1940
(whether or not registered or qualified
under that Act); nor (C) employed by a
bank or other organization exempt from
registration under federal or state
securities laws to perform functions that
would require registration or
qualification if such functions were
performed for an organization not so
exempt.8 A Professional user is any user
that is not a Non-Professional.
For BONO SM data, the proposed peruser fees are $5 per Professional user;
and $1 per Non-Professional user. For
ITTO data, the proposed per-user fees
are $10 per Professional user; and $1 per
Non-Professional user.
The Exchange notes that for many
years, exchanges have engaged in and
the Commission has accepted the
practice of price differentiation, both in
the context of market data as well as in
the context of executions. With respect
to market data, NASDAQ and NYSE
Euronext (‘‘NYSE’’) in their capacities as
network processors and exchanges have
differentiated in pricing between
Professional and Non-Professional
market data users, often charging
Professionals many times more than
Non-Professionals for using the same
data. For example, NASDAQ currently
charges Non-Professional users
(subscribers) $60 a month for NASDAQ
7 While the user fees would be paid by firms
(Internal Distributors and External Distributors),
some portion of the fees may be passed through to
users inside or outside the firms (that is, to internal
or external users).
8 The Exchange believes that Non-Professional
users of market data, in contrast to Professional data
users and distributors, often tend to be individual
consumers, smaller retail investors, and public
customers.
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Depth Data received via a Managed
Depth Solution and Professional users
$300 a month.9 Also, NASDAQ
currently charges Non-Professionals $15
per terminal for its NASDAQ Depth
Data via a standalone terminal, while
Professional investors pay roughly five
times the Non-Professional rate.10 This
reflects the value of the service to
various constituencies (i.e., lower prices
are charged to consumers with more
elastic demand) and allows both types
of investors to contribute to the high
fixed costs of operating an exchange
platform. The Exchange believes that
this differentiation for Professional and
Non-Professional data usage, as the
differentiation for Professional and NonProfessional users proposed in this
filing, is completely consistent with past
Commission precedent and economic
theory.11
The Exchange also proposes to assess
a monthly non-display enterprise
license fee. Proposed Rule 7054(c) states
that an ‘‘enterprise license’’ entitles a
distributor to provide BONO SM or ITTO
market data pursuant to this rule to an
unlimited number of non-display
devices 12 within the firm without any
per user charge. Under the proposal,
distributors of BONO SM and ITTO data
may, if they choose to subscribe to a
non-display enterprise license, be
charged a monthly enterprise license fee
or $2,500.
The non-display enterprise license is
in addition to other distributor fees.
Thus, a firm that has a non-display
enterprise license could pay an Internal
Distributor fee and distribute data to
limitless number of non-user display
devices (devices within the firm)
pursuant to the license without
incurring further fees for each internal
user. However, the enterprise license
does not allow external distribution
without incurring an External
Distributor fee and external per user
fees, if applicable under the
circumstances.
Finally, the Exchange proposes a 30Day Free Trial Offer in subsection (g) of
9 See
Rule 7026.
Rule 7023.
11 In economic terms, charging lower fees to nonprofessional consumers increases overall economic
welfare by increasing output—in this case,
providing more data to more investors—and avoids
two equally undesirable alternatives: (i) requiring
the firm to charge uniformly high prices that
constrict demand, or (ii) insisting on uniformly low
prices at marginal cost (potentially zero or close to
zero) that do not allow the firm to cover its fixed
costs and thereby lead to bankruptcy.
12 Non-display devices do not graphically show
(display) BONO SM or ITTO market data but instead
use the data for performance of analytic or
calculative functions (e.g. algorithms).
10 See
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35499
Rule 7054.13 In particular, the 30-day
waiver of the user fees for NASDAQ
options market data pursuant to the rule
extends to all new individual (non-firm)
users (subscribers) and potential new
individual users. This fee waiver period
will be applied on a rolling basis,
determined by the date on which a new
individual (non-distributor or firm) user
or potential individual user is first
entitled by a distributor to receive
access to NASDAQ options market data.
Subsection (g) provides that a
distributor may only provide this waiver
to a specific individual user one time.
The Exchange notes that the
categories of BONO SM and ITTO market
data and fees compare favorably with
similar products offered by other
markets such as International Stock
Exchange (‘‘ISE’’), NYSE, NASDAQ
OMX PHLX (‘‘Phlx’’), and Chicago
Board Options Exchange (‘‘CBOE’’). For
example, ISE offers market data
products that are similar to BONO SM: a
data feed that shows the top of the
market entitled TOP Quote Feed,14 and
a data feed that shows the top five price
levels entitled Depth of Market.15 NYSE
offers a market data product for Arca
and Amex that is similar to BONO SM
and ITTO: a feed that shows top of book,
last sale, and depth of quote and is
entitled NYSE Arca Book for Options.16
Phlx offers a market data feed entitled
TOPO that is similar to BONO SM and
shows orders and quotes at the top of
the market, as well as trades; and a
TOPO Plus Orders feed that is similar to
ITTO and shows the data in the TOPO
data feed as well as the depth of
orders.17 A subsidiary of CBOE for
13 For other Exchange data products that offer a
30-day free trial, see Rules 7023, 7044 and 7036.
See also Rules 7049 and 7055.
14 The ISE TOP Quote Feed has a monthly base
access fee of $5,000 applicable to professionals and
non-professionals plus a $10 variable device fee for
professionals and a no device fee for internal use
professionals; or a flat fixed enterprise fee of $2,500
for professionals and a $2,000 fee for internal use
professionals. The Exchange notes that the monthly
fees for the ISE TOP Quote Feed are higher than
those proposed in this filing.
15 The ISE Depth of Market Feed has a monthly
base access fee of $5,000 applicable to professionals
and non-professionals plus a $50 variable device fee
for professionals and a $5 per device fee for external
distribution non-professionals; or a flat fixed
enterprise fee of $7,500 for internal use
professionals, $12,500 for external use
professionals, and $10,000 for non-professionals.
The Exchange notes that the monthly fees for ISE
Depth of Market are higher than those proposed in
this filing for a more robust product.
16 The fee for NYSE Arca Book for Options is
$750 per month.
17 TOPO Plus Orders has a monthly fee of $4,000
for internal distributors or $5,000 for external
distributors plus a monthly fee of $1 per nonprofessional subscribers (users) and $20 for
professional subscribers. The Exchange notes that
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which CBOE charges fees offers a
market data feed that is similar to
BONO SM and shows BBO, last sale, and
top of book data.18 And BATS offers
Multicast PITCH, which is their depth
of market and last sale feed similar to
ITTO.19
The Exchange believes that the
continued availability of BONOSM and
ITTO data feeds enhances transparency,
fosters competition among orders and
markets, and enables buyers and sellers
to obtain better prices.
2. Statutory Basis
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NASDAQ believes that the proposed
rule change is consistent with the
provisions of Section 6 of the Act,20 in
general and with Sections 6(b)(5) of the
Act,21 in particular in that it is designed
to prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, to foster
cooperation and coordination with
persons engaged in regulating, clearing,
settling, processing information with
respect to, and facilitating transactions
in securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
In adopting Regulation NMS, the
Commission granted self-regulatory
organizations like NASDAQ 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. NASDAQ believes that this
proposal is in keeping with those
principles by promoting increased
transparency through the dissemination
of more useful proprietary data and also
by clarifying its availability to various
market participants.
the monthly fees for TOPO Plus Orders are higher
than those proposed in this filing. See Securities
Exchange Act Release No. 62194 (May 28, 2010), 75
FR 31830 (June 4, 2010) (SR–Phlx–2010–48)(order
approving proposal related to TOPO Plus Orders
market data fees).
18 The subsidiary is identified as Market Data
Express, LLC (‘‘MDX’’) by CBOE, which indicates
that the feed will also provide data regarding
contingency orders and complex strategies. The
monthly fee charged by CBOE for the data is $3,500
plus a $25 per user or device fee. See Securities
Exchange Act Release No. 63997 (March 1, 2011),
76 FR 12388 (March 7, 2011) (SR–CBOE–2011–014)
(notice of filing and immediate effectiveness). In the
filing, CBOE specifically references as similar
products the Phlx TOPO Plus Orders feed and the
ISE Depth of Market Feed.
19 BATS offers Multicast PITCH without charge
ostensibly to attract order flow to that exchange.
20 15 U.S.C. 78f.
21 15 U.S.C. 78f(b)(5).
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Additionally, NASDAQ has made a
voluntary decision to make this market
data available. NASDAQ is not required
by the Exchange Act in the first instance
to make the data available, unlike the
best bid and offer which must be made
available under the Act. NASDAQ has
chosen to make the noted data available
to improve market quality, to attract
order flow, and to increase
transparency; and will continue to make
the data available until such time as
NASDAQ changes its rule.
NASDAQ believes that its ITTO and
BONO,SM which includes the NBBO and
last sale information for trades executed
on NOM in BONO,SM are precisely the
sort of market data products that the
Commission envisioned when it
adopted Regulation NMS. The
Commission concluded that Regulation
NMS—by lessening regulation of 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
own internal analysis of the need for such
data.22
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.
The recent decision of the United
States Court of Appeals for the District
of Columbia Circuit in NetCoaliton v.
SEC, No. 09–1042 (D.C. Cir. 2010)
upheld the Commission’s reliance upon
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, at 15 (quoting H.R.
Rep. No. 94–229, at 92 (1975), as
reprinted in 1975 U.S.C.C.A.N. 321,
323).
22 Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005).
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The court agreed with the
Commission’s conclusion that
‘‘Congress intended that ‘competitive
forces should dictate the services and
practices that constitute the U.S.
national market system for trading
equity securities.’ ’’ 23
The Court in NetCoalition, although
upholding the Commission’s conclusion
that competitive forces may be relied
upon to establish the fairness of prices,
nevertheless concluded that the record
in that case did not adequately support
the Commission’s conclusions as to the
competitive nature of the market for
NYSEArca’s data product at issue in
that case. As discussed previously and
explained below in NASDAQ’s
Statement on Burden on Competition,
however, NASDAQ believes that there is
substantial evidence of competition in
the marketplace for data that was not in
the record in the NetCoalition case, and
that the Commission is entitled to rely
upon such evidence in concluding that
the fees established in this filing are the
product of competition, and therefore in
accordance with the relevant statutory
standards.24
Competitive products similar to
BONO SM and ITTO are, as previously
discussed, offered by other exchanges,
albeit sometimes at higher prices. ISE
offers two data products similar to
BONO SM that are called TOP Quote
Feed, Depth of Market and have fees
higher that those proposed in this
filing.25 NYSE offers a market data
product similar to BONO SM and ITTO
called NYSE Arca Book of Options that
has market data for NYSE Arca and
NYAE Amex. Phlx offers a market data
product that is similar to ITTO.26 CBOE
offers a market data product that is
similar to BONO.SM 27 BATS offers a
market data product similar to ITTO.
23 NetCoaliton
v. SEC at p. 16.
should also be noted that Section 916 of
Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (‘‘Dodd-Frank Act’’) has
amended paragraph (A) of Section 19(b)(3) of the
Act, 15 U.S.C. 78s(b)(3) to make it clear that all
exchange fees, including fees for market data, may
be filed by exchanges on an immediately effective
basis. Although this change in the law does not
alter the Commission’s authority to evaluate and
ultimately disapprove exchange rules if it
concludes that they are not consistent with the Act,
it unambiguously reflects a conclusion that market
data fee changes do not require prior Commission
review before taking effect, and that a formal
proceeding with regard to a particular fee change
is required only if the Commission determines that
it is necessary or appropriate to suspend the fee and
institute such a proceeding.
25 For the fees related to ISE TOP Quote Feed and
Depth of Market, see supra notes 14 and 15.
26 For the fees related to NYSE Arca Book of
Options and Phlx TOPO Plus Orders, see supra
notes 16 and 17.
27 For the fees related to the CBOE market data
product, see supra note 18.
24 It
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Moreover, the Exchange notes that, as a
substitute for exchange data,
consolidated market data (e.g. last sale,
NBBO, current quotes) are also available
from securities information processors
such as OPRA.
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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.
NASDAQ’s ability to price its BONO SM
and ITTO products is constrained by (1)
Competition between exchanges and
other trading platforms that compete
with each other in a variety of
dimensions; (2) the existence of
inexpensive real-time consolidated data
and free delayed consolidated data; and
(3) the inherent contestability of the
market for proprietary last sale data.
NASDAQ believes that the Dodd-Frank
Act amendments to Section 19
materially alter the scope of the
Commission’s review of future market
data filings, by creating a presumption
that all fees may take effect
immediately, without prior analysis by
the Commission of the competitive
environment. Even in the absence of
this important statutory change,
however, NASDAQ believes that a
record may readily be established to
demonstrate the competitive nature of
the market in question.
The market for market data products
is competitive and inherently
contestable because there is fierce
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. Brokerdealers 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’’) and electronic
communication networks (‘‘ECNs’’). For
example, the Exchange has noted that
numerous other U.S. options exchanges
offer market data products that are
substantially similar to the ITTO and
BONO SM products, which the Exchange
must consider in its pricing discipline
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in order to compete for listings, trades,
and the market data itself.
The large number of SROs, 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, ATS, and BD is currently
permitted to produce proprietary data
products, and many currently do or
have announced plans to do so,
including ISE, CBOE, NYSE (NYSE
Amex and NYSE Arca), Phlx, and
BATS. Indeed, the Exchange has
discussed a host of products that are
similar to ITTO and BONO,SM
including: ISE’s TOP Quote Feed and
Depth of Market feed; NYSE’s Arca
Book of Options feed; Phlx’s TOPO Plus
Orders feed; BATS’ Multicast PITCH
feed; and CBOE’s recently fee liable data
feed through MDX.
Furthermore, 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 brokerdealers’ 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.
PO 00000
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Sfmt 4703
35501
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 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 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.
Competition among platforms has
driven NASDAQ continually to improve
its platform data offerings and to cater
to customers’ data needs. For example,
NASDAQ has been offering front end
applications such as its NetView and
ITCH equity data products and ITTO
and BONO SM options data products to
help customers utilize data. Yet another
example of the continuous effort by
exchanges to improve platform data is
Phlx’s TOPO Plus Orders and TOPO
data products.
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emcdonald on DSK2BSOYB1PROD with NOTICES
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Federal Register / Vol. 76, No. 117 / Friday, June 17, 2011 / Notices
Moreover, the Exchange believes that
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 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.
In the recent filing approving the
aforementioned Phlx TOPO Plus Orders
data feed,28 the Commission recognized
the intense competition among
exchanges, particularly as related to
options market data, stating:
Phlx currently competes with seven
other options exchanges for order flow.
Attracting order flow is an essential part
of Phlx’s competitive success. If Phlx
cannot attract order flow to its market,
it will not be able to execute
transactions. If Phlx cannot execute
transactions on its market, it will not
generate transaction revenue. If Phlx
cannot attract orders or execute
transactions on its market, it will not
have market data to distribute, for a fee
or otherwise, and will not earn market
data revenue and thus not be
competitive with other exchanges that
have this ability. This compelling need
to attract order flow imposes significant
pressure on Phlx to act reasonably in
setting its fees for Phlx market data,
particularly given that the market
participants that will pay such fees
often will be the same market
participants from whom Phlx must
attract order flow. These market
participants include broker-dealers that
control the handling of a large volume
of customer and proprietary order flow.
Given the portability of order flow from
one exchange to another, any exchange
that sought to charge unreasonably high
data fees would risk alienating many of
the same customers on whose orders it
depends for competitive survival.
The primary competition and antitrust regulator in the U.S., the Antitrust
Division of the U.S. Department of
Justice (the ‘‘Antitrust Division’’), has
recognized the intensely competitive
nature of exchange market data. When
analyzing competition among
exchanges, Assistant Attorney General
Christine Varney recently stated:
If the acquisition [of NYSE by
NASDAQ and ICE] proceeded, it would
have eliminated substantial competition
28 See Securities Exchange Act Release No. 62194
(May 28, 2010), 75 FR 31830 (June 4, 2010) (SR–
Phlx–2010–48) (order approving proposal related to
TOPO Plus Orders market data fees).
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17:39 Jun 16, 2011
Jkt 223001
in the following ways * * * NASDAQ
and NYSE also compete head to head to
offer real-time equity data products.
These data products include the best bid
and offer of every exchange and
information on each equity trade,
including the last sale. Post-merger, the
[new] firm would have the ability to
raise the cost of real-time proprietary
equity data and the firm would be less
likely to develop new, innovative, realtime data products.29
In establishing the price for the
BONO SM and ITTO products, NASDAQ
considered the competitiveness of the
market for data and all of the
implications of that competition.
NASDAQ believes that it has considered
all relevant factors and has not
considered irrelevant factors in order to
establish a fair, reasonable, and not
unreasonably discriminatory fees and an
equitable allocation of fees among all
users. The existence of alternatives to
ITTO and BONO,SM including noted
competitive products by other
exchanges and real-time consolidated
last sale and NBBO data, free delayed
consolidated data, and even proprietary
data from other sources, ensures that
NASDAQ cannot set unreasonable fees,
or fees that are unreasonably
discriminatory, without losing business
to these alternatives.30 NASDAQ
believes that this demonstrates the
consistency of these fees with
applicable statutory standards.
Accordingly, 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
purpose of the Act.
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.31 At any time
within 60 days of the filing of the
29 See Remarks as Prepared for Delivery by
Assistant Attorney General Christine Varney
Regarding NASDAQ OMX Group Inc. and
Intercontinental Exchange Inc. Abandoning Their
Bid for NYSE Euronext (May 16, 2011).
30 The Exchange notes also that competitiveness
in the market data field (as in other areas such as,
for example, securities offerings and pricing)
encourages—and often requires—exchanges to be
innovative and forward-thinking in terms of market
data product offerings.
31 15 U.S.C. 78s(b)(3)(A)(ii).
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Fmt 4703
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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 (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NASDAQ–2011–075 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–2011–075. 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 (https://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 such filing
will also 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
E:\FR\FM\17JNN1.SGM
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Federal Register / Vol. 76, No. 117 / Friday, June 17, 2011 / Notices
identifying information from
submissions. You should submit only
information that you wish to make
available publicly. All submissions
should refer to File No. SR–NASDAQ–
2011–075 and should be submitted on
or before July 8, 2011.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.32
Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011–15015 Filed 6–16–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–64654; File No. SR–CBOE–
2011–039]
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing of
Proposed Rule Change To Trade
Single Stock Dividend Options
Exchange’s Web site (https://
www.cboe.org/legal), at the Exchange’s
Office of the Secretary and at the
Commission’s Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
self-regulatory organization included
statements concerning the purpose of
and basis for the proposed rule change
and discussed any comments it received
on the proposed rule change. The text
of those statements may be examined at
the places specified in Item IV below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
June 13, 2011.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on May 31,
2011, the Chicago Board Options
Exchange, Incorporated (‘‘Exchange’’ or
‘‘CBOE’’) filed with the Securities and
Exchange Commission (the
‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Chicago Board Options Exchange,
Incorporated (‘‘CBOE’’ or ‘‘Exchange’’)
proposes to amend certain of its rules to
provide for the listing and trading of
options that overlie the ordinary cash
dividends paid by an issuer over an
annual, semi-annual, or quarterly
‘‘accrual period.’’ The options will be
cash-settled, have European-style
exercise and be P.M.-settled. The text of
the rule proposal is available on the
The purpose of the proposed rule
change is to permit the Exchange to list
and trade options that overlie the
ordinary cash dividends paid by an
issuer over an annual accrual period.
The Exchange may also list series of
SSDOs with an accrual period of less
than a year, but in no event less than
one quarter of a year. SSDOs will be
cash-settled, have European-style
exercise and be P.M.-settled.
Product Design
Each SSDO represents the
accumulated ordinary dividend
amounts paid by a specific issuer over
a specified accrual period. For purposes
of SSDOs, dividends are deemed to be
‘‘paid’’ on the ex-dividend date. Each
annual accrual period will run from the
business day after the third Friday of
December through the third Friday of
the following December. For an SSDO
with an accrual period of less than a
year, the accrual period runs from the
business day after the third Friday of the
month beginning the accrual period
through the third Friday of the month
ending the accrual period.3 An example
of a quarterly accrual period is one that
emcdonald on DSK2BSOYB1PROD with NOTICES
will run from Monday, March 21, 2011
through Friday, June 17, 2011.
The underlying value for SSDOs will
be equal to ten (10) times the exdividend amounts of an issuer
accumulated over the specified accrual
period. Each day, CBOE will calculate
the aggregate daily dividend totals for
the specific issuer, which are summed
up over any given accrual period (e.g.,
quarterly, semi-annually, annually).
During each business day, CBOE will
disseminate the underlying SSDO value,
multiplied by ten (10), through the
Options Price Reporting Authority
(‘‘OPRA’’), the Consolidated Tape
Association (‘‘CTA’’) tape and/or the
Market Data Index (‘‘MDI’’) feed.
Options Trading
Each SSDO will be quoted in
decimals and one point will be equal to
$100. The minimum price variation
shall be established on a class-by-class
basis by the Exchange and shall not be
less than $0.01. Exhibit 3 presents
proposed contract specifications for
SSDOs.
The Exchange expects that the
underlying index values for SSDOs will
be relatively low. As a result, the
proposal permits the Exchange to
designate $0.01 as the minimum price
variation for quotes and believes that
granular pricing will result in more
pricing points. The availability of more
pricing points creates tighter spreads
between quotes, which in turn benefits
investors.
Similarly, the Exchange is proposing
to list series at 1 point ($1.00) or greater
strike price intervals if the strike price
is equal to or less than $200 and 2.5
points ($2.50) or greater strike price
intervals if the strike price exceeds
$200. Because the underlying value of
an SSDO will fluctuate around a limited
expected dividend value range, the
Exchange believes that a granular strike
price increment will provide investors
with greater flexibility by allowing them
to establish positions that are better
tailored to meet their investment
objectives. Below are examples of values
underlying SSDOs using past ordinary
dividend payouts over varying accrual
periods:
Ex-dividend
amount
Ex-dividend date
35503
Cumulative
dividend
SSDO Index
value
Example: Annual Accrual Period
December 21, 2009 through December 17, 2010
Exxon Mobil Corporation (XOM):
32 17
1 15
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
VerDate Mar<15>2010
17:39 Jun 16, 2011
2 17
CFR 240.19b–4.
Exchange will assign separate trading
symbols to SSDOs overlying the accumulated ex3 The
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dividends of the same issuer that have different
accrual periods.
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]]>Agencies
[Federal Register Volume 76, Number 117 (Friday, June 17, 2011)]
[Notices]
[Pages 35498-35503]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-15015]
[[Page 35498]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-64652; File No. SR-NASDAQ-2011-075]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Regarding BONO SM and ITTO Market Data
June 13, 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 May 31, 2011, The NASDAQ Stock Market LLC (``NASDAQ'') filed with
the Securities and Exchange Commission (``SEC'' or ``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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASDAQ proposes changes to add new Rule 7054 (NASDAQ Options Market
Data Distributor Fees) setting forth the fees for options market data
feeds known as Best of NASDAQ Options and NASDAQ ITCH to Trade Options.
While the proposed fee changes are effective upon filing, the
Exchange has designated these changes to be operative on July 1, 2011.
The text of the proposed rule change is available at https://www.nasdaq.cchwallstreet.com, at NASDAQ's principal office, and at the
Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, 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
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to add new Rule 7054 setting forth the fees
for options market data feeds known as Best of NASDAQ Options (``BONO
SM'') and NASDAQ ITCH to Trade Options (``ITTO'').
Background
The Exchange recently modified Chapter VI, Section 1(a)(3) of the
NASDAQ Options Market (``NOM'') Rules to specify the names and content
of the two data feeds that are the subject of this filing, BONO
SM and ITTO.\3\
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\3\ Securities Exchange Act Release No. 63983 (February 25,
2011), 76 FR 12178 (March 4, 2011) (SR-NASDAQ-2011-032) (notice of
filing and immediate effectiveness to offer, among other things,
BONO SM and ITTO market data for free). The filing also
offered NASDAQ Options Depth at Price (DAP) and NASDAQ Options Net
Order Imbalance (NOIView) for free; this proposal does not affect
the DAP and NOIView data feeds. Chapter VI, Section 1(a)(3) states
generally that the NOM trading system includes data feeds that can
be used to display without attribution to Participants' MPIDs
Displayed Orders on both the bid and offer side of the market for
price levels then within the NASDAQ Options Market using the minimum
price variation applicable to that security.
---------------------------------------------------------------------------
ITTO is currently described in the Exchange's option rules at
subsection (a)(3)(B) of Chapter VI, Section 1 as a data feed that
provides quotation information for individual orders on the NOM book,
last sale information for trades executed on NOM, and Order Imbalance
Information as set forth in NOM Rules Chapter VI, Section 8. ITTO is
the options equivalent of the NASDAQ TotalView/ITCH data feed that
NASDAQ offers under NASDAQ Rule 7023 with respect to equities traded on
NASDAQ. As with TotalView, members use ITTO to ``build'' their view of
the NOM book by adding individual orders that appear on the feed, and
subtracting individual orders that are executed.
BONO SM is currently described in subsection (a)(3)(A)
of Chapter VI, Section 1 as a data feed that provides the NOM Best Bid
and Offer (``NBBO'') and last sale information for trades executed on
NOM. The NBBO and last sale information are identical to the
information that NOM sends the Options Price Regulatory Authority
(``OPRA'') and which OPRA disseminates via the consolidated data feed
for options. BONO is the options equivalent of the NASDAQ Basic data
feed offered for equities under NASDAQ Rule 7047.
The Proposal
The Exchange has been offering the BONO SM and ITTO
options market data feeds free of charge. The Exchange now proposes to
institute Rule 7054 setting forth fees for recipients of BONO
SM and ITTO data, with a free trial offer for certain data
recipients.
The definitions of BONO SM and ITTO are established in
new Rule 7054. Proposed Rule 7054(d) states that BONO SM is
a data feed that provides the NBBO and last sale information for trades
executed on NOM. Proposed Rule 7054(e) states that ITTO is a data feed
that provides quotation information for individual orders on the NOM
book, last sale information for trades executed on NOM, and Order
Imbalance Information as set forth in NOM Rules Chapter VI, Section
8.\4\
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\4\ The language of subsections (d) and (e) within Rule 7054 is
identical to the language that describes BONO SM and ITTO
in NOM option rules at Chapter VI, Section 1(a)(3)(A) and (B).
---------------------------------------------------------------------------
Using elements of the current fee structure for recipients of
NASDAQ TotalView and NASDAQ Basic,\5\ which are similar on the equities
side to BONO SM and ITTO, the Exchange proposes to charge
monthly fees for firms that are distributors of BONO SM and
ITTO market data. Proposed Rule 7054(b) states that a ``distributor''
of NASDAQ options market data is any entity that receives a feed or
data file of NASDAQ data directly from NASDAQ or indirectly through
another entity and then distributes the data either internally (within
that entity) or externally (outside that entity). Proposed subsection
(b) also states that all distributors would be required to execute a
NASDAQ distributor agreement. The amount of the monthly fees would
depend on whether a distributor is an ``Internal Distributor'' or
``External Distributor.'' \6\
---------------------------------------------------------------------------
\5\ See Rules 7023 and 7047.
\6\ Thus, a distributor may pay either ``Internal Distributor''
or ``External Distributor'' fees.
---------------------------------------------------------------------------
An Internal Distributor is a firm that is permitted by agreement
with the Exchange to provide BONO SM and ITTO data to
internal users (i.e., users within their own organization). Under the
proposal, Internal Distributors of BONO SM and ITTO data
would be charged a monthly fee of $1,500 per firm.
An External Distributor is a firm that is permitted by agreement
with the Exchange to provide BONO SM and ITTO data to both
internal users and to external users (i.e., users outside of their own
organization). External Distributors would be charged a monthly fee of
$2,000 per firm. The fee paid by an
[[Page 35499]]
External Distributor includes the Internal Distributor Fee. The fee
paid by an Internal Distributor or an External Distributor would allow
access to both the BONO SM and ITTO data feeds.
The Exchange also proposes to assess user fees for BONO
SM and ITTO data on a per-user basis.\7\ These fees would
vary based on whether they are for Professional users or Non-
Professional users. Proposed Rule 7054 (f) states that the term ``Non-
Professional'' shall have the same meaning as in NASDAQ Rule
7011(b)(2). Rule 7011(b)(2) defines a ``Non-Professional'' as a natural
person who is neither: (A) Registered or qualified in any capacity with
the Commission, the Commodities Futures Trading Commission, any state
securities agency, any securities exchange or association, or any
commodities or futures contract market or association; (B) engaged as
an ``investment adviser'' as that term is defined in Section 201(11) of
the Investment Advisors Act of 1940 (whether or not registered or
qualified under that Act); nor (C) employed by a bank or other
organization exempt from registration under federal or state securities
laws to perform functions that would require registration or
qualification if such functions were performed for an organization not
so exempt.\8\ A Professional user is any user that is not a Non-
Professional.
---------------------------------------------------------------------------
\7\ While the user fees would be paid by firms (Internal
Distributors and External Distributors), some portion of the fees
may be passed through to users inside or outside the firms (that is,
to internal or external users).
\8\ The Exchange believes that Non-Professional users of market
data, in contrast to Professional data users and distributors, often
tend to be individual consumers, smaller retail investors, and
public customers.
---------------------------------------------------------------------------
For BONO SM data, the proposed per-user fees are $5 per
Professional user; and $1 per Non-Professional user. For ITTO data, the
proposed per-user fees are $10 per Professional user; and $1 per Non-
Professional user.
The Exchange notes that for many years, exchanges have engaged in
and the Commission has accepted the practice of price differentiation,
both in the context of market data as well as in the context of
executions. With respect to market data, NASDAQ and NYSE Euronext
(``NYSE'') in their capacities as network processors and exchanges have
differentiated in pricing between Professional and Non-Professional
market data users, often charging Professionals many times more than
Non-Professionals for using the same data. For example, NASDAQ
currently charges Non-Professional users (subscribers) $60 a month for
NASDAQ Depth Data received via a Managed Depth Solution and
Professional users $300 a month.\9\ Also, NASDAQ currently charges Non-
Professionals $15 per terminal for its NASDAQ Depth Data via a
standalone terminal, while Professional investors pay roughly five
times the Non-Professional rate.\10\ This reflects the value of the
service to various constituencies (i.e., lower prices are charged to
consumers with more elastic demand) and allows both types of investors
to contribute to the high fixed costs of operating an exchange
platform. The Exchange believes that this differentiation for
Professional and Non-Professional data usage, as the differentiation
for Professional and Non-Professional users proposed in this filing, is
completely consistent with past Commission precedent and economic
theory.\11\
---------------------------------------------------------------------------
\9\ See Rule 7026.
\10\ See Rule 7023.
\11\ In economic terms, charging lower fees to non-professional
consumers increases overall economic welfare by increasing output--
in this case, providing more data to more investors--and avoids two
equally undesirable alternatives: (i) requiring the firm to charge
uniformly high prices that constrict demand, or (ii) insisting on
uniformly low prices at marginal cost (potentially zero or close to
zero) that do not allow the firm to cover its fixed costs and
thereby lead to bankruptcy.
---------------------------------------------------------------------------
The Exchange also proposes to assess a monthly non-display
enterprise license fee. Proposed Rule 7054(c) states that an
``enterprise license'' entitles a distributor to provide BONO
SM or ITTO market data pursuant to this rule to an unlimited
number of non-display devices \12\ within the firm without any per user
charge. Under the proposal, distributors of BONO SM and ITTO
data may, if they choose to subscribe to a non-display enterprise
license, be charged a monthly enterprise license fee or $2,500.
---------------------------------------------------------------------------
\12\ Non-display devices do not graphically show (display) BONO
SM or ITTO market data but instead use the data for
performance of analytic or calculative functions (e.g. algorithms).
---------------------------------------------------------------------------
The non-display enterprise license is in addition to other
distributor fees. Thus, a firm that has a non-display enterprise
license could pay an Internal Distributor fee and distribute data to
limitless number of non-user display devices (devices within the firm)
pursuant to the license without incurring further fees for each
internal user. However, the enterprise license does not allow external
distribution without incurring an External Distributor fee and external
per user fees, if applicable under the circumstances.
Finally, the Exchange proposes a 30-Day Free Trial Offer in
subsection (g) of Rule 7054.\13\ In particular, the 30-day waiver of
the user fees for NASDAQ options market data pursuant to the rule
extends to all new individual (non-firm) users (subscribers) and
potential new individual users. This fee waiver period will be applied
on a rolling basis, determined by the date on which a new individual
(non-distributor or firm) user or potential individual user is first
entitled by a distributor to receive access to NASDAQ options market
data. Subsection (g) provides that a distributor may only provide this
waiver to a specific individual user one time.
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\13\ For other Exchange data products that offer a 30-day free
trial, see Rules 7023, 7044 and 7036. See also Rules 7049 and 7055.
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The Exchange notes that the categories of BONO SM and
ITTO market data and fees compare favorably with similar products
offered by other markets such as International Stock Exchange
(``ISE''), NYSE, NASDAQ OMX PHLX (``Phlx''), and Chicago Board Options
Exchange (``CBOE''). For example, ISE offers market data products that
are similar to BONO SM: a data feed that shows the top of
the market entitled TOP Quote Feed,\14\ and a data feed that shows the
top five price levels entitled Depth of Market.\15\ NYSE offers a
market data product for Arca and Amex that is similar to BONO
SM and ITTO: a feed that shows top of book, last sale, and
depth of quote and is entitled NYSE Arca Book for Options.\16\ Phlx
offers a market data feed entitled TOPO that is similar to BONO
SM and shows orders and quotes at the top of the market, as
well as trades; and a TOPO Plus Orders feed that is similar to ITTO and
shows the data in the TOPO data feed as well as the depth of
orders.\17\ A subsidiary of CBOE for
[[Page 35500]]
which CBOE charges fees offers a market data feed that is similar to
BONO SM and shows BBO, last sale, and top of book data.\18\
And BATS offers Multicast PITCH, which is their depth of market and
last sale feed similar to ITTO.\19\
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\14\ The ISE TOP Quote Feed has a monthly base access fee of
$5,000 applicable to professionals and non-professionals plus a $10
variable device fee for professionals and a no device fee for
internal use professionals; or a flat fixed enterprise fee of $2,500
for professionals and a $2,000 fee for internal use professionals.
The Exchange notes that the monthly fees for the ISE TOP Quote Feed
are higher than those proposed in this filing.
\15\ The ISE Depth of Market Feed has a monthly base access fee
of $5,000 applicable to professionals and non-professionals plus a
$50 variable device fee for professionals and a $5 per device fee
for external distribution non-professionals; or a flat fixed
enterprise fee of $7,500 for internal use professionals, $12,500 for
external use professionals, and $10,000 for non-professionals. The
Exchange notes that the monthly fees for ISE Depth of Market are
higher than those proposed in this filing for a more robust product.
\16\ The fee for NYSE Arca Book for Options is $750 per month.
\17\ TOPO Plus Orders has a monthly fee of $4,000 for internal
distributors or $5,000 for external distributors plus a monthly fee
of $1 per non-professional subscribers (users) and $20 for
professional subscribers. The Exchange notes that the monthly fees
for TOPO Plus Orders are higher than those proposed in this filing.
See Securities Exchange Act Release No. 62194 (May 28, 2010), 75 FR
31830 (June 4, 2010) (SR-Phlx-2010-48)(order approving proposal
related to TOPO Plus Orders market data fees).
\18\ The subsidiary is identified as Market Data Express, LLC
(``MDX'') by CBOE, which indicates that the feed will also provide
data regarding contingency orders and complex strategies. The
monthly fee charged by CBOE for the data is $3,500 plus a $25 per
user or device fee. See Securities Exchange Act Release No. 63997
(March 1, 2011), 76 FR 12388 (March 7, 2011) (SR-CBOE-2011-014)
(notice of filing and immediate effectiveness). In the filing, CBOE
specifically references as similar products the Phlx TOPO Plus
Orders feed and the ISE Depth of Market Feed.
\19\ BATS offers Multicast PITCH without charge ostensibly to
attract order flow to that exchange.
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The Exchange believes that the continued availability of BONO\SM\
and ITTO data feeds enhances transparency, fosters competition among
orders and markets, and enables buyers and sellers to obtain better
prices.
2. Statutory Basis
NASDAQ believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\20\ in general and with
Sections 6(b)(5) of the Act,\21\ in particular in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, to foster cooperation and
coordination with persons engaged in regulating, clearing, settling,
processing information with respect to, and facilitating transactions
in securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
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\20\ 15 U.S.C. 78f.
\21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
In adopting Regulation NMS, the Commission granted self-regulatory
organizations like NASDAQ 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. NASDAQ believes that this proposal is in
keeping with those principles by promoting increased transparency
through the dissemination of more useful proprietary data and also by
clarifying its availability to various market participants.
Additionally, NASDAQ has made a voluntary decision to make this
market data available. NASDAQ is not required by the Exchange Act in
the first instance to make the data available, unlike the best bid and
offer which must be made available under the Act. NASDAQ has chosen to
make the noted data available to improve market quality, to attract
order flow, and to increase transparency; and will continue to make the
data available until such time as NASDAQ changes its rule.
NASDAQ believes that its ITTO and BONO,SM which includes
the NBBO and last sale information for trades executed on NOM in
BONO,SM are precisely the sort of market data products that
the Commission envisioned when it adopted Regulation NMS. The
Commission concluded that Regulation NMS--by lessening regulation of
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.\22\
\22\ Securities Exchange Act Release No. 51808 (June 9, 2005),
70 FR 37496 (June 29, 2005).
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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.
The recent decision of the United States Court of Appeals for the
District of Columbia Circuit in NetCoaliton v. SEC, No. 09-1042 (D.C.
Cir. 2010) upheld the Commission's reliance upon 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, 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 agreed with the Commission's conclusion that ``Congress
intended that `competitive forces should dictate the services and
practices that constitute the U.S. national market system for trading
equity securities.' '' \23\
---------------------------------------------------------------------------
\23\ NetCoaliton v. SEC at p. 16.
---------------------------------------------------------------------------
The Court in NetCoalition, although upholding the Commission's
conclusion that competitive forces may be relied upon to establish the
fairness of prices, nevertheless concluded that the record in that case
did not adequately support the Commission's conclusions as to the
competitive nature of the market for NYSEArca's data product at issue
in that case. As discussed previously and explained below in NASDAQ's
Statement on Burden on Competition, however, NASDAQ believes that there
is substantial evidence of competition in the marketplace for data that
was not in the record in the NetCoalition case, and that the Commission
is entitled to rely upon such evidence in concluding that the fees
established in this filing are the product of competition, and
therefore in accordance with the relevant statutory standards.\24\
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\24\ It should also be noted that Section 916 of Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank
Act'') has amended paragraph (A) of Section 19(b)(3) of the Act, 15
U.S.C. 78s(b)(3) to make it clear that all exchange fees, including
fees for market data, may be filed by exchanges on an immediately
effective basis. Although this change in the law does not alter the
Commission's authority to evaluate and ultimately disapprove
exchange rules if it concludes that they are not consistent with the
Act, it unambiguously reflects a conclusion that market data fee
changes do not require prior Commission review before taking effect,
and that a formal proceeding with regard to a particular fee change
is required only if the Commission determines that it is necessary
or appropriate to suspend the fee and institute such a proceeding.
---------------------------------------------------------------------------
Competitive products similar to BONO SM and ITTO are, as
previously discussed, offered by other exchanges, albeit sometimes at
higher prices. ISE offers two data products similar to BONO
SM that are called TOP Quote Feed, Depth of Market and have
fees higher that those proposed in this filing.\25\ NYSE offers a
market data product similar to BONO SM and ITTO called NYSE
Arca Book of Options that has market data for NYSE Arca and NYAE Amex.
Phlx offers a market data product that is similar to ITTO.\26\ CBOE
offers a market data product that is similar to BONO.SM \27\
BATS offers a market data product similar to ITTO.
[[Page 35501]]
Moreover, the Exchange notes that, as a substitute for exchange data,
consolidated market data (e.g. last sale, NBBO, current quotes) are
also available from securities information processors such as OPRA.
---------------------------------------------------------------------------
\25\ For the fees related to ISE TOP Quote Feed and Depth of
Market, see supra notes 14 and 15.
\26\ For the fees related to NYSE Arca Book of Options and Phlx
TOPO Plus Orders, see supra notes 16 and 17.
\27\ For the fees related to the CBOE market data product, see
supra note 18.
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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. NASDAQ's ability to
price its BONO SM and ITTO products is constrained by (1)
Competition between exchanges and other trading platforms that compete
with each other in a variety of dimensions; (2) the existence of
inexpensive real-time consolidated data and free delayed consolidated
data; and (3) the inherent contestability of the market for proprietary
last sale data. NASDAQ believes that the Dodd-Frank Act amendments to
Section 19 materially alter the scope of the Commission's review of
future market data filings, by creating a presumption that all fees may
take effect immediately, without prior analysis by the Commission of
the competitive environment. Even in the absence of this important
statutory change, however, NASDAQ believes that a record may readily be
established to demonstrate the competitive nature of the market in
question.
The market for market data products is competitive and inherently
contestable because there is fierce 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'')
and electronic communication networks (``ECNs''). For example, the
Exchange has noted that numerous other U.S. options exchanges offer
market data products that are substantially similar to the ITTO and
BONO SM products, which the Exchange must consider in its
pricing discipline in order to compete for listings, trades, and the
market data itself.
The large number of SROs, 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,
ATS, and BD is currently permitted to produce proprietary data
products, and many currently do or have announced plans to do so,
including ISE, CBOE, NYSE (NYSE Amex and NYSE Arca), Phlx, and BATS.
Indeed, the Exchange has discussed a host of products that are similar
to ITTO and BONO,SM including: ISE's TOP Quote Feed and
Depth of Market feed; NYSE's Arca Book of Options feed; Phlx's TOPO
Plus Orders feed; BATS' Multicast PITCH feed; and CBOE's recently fee
liable data feed through MDX.
Furthermore, 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 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.
Competition among platforms has driven NASDAQ continually to
improve its platform data offerings and to cater to customers' data
needs. For example, NASDAQ has been offering front end applications
such as its NetView and ITCH equity data products and ITTO and BONO
SM options data products to help customers utilize data. Yet
another example of the continuous effort by exchanges to improve
platform data is Phlx's TOPO Plus Orders and TOPO data products.
[[Page 35502]]
Moreover, the Exchange believes that 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
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.
In the recent filing approving the aforementioned Phlx TOPO Plus
Orders data feed,\28\ the Commission recognized the intense competition
among exchanges, particularly as related to options market data,
stating:
---------------------------------------------------------------------------
\28\ See Securities Exchange Act Release No. 62194 (May 28,
2010), 75 FR 31830 (June 4, 2010) (SR-Phlx-2010-48) (order approving
proposal related to TOPO Plus Orders market data fees).
---------------------------------------------------------------------------
Phlx currently competes with seven other options exchanges for
order flow. Attracting order flow is an essential part of Phlx's
competitive success. If Phlx cannot attract order flow to its market,
it will not be able to execute transactions. If Phlx cannot execute
transactions on its market, it will not generate transaction revenue.
If Phlx cannot attract orders or execute transactions on its market, it
will not have market data to distribute, for a fee or otherwise, and
will not earn market data revenue and thus not be competitive with
other exchanges that have this ability. This compelling need to attract
order flow imposes significant pressure on Phlx to act reasonably in
setting its fees for Phlx market data, particularly given that the
market participants that will pay such fees often will be the same
market participants from whom Phlx must attract order flow. These
market participants include broker-dealers that control the handling of
a large volume of customer and proprietary order flow. Given the
portability of order flow from one exchange to another, any exchange
that sought to charge unreasonably high data fees would risk alienating
many of the same customers on whose orders it depends for competitive
survival.
The primary competition and anti-trust regulator in the U.S., the
Antitrust Division of the U.S. Department of Justice (the ``Antitrust
Division''), has recognized the intensely competitive nature of
exchange market data. When analyzing competition among exchanges,
Assistant Attorney General Christine Varney recently stated:
If the acquisition [of NYSE by NASDAQ and ICE] proceeded, it would
have eliminated substantial competition in the following ways * * *
NASDAQ and NYSE also compete head to head to offer real-time equity
data products. These data products include the best bid and offer of
every exchange and information on each equity trade, including the last
sale. Post-merger, the [new] firm would have the ability to raise the
cost of real-time proprietary equity data and the firm would be less
likely to develop new, innovative, real-time data products.\29\
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\29\ See Remarks as Prepared for Delivery by Assistant Attorney
General Christine Varney Regarding NASDAQ OMX Group Inc. and
Intercontinental Exchange Inc. Abandoning Their Bid for NYSE
Euronext (May 16, 2011).
---------------------------------------------------------------------------
In establishing the price for the BONO SM and ITTO
products, NASDAQ considered the competitiveness of the market for data
and all of the implications of that competition. NASDAQ believes that
it has considered all relevant factors and has not considered
irrelevant factors in order to establish a fair, reasonable, and not
unreasonably discriminatory fees and an equitable allocation of fees
among all users. The existence of alternatives to ITTO and
BONO,SM including noted competitive products by other
exchanges and real-time consolidated last sale and NBBO data, free
delayed consolidated data, and even proprietary data from other
sources, ensures that NASDAQ cannot set unreasonable fees, or fees that
are unreasonably discriminatory, without losing business to these
alternatives.\30\ NASDAQ believes that this demonstrates the
consistency of these fees with applicable statutory standards.
---------------------------------------------------------------------------
\30\ The Exchange notes also that competitiveness in the market
data field (as in other areas such as, for example, securities
offerings and pricing) encourages--and often requires--exchanges to
be innovative and forward-thinking in terms of market data product
offerings.
---------------------------------------------------------------------------
Accordingly, 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 purpose of the Act.
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.\31\ 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.
---------------------------------------------------------------------------
\31\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------
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 (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NASDAQ-2011-075 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-2011-075. 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 (https://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 such filing will also 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
[[Page 35503]]
identifying information from submissions. You should submit only
information that you wish to make available publicly. All submissions
should refer to File No. SR-NASDAQ-2011-075 and should be submitted on
or before July 8, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\32\
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\32\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-15015 Filed 6-16-11; 8:45 am]
BILLING CODE 8011-01-P
