Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Extend Fee Pilot Program for NASDAQ Last Sale, 63334-63339 [2011-26270]
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Federal Register / Vol. 76, No. 197 / Wednesday, October 12, 2011 / Notices
Commissioner Walter, as duty officer,
determined that no earlier notice thereof
was possible.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
For further information and to
ascertain what, if any, matters have been
added, deleted or postponed, please
contact:
The Office of the Secretary at (202)
551–5400.
October 6, 2011.
Elizabeth M. Murphy,
Secretary.
Dated: October 6, 2011.
Elizabeth M. Murphy,
Secretary.
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Extend Fee
Pilot Program for NASDAQ Last Sale
[FR Doc. 2011–26435 Filed 10–7–11; 11:15 am]
[FR Doc. 2011–26386 Filed 10–7–11; 11:15 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65488; File No. SR–
NASDAQ–2011–132]
BILLING CODE 8011–01–P
October 5, 2011.
SECURITIES AND EXCHANGE
COMMISSION
jlentini on DSK4TPTVN1PROD with NOTICES
Sunshine Act Meeting
Notice is hereby given, pursuant to
the provisions of the Government in the
Sunshine Act, Public Law 94–409, that
the Securities and Exchange
Commission will hold a Closed Meeting
on Thursday, October 13, 2011 at 3:30
p.m.
Commissioners, Counsel to the
Commissioners, the Secretary to the
Commission, and recording secretaries
will attend the Closed Meeting. Certain
staff members who have an interest in
the matters also may be present.
The General Counsel of the
Commission, or his designee, has
certified that, in his opinion, one or
more of the exemptions set forth in 5
U.S.C. 552b(c)(3), (5), (7), 9(B) and (10)
and 17 CFR 200.402(a)(3), (5), (7), 9(ii)
and (10), permit consideration of the
scheduled matters at the Closed
Meeting.
Commissioner Walter, as duty officer,
voted to consider the items listed for the
Closed Meeting in a closed session.
The subject matter of the Closed
Meeting scheduled for Thursday,
October 13, 2011 will be:
Institution and settlement of
injunctive actions;
Institution and settlement of
administrative proceedings;
Adjudicatory matters; and
Other matters relating to enforcement
proceedings.
At times, changes in Commission
priorities require alterations in the
scheduling of meeting items.
For further information and to
ascertain what, if any, matters have been
added, deleted or postponed, please
contact:
The Office of the Secretary at (202)
551–5400.
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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
September 27, 2011, The NASDAQ
Stock Market LLC (‘‘NASDAQ’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III 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
NASDAQ is proposing to extend for
three months the fee pilot pursuant to
which NASDAQ distributes the
NASDAQ Last Sale (‘‘NLS’’) market data
products. NLS allows data distributors
to have access to real-time market data
for a capped fee, enabling those
distributors to provide free access to the
data to millions of individual investors
via the internet and television.
Specifically, NASDAQ offers the
‘‘NASDAQ Last Sale for NASDAQ’’ and
‘‘NASDAQ Last Sale for NYSE/Amex’’
data feeds containing last sale activity in
US equities within the NASDAQ Market
Center and reported to the jointlyoperated FINRA/NASDAQ Trade
Reporting Facility (‘‘FINRA/NASDAQ
TRF’’), which is jointly operated by
NASDAQ and the Financial Industry
Regulatory Authority (‘‘FINRA’’). The
purpose of this proposal is to extend the
existing pilot program for three months,
from October 1, 2011 through December
31, 2011.
This pilot program supports the
aspiration of Regulation NMS to
increase the availability of proprietary
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
Frm 00057
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data by allowing market forces to
determine the amount of proprietary
market data information that is made
available to the public and at what
price. During the pilot period, the
program has vastly increased the
availability of NASDAQ proprietary
market data to individual investors.
Based upon data from NLS distributors,
NASDAQ believes that since its launch
in July 2008, the NLS data has been
viewed by over 50,000,000 investors on
Web sites operated by Google,
Interactive Data, and Dow Jones, among
others.
The text of the proposed rule change
is below. Proposed new language is in
italics; proposed deletions are in
brackets.
*
*
*
*
*
7039. NASDAQ Last Sale Data Feeds
(a) For a three month pilot period
commencing on [July] October 1, 2011,
NASDAQ shall offer two proprietary
data feeds containing real-time last sale
information for trades executed on
NASDAQ or reported to the NASDAQ/
FINRA Trade Reporting Facility.
(1)–(2) No change.
(b)–(c) 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, 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
Prior to the launch of NLS, public
investors that wished to view market
data to monitor their portfolios
generally had two choices: (1) Pay for
real-time market data or (2) use free data
that is 15 to 20 minutes delayed. To
increase consumer choice, NASDAQ
proposed a pilot to offer access to realtime market data to data distributors for
a capped fee, enabling those distributors
to disseminate the data at no cost to
millions of internet users and television
viewers. NASDAQ now proposes a
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three-month extension of that pilot
program, subject to the same fee
structure as is applicable today.3
NLS consists of two separate ‘‘Level
1’’ products containing last sale activity
within the NASDAQ market and
reported to the jointly-operated FINRA/
NASDAQ TRF. First, the ‘‘NASDAQ
Last Sale for NASDAQ’’ data product is
a real-time data feed that provides realtime last sale information including
execution price, volume, and time for
executions occurring within the
NASDAQ system as well as those
reported to the FINRA/NASDAQ TRF.
Second, the ‘‘NASDAQ Last Sale for
NYSE/Amex’’ data product provides
real-time last sale information including
execution price, volume, and time for
NYSE- and NYSE Amex-securities
executions occurring within the
NASDAQ system as well as those
reported to the FINRA/NASDAQ TRF.
By contrast, the securities information
processors (‘‘SIPs’’) that provide ‘‘core’’
data consolidate last sale information
from all exchanges and trade reporting
facilities (‘‘TRFs’’). Thus, NLS replicates
a subset of the information provided by
the SIPs.
NASDAQ established two different
pricing models, one for clients that are
able to maintain username/password
entitlement systems and/or quote
counting mechanisms to account for
usage, and a second for those that are
not. Firms with the ability to maintain
username/password entitlement systems
and/or quote counting mechanisms are
eligible for a specified fee schedule for
the NASDAQ Last Sale for NASDAQ
Product and a separate fee schedule for
the NASDAQ Last Sale for NYSE/Amex
Product. Firms that are unable to
maintain username/password
entitlement systems and/or quote
counting mechanisms also have
multiple options for purchasing the
NASDAQ Last Sale data. These firms
choose between a ‘‘Unique Visitor’’
model for internet delivery or a
‘‘Household’’ model for television
delivery. Unique Visitor and Household
populations must be reported monthly
and must be validated by a third-party
vendor or ratings agency approved by
NASDAQ at NASDAQ’s sole discretion.
In addition, to reflect the growing
confluence between these media outlets,
3 NASDAQ previously stated that it would file a
proposed rule change to make the NLS pilot fees
permanent. NASDAQ has also informed
Commission staff that it is consulting with FINRA
to develop a proposed rule change by FINRA to
allow inclusion of FINRA/NASDAQ TRF data in
NLS on a permanent basis. Based on the progress
of these discussions, NASDAQ expects that it and
FINRA will both submit filings to make NLS
permanent prior to the expiration of the threemonth pilot period.
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NASDAQ offered a reduction in fees
when a single distributor distributes
NASDAQ Last Sale Data Products via
multiple distribution mechanisms.
Second, NASDAQ established a cap
on the monthly fee, currently set at
$50,000 per month for all NASDAQ Last
Sale products. The fee cap enables
NASDAQ to compete effectively against
other exchanges that also offer last sale
data for purchase or at no charge.
As with the distribution of other
NASDAQ proprietary products, all
distributors of the NASDAQ Last Sale
for NASDAQ and/or NASDAQ Last Sale
for NYSE/Amex products pay a single
$1,500/month NASDAQ Last Sale
Distributor Fee in addition to any
applicable usage fees. The $1,500
monthly fee applies to all distributors
and does not vary based on whether the
distributor distributes the data
internally or externally or distributes
the data via both the internet and
television.
2. Statutory Basis
NASDAQ believes that the proposed
rule change is consistent with the
provisions of Section 6 of the Act,4 in
general, and with Section 6(b)(4) of the
Act,5 in particular, in that it provides an
equitable allocation of reasonable fees
among users and recipients of the data.
In adopting Regulation NMS, the
Commission granted self-regulatory
organizations (‘‘SROs’’) and brokerdealers (‘‘BDs’’) 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 its NASDAQ
Last Sale market data products are
precisely the sort of market data product
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
4 15
5 15
PO 00000
U.S.C. 78f.
U.S.C. 78f(b)(4).
Frm 00058
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own internal analysis of the need for such
data.6
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 BDs 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 [sic], 615 F.3d 525 (DC 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 [sic], at 535
(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.’ ’’ 7
The Court in NetCoalition, while
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 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.8 Moreover, NASDAQ further
6 Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005).
7 NetCoaliton [sic], at 535.
8 It should also be noted that Section 916 of DoddFrank 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
Continued
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Federal Register / Vol. 76, No. 197 / Wednesday, October 12, 2011 / Notices
notes that the product at issue in this
filing—a NASDAQ last sale data
product that replicates a subset of the
information available through ‘‘core’’
data products whose fees have been
reviewed and approved by the SEC—is
quite different from the NYSEArca
depth-of-book data product at issue in
NetCoalition. Accordingly, any findings
of the court with respect to that product
may not be relevant to the product at
issue in this filing.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
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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 Last Sale
Data 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 market-specific data and free
delayed consolidated data; and (3) the
inherent contestability of the market for
proprietary last sale data.
The market for proprietary last sale
data products is currently 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.
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
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.
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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. Moreover, 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,
the operation of the exchange is
characterized by high fixed costs and
low marginal costs. This cost structure
is common in content and content
distribution industries such as software,
where developing new software
typically requires a large initial
investment (and continuing large
investments to ‘‘upgrade’’ the software),
but once the software is developed, the
incremental cost of providing that
software to an additional user is
typically small, or even zero (e.g., if the
software can be downloaded over the
internet after being purchase).9 In
NASDAQ’s case, it is costly to build and
maintain a trading platform, but the
incremental cost of trading each
additional share on an existing platform,
or distributing an additional instance of
data, is very low. Market information
and executions are each produced
jointly (in the sense that the activities of
trading and placing order are the source
of the information that is distributed)
and are each subject to significant scale
economies. In such cases, marginal cost
pricing is not feasible because if all sales
were priced at the margin, NASDAQ
would be unable to defray its platform
costs of providing the joint products.
An exchange’s BD customers view the
costs of transaction executions and of
data as a unified cost of doing business
with the exchange. A BD 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 BD chooses to buy to
support its trading decisions (or those of
9 See William J. Baumol and Daniel G. Swanson,
‘‘The New Economy and Ubiquitous Competitive
Price Discrimination: Identifying Defensible Criteria
of Market Power,’’ Antitrust Law Journal, Vol. 70,
No. 3 (2003).
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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 BD will choose not to buy it.
Moreover, as a BD chooses to direct
fewer orders to a particular exchange,
the value of the product to that BD
decreases, for two reasons. First, the
product will contain less information,
because executions of the BD’s trading
activity will not be reflected in it.
Second, and perhaps more important,
the product will be less valuable to that
BD because it does not provide
information about the venue to which it
is directing its orders. Data from the
competing venue to which the BD is
directing orders will become
correspondingly more valuable.
Similarly, in the case of products such
as NLS that are distributed through
market data vendors, the vendors
provide 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 Google, impose
a discipline by providing only data that
will enable them to attract ‘‘eyeballs’’
that contribute to their advertising
revenue. Retail BDs, 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.
Moreover, NASDAQ believes that
products such as NLS can enhance
order flow to NASDAQ by providing
more widespread distribution of
information about transactions in real
time, thereby encouraging wider
participation in the market by investors
with access to the internet or television.
Conversely, the value of such products
to distributors and investors decreases if
order flow falls, because the products
contain less content.
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
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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.
NASDAQ pays rebates to attract orders,
charges relatively low prices for market
information and charges relatively high
prices for accessing posted liquidity.
Other platforms may choose a strategy
of paying lower liquidity rebates to
attract orders, setting relatively low
prices for accessing posted liquidity,
and setting relatively high prices for
market information. Still others may
provide most data free of charge and
rely exclusively on transaction fees to
recover their costs. Finally, some
platforms may incentivize use by
providing opportunities for equity
ownership, which may allow them to
charge lower direct fees for executions
and data.
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. Such regulation is
unnecessary because an ‘‘excessive’’
price for one of the joint products will
ultimately have to be reflected in lower
prices for other products sold by the
firm, or otherwise the firm experience a
loss in the volume of its sales that will
be adverse to its overall profitability. In
other words, an increase in the price of
data will ultimately have to be
accompanied by a decrease in the cost
of executions, or the volume of both
data and executions will fall.
The level of competition and
contestability in the market is evident in
the numerous alternative venues that
compete for order flow, including
thirteen SRO markets, as well as
internalizing BDs and various forms of
alternative trading systems (‘‘ATSs’’),
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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. It is common for BDs to further
and exploit this competition by sending
their order flow and transaction reports
to multiple markets, rather than
providing them all to a single market.
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, BATS, and
Direct Edge.
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 BDs’ 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 a core data product,
an SRO proprietary product, and/or a
non-SRO proprietary product, the data
available in proprietary products is
exponentially greater than the actual
number of orders and transaction
reports that exist in the marketplace.
Indeed, in the case of NLS, the data
provided through that product appears
both in (i) real-time core data products
offered by the SIPs for a fee, and (ii) free
SIP data products with a 15-minute time
delay, and finds a close substitute in
last-sale products of competing venues.
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
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63337
the largest electronic trading platforms
and proprietary data producers:
Archipelago, Bloomberg Tradebook,
Island, RediBook, Attain, TracECN,
BATS Trading and Direct Edge. Today,
BATS and Direct Edge provide data at
no charge in order to attract order flow,
and use market data revenue rebates
from the resulting executions to
maintain low execution charges for their
users. 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 BDs have previously
published their proprietary data
individually, Regulation NMS
encourages market data vendors and
BDs 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.
Moreover, consolidated data provides
two additional measures of pricing
discipline for proprietary data products
that are a subset of the consolidated data
stream. First, the consolidated data is
widely available in real-time at $1 per
month for non-professional users.
Second, consolidated data is also
available at no cost with a 15- or 20minute delay. Because consolidated
data contains marketwide information,
it effectively places a cap on the fees
assessed for proprietary data (such as
last sale data) that is simply a subset of
the consolidated data. The mere
availability of low-cost or free
consolidated data provides a powerful
form of pricing discipline for
proprietary data products that contain
data elements that are a subset of the
consolidated data, by highlighting the
optional nature of proprietary products.
The competitive nature of the market
for products such as NLS is borne out
by the performance of the market. In
May 2008, the internet portal Yahoo!
began offering its Web site viewers realtime last sale data (as well as best quote
data) provided by BATS Trading. In
response, in June 2008, NASDAQ
launched NLS, which was initially
subject to an ‘‘enterprise cap’’ of
$100,000 for customers receiving only
one of the NLS products, and $150,000
for customers receiving both products.
The majority of NASDAQ’s sales were at
the capped level. In early 2009, BATS
expanded its offering of free data to
include depth-of-book data. Also in
early 2009, NYSEArca announced the
launch of a competitive last sale product
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with an enterprise price of $30,000 per
month. In response, NASDAQ combined
the enterprise cap for the NLS products
and reduced the cap to $50,000 (i.e., a
reduction of $100,000 per month).
Although each of these products offers
only a specific subset of data available
from the SIPs, NASDAQ believes that
the products are viewed as substitutes
for each other and for core last-sale data,
rather than as products that must be
obtained in tandem. For example, while
the internet portal Yahoo! continues to
disseminate only the BATS last sale
product, Google disseminates only
NASDAQ’s product.
In this environment, a supercompetitive 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. The existence of
fierce competition for order flow
implies a high degree of price sensitivity
on the part of BDs with order flow, since
they may readily reduce costs by
directing orders toward the lowest-cost
trading venues. A BD 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. If a
platform increases its market data fees,
the change will affect the overall cost of
doing business with the platform, and
affected BDs will assess whether they
can lower their trading costs by
directing orders elsewhere and thereby
lessening the need for the more
expensive data. Similarly, increases in
the cost of NLS would impair the
willingness of distributors to take a
product for which there are numerous
alternatives, impacting NLS data
revenues, the value of NLS as a tool for
attracting order flow, and ultimately, the
volume of orders routed to NASDAQ
and the value of its other data products.
In establishing the price for the
NASDAQ Last Sale Products, NASDAQ
considered the competitiveness of the
market for last sale 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 numerous
alternatives to NLS, including real-time
consolidated data, free delayed
consolidated data, and proprietary data
from other sources ensures that
NASDAQ cannot set unreasonable fees,
or fees that are unreasonably
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discriminatory, without losing business
to these alternatives. Accordingly,
NASDAQ believes that the acceptance
of the NLS product in the marketplace
demonstrates the consistency of these
fees with applicable statutory standards.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Three comment letters were filed
regarding the proposed rule change as
originally published for comment
NASDAQ responded to these comments
in a letter dated December 13, 2007.
Both the comment letters and
NASDAQ’s response are available on
the SEC Web site at https://www.sec.gov/
comments/sr-nasdaq-2006–060/
nasdaq2006060.shtml. In addition, in
response to prior filings to extend the
NLS pilot,10 the Securities Industry and
Financial Markets Association
(‘‘SIFMA’’) and NetCoalition filed
comment letters contending that the
SEC should suspend and institute
disapproval proceedings with respect to
the filing.11 The letters incorrectly assert
that the NetCoalition case stands for the
proposition that the Commission must
review cost data to substantiate a
determination that competitive forces
constrain the price of market data. In
fact, the court held the opposite:
The petitioners believe that the SEC’s
market-based approach is prohibited under
the Exchange Act because the Congress
intended ‘‘fair and reasonable’’ to be
determined using a cost-based approach. The
SEC counters that, because it has statutorilygranted flexibility in evaluating market data
fees, its market-based approach is fully
consistent with the Exchange Act. We agree
with the SEC.12
10 Securities Exchange Act Release No. 64856
(July 12, 2011), 76 FR 41845 (July 15, 2011) (SR–
NASDAQ–2011–092); Securities Exchange Act
Release No. 64188 (April 5, 2011), 76 FR 20054
(April 11, 2011) (SR–NASDAQ–2011–044).
11 The most recent comment letter is captioned
with a reference to SR–NASDAQ–2011–092, but
then states that it is commenting on a proposal to
amend fees for NASDAQ Basic, an entirely different
data product.
12 NetCoalition, 615 F3d. at 534. While the court
noted that cost data could sometimes be relevant in
determining the reasonableness of fees, it
acknowledged that submission of cost data may be
inappropriate where there are ‘‘difficulties in
calculating the direct costs * * * of market data,’’
Id. at 539. That is the case here, due to the fact that
the fixed costs of market data production are
inseparable from the fixed costs of providing a
trading platform, and the marginal costs of market
data production are minimal or even zero. Because
the costs of providing execution services and
market data are not unique to either of the provided
services, there is no meaningful way to allocate
these costs among the two ‘‘joint products’’—and
any attempt to do so would result in inherently
arbitrary cost allocations.
The court explicitly acknowledged that the ‘‘joint
product’’ theory set forth by NASDAQ’s economic
PO 00000
Frm 00061
Fmt 4703
Sfmt 4703
SIFMA and NetCoalition further
contend the prior filing lacked evidence
supporting a conclusion that the market
for NLS is competitive, asserting that
arguments about competition for order
flow and substitutability were rejected
in NetCoalition. While the court did
determine that the record before it was
not sufficient to allow it to endorse
those theories on the facts of that case,
the court did not itself make any
conclusive findings about the actual
presence or absence of competition or
the accuracy of these theories: rather, it
simply made a finding about the state of
the SEC’s record. Moreover, analysis
about competition in the market for
depth-of-book data is only tangentially
relevant to the market for last sale data.
As discussed above and in the prior
filing, perfect and partial substitutes for
NLS exist in the form of real-time core
market data, free delayed core market
data, and the last sale products of
competing venues, additional
competitive entry is possible, and
evidence of competition is readily
apparent in the pricing behavior of the
venues offering last sale products and
the consumption patterns of their
customers. Thus, although NASDAQ
believes that the competitive nature of
the market for all market data, including
depth-of-book data, will ultimately be
established, SIFMA and NetCoalition’s
letters not only mischaracterize the
NetCoalition decision, they also fail to
address the characteristics of the
product at issue and the evidence
already presented.
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.13 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
experts in NetCoalition (and also described in this
filing) could explain the competitive dynamic of the
market and explain why consideration of cost data
would be unavailing. The court found, however,
that the Commission could not rely on the theory
because it was not in the Commission’s record. Id.
at 541 n.16. For the purpose of providing a
complete explanation of the theory, NASDAQ is
further submitting as Exhibit 3 to this filing a study
that was submitted to the Commission in SR–
NASDAQ–2011–10. See Statement of Janusz
Ordover and Gustavo Bamberger at 2–17 (December
29, 2010).
13 15 U.S.C. 78s(b)(3)(a)(ii) [sic].
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Federal Register / Vol. 76, No. 197 / Wednesday, October 12, 2011 / Notices
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–2011–132 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–2011–132. 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 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–2011–132 and should be
submitted on or before November 2,
2011.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.14
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011–26270 Filed 10–11–11; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–65489; File No. SR–CME–
2011–08]
Self-Regulatory Organizations;
Chicago Mercantile Exchange, Inc.;
Notice of Filing and Immediate
Effectiveness of Proposed Rule
Change and Amendment To Add One
Additional Series of Credit Default
Index Swaps Available for Clearing
October 5, 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
September 26, 2011, Chicago Mercantile
Exchange Inc. (‘‘CME’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change described in Items I, II and III
below, and an amendment thereto on
the same day,3 which items have been
prepared primarily by CME. CME filed
the proposed rule change pursuant to
Section 19(b)(3)(A) 4 of the Act and Rule
19b–4(f)(4)(i) 5 thereunder.
I. Self-Regulatory Organization’s
Statement of Terms of Substance of the
Proposed Rule Change
The text of the proposed rule change
is below. Italicized text indicates
additions; bracketed text indicates
deletions.
*
*
*
*
*
Chicago Mercantile Exchange Inc. Rulebook
Rule 100—80203—No Change.
*
*
*
*
CME Chapter 802 Rules: Appendix 1
Appendix 1
CDX Indices
CDX Index
Termination dat.
(scheduled termination)
Series
9
CDX North American Investment Grade (CDX.NA.IG) ...........................................................................
10
CDX North American Investment Grade (CDX.NA.IG) ...........................................................................
11
CDX North American Investment Grade (CDX.NA.IG) ...........................................................................
jlentini on DSK4TPTVN1PROD with NOTICES
CDX North American Investment Grade (CDX.NA.IG) ...........................................................................
12
CDX North American Investment Grade (CDX.NA.IG) ...........................................................................
13
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
14 17
2 17
1 15
3 The
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*
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CFR 240.19b–4.
amendment was technical in nature.
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5 17
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20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
20
Dec 2012.
Dec 2014.
Dec 2017.
Jun 2013.
Jun 2015.
Jun 2018.
Dec 2011.
Dec 2013.
Dec 2015.
Dec 2018.
Jun 2012.
Jun 2014.
Jun 2016.
Jun 2019.
Dec 2012.
Dec 2014.
Dec 2016.
U.S.C. 78s(b)(3)(A).
CFR 240.19b–4(f)(4)(i).
12OCN1
]]>Agencies
[Federal Register Volume 76, Number 197 (Wednesday, October 12, 2011)]
[Notices]
[Pages 63334-63339]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-26270]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-65488; File No. SR-NASDAQ-2011-132]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Extend Fee Pilot Program for NASDAQ Last Sale
October 5, 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 September 27, 2011, The NASDAQ Stock Market LLC (``NASDAQ'') filed
with the Securities and Exchange Commission (``Commission'') the
proposed rule change as described in Items I, II, and III 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.
---------------------------------------------------------------------------
\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 is proposing to extend for three months the fee pilot
pursuant to which NASDAQ distributes the NASDAQ Last Sale (``NLS'')
market data products. NLS allows data distributors to have access to
real-time market data for a capped fee, enabling those distributors to
provide free access to the data to millions of individual investors via
the internet and television. Specifically, NASDAQ offers the ``NASDAQ
Last Sale for NASDAQ'' and ``NASDAQ Last Sale for NYSE/Amex'' data
feeds containing last sale activity in US equities within the NASDAQ
Market Center and reported to the jointly-operated FINRA/NASDAQ Trade
Reporting Facility (``FINRA/NASDAQ TRF''), which is jointly operated by
NASDAQ and the Financial Industry Regulatory Authority (``FINRA''). The
purpose of this proposal is to extend the existing pilot program for
three months, from October 1, 2011 through December 31, 2011.
This pilot program supports the aspiration of Regulation NMS to
increase the availability of proprietary data by allowing market forces
to determine the amount of proprietary market data information that is
made available to the public and at what price. During the pilot
period, the program has vastly increased the availability of NASDAQ
proprietary market data to individual investors. Based upon data from
NLS distributors, NASDAQ believes that since its launch in July 2008,
the NLS data has been viewed by over 50,000,000 investors on Web sites
operated by Google, Interactive Data, and Dow Jones, among others.
The text of the proposed rule change is below. Proposed new
language is in italics; proposed deletions are in brackets.
* * * * *
7039. NASDAQ Last Sale Data Feeds
(a) For a three month pilot period commencing on [July] October 1,
2011, NASDAQ shall offer two proprietary data feeds containing real-
time last sale information for trades executed on NASDAQ or reported to
the NASDAQ/FINRA Trade Reporting Facility.
(1)-(2) No change.
(b)-(c) 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, 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
Prior to the launch of NLS, public investors that wished to view
market data to monitor their portfolios generally had two choices: (1)
Pay for real-time market data or (2) use free data that is 15 to 20
minutes delayed. To increase consumer choice, NASDAQ proposed a pilot
to offer access to real-time market data to data distributors for a
capped fee, enabling those distributors to disseminate the data at no
cost to millions of internet users and television viewers. NASDAQ now
proposes a
[[Page 63335]]
three-month extension of that pilot program, subject to the same fee
structure as is applicable today.\3\
---------------------------------------------------------------------------
\3\ NASDAQ previously stated that it would file a proposed rule
change to make the NLS pilot fees permanent. NASDAQ has also
informed Commission staff that it is consulting with FINRA to
develop a proposed rule change by FINRA to allow inclusion of FINRA/
NASDAQ TRF data in NLS on a permanent basis. Based on the progress
of these discussions, NASDAQ expects that it and FINRA will both
submit filings to make NLS permanent prior to the expiration of the
three-month pilot period.
---------------------------------------------------------------------------
NLS consists of two separate ``Level 1'' products containing last
sale activity within the NASDAQ market and reported to the jointly-
operated FINRA/NASDAQ TRF. First, the ``NASDAQ Last Sale for NASDAQ''
data product is a real-time data feed that provides real-time last sale
information including execution price, volume, and time for executions
occurring within the NASDAQ system as well as those reported to the
FINRA/NASDAQ TRF. Second, the ``NASDAQ Last Sale for NYSE/Amex'' data
product provides real-time last sale information including execution
price, volume, and time for NYSE- and NYSE Amex-securities executions
occurring within the NASDAQ system as well as those reported to the
FINRA/NASDAQ TRF. By contrast, the securities information processors
(``SIPs'') that provide ``core'' data consolidate last sale information
from all exchanges and trade reporting facilities (``TRFs''). Thus, NLS
replicates a subset of the information provided by the SIPs.
NASDAQ established two different pricing models, one for clients
that are able to maintain username/password entitlement systems and/or
quote counting mechanisms to account for usage, and a second for those
that are not. Firms with the ability to maintain username/password
entitlement systems and/or quote counting mechanisms are eligible for a
specified fee schedule for the NASDAQ Last Sale for NASDAQ Product and
a separate fee schedule for the NASDAQ Last Sale for NYSE/Amex Product.
Firms that are unable to maintain username/password entitlement systems
and/or quote counting mechanisms also have multiple options for
purchasing the NASDAQ Last Sale data. These firms choose between a
``Unique Visitor'' model for internet delivery or a ``Household'' model
for television delivery. Unique Visitor and Household populations must
be reported monthly and must be validated by a third-party vendor or
ratings agency approved by NASDAQ at NASDAQ's sole discretion. In
addition, to reflect the growing confluence between these media
outlets, NASDAQ offered a reduction in fees when a single distributor
distributes NASDAQ Last Sale Data Products via multiple distribution
mechanisms.
Second, NASDAQ established a cap on the monthly fee, currently set
at $50,000 per month for all NASDAQ Last Sale products. The fee cap
enables NASDAQ to compete effectively against other exchanges that also
offer last sale data for purchase or at no charge.
As with the distribution of other NASDAQ proprietary products, all
distributors of the NASDAQ Last Sale for NASDAQ and/or NASDAQ Last Sale
for NYSE/Amex products pay a single $1,500/month NASDAQ Last Sale
Distributor Fee in addition to any applicable usage fees. The $1,500
monthly fee applies to all distributors and does not vary based on
whether the distributor distributes the data internally or externally
or distributes the data via both the internet and television.
2. Statutory Basis
NASDAQ believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\4\ in general, and with Section
6(b)(4) of the Act,\5\ in particular, in that it provides an equitable
allocation of reasonable fees among users and recipients of the data.
In adopting Regulation NMS, the Commission granted self-regulatory
organizations (``SROs'') and broker-dealers (``BDs'') 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.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78f.
\5\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------
NASDAQ believes that its NASDAQ Last Sale market data products are
precisely the sort of market data product 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.\6\
---------------------------------------------------------------------------
\6\ 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 BDs 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 [sic], 615 F.3d 525
(DC 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 [sic], at 535 (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.' '' \7\
---------------------------------------------------------------------------
\7\ NetCoaliton [sic], at 535.
---------------------------------------------------------------------------
The Court in NetCoalition, while 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 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.\8\ Moreover, NASDAQ further
[[Page 63336]]
notes that the product at issue in this filing--a NASDAQ last sale data
product that replicates a subset of the information available through
``core'' data products whose fees have been reviewed and approved by
the SEC--is quite different from the NYSEArca depth-of-book data
product at issue in NetCoalition. Accordingly, any findings of the
court with respect to that product may not be relevant to the product
at issue in this filing.
---------------------------------------------------------------------------
\8\ 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.
---------------------------------------------------------------------------
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 Last Sale Data 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 market-specific data and free delayed
consolidated data; and (3) the inherent contestability of the market
for proprietary last sale data.
The market for proprietary last sale data products is currently
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.
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 trade executions, exchange data products cannot
exist. Moreover, 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, the operation of the
exchange is characterized by high fixed costs and low marginal costs.
This cost structure is common in content and content distribution
industries such as software, where developing new software typically
requires a large initial investment (and continuing large investments
to ``upgrade'' the software), but once the software is developed, the
incremental cost of providing that software to an additional user is
typically small, or even zero (e.g., if the software can be downloaded
over the internet after being purchase).\9\ In NASDAQ's case, it is
costly to build and maintain a trading platform, but the incremental
cost of trading each additional share on an existing platform, or
distributing an additional instance of data, is very low. Market
information and executions are each produced jointly (in the sense that
the activities of trading and placing order are the source of the
information that is distributed) and are each subject to significant
scale economies. In such cases, marginal cost pricing is not feasible
because if all sales were priced at the margin, NASDAQ would be unable
to defray its platform costs of providing the joint products.
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\9\ See William J. Baumol and Daniel G. Swanson, ``The New
Economy and Ubiquitous Competitive Price Discrimination: Identifying
Defensible Criteria of Market Power,'' Antitrust Law Journal, Vol.
70, No. 3 (2003).
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An exchange's BD customers view the costs of transaction executions
and of data as a unified cost of doing business with the exchange. A BD
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 BD 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 BD will choose not to buy it. Moreover, as a BD
chooses to direct fewer orders to a particular exchange, the value of
the product to that BD decreases, for two reasons. First, the product
will contain less information, because executions of the BD's trading
activity will not be reflected in it. Second, and perhaps more
important, the product will be less valuable to that BD because it does
not provide information about the venue to which it is directing its
orders. Data from the competing venue to which the BD is directing
orders will become correspondingly more valuable.
Similarly, in the case of products such as NLS that are distributed
through market data vendors, the vendors provide 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 Google, impose a discipline by
providing only data that will enable them to attract ``eyeballs'' that
contribute to their advertising revenue. Retail BDs, 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. Moreover, NASDAQ believes that products
such as NLS can enhance order flow to NASDAQ by providing more
widespread distribution of information about transactions in real time,
thereby encouraging wider participation in the market by investors with
access to the internet or television. Conversely, the value of such
products to distributors and investors decreases if order flow falls,
because the products contain less content.
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
[[Page 63337]]
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. NASDAQ pays rebates to attract orders, charges relatively
low prices for market information and charges relatively high prices
for accessing posted liquidity. Other platforms may choose a strategy
of paying lower liquidity rebates to attract orders, setting relatively
low prices for accessing posted liquidity, and setting relatively high
prices for market information. Still others may provide most data free
of charge and rely exclusively on transaction fees to recover their
costs. Finally, some platforms may incentivize use by providing
opportunities for equity ownership, which may allow them to charge
lower direct fees for executions and data.
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. Such regulation is unnecessary because an ``excessive'' price
for one of the joint products will ultimately have to be reflected in
lower prices for other products sold by the firm, or otherwise the firm
experience a loss in the volume of its sales that will be adverse to
its overall profitability. In other words, an increase in the price of
data will ultimately have to be accompanied by a decrease in the cost
of executions, or the volume of both data and executions will fall.
The level of competition and contestability in the market is
evident in the numerous alternative venues that compete for order flow,
including thirteen SRO markets, as well as internalizing 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. It is common for BDs to
further and exploit this competition by sending their order flow and
transaction reports to multiple markets, rather than providing them all
to a single market. 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, BATS, and Direct Edge.
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 BDs'
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 a core data product,
an SRO proprietary product, and/or a non-SRO proprietary product, the
data available in proprietary products is exponentially greater than
the actual number of orders and transaction reports that exist in the
marketplace. Indeed, in the case of NLS, the data provided through that
product appears both in (i) real-time core data products offered by the
SIPs for a fee, and (ii) free SIP data products with a 15-minute time
delay, and finds a close substitute in last-sale products of competing
venues.
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. Today,
BATS and Direct Edge provide data at no charge in order to attract
order flow, and use market data revenue rebates from the resulting
executions to maintain low execution charges for their users. 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 BDs have
previously published their proprietary data individually, Regulation
NMS encourages market data vendors and BDs 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.
Moreover, consolidated data provides two additional measures of
pricing discipline for proprietary data products that are a subset of
the consolidated data stream. First, the consolidated data is widely
available in real-time at $1 per month for non-professional users.
Second, consolidated data is also available at no cost with a 15- or
20- minute delay. Because consolidated data contains marketwide
information, it effectively places a cap on the fees assessed for
proprietary data (such as last sale data) that is simply a subset of
the consolidated data. The mere availability of low-cost or free
consolidated data provides a powerful form of pricing discipline for
proprietary data products that contain data elements that are a subset
of the consolidated data, by highlighting the optional nature of
proprietary products.
The competitive nature of the market for products such as NLS is
borne out by the performance of the market. In May 2008, the internet
portal Yahoo! began offering its Web site viewers real-time last sale
data (as well as best quote data) provided by BATS Trading. In
response, in June 2008, NASDAQ launched NLS, which was initially
subject to an ``enterprise cap'' of $100,000 for customers receiving
only one of the NLS products, and $150,000 for customers receiving both
products. The majority of NASDAQ's sales were at the capped level. In
early 2009, BATS expanded its offering of free data to include depth-
of-book data. Also in early 2009, NYSEArca announced the launch of a
competitive last sale product
[[Page 63338]]
with an enterprise price of $30,000 per month. In response, NASDAQ
combined the enterprise cap for the NLS products and reduced the cap to
$50,000 (i.e., a reduction of $100,000 per month). Although each of
these products offers only a specific subset of data available from the
SIPs, NASDAQ believes that the products are viewed as substitutes for
each other and for core last-sale data, rather than as products that
must be obtained in tandem. For example, while the internet portal
Yahoo! continues to disseminate only the BATS last sale product, Google
disseminates only NASDAQ's product.
In this environment, 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. The existence of fierce
competition for order flow implies a high degree of price sensitivity
on the part of BDs with order flow, since they may readily reduce costs
by directing orders toward the lowest-cost trading venues. A BD 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. If a platform increases its market data fees, the
change will affect the overall cost of doing business with the
platform, and affected BDs will assess whether they can lower their
trading costs by directing orders elsewhere and thereby lessening the
need for the more expensive data. Similarly, increases in the cost of
NLS would impair the willingness of distributors to take a product for
which there are numerous alternatives, impacting NLS data revenues, the
value of NLS as a tool for attracting order flow, and ultimately, the
volume of orders routed to NASDAQ and the value of its other data
products.
In establishing the price for the NASDAQ Last Sale Products, NASDAQ
considered the competitiveness of the market for last sale 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 numerous alternatives to NLS, including real-
time consolidated data, free delayed consolidated data, and proprietary
data from other sources ensures that NASDAQ cannot set unreasonable
fees, or fees that are unreasonably discriminatory, without losing
business to these alternatives. Accordingly, NASDAQ believes that the
acceptance of the NLS product in the marketplace demonstrates the
consistency of these fees with applicable statutory standards.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Three comment letters were filed regarding the proposed rule change
as originally published for comment NASDAQ responded to these comments
in a letter dated December 13, 2007. Both the comment letters and
NASDAQ's response are available on the SEC Web site at https://www.sec.gov/comments/sr-nasdaq-2006-060/nasdaq2006060.shtml. In
addition, in response to prior filings to extend the NLS pilot,\10\ the
Securities Industry and Financial Markets Association (``SIFMA'') and
NetCoalition filed comment letters contending that the SEC should
suspend and institute disapproval proceedings with respect to the
filing.\11\ The letters incorrectly assert that the NetCoalition case
stands for the proposition that the Commission must review cost data to
substantiate a determination that competitive forces constrain the
price of market data. In fact, the court held the opposite:
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\10\ Securities Exchange Act Release No. 64856 (July 12, 2011),
76 FR 41845 (July 15, 2011) (SR-NASDAQ-2011-092); Securities
Exchange Act Release No. 64188 (April 5, 2011), 76 FR 20054 (April
11, 2011) (SR-NASDAQ-2011-044).
\11\ The most recent comment letter is captioned with a
reference to SR-NASDAQ-2011-092, but then states that it is
commenting on a proposal to amend fees for NASDAQ Basic, an entirely
different data product.
The petitioners believe that the SEC's market-based approach is
prohibited under the Exchange Act because the Congress intended
``fair and reasonable'' to be determined using a cost-based
approach. The SEC counters that, because it has statutorily-granted
flexibility in evaluating market data fees, its market-based
approach is fully consistent with the Exchange Act. We agree with
the SEC.\12\
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\12\ NetCoalition, 615 F3d. at 534. While the court noted that
cost data could sometimes be relevant in determining the
reasonableness of fees, it acknowledged that submission of cost data
may be inappropriate where there are ``difficulties in calculating
the direct costs * * * of market data,'' Id. at 539. That is the
case here, due to the fact that the fixed costs of market data
production are inseparable from the fixed costs of providing a
trading platform, and the marginal costs of market data production
are minimal or even zero. Because the costs of providing execution
services and market data are not unique to either of the provided
services, there is no meaningful way to allocate these costs among
the two ``joint products''--and any attempt to do so would result in
inherently arbitrary cost allocations.
The court explicitly acknowledged that the ``joint product''
theory set forth by NASDAQ's economic experts in NetCoalition (and
also described in this filing) could explain the competitive dynamic
of the market and explain why consideration of cost data would be
unavailing. The court found, however, that the Commission could not
rely on the theory because it was not in the Commission's record.
Id. at 541 n.16. For the purpose of providing a complete explanation
of the theory, NASDAQ is further submitting as Exhibit 3 to this
filing a study that was submitted to the Commission in SR-NASDAQ-
2011-10. See Statement of Janusz Ordover and Gustavo Bamberger at 2-
17 (December 29, 2010).
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SIFMA and NetCoalition further contend the prior filing lacked
evidence supporting a conclusion that the market for NLS is
competitive, asserting that arguments about competition for order flow
and substitutability were rejected in NetCoalition. While the court did
determine that the record before it was not sufficient to allow it to
endorse those theories on the facts of that case, the court did not
itself make any conclusive findings about the actual presence or
absence of competition or the accuracy of these theories: rather, it
simply made a finding about the state of the SEC's record. Moreover,
analysis about competition in the market for depth-of-book data is only
tangentially relevant to the market for last sale data. As discussed
above and in the prior filing, perfect and partial substitutes for NLS
exist in the form of real-time core market data, free delayed core
market data, and the last sale products of competing venues, additional
competitive entry is possible, and evidence of competition is readily
apparent in the pricing behavior of the venues offering last sale
products and the consumption patterns of their customers. Thus,
although NASDAQ believes that the competitive nature of the market for
all market data, including depth-of-book data, will ultimately be
established, SIFMA and NetCoalition's letters not only mischaracterize
the NetCoalition decision, they also fail to address the
characteristics of the product at issue and the evidence already
presented.
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.\13\ 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
[[Page 63339]]
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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\13\ 15 U.S.C. 78s(b)(3)(a)(ii) [sic].
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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 (https://www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-NASDAQ-2011-132 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-2011-132. 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 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-2011-132 and should be submitted on or before November 2, 2011.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-26270 Filed 10-11-11; 8:45 am]
BILLING CODE 8011-01-P
