Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Re-Institute Fees for NASDAQ Basic and To Offer an Optional Nasdaq Basic Non-Professional Enterprise License Fee, 64137-64142 [2011-26673]

Download as PDF Federal Register / Vol. 76, No. 200 / Monday, October 17, 2011 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others The Exchange has not solicited, and does not intend to solicit, comments on this proposed rule change. The Exchange has not received any unsolicited written comments from members or other interested parties. 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 such 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: jlentini on DSK4TPTVN1PROD with NOTICES Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– ISE–2011–66 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–ISE–2011–66. 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 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 No. SR–ISE–2011– 66 and should be submitted on or before November 7, 2011. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.14 Elizabeth M. Murphy, Secretary. [FR Doc. 2011–26677 Filed 10–14–11; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–65526; File No. SR– NASDAQ–2011–130] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Re-Institute Fees for NASDAQ Basic and To Offer an Optional Nasdaq Basic NonProfessional Enterprise License Fee October 11, 2011. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19–b4 thereunder,2 notice is hereby given that on September 30, 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 NASDAQ. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. 14 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 13 15 U.S.C. 78s(b)(3)(A)(ii). VerDate Mar<15>2010 16:32 Oct 14, 2011 Jkt 226001 PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 64137 I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change NASDAQ proposes to re-institute the fees for ‘‘Nasdaq Basic,’’ which is a real time data feed combining both NASDAQ’s Best Bid and Offer (‘‘QBBO’’) and the ‘‘NASDAQ Last Sale,’’ 3 as well as to offer an optional NASDAQ Basic Non-Professional Enterprise License Fee for broker-dealer distribution of NASDAQ Basic data to non-professional users with which the broker-dealer has a brokerage relationship (the ‘‘Basic NonProfessional Enterprise License’’ or ‘‘Enterprise License’’). The text of the proposed rule change is below. Proposed new language is in italics. * * * * * 7047. Nasdaq Basic (a) No change. (b) User Fees. (1) Except as provided in (b)(2) and (b)(3), for the NASDAQ Basic product there shall be a per subscriber monthly charge of $10 for NASDAQ-listed stocks, $5 for NYSE-listed stocks, and $5 for Alternext-listed stocks; or (2) For each non-professional subscriber, as defined in Rule 7011(b), there shall be a per subscriber monthly charge of $0.50 for NASDAQ-listed stocks, $0.25 for NYSE-listed stocks, and $0.25 for Alternext-listed stocks; or (3) There shall be a per query fee for NASDAQ Basic of $0.0025 for NASDAQ-listed stocks, $0.0015 for NYSE-listed stocks, and $0.0015 for Alternext-listed stocks. (4) An alternative to (b)(2) a brokerdealer may purchase an enterprise license at a rate of $100,000 per month for distribution to non-professional subscribers. The enterprise license entitles a Distributor to provide Nasdaq Basic to an unlimited number of nonprofessional subscribers with whom the firm has a brokerage relationship. The enterprise license is in addition to the Distributor Fee listed in (c)(1). (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, NASDAQ included statements 3 NASDAQ has also filed a companion release to establish Nasdaq Basic. See SR–NASDAQ–2011– 129. Additionally, NASDAQ is aware that the NASDAQ Basic pilot program has lapsed and NASDAQ intends to submit a separate filing to address the lapsed period shortly. E:\FR\FM\17OCN1.SGM 17OCN1 64138 Federal Register / Vol. 76, No. 200 / Monday, October 17, 2011 / Notices 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. jlentini on DSK4TPTVN1PROD with NOTICES A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change 1. Purpose NASDAQ proposes to re-institute all of the user and distributor fees for Nasdaq Basic,4 as well as to offer an optional Enterprise License fee for broker-dealer distribution of Nasdaq Basic data to non-professional users with which the broker-dealer has a brokerage relationship. NASDAQ has also filed a companion release to establish Nasdaq Basic.5 Consistent with the sale of consolidated data and of NASDAQ proprietary data, NASDAQ charges a fee for professional use of Nasdaq Basic, and a reduced fee for non-professional use. Specifically, for each professional user of the Nasdaq Basic product, there is a per subscriber monthly charge of $10 for NASDAQ-listed stocks, $5 for NYSE-listed stocks, and $5 for NYSE Amex-listed stocks. For each nonprofessional subscriber, there is a per subscriber monthly charge of $0.50 for NASDAQ-listed stocks, $0.25 for NYSElisted stocks, and $0.25 for NYSE Amexlisted stocks. ‘‘Non-professional’’ will have the same meaning in this proposed rule as it currently has in Rule 7011(b). For users that do not require a monthly subscription, there is a per query option available for Nasdaq Basic, with a fee of $0.0025 for NASDAQ-listed stocks, $0.0015 for NYSE-listed stocks, and $0.0015 for NYSE Amex-listed stocks. Vendors that report per query usage to NASDAQ are permitted to convert to monthly subscription fees when the cost of individual users’ queries exceeds the cost of the monthly subscription. As with the distribution of certain other NASDAQ proprietary products, all distributors of Nasdaq Basic are assessed a monthly Distributor Fee in addition to any applicable usage fees. Each Distributor of Nasdaq Basic shall pay a monthly fee of $1,500 for either internal or external distribution. Also, each Distributor may pay $1,500 4 See Securities Exchange Act Release No. 59582 (March 16, 2009) 74 FR 12423 (March 24, 2009) (SR–NASDAQ–2008–102). 5 Supra note 3. VerDate Mar<15>2010 16:32 Oct 14, 2011 Jkt 226001 monthly to distribute data derived from Nasdaq Basic to an unlimited number of non-professional subscribers. The term ‘‘Distributor’’ has the same meaning in this proposed rule as currently set forth in NASDAQ Rule 7019. Basic Non-Professional Enterprise License Current Proposal. NASDAQ will begin offering a voluntary Enterprise License Fee for the Nasdaq Basic product (NASDAQ Rule 7047) for nonprofessional usage, which will cost $100,000 per month. The Basic NonProfessional Enterprise License is available only to broker-dealers registered under the Act and would be in lieu of non-professional usage fees only. Additionally, it is an option only for those customers with whom the broker-dealer maintains a brokerage relationship. The Enterprise License also includes an allowance to distribute data, under a certain threshold, to external professional subscribers with which the firm has a brokerage relationship.6 The Basic Non-Professional Enterprise License Fee would be in addition to the distributor fees in NASDAQ Rule 7047(c). Broker-dealers that choose to pay the Basic Non-Professional Enterprise License Fee of $100,000 per month would not pay for any of the non-professional user fees in NASDAQ Rule 7047(b). The broker-dealer would continue to pay user fees for those users that are not eligible under the Enterprise License. The Basic Non-Professional Enterprise License Fee does not involve the creation of a new data feed, but rather is a new pricing option for an existing data feed. The Basic NonProfessional Enterprise License Fee allows firms to use the Nasdaq Basic data for display purposes only, but does not permit its redistribution in any other manner. This is not a new service or a new product. NASDAQ is merely creating a new pricing option specific for the broker-dealer non-professional user community. Background. NASDAQ disseminates market data feeds in two capacities. First, NASDAQ disseminates consolidated or ‘‘core’’ data in its capacity as Securities Information Processor for the national market system plan governing securities listed on NASDAQ as a national securities 6 NASDAQ relies on distributor self-reporting of usage for products associated with a data feed rather than on individual contact with each enduser customer. NASDAQ permits distributors to designate an entire user population as ‘‘nonprofessional’’ provided that the number of professional subscribers within that user population does not exceed ten percent (10%) of the total population. PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 exchange.7 Second, NASDAQ separately disseminates proprietary or ‘‘non-core’’ data in its capacity as a registered national securities exchange. Non-core data is any data generated by the NASDAQ Market Center Execution System that is voluntarily disseminated by NASDAQ separate and apart from the consolidated data.8 NASDAQ has numerous proprietary data products, such as NASDAQ TotalView, NASDAQ Last Sale, and Nasdaq Basic. NASDAQ continues to seek broader distribution of non-core data and to reduce the cost of providing non-core data to larger numbers of investors. In the past, NASDAQ has accomplished this goal in part by offering similar capped fees, flat fees or enterprise licenses for professional and nonprofessional usage of TotalView which contains the full depth of book data for the NASDAQ Market Center Execution System. NASDAQ has also implemented these capped/flat fees with other products, such as NASDAQ Last Sale. NASDAQ believes that the adoption of flat fee structures or enterprise licenses has led to greater distribution of market data, particularly among nonprofessional users. Based on input from market participants and market data distributors, NASDAQ believes that this increase in distribution is attributable in part to the relief it provides distributors from the NASDAQ requirement that distributors count and report each nonprofessional user of NASDAQ proprietary data. In addition to increased administrative flexibility, enterprise licenses also encourage broader distribution by firms that are currently over the fee cap as well as those that are approaching the cap and wish to take advantage of the benefits of the program. Further, NASDAQ believes that capping fees in this manner creates goodwill with broker-dealers and increases transparency for nonprofessional users. Accordingly, NASDAQ is establishing the Basic Non-Professional Enterprise License Fee for Nasdaq Basic under NASDAQ Rule 7047(b)(4), an optional non-professional enterprise license for distributors of Nasdaq Basic. This Enterprise License Fee includes nonprofessional usage fees, but does not include distributor fees.9 The Enterprise License is available only to brokerdealers registered under the Act, and would cover all non-professional usage 7 See Securities Exchange Act Release No. 59039 (Dec. 2, 2008) at p. 41. 8 Id. 9 Distributors who utilize the enterprise license would still be liable for the applicable distributor fees. E:\FR\FM\17OCN1.SGM 17OCN1 Federal Register / Vol. 76, No. 200 / Monday, October 17, 2011 / Notices fees to customers with whom the firm has a brokerage relationship with an allowance to distribute data to external professional subscribers with which the firm has a brokerage relationship.10 Non-broker-dealer vendors and application service providers would not be eligible for the Enterprise License; such firms typically pass through the cost of market data user fees to their customers. The proposed Basic NonProfessional Enterprise License still requires firms to continue to report usage in accordance to the current reporting policy. This information provides NASDAQ with accurate information for monitoring and auditing purposes. The proposed Basic Non-Professional Enterprise License Fee is completely optional and does not replace existing enterprise license fee alternatives set forth in Rule 7047. Additionally, the proposal does not impact individual usage fees for any product or in any way raise the costs of any user of any NASDAQ data product. To the contrary, the Enterprise License provides brokerdealers with an additional approach to providing more NASDAQ data at a lower cost. 2. Statutory Basis jlentini on DSK4TPTVN1PROD with NOTICES NASDAQ believes that the proposed rule change is consistent with the provisions of Section 6 of the Act,11 in general, and with Section 6(b)(4) of the Act,12 in particular, in that it provides an equitable allocation of reasonable fees among users and recipients of NASDAQ data. In adopting Regulation NMS, the Commission granted selfregulatory organizations and brokerdealers increased authority and flexibility to offer new and unique market data to the public. It was believed that this authority would expand the amount of data available to consumers, and also spur innovation and competition for the provision of market data. The Commission concluded that Regulation NMS—by deregulating the market in proprietary data—would itself further the Act’s goals of facilitating efficiency and competition: [E]fficiency is promoted when brokerdealers who do not need the data beyond the prices, sizes, market center identifications of the NBBO and consolidated last sale information are not required to receive (and pay for) such data. The Commission also believes that efficiency is promoted when broker-dealers may choose to receive (and pay for) additional market data based on their note 6. U.S.C. 78f. 12 15 U.S.C. 78f(b)(4). own internal analysis of the need for such data.13 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. Nasdaq Basic is precisely the sort of market data product that the Commission envisioned when it adopted Regulation NMS. On July 21, 2010, President Barack Obama signed into law H.R. 4173, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (‘‘Dodd-Frank Act’’), which amended Section 19 of the Act. Among other things, Section 916 of the Dodd-Frank Act amended paragraph (A) of Section 19(b)(3) of the Act by inserting the phrase ‘‘on any person, whether or not the person is a member of the selfregulatory organization’’ after ‘‘due, fee or other charge imposed by the selfregulatory organization.’’ As a result, all SRO rule proposals establishing or changing dues, fees, or other charges are immediately effective upon filing regardless of whether such dues, fees, or other charges are imposed on members of the SRO, non-members, or both. Section 916 further amended paragraph (C) of Section 19(b)(3) of the Exchange Act to read, in pertinent part, ‘‘At any time within the 60-day period beginning on the date of filing of such a proposed rule change in accordance with the provisions of paragraph (1) [of Section 19(b)], the Commission summarily may temporarily suspend the change in the rules of the self-regulatory organization made thereby, if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of this title. If the Commission takes such action, the Commission shall institute proceedings under paragraph (2)(B) [of Section 19(b)] to determine whether the proposed rule should be approved or disapproved.’’ The decision of the United States Court of Appeals for the District of Columbia Circuit in NetCoalition v. SEC, No. 09–1042 (D.C. Cir. 2010), although reviewing a Commission decision made prior to the effective date of the Dodd-Frank Act, upheld the Commission’s reliance upon competitive markets to set reasonable 10 Supra 11 15 VerDate Mar<15>2010 16:32 Oct 14, 2011 13 Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005). Jkt 226001 PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 64139 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.’ ’’ NetCoalition, at 15 (quoting H.R. Rep. No. 94–229, at 92 (1975), as reprinted in 1975 U.S.C.C.A.N. 321, 323). The court’s conclusions about Congressional intent are therefore reinforced by the Dodd-Frank Act amendments, which create a presumption that exchange fees, including market data fees, may take effect immediately, without prior Commission approval, and that the Commission should take action to suspend a fee change and institute a proceeding to determine whether the fee change should be approved or disapproved only where the Commission has concerns that the change may not be consistent with the Act. NASDAQ believes that this proposal is in keeping with those principles by promoting increased transparency through the dissemination of Nasdaq Basic. The dissemination is designed to increase not only transparency for nonprofessional users, but also to reduce burdensome administrative costs in addition to actual per user costs. NASDAQ notes also that Nasdaq Basic data is already distributed and that this filing proposes to distribute no additional data elements. Nasdaq Basic is distributed and purchased on a voluntary basis, in that neither NASDAQ nor market data distributors are required by any rule or regulation to make this data available. Accordingly, distributors and users can discontinue use at any time and for any reason, including due to an assessment of the reasonableness of fees charged. B. Self-Regulatory Organization’s Statement on Burden on Competition NASDAQ does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act, as amended. Notwithstanding its determination that the Commission may rely upon competition to establish fair and equitably allocated fees for market data, the NetCoalition court found that the Commission had not, in that case, compiled a record that adequately supported its conclusion that the market for the data at issue in the case was E:\FR\FM\17OCN1.SGM 17OCN1 jlentini on DSK4TPTVN1PROD with NOTICES 64140 Federal Register / Vol. 76, No. 200 / Monday, October 17, 2011 / Notices competitive. NASDAQ believes that a record may readily be established to demonstrate the competitive nature of the market in question. There is intense competition between trading platforms that provide transaction execution and routing services and proprietary data products. Transaction execution and proprietary data products are complementary in that market data is both an input and a byproduct of the execution service. In fact, market data and trade execution are a paradigmatic example of joint products with joint costs. The decision whether and on which platform to post an order will depend on the attributes of the platform where the order can be posted, including the execution fees, data quality and price and distribution of its data products. Without the prospect of a taking order seeing and reacting to a posted order on a particular platform, the posting of the order would accomplish little. Without trade executions, exchange data products cannot exist. Data products are valuable to many end users only insofar as they provide information that end users expect will assist them or their customers in making trading decisions. The costs of producing market data include not only the costs of the data distribution infrastructure, but also the costs of designing, maintaining, and operating the exchange’s transaction execution platform and the cost of regulating the exchange to ensure its fair operation and maintain investor confidence. The total return that a trading platform earns reflects the revenues it receives from both products and the joint costs it incurs. Moreover, an exchange’s customers view the costs of transaction executions and of data as a unified cost of doing business with the exchange. A broker-dealer will direct orders to a particular exchange only if the expected revenues from executing trades on the exchange exceed net transaction execution costs and the cost of data that the broker-dealer chooses to buy to support its trading decisions (or those of its customers). The choice of data products is, in turn, a product of the value of the products in making profitable trading decisions. If the cost of the product exceeds its expected value, the broker-dealer will choose not to buy it. Moreover, as a broker-dealer chooses to direct fewer orders to a particular exchange, the value of the product to that broker-dealer decreases, for two reasons. First, the product will contain less information, because executions of the broker-dealer’s orders will not be reflected in it. Second, and perhaps more important, the product will be less valuable to that broker- VerDate Mar<15>2010 16:32 Oct 14, 2011 Jkt 226001 dealer because it does not provide information about the venue to which it is directing its orders. Data from the competing venue to which the brokerdealer is directing orders will become correspondingly more valuable. Thus, a super-competitive increase in the fees charged for either transactions or data has the potential to impair revenues from both products. ‘‘No one disputes that competition for order flow is ‘fierce’.’’ NetCoalition at 24. However, the existence of fierce competition for order flow implies a high degree of price sensitivity on the part of broker-dealers with order flow, since they may readily reduce costs by directing orders toward the lowest-cost trading venues. A broker-dealer that shifted its order flow from one platform to another in response to order execution price differentials would both reduce the value of that platform’s market data and reduce its own need to consume data from the disfavored platform. Similarly, if a platform increases its market data fees, the change will affect the overall cost of doing business with the platform, and affected broker-dealers will assess whether they can lower their trading costs by directing orders elsewhere and thereby lessening the need for the more expensive data. Analyzing the cost of market data distribution in isolation from the cost of all of the inputs supporting the creation of market data will inevitably underestimate the cost of the data. Thus, because it is impossible to create data without a fast, technologically robust, and well-regulated execution system, system costs and regulatory costs affect the price of market data. It would be equally misleading, however, to attribute all of the exchange’s costs to the market data portion of an exchange’s joint product. Rather, all of the exchange’s costs are incurred for the unified purposes of attracting order flow, executing and/or routing orders, and generating and selling data about market activity. The total return that an exchange earns reflects the revenues it receives from the joint products and the total costs of the joint products. Competition among trading platforms can be expected to constrain the aggregate return each platform earns from the sale of its joint products, but different platforms may choose from a range of possible, and equally reasonable, pricing strategies as the means of recovering total costs. For example, some platform may choose to pay rebates to attract orders, charge relatively low prices for market information (or provide information free of charge) and charge relatively high prices for accessing posted liquidity. PO 00000 Frm 00071 Fmt 4703 Sfmt 4703 Other platforms may choose a strategy of paying lower rebates (or no rebates) to attract orders, setting relatively high prices for market information, and setting relatively low prices for accessing posted liquidity. In this environment, there is no economic basis for regulating maximum prices for one of the joint products in an industry in which suppliers face competitive constraints with regard to the joint offering. This would be akin to strictly regulating the price that an automobile manufacturer can charge for car sound systems despite the existence of a highly competitive market for cars and the availability of after-market alternatives to the manufacturer-supplied system. The market for market data products is competitive and inherently contestable because there is fierce competition for the inputs necessary to the creation of proprietary data and strict pricing discipline for the proprietary products themselves. Numerous exchanges compete with each other for listings, trades, and market data itself, providing virtually limitless opportunities for entrepreneurs who wish to produce and distribute their own market data. This proprietary data is produced by each individual exchange, as well as other entities, in a vigorously competitive market. Broker-dealers currently have numerous alternative venues for their order flow, including ten self-regulatory organization (‘‘SRO’’) markets, as well as internalizing broker-dealers (‘‘BDs’’) and various forms of alternative trading systems (‘‘ATSs’’), including dark pools and electronic communication networks (‘‘ECNs’’). Each SRO market competes to produce transaction reports via trade executions, and two FINRA-regulated Trade Reporting Facilities (‘‘TRFs’’) compete to attract internalized transaction reports. Competitive markets for order flow, executions, and transaction reports provide pricing discipline for the inputs of proprietary data products. The large number of SROs, TRFs, BDs, and ATSs that currently produce proprietary data or are currently capable of producing it provides further pricing discipline for proprietary data products. Each SRO, TRF, ATS, and BD is currently permitted to produce proprietary data products, and many currently do or have announced plans to do so, including NASDAQ, NYSE, NYSE Amex, NYSEArca, and BATS. Any ATS or BD can combine with any other ATS, BD, or multiple ATSs or BDs to produce joint proprietary data products. Additionally, order routers and market data vendors can facilitate single or multiple broker-dealers’ E:\FR\FM\17OCN1.SGM 17OCN1 jlentini on DSK4TPTVN1PROD with NOTICES Federal Register / Vol. 76, No. 200 / Monday, October 17, 2011 / Notices 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 and Google, impose a discipline by providing only data that will enable them to attract ‘‘eyeballs’’ that contribute to their advertising revenue. Retail broker-dealers, such as Schwab and Fidelity, offer their customers proprietary data only if it promotes trading and generates sufficient commission revenue. Although the business models may differ, these vendors’ pricing discipline is the same: They can simply refuse to purchase any proprietary data product that fails to provide sufficient value. NASDAQ and other producers of proprietary data products must understand and respond to these varying business models and pricing disciplines in order to market proprietary data products successfully. In addition to the competition and price discipline described above, the market for proprietary data products is also highly contestable because market entry is rapid, inexpensive, and profitable. The history of electronic trading is replete with examples of entrants that swiftly grew into some of the largest electronic trading platforms and proprietary data producers: Archipelago, Bloomberg Tradebook, Island, RediBook, Attain, TracECN, BATS Trading and Direct Edge. A proliferation of dark pools and other ATSs operate profitably with fragmentary shares of consolidated market volume. VerDate Mar<15>2010 16:32 Oct 14, 2011 Jkt 226001 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. For example, NASDAQ submits that in and of itself, NASDAQ’s decision voluntarily to cap fees on existing products, as is the effect of a flat fee or an enterprise license, is evidence of market forces at work. The court in NetCoalition did cite favorably an economic study by Ordover and Bamberger which concluded that ‘‘[a]lthough an exchange may price its trade execution fees higher and its market data fees lower (or vice versa), because of ‘‘platform’’ competition the exchange nonetheless receives the same return from the two ‘‘joint products’’ in the aggregate.’’ 14 Ordover and Bamberger also provided additional comments expanding upon the impact of platform competition.15 Among the conclusions that Ordover and Bamberger reach are: NASDAQ is subject to significant competitive forces in setting the prices and other terms of execution services and proprietary data products. Competitive forces constrain the prices that platforms can charge for noncore market information. A trading platform cannot generate market information unless it receives trade orders. For this reason, a platform can be expected to use its market data product as a tool for attracting liquidity and trading to its exchange. While, by definition, information that is proprietary to an exchange cannot be 14 See NetCoalition at fn. 16. Securities Exchange Act Release No. 63745 (Jan. 20, 2011); 76 FR 4970 (Jan. 27, 2011) (SR– NASDAQ–2011–010) (attached to original filing as Exhibit 3). 15 See PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 64141 obtained elsewhere, this does not enable the owner of such information to exercise monopoly power over that ` information vis-a-vis firms with the need for such information. Even though market information from one platform may not be a perfect substitute for market information from one or more other platforms, the existence of alternative sources of information can be expected to constrain the prices platforms charge for market data. Besides the fact that similar information can be obtained elsewhere, the feasibility of supra-competitive pricing is constrained by the traders’ ability to shift their trades elsewhere, which lowers the activity on the exchange and so in the long run reduces the quality of the information generated by the exchange. Competition among platforms has driven NASDAQ continually to improve its platform data offerings and to cater to customers’ data needs. For example, NASDAQ has developed and maintained multiple delivery mechanisms (IP, multi-cast, and compression) that enable customers to receive data in the form and manner they prefer and at the lowest cost to them. NASDAQ offers front end applications such as its ‘‘Bookviewer’’ to help customers utilize data. NASDAQ has created new products like TotalView Aggregate to complement TotalView ITCH and Level 2, because offering data in multiple formatting allows NASDAQ to better fit customer needs. NASDAQ offers data via multiple extranet providers, thereby helping to reduce network and total cost for its data products. NASDAQ has developed an online administrative system to provide customers transparency into their data feed requests and streamline data usage reporting. NASDAQ has also expanded its flat fee or enterprise license options to reduce the administrative burden and costs to firms that purchase market data. Despite these enhancements and a dramatic increase in message traffic, NASDAQ’s fees for depth-of-book data have remained flat. In fact, as a percent of total customer costs, NASDAQ data fees have fallen relative to other data usage costs—including bandwidth, programming, and infrastructure—that have risen. The same holds true for execution services; despite numerous enhancements to NASDAQ’s trading platform, absolute and relative trading costs have declined. Platform competition has intensified as new entrants have emerged, constraining prices for both executions and for data. The vigor of competition for non-core data information is significant and the E:\FR\FM\17OCN1.SGM 17OCN1 64142 Federal Register / Vol. 76, No. 200 / Monday, October 17, 2011 / Notices Exchange believes that this proposal clearly evidences such competition. NASDAQ is offering a new pricing model in order to keep pace with changes in the industry and evolving customer needs. It is entirely optional and is geared towards attracting new customers, as well as retaining existing customers. The Exchange has witnessed competitors creating new products and innovative pricing in this space over the course of the past year. NASDAQ continues to see firms challenge its pricing on the basis of the Exchange’s explicit fees being higher than the zeropriced fees from other competitors such as BATS. In all cases, firms make decisions on how much and what types of data to consume on the basis of the total cost of interacting with NASDAQ or other exchanges. Of course, the explicit data fees are but one factor in a total platform analysis. Some competitors have lower transactions fees and higher data fees, and others are vice versa. The market for this non-core data information is highly competitive and continually evolves as products develop and change. 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.16 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. jlentini on DSK4TPTVN1PROD with NOTICES 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: 16 15 U.S.C. 78s(b)(3)(a)(ii) [sic]. VerDate Mar<15>2010 16:32 Oct 14, 2011 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–2011–130 on the subject line. Paper Comments [Release No. 34–65528; File No. SR– NASDAQ–2011–138] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change Regarding Expansion of the Short Term Option Series Program • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street, NE., Washington, DC 20549–1090. October 11, 2011. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17 Elizabeth M. Murphy, Secretary. (notice of filing and immediate effectiveness regarding expansion of STO Program). 4 Short Term Option Series are series in an option class that is approved for listing and trading on the Exchange in which the series is opened for trading on any Thursday or Friday that is a business day and that expires on the Friday of the next business week. If a Thursday or Friday is not a business day, the series may be opened (or shall expire) on the first business day immediately prior to that Thursday or Friday, respectively. NOM chapter 1, Section 1(a)(59) and Chapter XIV, Section 2(n). 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 28, 2011, The NASDAQ Stock Market LLC (‘‘NASDAQ’’) filed All submissions should refer to File with the Securities and Exchange Number SR–NASDAQ–2011–130. This Commission (‘‘Commission’’) the file number should be included on the subject line if e-mail is used. To help the proposed rule change as described in Items I, II, and III below, which Items Commission process and review your have been prepared by NASDAQ. The comments more efficiently, please use only one method. The Commission will Commission is publishing this notice to post all comments on the Commission’s solicit comments on the proposed rule change from interested persons. Internet Web site (https://www.sec.gov/ rules/sro.shtml). Copies of the I. Self-Regulatory Organization’s Statement of the Terms of Substance of submission, all subsequent the Proposed Rule Change amendments, all written statements with respect to the proposed rule NASDAQ is filing with the change that are filed with the Commission a proposal for the Commission, and all written NASDAQ Options Market (‘‘NOM’’ or communications relating to the ‘‘Exchange’’) to expand the Short Term proposed rule change between the Option Series Program (‘‘STO Program’’ Commission and any person, other than or ‘‘Program’’) 3 so that the Exchange those that may be withheld from the may select thirty option classes on public in accordance with the which Short Term Option Series 4 may provisions of 5 U.S.C. 552, will be be opened; and may open certain Short available for Web site viewing and Term Option Series that are opened by printing in the Commission’s Public other securities exchanges. The Exchange requests that the Reference Room, 100 F Street, NE., proposal be approved on an accelerated Washington, DC 20549, on official basis. business days between the hours of 10 The text of the proposed rule change a.m. and 3 p.m. Copies of the filing also is available from NASDAQ’s Web site at will be available for inspection and https://nasdaq.cchwallstreet.com/ copying at the principal office of the Exchange. All comments received will 1 15 U.S.C. 78s(b)(1). be posted without change; the 2 17 CFR 240.19b–4. Commission does not edit personal 3 See Securities Exchange Act Release No. 62297 identifying information from (June 15, 2010), 75 FR 35111 (June 21, 2010) (SR– submissions. You should submit only NASDAQ–2010–073) (notice of filing and immediate effectiveness permanently establishing information that you wish to make Short Term Option Series Program on NASDAQ). available publicly. All submissions Short term options are generally known as ‘‘STOs’’ should refer to File Number SR– or ‘‘weeklies.’’ The Exchange’s STO program was NASDAQ–2011–130 and should be last expanded in 2011, following the lead of other markets that have STO programs. See Securities submitted on or before November 7, Exchange Act Release No. 64826 (July 6, 2011), 76 2011. FR 40969 (July 12, 2011) (SR–NASDAQ–2011–090) [FR Doc. 2011–26673 Filed 10–14–11; 8:45 am] BILLING CODE 8011–01–P 17 17 Jkt 226001 SECURITIES AND EXCHANGE COMMISSION PO 00000 CFR 200.30–3(a)(12). Frm 00073 Fmt 4703 Sfmt 4703 E:\FR\FM\17OCN1.SGM 17OCN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 76, Number 200 (Monday, October 17, 2011)]
[Notices]
[Pages 64137-64142]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-26673]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-65526; File No. SR-NASDAQ-2011-130]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Re-Institute Fees for NASDAQ Basic and To Offer an Optional Nasdaq
Basic Non-Professional Enterprise License Fee

October 11, 2011.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19-b4 thereunder,\2\ notice is hereby given that
on September 30, 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 NASDAQ. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

NASDAQ proposes to re-institute the fees for ``Nasdaq Basic,''
which is a real time data feed combining both NASDAQ's Best Bid and
Offer (``QBBO'') and the ``NASDAQ Last Sale,'' \3\ as well as to offer
an optional NASDAQ Basic Non-Professional Enterprise License Fee for
broker-dealer distribution of NASDAQ Basic data to non-professional
users with which the broker-dealer has a brokerage relationship (the
``Basic Non-Professional Enterprise License'' or ``Enterprise
License'').
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\3\ NASDAQ has also filed a companion release to establish
Nasdaq Basic. See SR-NASDAQ-2011-129. Additionally, NASDAQ is aware
that the NASDAQ Basic pilot program has lapsed and NASDAQ intends to
submit a separate filing to address the lapsed period shortly.
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The text of the proposed rule change is below. Proposed new
language is in italics.
* * * * *
7047. Nasdaq Basic
(a) No change.
(b) User Fees.
(1) Except as provided in (b)(2) and (b)(3), for the NASDAQ Basic
product there shall be a per subscriber monthly charge of $10 for
NASDAQ-listed stocks, $5 for NYSE-listed stocks, and $5 for Alternext-
listed stocks; or
(2) For each non-professional subscriber, as defined in Rule
7011(b), there shall be a per subscriber monthly charge of $0.50 for
NASDAQ-listed stocks, $0.25 for NYSE-listed stocks, and $0.25 for
Alternext-listed stocks; or
(3) There shall be a per query fee for NASDAQ Basic of $0.0025 for
NASDAQ-listed stocks, $0.0015 for NYSE-listed stocks, and $0.0015 for
Alternext-listed stocks.
(4) An alternative to (b)(2) a broker-dealer may purchase an
enterprise license at a rate of $100,000 per month for distribution to
non-professional subscribers. The enterprise license entitles a
Distributor to provide Nasdaq Basic to an unlimited number of non-
professional subscribers with whom the firm has a brokerage
relationship. The enterprise license is in addition to the Distributor
Fee listed in (c)(1).
(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, NASDAQ included statements

[[Page 64138]]

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

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

1. Purpose
NASDAQ proposes to re-institute all of the user and distributor
fees for Nasdaq Basic,\4\ as well as to offer an optional Enterprise
License fee for broker-dealer distribution of Nasdaq Basic data to non-
professional users with which the broker-dealer has a brokerage
relationship. NASDAQ has also filed a companion release to establish
Nasdaq Basic.\5\
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\4\ See Securities Exchange Act Release No. 59582 (March 16,
2009) 74 FR 12423 (March 24, 2009) (SR-NASDAQ-2008-102).
\5\ Supra note 3.
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Consistent with the sale of consolidated data and of NASDAQ
proprietary data, NASDAQ charges a fee for professional use of Nasdaq
Basic, and a reduced fee for non-professional use. Specifically, for
each professional user of the Nasdaq Basic product, there is a per
subscriber monthly charge of $10 for NASDAQ-listed stocks, $5 for NYSE-
listed stocks, and $5 for NYSE Amex-listed stocks. For each non-
professional subscriber, there is a per subscriber monthly charge of
$0.50 for NASDAQ-listed stocks, $0.25 for NYSE-listed stocks, and $0.25
for NYSE Amex-listed stocks. ``Non-professional'' will have the same
meaning in this proposed rule as it currently has in Rule 7011(b). For
users that do not require a monthly subscription, there is a per query
option available for Nasdaq Basic, with a fee of $0.0025 for NASDAQ-
listed stocks, $0.0015 for NYSE-listed stocks, and $0.0015 for NYSE
Amex-listed stocks. Vendors that report per query usage to NASDAQ are
permitted to convert to monthly subscription fees when the cost of
individual users' queries exceeds the cost of the monthly subscription.
As with the distribution of certain other NASDAQ proprietary
products, all distributors of Nasdaq Basic are assessed a monthly
Distributor Fee in addition to any applicable usage fees. Each
Distributor of Nasdaq Basic shall pay a monthly fee of $1,500 for
either internal or external distribution. Also, each Distributor may
pay $1,500 monthly to distribute data derived from Nasdaq Basic to an
unlimited number of non-professional subscribers. The term
``Distributor'' has the same meaning in this proposed rule as currently
set forth in NASDAQ Rule 7019.
Basic Non-Professional Enterprise License Current Proposal. NASDAQ
will begin offering a voluntary Enterprise License Fee for the Nasdaq
Basic product (NASDAQ Rule 7047) for non-professional usage, which will
cost $100,000 per month. The Basic Non-Professional Enterprise License
is available only to broker-dealers registered under the Act and would
be in lieu of non-professional usage fees only. Additionally, it is an
option only for those customers with whom the broker-dealer maintains a
brokerage relationship. The Enterprise License also includes an
allowance to distribute data, under a certain threshold, to external
professional subscribers with which the firm has a brokerage
relationship.\6\
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\6\ NASDAQ relies on distributor self-reporting of usage for
products associated with a data feed rather than on individual
contact with each end-user customer. NASDAQ permits distributors to
designate an entire user population as ``non-professional'' provided
that the number of professional subscribers within that user
population does not exceed ten percent (10%) of the total
population.
---------------------------------------------------------------------------

The Basic Non-Professional Enterprise License Fee would be in
addition to the distributor fees in NASDAQ Rule 7047(c). Broker-dealers
that choose to pay the Basic Non-Professional Enterprise License Fee of
$100,000 per month would not pay for any of the non-professional user
fees in NASDAQ Rule 7047(b). The broker-dealer would continue to pay
user fees for those users that are not eligible under the Enterprise
License. The Basic Non-Professional Enterprise License Fee does not
involve the creation of a new data feed, but rather is a new pricing
option for an existing data feed. The Basic Non-Professional Enterprise
License Fee allows firms to use the Nasdaq Basic data for display
purposes only, but does not permit its redistribution in any other
manner. This is not a new service or a new product. NASDAQ is merely
creating a new pricing option specific for the broker-dealer non-
professional user community.
Background. NASDAQ disseminates market data feeds in two
capacities. First, NASDAQ disseminates consolidated or ``core'' data in
its capacity as Securities Information Processor for the national
market system plan governing securities listed on NASDAQ as a national
securities exchange.\7\ Second, NASDAQ separately disseminates
proprietary or ``non-core'' data in its capacity as a registered
national securities exchange. Non-core data is any data generated by
the NASDAQ Market Center Execution System that is voluntarily
disseminated by NASDAQ separate and apart from the consolidated
data.\8\ NASDAQ has numerous proprietary data products, such as NASDAQ
TotalView, NASDAQ Last Sale, and Nasdaq Basic.
---------------------------------------------------------------------------

\7\ See Securities Exchange Act Release No. 59039 (Dec. 2, 2008)
at p. 41.
\8\ Id.
---------------------------------------------------------------------------

NASDAQ continues to seek broader distribution of non-core data and
to reduce the cost of providing non-core data to larger numbers of
investors. In the past, NASDAQ has accomplished this goal in part by
offering similar capped fees, flat fees or enterprise licenses for
professional and non-professional usage of TotalView which contains the
full depth of book data for the NASDAQ Market Center Execution System.
NASDAQ has also implemented these capped/flat fees with other products,
such as NASDAQ Last Sale. NASDAQ believes that the adoption of flat fee
structures or enterprise licenses has led to greater distribution of
market data, particularly among non-professional users.
Based on input from market participants and market data
distributors, NASDAQ believes that this increase in distribution is
attributable in part to the relief it provides distributors from the
NASDAQ requirement that distributors count and report each non-
professional user of NASDAQ proprietary data. In addition to increased
administrative flexibility, enterprise licenses also encourage broader
distribution by firms that are currently over the fee cap as well as
those that are approaching the cap and wish to take advantage of the
benefits of the program. Further, NASDAQ believes that capping fees in
this manner creates goodwill with broker-dealers and increases
transparency for non-professional users.
Accordingly, NASDAQ is establishing the Basic Non-Professional
Enterprise License Fee for Nasdaq Basic under NASDAQ Rule 7047(b)(4),
an optional non-professional enterprise license for distributors of
Nasdaq Basic. This Enterprise License Fee includes non-professional
usage fees, but does not include distributor fees.\9\ The Enterprise
License is available only to broker-dealers registered under the Act,
and would cover all non-professional usage

[[Page 64139]]

fees to customers with whom the firm has a brokerage relationship with
an allowance to distribute data to external professional subscribers
with which the firm has a brokerage relationship.\10\ Non-broker-dealer
vendors and application service providers would not be eligible for the
Enterprise License; such firms typically pass through the cost of
market data user fees to their customers. The proposed Basic Non-
Professional Enterprise License still requires firms to continue to
report usage in accordance to the current reporting policy. This
information provides NASDAQ with accurate information for monitoring
and auditing purposes.
---------------------------------------------------------------------------

\9\ Distributors who utilize the enterprise license would still
be liable for the applicable distributor fees.
\10\ Supra note 6.
---------------------------------------------------------------------------

The proposed Basic Non-Professional Enterprise License Fee is
completely optional and does not replace existing enterprise license
fee alternatives set forth in Rule 7047. Additionally, the proposal
does not impact individual usage fees for any product or in any way
raise the costs of any user of any NASDAQ data product. To the
contrary, the Enterprise License provides broker-dealers with an
additional approach to providing more NASDAQ data at a lower cost.
2. Statutory Basis
NASDAQ believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\11\ in general, and with
Section 6(b)(4) of the Act,\12\ in particular, in that it provides an
equitable allocation of reasonable fees among users and recipients of
NASDAQ data. In adopting Regulation NMS, the Commission granted self-
regulatory organizations and broker-dealers increased authority and
flexibility to offer new and unique market data to the public. It was
believed that this authority would expand the amount of data available
to consumers, and also spur innovation and competition for the
provision of market data.
---------------------------------------------------------------------------

\11\ 15 U.S.C. 78f.
\12\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

The Commission concluded that Regulation NMS--by deregulating the
market in proprietary data--would itself further the Act's goals of
facilitating efficiency and competition:

[E]fficiency is promoted when broker-dealers who do not need the
data beyond the prices, sizes, market center identifications of the
NBBO and consolidated last sale information are not required to
receive (and pay for) such data. The Commission also believes that
efficiency is promoted when broker-dealers may choose to receive
(and pay for) additional market data based on their own internal
analysis of the need for such data.\13\
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\13\ Securities Exchange Act Release No. 51808 (June 9, 2005),
70 FR 37496 (June 29, 2005).

By removing ``unnecessary regulatory restrictions'' on the ability of
exchanges to sell their own data, Regulation NMS advanced the goals of
the Act and the principles reflected in its legislative history. If the
free market should determine whether proprietary data is sold to
broker-dealers at all, it follows that the price at which such data is
sold should be set by the market as well. Nasdaq Basic is precisely the
sort of market data product that the Commission envisioned when it
adopted Regulation NMS.
On July 21, 2010, President Barack Obama signed into law H.R. 4173,
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
(``Dodd-Frank Act''), which amended Section 19 of the Act. Among other
things, Section 916 of the Dodd-Frank Act amended paragraph (A) of
Section 19(b)(3) of the Act by inserting the phrase ``on any person,
whether or not the person is a member of the self-regulatory
organization'' after ``due, fee or other charge imposed by the self-
regulatory organization.'' As a result, all SRO rule proposals
establishing or changing dues, fees, or other charges are immediately
effective upon filing regardless of whether such dues, fees, or other
charges are imposed on members of the SRO, non-members, or both.
Section 916 further amended paragraph (C) of Section 19(b)(3) of the
Exchange Act to read, in pertinent part, ``At any time within the 60-
day period beginning on the date of filing of such a proposed rule
change in accordance with the provisions of paragraph (1) [of Section
19(b)], the Commission summarily may temporarily suspend the change in
the rules of the self-regulatory organization made thereby, if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors, or otherwise
in furtherance of the purposes of this title. If the Commission takes
such action, the Commission shall institute proceedings under paragraph
(2)(B) [of Section 19(b)] to determine whether the proposed rule should
be approved or disapproved.''
The decision of the United States Court of Appeals for the District
of Columbia Circuit in NetCoalition v. SEC, No. 09-1042 (D.C. Cir.
2010), although reviewing a Commission decision made prior to the
effective date of the Dodd-Frank Act, 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.' ''
NetCoalition, at 15 (quoting H.R. Rep. No. 94-229, at 92 (1975), as
reprinted in 1975 U.S.C.C.A.N. 321, 323). The court's conclusions about
Congressional intent are therefore reinforced by the Dodd-Frank Act
amendments, which create a presumption that exchange fees, including
market data fees, may take effect immediately, without prior Commission
approval, and that the Commission should take action to suspend a fee
change and institute a proceeding to determine whether the fee change
should be approved or disapproved only where the Commission has
concerns that the change may not be consistent with the Act.
NASDAQ believes that this proposal is in keeping with those
principles by promoting increased transparency through the
dissemination of Nasdaq Basic. The dissemination is designed to
increase not only transparency for non-professional users, but also to
reduce burdensome administrative costs in addition to actual per user
costs. NASDAQ notes also that Nasdaq Basic data is already distributed
and that this filing proposes to distribute no additional data
elements. Nasdaq Basic is distributed and purchased on a voluntary
basis, in that neither NASDAQ nor market data distributors are required
by any rule or regulation to make this data available. Accordingly,
distributors and users can discontinue use at any time and for any
reason, including due to an assessment of the reasonableness of fees
charged.

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

NASDAQ does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended. Notwithstanding its
determination that the Commission may rely upon competition to
establish fair and equitably allocated fees for market data, the
NetCoalition court found that the Commission had not, in that case,
compiled a record that adequately supported its conclusion that the
market for the data at issue in the case was

[[Page 64140]]

competitive. NASDAQ believes that a record may readily be established
to demonstrate the competitive nature of the market in question.
There is intense competition between trading platforms that provide
transaction execution and routing services and proprietary data
products. Transaction execution and proprietary data products are
complementary in that market data is both an input and a byproduct of
the execution service. In fact, market data and trade execution are a
paradigmatic example of joint products with joint costs. The decision
whether and on which platform to post an order will depend on the
attributes of the platform where the order can be posted, including the
execution fees, data quality and price and distribution of its data
products. Without the prospect of a taking order seeing and reacting to
a posted order on a particular platform, the posting of the order would
accomplish little. Without trade executions, exchange data products
cannot exist. Data products are valuable to many end users only insofar
as they provide information that end users expect will assist them or
their customers in making trading decisions.
The costs of producing market data include not only the costs of
the data distribution infrastructure, but also the costs of designing,
maintaining, and operating the exchange's transaction execution
platform and the cost of regulating the exchange to ensure its fair
operation and maintain investor confidence. The total return that a
trading platform earns reflects the revenues it receives from both
products and the joint costs it incurs. Moreover, an exchange's
customers view the costs of transaction executions and of data as a
unified cost of doing business with the exchange. A broker-dealer will
direct orders to a particular exchange only if the expected revenues
from executing trades on the exchange exceed net transaction execution
costs and the cost of data that the broker-dealer chooses to buy to
support its trading decisions (or those of its customers). The choice
of data products is, in turn, a product of the value of the products in
making profitable trading decisions. If the cost of the product exceeds
its expected value, the broker-dealer will choose not to buy it.
Moreover, as a broker-dealer chooses to direct fewer orders to a
particular exchange, the value of the product to that broker-dealer
decreases, for two reasons. First, the product will contain less
information, because executions of the broker-dealer's orders will not
be reflected in it. Second, and perhaps more important, the product
will be less valuable to that broker-dealer because it does not provide
information about the venue to which it is directing its orders. Data
from the competing venue to which the broker-dealer is directing orders
will become correspondingly more valuable.
Thus, a super-competitive increase in the fees charged for either
transactions or data has the potential to impair revenues from both
products. ``No one disputes that competition for order flow is
`fierce'.'' NetCoalition at 24. However, the existence of fierce
competition for order flow implies a high degree of price sensitivity
on the part of broker-dealers with order flow, since they may readily
reduce costs by directing orders toward the lowest-cost trading venues.
A broker-dealer that shifted its order flow from one platform to
another in response to order execution price differentials would both
reduce the value of that platform's market data and reduce its own need
to consume data from the disfavored platform. Similarly, if a platform
increases its market data fees, the change will affect the overall cost
of doing business with the platform, and affected broker-dealers will
assess whether they can lower their trading costs by directing orders
elsewhere and thereby lessening the need for the more expensive data.
Analyzing the cost of market data distribution in isolation from
the cost of all of the inputs supporting the creation of market data
will inevitably underestimate the cost of the data. Thus, because it is
impossible to create data without a fast, technologically robust, and
well-regulated execution system, system costs and regulatory costs
affect the price of market data. It would be equally misleading,
however, to attribute all of the exchange's costs to the market data
portion of an exchange's joint product. Rather, all of the exchange's
costs are incurred for the unified purposes of attracting order flow,
executing and/or routing orders, and generating and selling data about
market activity. The total return that an exchange earns reflects the
revenues it receives from the joint products and the total costs of the
joint products.
Competition among trading platforms can be expected to constrain
the aggregate return each platform earns from the sale of its joint
products, but different platforms may choose from a range of possible,
and equally reasonable, pricing strategies as the means of recovering
total costs. For example, some platform may choose to pay rebates to
attract orders, charge relatively low prices for market information (or
provide information free of charge) and charge relatively high prices
for accessing posted liquidity. Other platforms may choose a strategy
of paying lower rebates (or no rebates) to attract orders, setting
relatively high prices for market information, and setting relatively
low prices for accessing posted liquidity. In this environment, there
is no economic basis for regulating maximum prices for one of the joint
products in an industry in which suppliers face competitive constraints
with regard to the joint offering. This would be akin to strictly
regulating the price that an automobile manufacturer can charge for car
sound systems despite the existence of a highly competitive market for
cars and the availability of after-market alternatives to the
manufacturer-supplied system.
The market for market data products is competitive and inherently
contestable because there is fierce competition for the inputs
necessary to the creation of proprietary data and strict pricing
discipline for the proprietary products themselves. Numerous exchanges
compete with each other for listings, trades, and market data itself,
providing virtually limitless opportunities for entrepreneurs who wish
to produce and distribute their own market data. This proprietary data
is produced by each individual exchange, as well as other entities, in
a vigorously competitive market.
Broker-dealers currently have numerous alternative venues for their
order flow, including ten self-regulatory organization (``SRO'')
markets, as well as internalizing broker-dealers (``BDs'') and various
forms of alternative trading systems (``ATSs''), including dark pools
and electronic communication networks (``ECNs''). Each SRO market
competes to produce transaction reports via trade executions, and two
FINRA-regulated Trade Reporting Facilities (``TRFs'') compete to
attract internalized transaction reports. Competitive markets for order
flow, executions, and transaction reports provide pricing discipline
for the inputs of proprietary data products.
The large number of SROs, TRFs, BDs, and ATSs that currently
produce proprietary data or are currently capable of producing it
provides further pricing discipline for proprietary data products. Each
SRO, TRF, ATS, and BD is currently permitted to produce proprietary
data products, and many currently do or have announced plans to do so,
including NASDAQ, NYSE, NYSE Amex, NYSEArca, and BATS.
Any ATS or BD can combine with any other ATS, BD, or multiple ATSs
or BDs to produce joint proprietary data products. Additionally, order
routers and market data vendors can facilitate single or multiple
broker-dealers'

[[Page 64141]]

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 and Google, impose a
discipline by providing only data that will enable them to attract
``eyeballs'' that contribute to their advertising revenue. Retail
broker-dealers, such as Schwab and Fidelity, offer their customers
proprietary data only if it promotes trading and generates sufficient
commission revenue. Although the business models may differ, these
vendors' pricing discipline is the same: They can simply refuse to
purchase any proprietary data product that fails to provide sufficient
value. NASDAQ and other producers of proprietary data products must
understand and respond to these varying business models and pricing
disciplines in order to market proprietary data products successfully.
In addition to the competition and price discipline described
above, the market for proprietary data products is also highly
contestable because market entry is rapid, inexpensive, and profitable.
The history of electronic trading is replete with examples of entrants
that swiftly grew into some of the largest electronic trading platforms
and proprietary data producers: Archipelago, Bloomberg Tradebook,
Island, RediBook, Attain, TracECN, BATS Trading and Direct Edge. A
proliferation of dark pools and other ATSs operate profitably with
fragmentary shares of consolidated market volume.
Regulation NMS, by deregulating the market for proprietary data,
has increased the contestability of that market. While broker-dealers
have previously published their proprietary data individually,
Regulation NMS encourages market data vendors and broker-dealers to
produce proprietary products cooperatively in a manner never before
possible. Multiple market data vendors already have the capability to
aggregate data and disseminate it on a profitable scale, including
Bloomberg, and Thomson-Reuters.
The court in NetCoalition concluded that the Commission had failed
to demonstrate that the market for market data was competitive based on
the reasoning of the Commission's NetCoalition order because, in the
court's view, the Commission had not adequately demonstrated that the
depth-of-book data at issue in the case is used to attract order flow.
NASDAQ believes, however, that evidence not before the court clearly
demonstrates that availability of depth data attracts order flow. For
example, NASDAQ submits that in and of itself, NASDAQ's decision
voluntarily to cap fees on existing products, as is the effect of a
flat fee or an enterprise license, is evidence of market forces at
work.
The court in NetCoalition did cite favorably an economic study by
Ordover and Bamberger which concluded that ``[a]lthough an exchange may
price its trade execution fees higher and its market data fees lower
(or vice versa), because of ``platform'' competition the exchange
nonetheless receives the same return from the two ``joint products'' in
the aggregate.'' \14\ Ordover and Bamberger also provided additional
comments expanding upon the impact of platform competition.\15\ Among
the conclusions that Ordover and Bamberger reach are: NASDAQ is subject
to significant competitive forces in setting the prices and other terms
of execution services and proprietary data products.
---------------------------------------------------------------------------

\14\ See NetCoalition at fn. 16.
\15\ See Securities Exchange Act Release No. 63745 (Jan. 20,
2011); 76 FR 4970 (Jan. 27, 2011) (SR-NASDAQ-2011-010) (attached to
original filing as Exhibit 3).
---------------------------------------------------------------------------

Competitive forces constrain the prices that platforms can charge
for non-core market information. A trading platform cannot generate
market information unless it receives trade orders. For this reason, a
platform can be expected to use its market data product as a tool for
attracting liquidity and trading to its exchange.
While, by definition, information that is proprietary to an
exchange cannot be obtained elsewhere, this does not enable the owner
of such information to exercise monopoly power over that information
vis-[agrave]-vis firms with the need for such information. Even though
market information from one platform may not be a perfect substitute
for market information from one or more other platforms, the existence
of alternative sources of information can be expected to constrain the
prices platforms charge for market data.
Besides the fact that similar information can be obtained
elsewhere, the feasibility of supra-competitive pricing is constrained
by the traders' ability to shift their trades elsewhere, which lowers
the activity on the exchange and so in the long run reduces the quality
of the information generated by the exchange.
Competition among platforms has driven NASDAQ continually to
improve its platform data offerings and to cater to customers' data
needs. For example, NASDAQ has developed and maintained multiple
delivery mechanisms (IP, multi-cast, and compression) that enable
customers to receive data in the form and manner they prefer and at the
lowest cost to them. NASDAQ offers front end applications such as its
``Bookviewer'' to help customers utilize data. NASDAQ has created new
products like TotalView Aggregate to complement TotalView ITCH and
Level 2, because offering data in multiple formatting allows NASDAQ to
better fit customer needs. NASDAQ offers data via multiple extranet
providers, thereby helping to reduce network and total cost for its
data products. NASDAQ has developed an online administrative system to
provide customers transparency into their data feed requests and
streamline data usage reporting. NASDAQ has also expanded its flat fee
or enterprise license options to reduce the administrative burden and
costs to firms that purchase market data.
Despite these enhancements and a dramatic increase in message
traffic, NASDAQ's fees for depth-of-book data have remained flat. In
fact, as a percent of total customer costs, NASDAQ data fees have
fallen relative to other data usage costs--including bandwidth,
programming, and infrastructure--that have risen. The same holds true
for execution services; despite numerous enhancements to NASDAQ's
trading platform, absolute and relative trading costs have declined.
Platform competition has intensified as new entrants have emerged,
constraining prices for both executions and for data.
The vigor of competition for non-core data information is
significant and the

[[Page 64142]]

Exchange believes that this proposal clearly evidences such
competition. NASDAQ is offering a new pricing model in order to keep
pace with changes in the industry and evolving customer needs. It is
entirely optional and is geared towards attracting new customers, as
well as retaining existing customers.
The Exchange has witnessed competitors creating new products and
innovative pricing in this space over the course of the past year.
NASDAQ continues to see firms challenge its pricing on the basis of the
Exchange's explicit fees being higher than the zero-priced fees from
other competitors such as BATS. In all cases, firms make decisions on
how much and what types of data to consume on the basis of the total
cost of interacting with NASDAQ or other exchanges. Of course, the
explicit data fees are but one factor in a total platform analysis.
Some competitors have lower transactions fees and higher data fees, and
others are vice versa. The market for this non-core data information is
highly competitive and continually evolves as products develop and
change.

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.\16\ 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.
---------------------------------------------------------------------------

\16\ 15 U.S.C. 78s(b)(3)(a)(ii) [sic].
---------------------------------------------------------------------------

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-2011-130 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-2011-130. 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-2011-130 and should be submitted on or before November 7, 2011.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

\17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-26673 Filed 10-14-11; 8:45 am]
BILLING CODE 8011-01-P

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