Self-Regulatory Organizations; the NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change To Establish an Enhanced Display Distributor Fee, 3313-3318 [2012-1232]
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Federal Register / Vol. 77, No. 14 / Monday, January 23, 2012 / Notices
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.16
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–1233 Filed 1–20–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66165; File No. SR–
NASDAQ–2012–005]
Self-Regulatory Organizations; the
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
a Proposed Rule Change To Establish
an Enhanced Display Distributor Fee
January 17, 2012.
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 January 5,
2012, the NASDAQ Stock Market LLC
(‘‘Nasdaq’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
prepared by Nasdaq. The Commission is
publishing this notice to solicit
comments on the proposed rule from
interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of the Substance
of the Proposed Rule Change
3313
italicized; proposed deletions are in
brackets.3
*
*
*
*
*
7026. Distribution Models
(a) Display Solutions [Reserved]
(1) Enhanced Displays (optional
delivery method)
(A) The charges to be paid by
Distributors for offering subscribers of
Nasdaq Depth data controlled display
products along with access to an API or
similar solution shall be:
Nasdaq proposes to establish an
optional tiered distributor fee for
enhanced displays (the ‘‘Enhanced
Display Distributor Fee’’).
The text of the proposed rule change
is below. Proposed new language is
Number of downstream subscribers
Monthly Enhanced Display Solution Fee per Distributor for right to display products containing API or similar solution *.
1–299 users = $2,000/month.
300–399 users = $3,000/month.
400–499 users = $4,000/month.
500–599 users = $5,000/month.
600–699 users = $6,000/month.
700–799 users = $7,000/month.
800–899 users = $8,000/month.
900–999 users = $9,000/month.
1,000 users or more = $10,000/
month.
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* Customers that are subscribing to certain enterprise depth capped fees as described in Nasdaq Rule 7023(a)(1)(c) are exempt from this fee.
(B) The monthly fee per Professional
or Non-Professional subscriber for
utilizing Nasdaq TotalView or Nasdaq
OpenView data on a controlled display
product with access to an API or similar
solution through that display is the
applicable Nasdaq TotalView or Nasdaq
OpenView rates.
The monthly fee per Professional or
Non-Professional subscriber for utilizing
the Level 2 data for Nasdaq-listed
securities on a controlled display
product with access to an API or similar
solution through that display is the
applicable Nasdaq TotalView rates.
The monthly fee per Professional or
Non-Professional subscriber for utilizing
Nasdaq Level 2 data for NYSE, AMEX
or regional listed securities on a
controlled display product with access
to an API or similar solution through
that display is the applicable Nasdaq
OpenView rates.
(2) The term ‘‘non-professional’’ shall
have the same meaning as set forth in
Nasdaq Rule 7011(b).
16 17
1 15
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
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(3) The term ‘‘Distributor’’ shall have
the same meaning as set forth in Nasdaq
Rule 7019(c).
(b)–(c) No change.
*
*
*
*
*
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
Nasdaq is proposing to amend Nasdaq
Rule 7026 (Distribution Models) to
establish an optional Enhanced Display
Solution Fee to further the distribution
of Nasdaq TotalView, Nasdaq
OpenView and/or Nasdaq Level 2
Information (collectively, ‘‘Nasdaq
Depth Information’’). The new data
distribution model (an ‘‘Enhanced
Display Solution’’) offers a delivery
method available to firms seeking
simplified market data administration
and may be offered by Distributors to
external subscribers that are using the
Nasdaq Depth Information internally.
The proposed optional Enhanced
Display Solution Fee is intended to
provide a new pricing option for
Distributors who provide a controlled
display product along with an
Application Programming Interface
In its filing with the Commission,
Nasdaq included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. Nasdaq has prepared
summaries, set forth in sections A, B,
and C below, of the most significant
aspects of such statements.
2 17
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1. Purpose
3 Changes are marked to the rule text that appears
in the electronic Nasdaq Manual found at https://
nasdaqomx.cchwallstreet.com.
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(‘‘API’’) or similar solution to
subscribers. Non-display use is not
permitted under the Enhanced Display
Solution Fee structure. To ensure
compliance with this new fee,
Distributors must monitor for any nondisplay or excessive use suggesting that
the subscriber is not in compliance. The
Distributor is liable for any
unauthorized use by the Enhanced Data
subscribers under the Enhanced Display
Solution. This proposed optional new
fee only applies to external Distributors
offering any Nasdaq Depth Information
and who opt for an Enhanced Display
option.
This new pricing and administrative
option is in response to industry
demand, as well as due to changes in
the technology to distribute market data.
By providing this new fee option,
Distributors will have more
administrative flexibility in their receipt
and distribution of Nasdaq Depth
Information. Distributors opting for the
Enhanced Display Solution Fee would
still be fee liable for the applicable
Professional or Non-Professional
subscriber fees for Nasdaq TotalView
and Nasdaq OpenView, as described in
Nasdaq Rule 7023.4 Nasdaq proposes to
permit Distributors to select the
Enhanced Display Solution Fee at a
minimum rate of $2,000 per month for
up to 299 subscribers, and each tier of
100 users will be at an additional
incremental rate of $1,000 per month up
to a maximum of $10,000 per month for
1,000 or more subscribers per month.
The Enhanced Display Solution Fee is
independent from the applicable
subscriber fees as described above.
These new Enhanced Display Solution
Fees will become fee liable for the
billing month of April 2012.
This delivery option assesses a new
fee schedule to Distributors of Nasdaq
Depth Information that provide an API
or similar solution from a controlled
display. The Distributor must first agree
to reformat, redisplay and/or alter the
Nasdaq Depth Information prior to
retransmission, but not to affect the
integrity of the Nasdaq Depth
Information and not to render it
inaccurate, unfair, uninformative,
fictitious, misleading or discriminatory.
An Enhanced Display Solution is any
controlled display product containing
Nasdaq Depth Information where the
4 Subscribers redistributing Nasdaq Level 2
information under the proposed fee change will pay
underlying Nasdaq TotalView or Nasdaq OpenView
rates. A Subscriber redistributing Nasdaq Level 2
for Nasdaq-listed securities will pay the underlying
Nasdaq TotalView rates and a customer
redistributing Nasdaq Level 2 for NYSE, AMEX or
regional listed securities will pay the underlying
Nasdaq OpenView rates.
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Distributor controls a display of Nasdaq
Depth Information, but also allows the
subscriber to access an API or similar
solution from that display product. The
subscriber of an Enhanced Display may
use the Nasdaq Depth Information for
the subscriber’s own purposes and may
not redistribute the information outside
of their organization. The subscriber
may not redistribute the data internally
to other users in the same organization.
In the past, Nasdaq has considered
this type of retransmission to be an
uncontrolled display since the
Distributor does not control both the
entitlements and the display of the
information. Over the last ten years,
Distributors have improved the
technical delivery and monitoring of
data and the Enhanced Display offering
responds to an industry need to
administer these new types of technical
deliveries.
Some Distributors believe that an API
or other distribution from a display is a
better controlled product than a data
feed and as such should not be subject
to the same rates as a data feed. The
offering of a new pricing option for an
Enhanced Display would not only result
in Nasdaq offering lower fees for certain
existing Distributors, but will allow new
Distributors to deliver Enhanced
Displays to new clients, thereby
increasing transparency of the market.
Nasdaq continues to create new pricing
policies aimed at increasing
transparency in the market and believes
this is another step in that direction.
This includes the Enhanced Display
Solution as well as the Managed Data
Solution.
Accordingly, Nasdaq is establishing
the Enhanced Display Solution Fee for
Distributors who are seeking simplified
market data administration and would
like to offer Nasdaq Depth Information
to subscribers that are using the Nasdaq
Depth Information internally. The
Nasdaq Enhanced Display Solution Fee
is optional for firms providing a
controlled display product containing
Nasdaq Depth Information where the
Distributor controls a display of Nasdaq
Depth Information, but allows the
subscriber to access an API or similar
solution from that display product since
these firms can choose to pay the data
feed fees. The new Nasdaq Enhanced
Display Solution Fee is designed to
allow TotalView subscribers to
redistribute data via a terminal without
paying a higher fee for an attached API.
As a result, it does not impact
individual usage fees for TotalView or
in any way increase the costs of any
user of the TotalView data product. For
subscribers wanting to use this same
functionality for other products, they
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would be able to do so by paying the
applicable TotalView rates.
2. Statutory Basis
Nasdaq believes that the proposed
rule change is consistent with the
provisions of Section 6 of the Act,5 in
general, and with Section 6(b)(4) of the
Act,6 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.
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
own internal analysis of the need for such
data.7
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.
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
5 15
U.S.C. 78f.
U.S.C. 78f(b)(4).
7 Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005).
6 15
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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.’’
Nasdaq believes that these
amendments to Section 19 of the Act
reflect Congress’s intent to allow the
Commission to rely upon the forces of
competition to ensure that fees for
market data are reasonable and
equitably allocated. Although Section
19(b) had formerly authorized
immediate effectiveness for a ‘‘due, fee
or other charge imposed by the selfregulatory organization,’’ the
Commission adopted a policy and
subsequently a rule stipulating that fees
for data and other products available to
persons that are not members of the selfregulatory organization must be
approved by the Commission after first
being published for comment. At the
time, the Commission supported the
adoption of the policy and the rule by
pointing out that unlike members,
whose representation in self-regulatory
organization governance was mandated
by the Act, non-members should be
given the opportunity to comment on
fees before being required to pay them,
and that the Commission should
specifically approve all such fees.
Nasdaq believes that the amendment to
Section 19 reflects Congress’s
conclusion that the evolution of selfregulatory organization governance and
competitive market structure have
rendered the Commission’s prior policy
on non-member fees obsolete.
Specifically, many exchanges have
evolved from member-owned not-forprofit corporations into for-profit
investor-owned corporations (or
subsidiaries of investor-owned
corporations). Accordingly, exchanges
no longer have narrow incentives to
manage their affairs for the exclusive
benefit of their members, but rather
have incentives to maximize the appeal
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of their products to all customers,
whether members or non-members, so
as to broaden distribution and grow
revenues. Moreover, we believe that the
change also reflects an endorsement of
the Commission’s determinations that
reliance on competitive markets is an
appropriate means to ensure equitable
and reasonable prices. Simply put, the
change reflects a presumption that all
fee changes should be permitted to take
effect immediately, since the level of all
fees are constrained by competitive
forces.
The recent decision of the United
States Court of Appeals for the District
of Columbia Circuit in NetCoaliton v.
SEC [sic], 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.’ NetCoaltion [sic], at 15 (quoting
H.R. Rep. No. 94–229, at 92 (1975), as
reprinted in 1975 U.S.C.C.A.N. 321,
323). The court’s conclusions about
Congressional intent are therefore
reinforced by the Dodd-Frank Act
amendments, which create a
presumption that exchange fees,
including market data fees, may take
effect immediately, without prior
Commission approval, and that the
Commission should take action to
suspend a fee change and institute a
proceeding to determine whether the fee
change should be approved or
disapproved only where the
Commission has concerns that the
change may not be consistent with the
Act.
NASDAQ believes that this proposal
is in keeping with those principles by
promoting increased transparency
through the offering of a new pricing
option for an Enhanced Display, which
would not only result in Nasdaq offering
lower fees for certain existing
Distributors, but will allow new
Distributors to deliver Enhanced
Displays to new clients, thereby
increasing transparency of the market.
Additionally, the proposal provides for
simplified market data administration
and may be offered by Distributors to
external subscribers that are using the
Nasdaq Depth Information internally.
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Nasdaq notes also that this filing
proposes to distribute no additional data
elements and that the Enhanced Display
Solution Fee is optional. 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. Nasdaq
continues to create new pricing policies
aimed at increasing transparency in the
market and believes this is another step
in that direction.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
Nasdaq does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, as amended.
Notwithstanding its determination that
the Commission may rely upon
competition to establish fair and
equitably allocated fees for market data,
the NetCoaltion [sic] court found that
the Commission had not, in that case,
compiled a record that adequately
supported its conclusion that the market
for the data at issue in the case was
competitive. For the reasons discussed
above, Nasdaq believes that the DoddFrank Act amendments to Section 19
materially alter the scope of the
Commission’s review of future market
data filings, by creating a presumption
that all fees may take effect
immediately, without prior analysis by
the Commission of the competitive
environment. Even in the absence of
this important statutory change,
however, Nasdaq believes that a record
may readily be established to
demonstrate the competitive nature of
the market in question.
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
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expect will assist them or their
customers in making trading decisions.
The costs of producing market data
include not only the costs of the data
distribution infrastructure, but also the
costs of designing, maintaining, and
operating the exchange’s transaction
execution platform and the cost of
regulating the exchange to ensure its fair
operation and maintain investor
confidence. The total return that a
trading platform earns reflects the
revenues it receives from both products
and the joint costs it incurs. Moreover,
an exchange’s customers view the costs
of transaction executions and of data as
a unified cost of doing business with the
exchange. A broker-dealer will direct
orders to a particular exchange only if
the expected revenues from executing
trades on the exchange exceed net
transaction execution costs and the cost
of data that the broker-dealer chooses to
buy to support its trading decisions (or
those of its customers). The choice of
data products is, in turn, a product of
the value of the products in making
profitable trading decisions. If the cost
of the product exceeds its expected
value, the broker-dealer will choose not
to buy it. Moreover, as a broker-dealer
chooses to direct fewer orders to a
particular exchange, the value of the
product to that broker-dealer decreases,
for two reasons. First, the product will
contain less information, because
executions of the broker-dealer’s orders
will not be reflected in it. Second, and
perhaps more important, the product
will be less valuable to that brokerdealer because it does not provide
information about the venue to which it
is directing its orders. Data from the
competing venue to which the brokerdealer is directing orders will become
correspondingly more valuable.
Thus, a super-competitive increase in
the fees charged for either transactions
or data has the potential to impair
revenues from both products. ‘‘No one
disputes that competition for order flow
is ‘fierce’.’’ NetCoalition at 24. However,
the existence of fierce competition for
order flow implies a high degree of price
sensitivity on the part of broker-dealers
with order flow, since they may readily
reduce costs by directing orders toward
the lowest-cost trading venues. A
broker-dealer that shifted its order flow
from one platform to another in
response to order execution price
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
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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
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who wish to produce and distribute
their own market data. This proprietary
data is produced by each individual
exchange, as well as other entities, in a
vigorously competitive market.
Broker-dealers currently have
numerous alternative venues for their
order flow, including ten self-regulatory
organization (‘‘SRO’’) markets, as well
as internalizing broker-dealers (‘‘BDs’’)
and various forms of alternative trading
systems (‘‘ATSs’’), including dark pools
and electronic communication networks
(‘‘ECNs’’). Each SRO market competes to
produce transaction reports via trade
executions, and two FINRA-regulated
Trade Reporting Facilities (‘‘TRFs’’)
compete to attract internalized
transaction reports. Competitive markets
for order flow, executions, and
transaction reports provide pricing
discipline for the inputs of proprietary
data products.
The large number of SROs, TRFs, BDs,
and ATSs that currently produce
proprietary data or are currently capable
of producing it provides further pricing
discipline for proprietary data products.
Each SRO, TRF, ATS, and BD is
currently permitted to produce
proprietary data products, and many
currently do or have announced plans to
do so, including Nasdaq, NYSE, NYSE
Amex, NYSEArca, and BATS.
Any ATS or BD can combine with any
other ATS, BD, or multiple ATSs or BDs
to produce joint proprietary data
products. Additionally, order routers
and market data vendors can facilitate
single or multiple broker-dealers’
production of proprietary data products.
The potential sources of proprietary
products are virtually limitless.
The fact that proprietary data from
ATSs, BDs, and vendors can by-pass
SROs is significant in two respects.
First, non-SROs can compete directly
with SROs for the production and sale
of proprietary data products, as BATS
and Arca did before registering as
exchanges by publishing proprietary
book data on the Internet. Second,
because a single order or transaction
report can appear in an SRO proprietary
product, a non-SRO proprietary
product, or both, the data available in
proprietary products is exponentially
greater than the actual number of orders
and transaction reports that exist in the
marketplace.
Market data vendors provide another
form of price discipline for proprietary
data products because they control the
primary means of access to end users.
Vendors impose price restraints based
upon their business models. For
example, vendors such as Bloomberg
and Thomson Reuters that assess a
surcharge on data they sell may refuse
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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 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 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 data attracts order flow.
For example, as of July 2010, 92 of the
top 100 broker-dealers by shares
executed on Nasdaq consumed Level 2/
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17:58 Jan 20, 2012
Jkt 226001
NQDS and 80 of the top 100 brokerdealers consumed TotalView. During
that month, the Level 2/NQDS-users
were responsible for 94.44% of the
orders entered into Nasdaq and
TotalView users were responsible for
92.98%.
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/NQDS, because offering data in
multiple formatting allows Nasdaq to
better fit customer needs. Nasdaq offers
data via multiple extranet providers,
thereby helping to reduce network and
total cost for its data products. Nasdaq
has developed an online administrative
system to provide customers
transparency into their data feed
requests and streamline data usage
reporting. Nasdaq has also expanded its
Enterprise License options that reduce
the administrative burden and costs to
firms that purchase market data.
Despite these enhancements and a
dramatic increase in message traffic,
Nasdaq’s fees for market 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 depth
information is significant and the
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
PO 00000
Frm 00092
Fmt 4703
Sfmt 4703
3317
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 depth 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
No written comments were either
solicited or 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 8. At any time
within 60 days of the filing of the
proposed rule change, the Commission
summarily may temporarily suspend
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act. If the Commission
takes such action, the Commission shall
institute proceedings to determine
whether the proposed rule should be
approved or disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rulecomments@sec.gov. Please include File
Number SR–NASDAQ–2012–005 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.
8 15
E:\FR\FM\23JAN1.SGM
U.S.C. 78s(b)(3)(a)(ii).
23JAN1
3318
Federal Register / Vol. 77, No. 14 / Monday, January 23, 2012 / Notices
All submissions should refer to File
Number SR–NASDAQ–2012–005. This
file number should be included on the
subject line if email 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 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 offices 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–2012–005, and
should be submitted on or before
February 13, 2012.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.9
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–1232 Filed 1–20–12; 8:45 am]
BILLING CODE 8011–01–P
notice is hereby given that on January
13, 2012, Chicago Board Options
Exchange, Incorporated (‘‘CBOE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’) the proposed rule
change as described in Items I and II
below, which Items have been prepared
by the Exchange. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons and is
approving the proposed rule change on
an accelerated basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
CBOE is proposing to decouple and
extend the duration of its Credit Option
Margin Pilot Program through January
17, 2013. The text of the rule proposal
is available on the Exchange’s Web site
(https://www.cboe.org/legal), at the
Exchange’s Office of the Secretary, and
at the Commission’s Public Reference
Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
CBOE 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 III below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant parts of such
statements.
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–66163; File No. SR–CBOE–
2012–007]
A. Self-Regulatory Organization’s
Statement of the Purpose of, and the
Statutory Basis for, the Proposed Rule
Change
1. Purpose
TKELLEY on DSK3SPTVN1PROD with NOTICES
Self-Regulatory Organizations;
Chicago Board Options Exchange,
Incorporated; Notice of Filing and
Order Granting Accelerated Approval
of Proposed Rule Change To Decouple
and Extend CBOE’s Credit Option
Margin Pilot Program to January 17,
2013
January 17, 2012.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
9 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
1 15
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17:58 Jan 20, 2012
Jkt 226001
On February 2, 2011, the Commission
approved the Exchange’s proposal to
establish a Credit Option Margin Pilot
Program (‘‘Program’’).3 The Program
became effective on a pilot basis and has
run on a parallel track with FINRA Rule
4240, which is similarly operated on a
3 See Securities Exchange Act Release No. 63819
(February 2, 2011), 76 FR 6838 (February 8, 2011)
(order approving [SR–CBOE–2010–106]). To
implement the Program, the Exchange amended
Rule 12.3(l), Margin Requirements, to make CBOE’s
margin requirements for Credit Options consistent
with FINRA Rule 4240, Margin Requirements for
Credit Default Swaps. CBOE’s Credit Options (i.e.,
Credit Default Options and Credit Default Basket
Options) are analogous to credit default swaps.
PO 00000
Frm 00093
Fmt 4703
Sfmt 4703
pilot basis.4 CBOE’s Program is
currently scheduled to expire on
January 17, 2012.
In this current proposal, CBOE
proposes to decouple its Program from
the FINRA Rule 4240 margin pilot
program. CBOE’s decoupled Program
will be substantially similar to the
provisions of the FINRA Rule 4240
margin pilot program operated by
FINRA.
CBOE understands that in connection
with renewing its Rule 4240 margin
pilot, FINRA will be revising its Rule
4240 by adding new Supplementary
Material .02, which sets forth alternative
tables to the existing tables that may be
used by market participants to compute
the required margin. CBOE similarly
proposes to adopt alternative tables to
the existing tables in its rules that may
be used by Trading Permit Holders to
compute the required margins. These
new alternative tables are set forth in
Rules 12.3(l)(3)(ii), 12.3(l)(3)(iv) and
12.4(l)(4)(ii). Also, a few minor changes
are being made to Rule 12.3(l) to
renumber paragraphs and to make other
non-substantive changes.
Finally, CBOE proposes to extend its
decoupled Program for an additional
year to January 17, 2013.
CBOE notes for the Commission that
there are currently Credit Options listed
for trading on the Exchange that have
open interest. As a result, CBOE
believes that is in the public interest for
the Program to continue uninterrupted.
In the future, if the Exchange
proposes an additional extension of the
Credit Option Margin Pilot Program or
proposes to make the Program
permanent, then the Exchange will
submit a filing proposing such
amendments to the Program.
2. Statutory Basis
The Exchange believes this rule
proposal is consistent with the Act and
the rules and regulations under the Act
applicable to a national securities
exchange and, in particular, the
requirements of Section 6(b) of the Act.5
Specifically, the Exchange believes that
the proposed rule change is consistent
with the Section 6(b)(5) Act 6
requirements that the rules of an
exchange be designed to promote just
and equitable principles of trade, to
prevent fraudulent and manipulative
acts and, in general, to protect investors
and the public interest, and because it
4 See Securities Exchange Act Release No. 63819
(February 2, 2011), 76 FR 6838 (February 8, 2011)
(order approving [SR–CBOE–2010–106]).
5 15 U.S.C. 78f(b).
6 15 U.S.C. 78f(b)(5).
E:\FR\FM\23JAN1.SGM
23JAN1
]]>Agencies
[Federal Register Volume 77, Number 14 (Monday, January 23, 2012)]
[Notices]
[Pages 3313-3318]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-1232]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-66165; File No. SR-NASDAQ-2012-005]
Self-Regulatory Organizations; the NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
To Establish an Enhanced Display Distributor Fee
January 17, 2012.
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 January 5, 2012, the NASDAQ Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by Nasdaq.
The Commission is publishing this notice to solicit comments on the
proposed rule 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 the
Substance of the Proposed Rule Change
Nasdaq proposes to establish an optional tiered distributor fee for
enhanced displays (the ``Enhanced Display Distributor Fee'').
The text of the proposed rule change is below. Proposed new
language is italicized; proposed deletions are in brackets.\3\
---------------------------------------------------------------------------
\3\ Changes are marked to the rule text that appears in the
electronic Nasdaq Manual found at https://nasdaqomx.cchwallstreet.com.
---------------------------------------------------------------------------
* * * * *
7026. Distribution Models
(a) Display Solutions [Reserved]
(1) Enhanced Displays (optional delivery method)
(A) The charges to be paid by Distributors for offering subscribers
of Nasdaq Depth data controlled display products along with access to
an API or similar solution shall be:
------------------------------------------------------------------------
Number of downstream
subscribers
------------------------------------------------------------------------
Monthly Enhanced Display Solution Fee per 1-299 users = $2,000/month.
Distributor for right to display products 300-399 users = $3,000/
containing API or similar solution \*\. month.
400-499 users = $4,000/
month.
500-599 users = $5,000/
month.
600-699 users = $6,000/
month.
700-799 users = $7,000/
month.
800-899 users = $8,000/
month.
900-999 users = $9,000/
month.
1,000 users or more =
$10,000/month.
------------------------------------------------------------------------
* Customers that are subscribing to certain enterprise depth capped fees
as described in Nasdaq Rule 7023(a)(1)(c) are exempt from this fee.
(B) The monthly fee per Professional or Non-Professional subscriber
for utilizing Nasdaq TotalView or Nasdaq OpenView data on a controlled
display product with access to an API or similar solution through that
display is the applicable Nasdaq TotalView or Nasdaq OpenView rates.
The monthly fee per Professional or Non-Professional subscriber for
utilizing the Level 2 data for Nasdaq-listed securities on a controlled
display product with access to an API or similar solution through that
display is the applicable Nasdaq TotalView rates.
The monthly fee per Professional or Non-Professional subscriber for
utilizing Nasdaq Level 2 data for NYSE, AMEX or regional listed
securities on a controlled display product with access to an API or
similar solution through that display is the applicable Nasdaq OpenView
rates.
(2) The term ``non-professional'' shall have the same meaning as
set forth in Nasdaq Rule 7011(b).
(3) The term ``Distributor'' shall have the same meaning as set
forth in Nasdaq Rule 7019(c).
(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, Nasdaq included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. Nasdaq has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Nasdaq is proposing to amend Nasdaq Rule 7026 (Distribution Models)
to establish an optional Enhanced Display Solution Fee to further the
distribution of Nasdaq TotalView, Nasdaq OpenView and/or Nasdaq Level 2
Information (collectively, ``Nasdaq Depth Information''). The new data
distribution model (an ``Enhanced Display Solution'') offers a delivery
method available to firms seeking simplified market data administration
and may be offered by Distributors to external subscribers that are
using the Nasdaq Depth Information internally.
The proposed optional Enhanced Display Solution Fee is intended to
provide a new pricing option for Distributors who provide a controlled
display product along with an Application Programming Interface
[[Page 3314]]
(``API'') or similar solution to subscribers. Non-display use is not
permitted under the Enhanced Display Solution Fee structure. To ensure
compliance with this new fee, Distributors must monitor for any non-
display or excessive use suggesting that the subscriber is not in
compliance. The Distributor is liable for any unauthorized use by the
Enhanced Data subscribers under the Enhanced Display Solution. This
proposed optional new fee only applies to external Distributors
offering any Nasdaq Depth Information and who opt for an Enhanced
Display option.
This new pricing and administrative option is in response to
industry demand, as well as due to changes in the technology to
distribute market data. By providing this new fee option, Distributors
will have more administrative flexibility in their receipt and
distribution of Nasdaq Depth Information. Distributors opting for the
Enhanced Display Solution Fee would still be fee liable for the
applicable Professional or Non-Professional subscriber fees for Nasdaq
TotalView and Nasdaq OpenView, as described in Nasdaq Rule 7023.\4\
Nasdaq proposes to permit Distributors to select the Enhanced Display
Solution Fee at a minimum rate of $2,000 per month for up to 299
subscribers, and each tier of 100 users will be at an additional
incremental rate of $1,000 per month up to a maximum of $10,000 per
month for 1,000 or more subscribers per month. The Enhanced Display
Solution Fee is independent from the applicable subscriber fees as
described above. These new Enhanced Display Solution Fees will become
fee liable for the billing month of April 2012.
---------------------------------------------------------------------------
\4\ Subscribers redistributing Nasdaq Level 2 information under
the proposed fee change will pay underlying Nasdaq TotalView or
Nasdaq OpenView rates. A Subscriber redistributing Nasdaq Level 2
for Nasdaq-listed securities will pay the underlying Nasdaq
TotalView rates and a customer redistributing Nasdaq Level 2 for
NYSE, AMEX or regional listed securities will pay the underlying
Nasdaq OpenView rates.
---------------------------------------------------------------------------
This delivery option assesses a new fee schedule to Distributors of
Nasdaq Depth Information that provide an API or similar solution from a
controlled display. The Distributor must first agree to reformat,
redisplay and/or alter the Nasdaq Depth Information prior to
retransmission, but not to affect the integrity of the Nasdaq Depth
Information and not to render it inaccurate, unfair, uninformative,
fictitious, misleading or discriminatory. An Enhanced Display Solution
is any controlled display product containing Nasdaq Depth Information
where the Distributor controls a display of Nasdaq Depth Information,
but also allows the subscriber to access an API or similar solution
from that display product. The subscriber of an Enhanced Display may
use the Nasdaq Depth Information for the subscriber's own purposes and
may not redistribute the information outside of their organization. The
subscriber may not redistribute the data internally to other users in
the same organization.
In the past, Nasdaq has considered this type of retransmission to
be an uncontrolled display since the Distributor does not control both
the entitlements and the display of the information. Over the last ten
years, Distributors have improved the technical delivery and monitoring
of data and the Enhanced Display offering responds to an industry need
to administer these new types of technical deliveries.
Some Distributors believe that an API or other distribution from a
display is a better controlled product than a data feed and as such
should not be subject to the same rates as a data feed. The offering of
a new pricing option for an Enhanced Display would not only result in
Nasdaq offering lower fees for certain existing Distributors, but will
allow new Distributors to deliver Enhanced Displays to new clients,
thereby increasing transparency of the market. Nasdaq continues to
create new pricing policies aimed at increasing transparency in the
market and believes this is another step in that direction. This
includes the Enhanced Display Solution as well as the Managed Data
Solution.
Accordingly, Nasdaq is establishing the Enhanced Display Solution
Fee for Distributors who are seeking simplified market data
administration and would like to offer Nasdaq Depth Information to
subscribers that are using the Nasdaq Depth Information internally. The
Nasdaq Enhanced Display Solution Fee is optional for firms providing a
controlled display product containing Nasdaq Depth Information where
the Distributor controls a display of Nasdaq Depth Information, but
allows the subscriber to access an API or similar solution from that
display product since these firms can choose to pay the data feed fees.
The new Nasdaq Enhanced Display Solution Fee is designed to allow
TotalView subscribers to redistribute data via a terminal without
paying a higher fee for an attached API. As a result, it does not
impact individual usage fees for TotalView or in any way increase the
costs of any user of the TotalView data product. For subscribers
wanting to use this same functionality for other products, they would
be able to do so by paying the applicable TotalView rates.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\5\ in general, and with Section
6(b)(4) of the Act,\6\ 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.
---------------------------------------------------------------------------
\5\ 15 U.S.C. 78f.
\6\ 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.\7\
---------------------------------------------------------------------------
\7\ 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.
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
[[Page 3315]]
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.''
Nasdaq believes that these amendments to Section 19 of the Act
reflect Congress's intent to allow the Commission to rely upon the
forces of competition to ensure that fees for market data are
reasonable and equitably allocated. Although Section 19(b) had formerly
authorized immediate effectiveness for a ``due, fee or other charge
imposed by the self-regulatory organization,'' the Commission adopted a
policy and subsequently a rule stipulating that fees for data and other
products available to persons that are not members of the self-
regulatory organization must be approved by the Commission after first
being published for comment. At the time, the Commission supported the
adoption of the policy and the rule by pointing out that unlike
members, whose representation in self-regulatory organization
governance was mandated by the Act, non-members should be given the
opportunity to comment on fees before being required to pay them, and
that the Commission should specifically approve all such fees. Nasdaq
believes that the amendment to Section 19 reflects Congress's
conclusion that the evolution of self-regulatory organization
governance and competitive market structure have rendered the
Commission's prior policy on non-member fees obsolete. Specifically,
many exchanges have evolved from member-owned not-for-profit
corporations into for-profit investor-owned corporations (or
subsidiaries of investor-owned corporations). Accordingly, exchanges no
longer have narrow incentives to manage their affairs for the exclusive
benefit of their members, but rather have incentives to maximize the
appeal of their products to all customers, whether members or non-
members, so as to broaden distribution and grow revenues. Moreover, we
believe that the change also reflects an endorsement of the
Commission's determinations that reliance on competitive markets is an
appropriate means to ensure equitable and reasonable prices. Simply
put, the change reflects a presumption that all fee changes should be
permitted to take effect immediately, since the level of all fees are
constrained by competitive forces.
The recent decision of the United States Court of Appeals for the
District of Columbia Circuit in NetCoaliton v. SEC [sic], 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.'
NetCoaltion [sic], at 15 (quoting H.R. Rep. No. 94-229, at 92 (1975),
as reprinted in 1975 U.S.C.C.A.N. 321, 323). The court's conclusions
about Congressional intent are therefore reinforced by the Dodd-Frank
Act amendments, which create a presumption that exchange fees,
including market data fees, may take effect immediately, without prior
Commission approval, and that the Commission should take action to
suspend a fee change and institute a proceeding to determine whether
the fee change should be approved or disapproved only where the
Commission has concerns that the change may not be consistent with the
Act.
NASDAQ believes that this proposal is in keeping with those
principles by promoting increased transparency through the offering of
a new pricing option for an Enhanced Display, which would not only
result in Nasdaq offering lower fees for certain existing Distributors,
but will allow new Distributors to deliver Enhanced Displays to new
clients, thereby increasing transparency of the market. Additionally,
the proposal provides for simplified market data administration and may
be offered by Distributors to external subscribers that are using the
Nasdaq Depth Information internally. Nasdaq notes also that this filing
proposes to distribute no additional data elements and that the
Enhanced Display Solution Fee is optional. 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. Nasdaq
continues to create new pricing policies aimed at increasing
transparency in the market and believes this is another step in that
direction.
B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended. Notwithstanding its
determination that the Commission may rely upon competition to
establish fair and equitably allocated fees for market data, the
NetCoaltion [sic] court found that the Commission had not, in that
case, compiled a record that adequately supported its conclusion that
the market for the data at issue in the case was competitive. For the
reasons discussed above, Nasdaq believes that the Dodd-Frank Act
amendments to Section 19 materially alter the scope of the Commission's
review of future market data filings, by creating a presumption that
all fees may take effect immediately, without prior analysis by the
Commission of the competitive environment. Even in the absence of this
important statutory change, however, Nasdaq believes that a record may
readily be established to demonstrate the competitive nature of the
market in question.
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
[[Page 3316]]
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' 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 Thomson
Reuters that assess a surcharge on data they sell may refuse
[[Page 3317]]
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
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 data attracts order flow. For
example, as of July 2010, 92 of the top 100 broker-dealers by shares
executed on Nasdaq consumed Level 2/NQDS and 80 of the top 100 broker-
dealers consumed TotalView. During that month, the Level 2/NQDS-users
were responsible for 94.44% of the orders entered into Nasdaq and
TotalView users were responsible for 92.98%.
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/NQDS, because offering data in multiple formatting allows
Nasdaq to better fit customer needs. Nasdaq offers data via multiple
extranet providers, thereby helping to reduce network and total cost
for its data products. Nasdaq has developed an online administrative
system to provide customers transparency into their data feed requests
and streamline data usage reporting. Nasdaq has also expanded its
Enterprise License options that reduce the administrative burden and
costs to firms that purchase market data.
Despite these enhancements and a dramatic increase in message
traffic, Nasdaq's fees for market 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 depth information is significant and
the 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 depth 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
No written comments were either solicited or 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 \8\. At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
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\8\ 15 U.S.C. 78s(b)(3)(a)(ii).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-NASDAQ-2012-005 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.
[[Page 3318]]
All submissions should refer to File Number SR-NASDAQ-2012-005. This
file number should be included on the subject line if email 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 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 offices
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-2012-005, and should be submitted on or before February 13,
2012.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\9\
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\9\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-1232 Filed 1-20-12; 8:45 am]
BILLING CODE 8011-01-P
