Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Applicable to a New Version of the NASDAQ TotalView-ITCH Equities Depth Feed and Related Distributor and Administration Fees, 39752-39757 [2012-16376]
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Federal Register / Vol. 77, No. 129 / Thursday, July 5, 2012 / Notices
the proposal enables NASDAQ to be so
organized and to have the capacity to be
able to carry out the purposes of the Act
and to comply with and enforce
compliance by members and persons
associated with members with
provisions of the Act, the rules and
regulations thereunder, and NASDAQ
rules, and is designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
NASDAQ believes that the change
will provide greater flexibility to
NASDAQ OMX with regard to
populating a committee that includes
Directors with relevant expertise and
that is not excessively large in relation
to the size of the full Board of Directors,
while continuing to ensure that
Directors associated with NASDAQ
members and other broker-dealers do
not exert disproportionate influence of
the governance of NASDAQ OMX.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition not
necessary or appropriate in furtherance
of the purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission shall:
A. By order approve or disapprove
such proposed rule change; or
B. Institute proceedings to determine
whether the proposed rule change
should be disapproved.
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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 rulecomments@sec.gov. Please include File
Number SR–NASDAQ–2012–072 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–2012–072. 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, 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–2012–072 and should be
submitted on or before July 26, 2012.
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For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.6
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–16404 Filed 7–3–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67297; File No. SR–
NASDAQ–2012–063]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
a Proposed Rule Change Applicable to
a New Version of the NASDAQ
TotalView-ITCH Equities Depth Feed
and Related Distributor and
Administration Fees
June 28, 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 June 15,
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 Substance of
the Proposed Rule Change
Nasdaq proposes to establish fees for
a new optional delivery mechanism for
Nasdaq Depth data (defined below).
Specifically, Nasdaq proposes to
establish Distributor and Administration
fees for a hardware-based version of
Nasdaq TotalView-ITCH data and is not
offering a new market data product.
The text of the proposed rule change
is below. Proposed new language is in
italics; proposed deletions are in
brackets.3
*
*
*
*
*
7026. Distribution Models
(a)–(b) No change.
(c) [Reserved] Hardware-Based Delivery of
Nasdaq Depth data
(1) The charges to be paid by Distributors
for processing Nasdaq Depth data sourced
from a Nasdaq hardware-based market data
format shall be:
6 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Changes are marked to the rule text that appears
in the electronic Nasdaq Manual found at https://
nasdaqomx.cchwallstreet.com.
1 15
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Hardware-based delivery of Nasdaq depth data
Monthly fee
Internal Only Distributor .......................................................................................................................
External Only Distributor ......................................................................................................................
Internal and External Distributor ..........................................................................................................
Managed Data Solution Administration Fee ........................................................................................
(2) ‘‘Hardware-Based Delivery’’ means that
a distributor is processing data sourced from
a Nasdaq hardware coded market data
format such as TotalView-ITCH FPGA.
(3) Distributors of Nasdaq Depth data also
are subject to the market data fees as set
forth in this rule, Nasdaq Rule 7019(b) and
Nasdaq Rule 7023.
*
*
*
*
*
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
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1. Purpose
Nasdaq is proposing to amend Nasdaq
Rule 7026 (Distribution Models) to
establish Distributor and Administration
fees for an optional hardware-based
delivery of Nasdaq Depth-of-Book data,
defined in Nasdaq Rule 7023 to include
TotalView, OpenView, and NASDAQ
Level 2 (collectively, ‘‘Nasdaq Depth
data’’). This new delivery option of the
Nasdaq TotalView-ITCH equities depth
feed uses field-programmable gate array
(‘‘FPGA’’) technology. In offering a
hardware-delivery mechanism, Nasdaq
is serving those customers requiring a
predictable latency profile throughout
the trading day. By taking advantage of
hardware parallelism, FPGA technology
is capable of processing more data
packets during peak market conditions
without the introduction of variable
queuing latency.
The proposed Distributor fee for
utilizing the optional hardware-based
delivery of Nasdaq Depth data is
$25,000 for internal only distribution,
$2,500 for external only distribution and
$27,500 for internal and external
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distribution. The optional Managed Data
Solution (‘‘MDS’’) Administration fee is
tiered based upon the number of
subscribers, starting at $3,000 as
outlined above. There will be no change
in Nasdaq Depth data subscriber fees as
a result of these other fee changes.
This new pricing option is available
to all firms, regardless of how they
choose to access the hardware-based
version of Nasdaq Depth data, and is in
response to industry demand, as well as
due to changes in the technology to
distribute and consume market data.
Distributors opting to pay for the
hardware-based delivery of Nasdaq
Depth data would still be fee liable for
the applicable market data fees, as
described in Nasdaq Rule 7026, Nasdaq
Rule 7019(b) and Nasdaq Rule 7023.
Competition for depth data is
considerable and the Exchange believes
that this proposal clearly evidences
such competition. The Exchange is
offering a new pricing model in order to
keep pace with changes in the industry
and evolving customer needs as new
technologies emerge and products
continue to develop and change. It is
entirely optional and is geared towards
attracting new customers, as well as
retaining existing customers.
The proposed fees are based on
pricing conventions and distinctions
that exist in Nasdaq’s current fee
schedule, and the fee schedules of other
exchanges. These distinctions (e.g.,
internal versus external distribution, as
well as for MDS) for the proposed
optional Distributor and Administration
fees for hardware-based delivery of
Nasdaq Depth data are based on a
careful analysis of empirical data and
the application of time-tested pricing
principles already accepted by the
Commission and discussed in greater
depth in the Statutory Basis section
below. Also, the costs associated with
the hardware-based delivery system for
Nasdaq Depth data are higher than a
software-based solution since it involves
the expense of hiring personnel to create
and maintain the product, as well as
creating, shipping, installing and
maintaining the new equipment and
codebase. Because it uses a distinct
technology, the overall costs of creation
and maintenance of the hardware-based
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$25,000 per Distributor.
$2,500 per Distributor.
$27,500 per Distributor.
$3,000 = 1 Subscriber.
$3,500 = 2 Subscribers.
$4,000 = 3 Subscribers.
$500 for each additional Subscriber.
version of TotalView-ITCH are higher
than the software-based version. From a
messaging perspective, the data content
and sequencing will be identical on
both the hardware- and software-based
versions of the TotalView-ITCH
product.
The proposed hardware-based
delivery of Nasdaq Depth data is
completely optional. Nasdaq is offering
this new delivery mechanism for the
Nasdaq TotalView-ITCH product, which
uses FPGA technology, and is designed
to deliver Nasdaq direct data content in
a predictable manner throughout the
trading day.
2. Statutory Basis
Nasdaq believes that the proposed
rule change is consistent with the
provisions of Section 6 of the Act,4 in
general, and with Section 6(b)(4) of the
Act,5 in particular, in that it provides an
equitable allocation of reasonable fees
among users and recipients of 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.6
By removing ‘‘unnecessary regulatory
restrictions’’ on the ability of exchanges
to sell their own data, Regulation NMS
4 15
U.S.C. 78f.
U.S.C. 78f(b)(4).
6 Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005).
5 15
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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 Depth data 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.’’
Nasdaq believes that these
amendments to Section 19 of the Act
reflect Congress’ 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
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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’ 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-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
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 decision of the United States
Court of Appeals for the District of
Columbia Circuit in NetCoaliton v. SEC,
No. 09–1042 (D.C. Cir. 2010), although
reviewing a Commission decision made
prior to the effective date of the DoddFrank 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, 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
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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.
For the reasons stated above, Nasdaq
believes that the proposed fees are fair
and equitable, and not unreasonably
discriminatory. As described above, the
proposed fees are based on pricing
conventions and distinctions that exist
in Nasdaq’s current fee schedule, and
the fee schedules of other exchanges.
These distinctions (e.g., internal versus
external distribution and hardwarebased versus software-based system for
delivering Nasdaq Depth data) are based
on principles of fairness and equity that
have helped for many years to maintain
fair, equitable, and not unreasonably
discriminatory fees, and that apply with
equal or greater force to the current
proposal. The Distributor and
Administration fees for the optional
hardware-based delivery of Nasdaq
Depth data are based on careful analysis
of empirical data and the application of
time-tested pricing principles already
accepted by the Commission for many
years.
As described in greater detail below,
if Nasdaq has calculated improperly and
the market deems the proposed fees to
be unfair, inequitable, or unreasonably
discriminatory, firms can diminish or
discontinue the use of their data
because the proposed fee is entirely
optional to all parties. Firms are not
required to purchase Nasdaq Depth data
or to utilize any specific pricing
alternative if they do choose to purchase
Nasdaq Depth data. Nasdaq is not
required to make depth data available or
to offer specific pricing alternatives for
potential purchases. Nasdaq can
discontinue offering a pricing
alternative (as it has in the past) and
firms can discontinue their use at any
time and for any reason (as they often
do), including due to their assessment of
the reasonableness of fees charged.
Nasdaq continues to create new pricing
policies aimed at increasing fairness and
equitable allocation of fees among users,
and Nasdaq believes this is another
useful 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
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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 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
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 to 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
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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
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
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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
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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
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
VerDate Mar<15>2010
16:48 Jul 03, 2012
Jkt 226001
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/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
PO 00000
Frm 00082
Fmt 4703
Sfmt 4703
‘‘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 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.
E:\FR\FM\05JYN1.SGM
05JYN1
Federal Register / Vol. 77, No. 129 / Thursday, July 5, 2012 / Notices
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
Because the foregoing proposed rule
change does not: (i) Significantly affect
the protection of investors or the public
interest; (ii) impose any significant
burden on competition; and (iii) become
operative for 30 days from the date on
which it was filed, or such shorter time
as the Commission may designate, it has
become effective pursuant to Section
19(b)(3)(A) 7 of the Act and Rule 19b–
4(f)(6)(iii) thereunder.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: (i) Necessary or appropriate in
the public interest; (ii) for the protection
of investors; or (iii) 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
All submissions should refer to File
Number SR–NASDAQ–2012–063. 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, 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 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–2012–063, and should be
submitted on or before July 26, 2012.
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:
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.9
Kevin M. O’Neill,
Deputy Secretary.
Electronic Comments
[FR Doc. 2012–16376 Filed 7–3–12; 8:45 am]
• 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–2012–063 on the
subject line.
Self-Regulatory Organizations; C2
Options Exchange, Incorporated;
Notice of Filing and Immediate
Effectiveness of a Proposed Rule
Change To Amend Rule 8.2 Regarding
Market-Maker Registration Cost
• Send paper comments in triplicate
to Elizabeth M. Murphy, Secretary,
Securities and Exchange Commission,
100 F Street NE., Washington, DC
20549–1090.
TKELLEY on DSK3SPTVN1PROD with NOTICES
2012, C2 Options Exchange,
Incorporated (the ‘‘Exchange’’ or ‘‘C2’’)
filed with the Securities and Exchange
Commission (the ‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
C2 proposes to amend its Rule 8.2
regarding Market-Maker registration
cost. The text of the proposed rule
change is available on the Exchange’s
Web site (https://www.c2exchange.com/
Legal/), at the Exchange’s Office of the
Secretary, and at the Commission’
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of those
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant parts of such
statements.
BILLING CODE 8011–01–P
Paper Comments
39757
1. Purpose
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67296; File No. SR–C2–
2012–019]
June 28, 2012.
7 15
U.S.C. 78s(b)(3)(A).
8 17 CFR 240.19b–4(f)(6)(iii). In addition, Rule
19b–4(f)(6) requires a self-regulatory organization to
give the Commission written notice of its intent to
file the proposed rule change at least five business
days prior to the date of filing of the proposed rule
change, or such shorter time as designated by the
Commission. The Exchange has satisfied this
requirement.
VerDate Mar<15>2010
16:48 Jul 03, 2012
Jkt 226001
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that, on June 15,
PO 00000
9 17
CFR 200.30–3(a)(12).
U.S.C.78s(b)(1).
2 17 CFR 240.19b–4.
1 15
Frm 00083
Fmt 4703
Sfmt 4703
The Exchange proposes to amend its
Rule 8.2(d) regarding registration costs.
An option class registration of a MarketMaker confers the right to quote in that
product. Each Trading Permit held by a
Market-Maker has a registration credit of
1.0. A Market-Maker may select for each
Trading Permit the Market-Maker holds
any combination of option classes,
whose aggregate registration cost does
not exceed 1.0. When the Exchange
initially adopted language regarding
registration costs, the Exchange
designated every option traded on C2,
except SPX, VIX, OEX, DJX, and XSP
(the ‘‘Excluded Products’’), to have a
registration cost of .001, and stated that,
if C2 determines to commence trading of
any of the Excluded Products, it will file
a proposed rule change to adopt
E:\FR\FM\05JYN1.SGM
05JYN1
]]>Agencies
[Federal Register Volume 77, Number 129 (Thursday, July 5, 2012)]
[Notices]
[Pages 39752-39757]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-16376]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67297; File No. SR-NASDAQ-2012-063]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of a Proposed Rule Change
Applicable to a New Version of the NASDAQ TotalView-ITCH Equities Depth
Feed and Related Distributor and Administration Fees
June 28, 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 June 15, 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 Substance
of the Proposed Rule Change
Nasdaq proposes to establish fees for a new optional delivery
mechanism for Nasdaq Depth data (defined below). Specifically, Nasdaq
proposes to establish Distributor and Administration fees for a
hardware-based version of Nasdaq TotalView-ITCH data and is not
offering a new market data product.
The text of the proposed rule change is below. Proposed new
language is in italics; 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)-(b) No change.
(c) [Reserved] Hardware-Based Delivery of Nasdaq Depth data
(1) The charges to be paid by Distributors for processing Nasdaq
Depth data sourced from a Nasdaq hardware-based market data format
shall be:
[[Page 39753]]
----------------------------------------------------------------------------------------------------------------
Hardware-based delivery of Nasdaq depth
data Monthly fee
----------------------------------------------------------------------------------------------------------------
Internal Only Distributor.................. $25,000 per Distributor.
External Only Distributor.................. $2,500 per Distributor.
Internal and External Distributor.......... $27,500 per Distributor.
Managed Data Solution Administration Fee... $3,000 = 1 Subscriber.
$3,500 = 2 Subscribers.
$4,000 = 3 Subscribers.
$500 for each additional Subscriber.
----------------------------------------------------------------------------------------------------------------
(2) ``Hardware-Based Delivery'' means that a distributor is
processing data sourced from a Nasdaq hardware coded market data
format such as TotalView-ITCH FPGA.
(3) Distributors of Nasdaq Depth data also are subject to the
market data fees as set forth in this rule, Nasdaq Rule 7019(b) and
Nasdaq Rule 7023.
* * * * *
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 Distributor and Administration fees for an optional
hardware-based delivery of Nasdaq Depth-of-Book data, defined in Nasdaq
Rule 7023 to include TotalView, OpenView, and NASDAQ Level 2
(collectively, ``Nasdaq Depth data''). This new delivery option of the
Nasdaq TotalView-ITCH equities depth feed uses field-programmable gate
array (``FPGA'') technology. In offering a hardware-delivery mechanism,
Nasdaq is serving those customers requiring a predictable latency
profile throughout the trading day. By taking advantage of hardware
parallelism, FPGA technology is capable of processing more data packets
during peak market conditions without the introduction of variable
queuing latency.
The proposed Distributor fee for utilizing the optional hardware-
based delivery of Nasdaq Depth data is $25,000 for internal only
distribution, $2,500 for external only distribution and $27,500 for
internal and external distribution. The optional Managed Data Solution
(``MDS'') Administration fee is tiered based upon the number of
subscribers, starting at $3,000 as outlined above. There will be no
change in Nasdaq Depth data subscriber fees as a result of these other
fee changes.
This new pricing option is available to all firms, regardless of
how they choose to access the hardware-based version of Nasdaq Depth
data, and is in response to industry demand, as well as due to changes
in the technology to distribute and consume market data. Distributors
opting to pay for the hardware-based delivery of Nasdaq Depth data
would still be fee liable for the applicable market data fees, as
described in Nasdaq Rule 7026, Nasdaq Rule 7019(b) and Nasdaq Rule
7023.
Competition for depth data is considerable and the Exchange
believes that this proposal clearly evidences such competition. The
Exchange is offering a new pricing model in order to keep pace with
changes in the industry and evolving customer needs as new technologies
emerge and products continue to develop and change. It is entirely
optional and is geared towards attracting new customers, as well as
retaining existing customers.
The proposed fees are based on pricing conventions and distinctions
that exist in Nasdaq's current fee schedule, and the fee schedules of
other exchanges. These distinctions (e.g., internal versus external
distribution, as well as for MDS) for the proposed optional Distributor
and Administration fees for hardware-based delivery of Nasdaq Depth
data are based on a careful analysis of empirical data and the
application of time-tested pricing principles already accepted by the
Commission and discussed in greater depth in the Statutory Basis
section below. Also, the costs associated with the hardware-based
delivery system for Nasdaq Depth data are higher than a software-based
solution since it involves the expense of hiring personnel to create
and maintain the product, as well as creating, shipping, installing and
maintaining the new equipment and codebase. Because it uses a distinct
technology, the overall costs of creation and maintenance of the
hardware-based version of TotalView-ITCH are higher than the software-
based version. From a messaging perspective, the data content and
sequencing will be identical on both the hardware- and software-based
versions of the TotalView-ITCH product.
The proposed hardware-based delivery of Nasdaq Depth data is
completely optional. Nasdaq is offering this new delivery mechanism for
the Nasdaq TotalView-ITCH product, which uses FPGA technology, and is
designed to deliver Nasdaq direct data content in a predictable manner
throughout the trading day.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\4\ in general, and with Section
6(b)(4) of the Act,\5\ in particular, in that it provides an equitable
allocation of reasonable fees among users and recipients of 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.
---------------------------------------------------------------------------
\4\ 15 U.S.C. 78f.
\5\ 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.\6\
---------------------------------------------------------------------------
\6\ Securities Exchange Act Release No. 51808 (June 9, 2005), 70
FR 37496 (June 29, 2005).
By removing ``unnecessary regulatory restrictions'' on the ability of
exchanges to sell their own data, Regulation NMS
[[Page 39754]]
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 Depth data 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.''
Nasdaq believes that these amendments to Section 19 of the Act
reflect Congress' 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' 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 decision of the United States Court of Appeals for the District
of Columbia Circuit in NetCoaliton v. SEC, No. 09-1042 (D.C. Cir.
2010), 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, 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.
For the reasons stated above, Nasdaq believes that the proposed
fees are fair and equitable, and not unreasonably discriminatory. As
described above, the proposed fees are based on pricing conventions and
distinctions that exist in Nasdaq's current fee schedule, and the fee
schedules of other exchanges. These distinctions (e.g., internal versus
external distribution and hardware-based versus software-based system
for delivering Nasdaq Depth data) are based on principles of fairness
and equity that have helped for many years to maintain fair, equitable,
and not unreasonably discriminatory fees, and that apply with equal or
greater force to the current proposal. The Distributor and
Administration fees for the optional hardware-based delivery of Nasdaq
Depth data are based on careful analysis of empirical data and the
application of time-tested pricing principles already accepted by the
Commission for many years.
As described in greater detail below, if Nasdaq has calculated
improperly and the market deems the proposed fees to be unfair,
inequitable, or unreasonably discriminatory, firms can diminish or
discontinue the use of their data because the proposed fee is entirely
optional to all parties. Firms are not required to purchase Nasdaq
Depth data or to utilize any specific pricing alternative if they do
choose to purchase Nasdaq Depth data. Nasdaq is not required to make
depth data available or to offer specific pricing alternatives for
potential purchases. Nasdaq can discontinue offering a pricing
alternative (as it has in the past) and firms can discontinue their use
at any time and for any reason (as they often do), including due to
their assessment of the reasonableness of fees charged. Nasdaq
continues to create new pricing policies aimed at increasing fairness
and equitable allocation of fees among users, and Nasdaq believes this
is another useful 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
[[Page 39755]]
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 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 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 to 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
[[Page 39756]]
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 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.
[[Page 39757]]
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
Because the foregoing proposed rule change does not: (i)
Significantly affect the protection of investors or the public
interest; (ii) impose any significant burden on competition; and (iii)
become operative for 30 days from the date on which it was filed, or
such shorter time as the Commission may designate, it has become
effective pursuant to Section 19(b)(3)(A) \7\ of the Act and Rule 19b-
4(f)(6)(iii) thereunder.\8\
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\7\ 15 U.S.C. 78s(b)(3)(A).
\8\ 17 CFR 240.19b-4(f)(6)(iii). In addition, Rule 19b-4(f)(6)
requires a self-regulatory organization to give the Commission
written notice of its intent to file the proposed rule change at
least five business days prior to the date of filing of the proposed
rule change, or such shorter time as designated by the Commission.
The Exchange has satisfied this requirement.
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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: (i)
Necessary or appropriate in the public interest; (ii) for the
protection of investors; or (iii) 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 rule-comments@sec.gov. Please include
File Number SR-NASDAQ-2012-063 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-2012-063. 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, 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 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-2012-063, and should
be submitted on or before July 26, 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. 2012-16376 Filed 7-3-12; 8:45 am]
BILLING CODE 8011-01-P
