Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Extend Fee Pilot Program for NASDAQ Last Sale, 41467-41472 [2012-17096]

Download as PDF Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Notices any entity that controls, is controlled by, or is under common control with the Manager; or (b) ownership of less than 1% of the outstanding securities of any class of equity or debt of any publicly traded company that is either a SubAdviser or an entity that controls, is controlled by, or is under common control with a Sub-Adviser. 9. Each Fund will disclose in its registration statement the Aggregate Fee Disclosure. 10. Independent legal counsel, as defined in rule 0–1(a)(6) under the Act, has been and will continue to be engaged to represent the Independent Board Members. The selection of such counsel will be within the discretion of the then-existing Independent Board Members. 11. In the event the Commission adopts a rule under the Act providing substantially similar relief to that in the order requested in the application, the requested order will expire on the effective date of that rule. 12. The Manager will provide the Board, no less frequently than quarterly, with information about the Manager’s profitability on a per Fund basis. This information will reflect the impact on profitability of the hiring or termination of any Sub-Adviser during the applicable quarter. 13. Whenever a Sub-Adviser is hired or terminated, the Manager will provide the Board with information showing the expected impact on the profitability of the Manager. For the Commission, by the Division of Investment Management, under delegated authority. Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–17070 Filed 7–12–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–67376; File No. SR– NASDAQ–2012–078] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Extend Fee Pilot Program for NASDAQ Last Sale srobinson on DSK4SPTVN1PROD with NOTICES July 9, 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 27, 2012, The NASDAQ Stock Market LLC (‘‘NASDAQ’’ or the ‘‘Exchange’’) filed 1 15 2 17 U.S.C. 78s(b)(1). CFR 240.19b–4. VerDate Mar<15>2010 17:08 Jul 12, 2012 Jkt 226001 with the Securities and Exchange Commission (‘‘Commission’’) a 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 NASDAQ is proposing to extend for three months the fee pilot pursuant to which NASDAQ distributes the NASDAQ Last Sale (‘‘NLS’’) market data products. NLS allows data distributors to have access to real-time market data for a capped fee, enabling those distributors to provide free access to the data to millions of individual investors via the internet and television. Specifically, NASDAQ offers the ‘‘NASDAQ Last Sale for NASDAQ’’ and ‘‘NASDAQ Last Sale for NYSE/Amex’’ data feeds containing last sale activity in U.S. equities within the NASDAQ Market Center and reported to the FINRA/NASDAQ Trade Reporting Facility (‘‘FINRA/NASDAQ TRF’’), which is jointly operated by NASDAQ and the Financial Industry Regulatory Authority (‘‘FINRA’’). The purpose of this proposal is to extend the existing pilot program for three months, from July 1, 2012 to September 30, 2012. This pilot program supports the aspiration of Regulation NMS to increase the availability of proprietary data by allowing market forces to determine the amount of proprietary market data information that is made available to the public and at what price. During the pilot period, the program has vastly increased the availability of NASDAQ proprietary market data to individual investors. Based upon data from NLS distributors, NASDAQ believes that since its launch in July 2008, the NLS data has been viewed by over 50,000,000 investors on Web sites operated by Google, Interactive Data, and Dow Jones, among others. The text of the proposed rule change is below. Proposed new language is in italics; proposed deletions are in brackets. 7039. NASDAQ Last Sale Data Feeds (a) For a three month pilot period commencing on [April] July 1, 2012, NASDAQ shall offer two proprietary data feeds containing real-time last sale information for trades executed on NASDAQ or reported to the NASDAQ/ FINRA Trade Reporting Facility. (1)–(2) No change. (b)–(c) No change. PO 00000 Frm 00118 Fmt 4703 Sfmt 4703 41467 II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the self-regulatory organization included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of those statements may be examined at the places specified in Item III below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose Prior to the launch of NLS, public investors that wished to view market data to monitor their portfolios generally had two choices: (1) Pay for real-time market data or (2) use free data that is 15 to 20 minutes delayed. To increase consumer choice, NASDAQ proposed a pilot to offer access to realtime market data to data distributors for a capped fee, enabling those distributors to disseminate the data at no cost to millions of internet users and television viewers. NASDAQ now proposes a three-month extension of that pilot program, subject to the same fee structure as is applicable today.3 NLS consists of two separate ‘‘Level 1’’ products containing last sale activity within the NASDAQ market and reported to the jointly-operated FINRA/ NASDAQ TRF. First, the ‘‘NASDAQ Last Sale for NASDAQ’’ data product is a real-time data feed that provides realtime last sale information including execution price, volume, and time for executions occurring within the NASDAQ system as well as those reported to the FINRA/NASDAQ TRF. Second, the ‘‘NASDAQ Last Sale for NYSE/Amex’’ data product provides real-time last sale information including execution price, volume, and time for NYSE- and NYSE Amex-securities executions occurring within the NASDAQ system as well as those reported to the FINRA/NASDAQ TRF. By contrast, the securities information 3 NASDAQ previously stated that it would file a proposed rule change to make the NLS pilot fees permanent. NASDAQ has also informed Commission staff that it is consulting with FINRA to develop a proposed rule change by FINRA to allow inclusion of FINRA/NASDAQ TRF data in NLS on a permanent basis. Based on the progress of these discussions, NASDAQ expects that it and FINRA will both submit filings to make NLS permanent during 2012. E:\FR\FM\13JYN1.SGM 13JYN1 41468 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Notices srobinson on DSK4SPTVN1PROD with NOTICES processors (‘‘SIPs’’) that provide ‘‘core’’ data consolidate last sale information from all exchanges and trade reporting facilities (‘‘TRFs’’). Thus, NLS replicates a subset of the information provided by the SIPs. NASDAQ established two different pricing models, one for clients that are able to maintain username/password entitlement systems and/or quote counting mechanisms to account for usage, and a second for those that are not. Firms with the ability to maintain username/password entitlement systems and/or quote counting mechanisms are eligible for a specified fee schedule for the NASDAQ Last Sale for NASDAQ Product and a separate fee schedule for the NASDAQ Last Sale for NYSE/Amex Product. Firms that are unable to maintain username/password entitlement systems and/or quote counting mechanisms also have multiple options for purchasing the NASDAQ Last Sale data. These firms choose between a ‘‘Unique Visitor’’ model for internet delivery or a ‘‘Household’’ model for television delivery. Unique Visitor and Household populations must be reported monthly and must be validated by a third-party vendor or ratings agency approved by NASDAQ at NASDAQ’s sole discretion. In addition, to reflect the growing confluence between these media outlets, NASDAQ offered a reduction in fees when a single distributor distributes NASDAQ Last Sale Data Products via multiple distribution mechanisms. NASDAQ also established a cap on the monthly fee, currently set at $50,000 per month for all NASDAQ Last Sale products. The fee cap enables NASDAQ to compete effectively against other exchanges that also offer last sale data for purchase or at no charge. As with the distribution of other NASDAQ proprietary products, all distributors of the NASDAQ Last Sale for NASDAQ and/or NASDAQ Last Sale for NYSE/Amex products pay a single $1,500/month NASDAQ Last Sale Distributor Fee in addition to any applicable usage fees. The $1,500 monthly fee applies to all distributors and does not vary based on whether the distributor distributes the data internally or externally or distributes the data via both the internet and television. 2. Statutory Basis NASDAQ believes that the proposed rule change is consistent with the provisions of Section 6 of the Act,4 in general, and with Section 6(b)(4) of the Act,5 in particular, in that it provides an equitable allocation of reasonable fees among users and recipients of the data. In adopting Regulation NMS, the Commission granted self-regulatory organizations (‘‘SROs’’) and brokerdealers (‘‘BDs’’) increased authority and flexibility to offer new and unique market data to the public. It was believed that this authority would expand the amount of data available to consumers, and also spur innovation and competition for the provision of market data. NASDAQ believes that its NASDAQ Last Sale market data products are precisely the sort of market data product that the Commission envisioned when it adopted Regulation NMS. The Commission concluded that Regulation NMS—by lessening regulation of the market in proprietary data—would itself further the Act’s goals of facilitating efficiency and competition: [E]fficiency is promoted when brokerdealers who do not need the data beyond the prices, sizes, market center identifications of the NBBO and consolidated last sale information are not required to receive (and pay for) such data. The Commission also believes that efficiency is promoted when broker-dealers may choose to receive (and pay for) additional market data based on their own internal analysis of the need for such data.6 By removing unnecessary regulatory restrictions on the ability of exchanges to sell their own data, Regulation NMS advanced the goals of the Act and the principles reflected in its legislative history. If the free market should determine whether proprietary data is sold to BDs at all, it follows that the price at which such data is sold should be set by the market as well. The recent decision of the United States Court of Appeals for the District of Columbia Circuit in NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010), upheld the Commission’s reliance upon competitive markets to set reasonable and equitably allocated fees for market data. ‘‘In fact, the legislative history indicates that the Congress intended that the market system ‘evolve through the interplay of competitive forces as unnecessary regulatory restrictions are removed’ and that the SEC wield its regulatory power ‘in those situations where competition may not be sufficient,’ such as in the creation of a ‘consolidated transactional reporting system.’ NetCoalition, at 535 (quoting H.R. Rep. No. 94–229, at 92 (1975), as reprinted in 1975 U.S.C.C.A.N. 321, 5 15 U.S.C. 78f(b)(4). Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005). 6 Securities 4 15 U.S.C. 78f. VerDate Mar<15>2010 17:08 Jul 12, 2012 Jkt 226001 PO 00000 Frm 00119 Fmt 4703 Sfmt 4703 323). The court agreed with the Commission’s conclusion that ‘‘Congress intended that ‘competitive forces should dictate the services and practices that constitute the U.S. national market system for trading equity securities.’ ’’7 The Court in NetCoalition, while upholding the Commission’s conclusion that competitive forces may be relied upon to establish the fairness of prices, nevertheless concluded that the record in that case did not adequately support the Commission’s conclusions as to the competitive nature of the market for NYSEArca’s data product at issue in that case. As explained below in NASDAQ’s Statement on Burden on Competition, however, NASDAQ believes that there is substantial evidence of competition in the marketplace for data that was not in the record in the NetCoalition case, and that the Commission is entitled to rely upon such evidence in concluding that the fees established in this filing are the product of competition, and therefore in accordance with the relevant statutory standards.8 Moreover, NASDAQ further notes that the product at issue in this filing—a NASDAQ last sale data product that replicates a subset of the information available through ‘‘core’’ data products whose fees have been reviewed and approved by the SEC—is quite different from the NYSEArca depth-of-book data product at issue in NetCoalition. Accordingly, any findings of the court with respect to that product may not be relevant to the product at issue in this filing. B. Self-Regulatory Organization’s Statement on Burden on Competition NASDAQ does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act, as amended. NASDAQ’s ability to price its Last Sale Data Products is constrained by (1) competition between exchanges and 7 NetCoalition, at 535. should also be noted that Section 916 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (‘‘Dodd-Frank Act’’) has amended paragraph (A) of Section 19(b)(3) of the Act, 15 U.S.C. 78s(b)(3), to make it clear that all exchange fees, including fees for market data, may be filed by exchanges on an immediately effective basis. Although this change in the law does not alter the Commission’s authority to evaluate and ultimately disapprove exchange rules if it concludes that they are not consistent with the Act, it unambiguously reflects a conclusion that market data fee changes do not require prior Commission review before taking effect, and that a proceeding with regard to a particular fee change is required only if the Commission determines that it is necessary or appropriate to suspend the fee and institute such a proceeding. 8 It E:\FR\FM\13JYN1.SGM 13JYN1 srobinson on DSK4SPTVN1PROD with NOTICES Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Notices other trading platforms that compete with each other in a variety of dimensions; (2) the existence of inexpensive real-time consolidated data and market-specific data and free delayed consolidated data; and (3) the inherent contestability of the market for proprietary last sale data. The market for proprietary last sale data products is currently competitive and inherently contestable because there is fierce competition for the inputs necessary to the creation of proprietary data and strict pricing discipline for the proprietary products themselves. Numerous exchanges compete with each other for listings, trades, and market data itself, providing virtually limitless opportunities for entrepreneurs who wish to produce and distribute their own market data. This proprietary data is produced by each individual exchange, as well as other entities, in a vigorously competitive market. Transaction execution and proprietary data products are complementary in that market data is both an input and a byproduct of the execution service. In fact, market data and trade execution are a paradigmatic example of joint products with joint costs. The decision whether and on which platform to post an order will depend on the attributes of the platform where the order can be posted, including the execution fees, data quality and price, and distribution of its data products. Without trade executions, exchange data products cannot exist. Moreover, data products are valuable to many end users only insofar as they provide information that end users expect will assist them or their customers in making trading decisions. The costs of producing market data include not only the costs of the data distribution infrastructure, but also the costs of designing, maintaining, and operating the exchange’s transaction execution platform and the cost of regulating the exchange to ensure its fair operation and maintain investor confidence. The total return that a trading platform earns reflects the revenues it receives from both products and the joint costs it incurs. Moreover, the operation of the exchange is characterized by high fixed costs and low marginal costs. This cost structure is common in content and content distribution industries such as software, where developing new software typically requires a large initial investment (and continuing large investments to upgrade the software), but once the software is developed, the incremental cost of providing that software to an additional user is typically small, or even zero (e.g., if the VerDate Mar<15>2010 17:08 Jul 12, 2012 Jkt 226001 software can be downloaded over the internet after being purchased).9 In NASDAQ’s case, it is costly to build and maintain a trading platform, but the incremental cost of trading each additional share on an existing platform, or distributing an additional instance of data, is very low. Market information and executions are each produced jointly (in the sense that the activities of trading and placing orders are the source of the information that is distributed) and are each subject to significant scale economies. In such cases, marginal cost pricing is not feasible because if all sales were priced at the margin, NASDAQ would be unable to defray its platform costs of providing the joint products. An exchange’s BD customers view the costs of transaction executions and of data as a unified cost of doing business with the exchange. A BD will direct orders to a particular exchange only if the expected revenues from executing trades on the exchange exceed net transaction execution costs and the cost of data that the BD chooses to buy to support its trading decisions (or those of its customers). The choice of data products is, in turn, a product of the value of the products in making profitable trading decisions. If the cost of the product exceeds its expected value, the BD will choose not to buy it. Moreover, as a BD chooses to direct fewer orders to a particular exchange, the value of the product to that BD decreases, for two reasons. First, the product will contain less information, because executions of the BD’s trading activity will not be reflected in it. Second, and perhaps more important, the product will be less valuable to that BD because it does not provide information about the venue to which it is directing its orders. Data from the competing venue to which the BD is directing orders will become correspondingly more valuable. Similarly, in the case of products such as NLS that are distributed through market data vendors, the vendors provide price discipline for proprietary data products because they control the primary means of access to end users. Vendors impose price restraints based upon their business models. For example, vendors such as Bloomberg and Reuters that assess a surcharge on data they sell may refuse to offer proprietary products that end users will not purchase in sufficient numbers. Internet portals, such as Google, impose 9 See William J. Baumol and Daniel G. Swanson, ‘‘The New Economy and Ubiquitous Competitive Price Discrimination: Identifying Defensible Criteria of Market Power,’’ Antitrust Law Journal, Vol. 70, No. 3 (2003). PO 00000 Frm 00120 Fmt 4703 Sfmt 4703 41469 a discipline by providing only data that will enable them to attract ‘‘eyeballs’’ that contribute to their advertising revenue. Retail BDs, such as Schwab and Fidelity, offer their customers proprietary data only if it promotes trading and generates sufficient commission revenue. Although the business models may differ, these vendors’ pricing discipline is the same: they can simply refuse to purchase any proprietary data product that fails to provide sufficient value. NASDAQ and other producers of proprietary data products must understand and respond to these varying business models and pricing disciplines in order to market proprietary data products successfully. Moreover, NASDAQ believes that products such as NLS can enhance order flow to NASDAQ by providing more widespread distribution of information about transactions in real time, thereby encouraging wider participation in the market by investors with access to the internet or television. Conversely, the value of such products to distributors and investors decreases if order flow falls, because the products contain less content. Analyzing the cost of market data distribution in isolation from the cost of all of the inputs supporting the creation of market data will inevitably underestimate the cost of the data. Thus, because it is impossible to create data without a fast, technologically robust, and well-regulated execution system, system costs and regulatory costs affect the price of market data. It would be equally misleading, however, to attribute all of the exchange’s costs to the market data portion of an exchange’s joint product. Rather, all of the exchange’s costs are incurred for the unified purposes of attracting order flow, executing and/or routing orders, and generating and selling data about market activity. The total return that an exchange earns reflects the revenues it receives from the joint products and the total costs of the joint products. Competition among trading platforms can be expected to constrain the aggregate return each platform earns from the sale of its joint products, but different platforms may choose from a range of possible, and equally reasonable, pricing strategies as the means of recovering total costs. NASDAQ pays rebates to attract orders, charges relatively low prices for market information and charges relatively high prices for accessing posted liquidity. Other platforms may choose a strategy of paying lower liquidity rebates to attract orders, setting relatively low prices for accessing posted liquidity, and setting relatively high prices for E:\FR\FM\13JYN1.SGM 13JYN1 srobinson on DSK4SPTVN1PROD with NOTICES 41470 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Notices market information. Still others may provide most data free of charge and rely exclusively on transaction fees to recover their costs. Finally, some platforms may incentivize use by providing opportunities for equity ownership, which may allow them to charge lower direct fees for executions and data. In this environment, there is no economic basis for regulating maximum prices for one of the joint products in an industry in which suppliers face competitive constraints with regard to the joint offering. Such regulation is unnecessary because an ‘‘excessive’’ price for one of the joint products will ultimately have to be reflected in lower prices for other products sold by the firm, or otherwise the firm will experience a loss in the volume of its sales that will be adverse to its overall profitability. In other words, an increase in the price of data will ultimately have to be accompanied by a decrease in the cost of executions, or the volume of both data and executions will fall. The level of competition and contestability in the market is evident in the numerous alternative venues that compete for order flow, including thirteen SRO markets, as well as internalizing BDs and various forms of alternative trading systems (‘‘ATSs’’), including dark pools and electronic communication networks (‘‘ECNs’’). Each SRO market competes to produce transaction reports via trade executions, and two FINRA-regulated TRFs compete to attract internalized transaction reports. It is common for BDs to further and exploit this competition by sending their order flow and transaction reports to multiple markets, rather than providing them all to a single market. Competitive markets for order flow, executions, and transaction reports provide pricing discipline for the inputs of proprietary data products. The large number of SROs, TRFs, BDs, and ATSs that currently produce proprietary data or are currently capable of producing it provides further pricing discipline for proprietary data products. Each SRO, TRF, ATS, and BD is currently permitted to produce proprietary data products, and many currently do or have announced plans to do so, including NASDAQ, NYSE, NYSEAmex, NYSEArca, BATS, and Direct Edge. Any ATS or BD can combine with any other ATS, BD, or multiple ATSs or BDs to produce joint proprietary data products. Additionally, order routers and market data vendors can facilitate single or multiple BDs’ production of proprietary data products. The potential VerDate Mar<15>2010 17:08 Jul 12, 2012 Jkt 226001 sources of proprietary products are virtually limitless. The fact that proprietary data from ATSs, BDs, and vendors can by-pass SROs is significant in two respects. First, non-SROs can compete directly with SROs for the production and sale of proprietary data products, as BATS and Arca did before registering as exchanges by publishing proprietary book data on the Internet. Second, because a single order or transaction report can appear in a core data product, an SRO proprietary product, and/or a non-SRO proprietary product, the data available in proprietary products is exponentially greater than the actual number of orders and transaction reports that exist in the marketplace. Indeed, in the case of NLS, the data provided through that product appears both in (i) real-time core data products offered by the SIPs for a fee, and (ii) free SIP data products with a 15-minute time delay, and finds a close substitute in last-sale products of competing venues. In addition to the competition and price discipline described above, the market for proprietary data products is also highly contestable because market entry is rapid, inexpensive, and profitable. The history of electronic trading is replete with examples of entrants that swiftly grew into some of the largest electronic trading platforms and proprietary data producers: Archipelago, Bloomberg Tradebook, Island, RediBook, Attain, TracECN, BATS Trading and Direct Edge. Today, BATS and Direct Edge provide data at no charge in order to attract order flow, and use market data revenue rebates from the resulting executions to maintain low execution charges for their users. A proliferation of dark pools and other ATSs operate profitably with fragmentary shares of consolidated market volume. Regulation NMS, by deregulating the market for proprietary data, has increased the contestability of that market. While BDs have previously published their proprietary data individually, Regulation NMS encourages market data vendors and BDs to produce proprietary products cooperatively in a manner never before possible. Multiple market data vendors already have the capability to aggregate data and disseminate it on a profitable scale, including Bloomberg and Thomson Reuters. Moreover, consolidated data provides two additional measures of pricing discipline for proprietary data products that are a subset of the consolidated data stream. First, the consolidated data is widely available in real-time at $1 per month for non-professional users. PO 00000 Frm 00121 Fmt 4703 Sfmt 4703 Second, consolidated data is also available at no cost with a 15- or 20minute delay. Because consolidated data contains marketwide information, it effectively places a cap on the fees assessed for proprietary data (such as last sale data) that is simply a subset of the consolidated data. The mere availability of low-cost or free consolidated data provides a powerful form of pricing discipline for proprietary data products that contain data elements that are a subset of the consolidated data, by highlighting the optional nature of proprietary products. The competitive nature of the market for products such as NLS is borne out by the performance of the market. In May 2008, the internet portal Yahoo! began offering its Web site viewers realtime last sale data (as well as best quote data) provided by BATS Trading. In response, in June 2008, NASDAQ launched NLS, which was initially subject to an ‘‘enterprise cap’’ of $100,000 for customers receiving only one of the NLS products, and $150,000 for customers receiving both products. The majority of NASDAQ’s sales were at the capped level. In early 2009, BATS expanded its offering of free data to include depth-of-book data. Also in early 2009, NYSEArca announced the launch of a competitive last sale product with an enterprise price of $30,000 per month. In response, NASDAQ combined the enterprise cap for the NLS products and reduced the cap to $50,000 (i.e., a reduction of $100,000 per month). Although each of these products offers only a specific subset of data available from the SIPs, NASDAQ believes that the products are viewed as substitutes for each other and for core last-sale data, rather than as products that must be obtained in tandem. For example, while the internet portal Yahoo! continues to disseminate only the BATS last sale product, Google disseminates only NASDAQ’s product. In this environment, a supercompetitive increase in the fees charged for either transactions or data has the potential to impair revenues from both products. ‘‘No one disputes that competition for order flow is ‘fierce’.’’ NetCoalition at 24. The existence of fierce competition for order flow implies a high degree of price sensitivity on the part of BDs with order flow, since they may readily reduce costs by directing orders toward the lowest-cost trading venues. A BD that shifted its order flow from one platform to another in response to order execution price differentials would both reduce the value of that platform’s market data and reduce its own need to consume data from the disfavored platform. If a E:\FR\FM\13JYN1.SGM 13JYN1 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Notices srobinson on DSK4SPTVN1PROD with NOTICES platform increases its market data fees, the change will affect the overall cost of doing business with the platform, and affected BDs will assess whether they can lower their trading costs by directing orders elsewhere and thereby lessening the need for the more expensive data. Similarly, increases in the cost of NLS would impair the willingness of distributors to take a product for which there are numerous alternatives, impacting NLS data revenues, the value of NLS as a tool for attracting order flow, and ultimately, the volume of orders routed to NASDAQ and the value of its other data products. In establishing the price for the NASDAQ Last Sale Products, NASDAQ considered the competitiveness of the market for last sale data and all of the implications of that competition. NASDAQ believes that it has considered all relevant factors and has not considered irrelevant factors in order to establish fair, reasonable, and not unreasonably discriminatory fees and an equitable allocation of fees among all users. The existence of numerous alternatives to NLS, including real-time consolidated data, free delayed consolidated data, and proprietary data from other sources ensures that NASDAQ cannot set unreasonable fees, or fees that are unreasonably discriminatory, without losing business to these alternatives. Accordingly, NASDAQ believes that the acceptance of the NLS product in the marketplace demonstrates the consistency of these fees with applicable statutory standards. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others Three comment letters were filed regarding the proposed rule change as originally published for comment NASDAQ responded to these comments in a letter dated December 13, 2007. Both the comment letters and NASDAQ’s response are available on the SEC Web site at https://www.sec.gov/ comments/sr-nasdaq-2006–060/ nasdaq2006060.shtml. In addition, in response to prior filings to extend the NLS pilot,10 the Securities Industry and Financial Markets Association (‘‘SIFMA’’) and NetCoalition filed comment letters contending that the SEC should suspend and institute 10 Securities Exchange Act Release No. 65488 (October 5, 2011), 76 FR 63334 (October 21, 2011) (SR–NASDAQ–2011–132); Securities Exchange Act Release No. 64856 (July 12, 2011), 76 FR 41845 (July 15, 2011) (SR–NASDAQ–2011–092); Securities Exchange Act Release No. 64188 (April 5, 2011), 76 FR 20054 (April 11, 2011) (SR–NASDAQ–2011– 044). VerDate Mar<15>2010 17:08 Jul 12, 2012 Jkt 226001 disapproval proceedings with respect to the filing. Last year, SIFMA and NetCoalition filed a petition seeking review by the United States Court of Appeals for the District of Columbia Circuit with respect to the NLS pricing pilots in effect from July 1, 2011 through September 30, 2011 and from October 1, 2011 through December 31, 2011. These appeals have been stayed pending resolution of the consolidated case NetCoalition v. SEC, Nos. 10–1421, 10– 1422, 11–1001, and 11–1065 (‘‘NetCoalition II’’). The letters submitted by SIFMA and NetCoalition incorrectly assert that the original NetCoalition case stands for the proposition that the Commission must review cost data to substantiate a determination that competitive forces constrain the price of market data. In fact, the court held the opposite: The petitioners believe that the SEC’s market-based approach is prohibited under the Exchange Act because the Congress intended ‘‘fair and reasonable’’ to be determined using a cost-based approach. The SEC counters that, because it has statutorilygranted flexibility in evaluating market data fees, its market-based approach is fully consistent with the Exchange Act. We agree with the SEC.11 SIFMA and NetCoalition further contend the prior filing lacked evidence supporting a conclusion that the market for NLS is competitive, asserting that arguments about competition for order flow and substitutability were rejected in NetCoalition. While the court did determine that the record before it was not sufficient to allow it to endorse those theories on the facts of that case, 11 NetCoalition, 615 F3d. at 534. While the court noted that cost data could sometimes be relevant in determining the reasonableness of fees, it acknowledged that submission of cost data may be inappropriate where there are ‘‘difficulties in calculating the direct costs * * * of market data,’’ Id. at 539. That is the case here, due to the fact that the fixed costs of market data production are inseparable from the fixed costs of providing a trading platform, and the marginal costs of market data production are minimal or even zero. Because the costs of providing execution services and market data are not unique to either of the provided services, there is no meaningful way to allocate these costs among the two ‘‘joint products’’—and any attempt to do so would result in inherently arbitrary cost allocations. The court explicitly acknowledged that the ‘‘joint product’’ theory set forth by NASDAQ’s economic experts in NetCoalition (and also described in this filing) could explain the competitive dynamic of the market and explain why consideration of cost data would be unavailing. The court found, however, that the Commission could not rely on the theory because it was not in the Commission’s record. Id. at 541 n.16. For the purpose of providing a complete explanation of the theory, NASDAQ is further submitting as Exhibit 3 to this filing a study that was submitted to the Commission in SR– NASDAQ–2011–010. See Statement of Janusz Ordover and Gustavo Bamberger at 2–17 (December 29, 2010). PO 00000 Frm 00122 Fmt 4703 Sfmt 4703 41471 the court did not itself make any conclusive findings about the actual presence or absence of competition or the accuracy of these theories: rather, it simply made a finding about the state of the SEC’s record. Moreover, analysis about competition in the market for depth-of-book data is only tangentially relevant to the market for last sale data. As discussed above and in the prior filing, perfect and partial substitutes for NLS exist in the form of real-time core market data, free delayed core market data, and the last sale products of competing venues, additional competitive entry is possible, and evidence of competition is readily apparent in the pricing behavior of the venues offering last sale products and the consumption patterns of their customers. Thus, although NASDAQ believes that the competitive nature of the market for all market data, including depth-of-book data, will ultimately be established, SIFMA and NetCoalition’s letters not only mischaracterize the NetCoalition decision, they also fail to address the characteristics of the product at issue and the evidence already presented. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act.12 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 12 15 E:\FR\FM\13JYN1.SGM U.S.C. 78s(b)(3)(A)(ii). 13JYN1 41472 Federal Register / Vol. 77, No. 135 / Friday, July 13, 2012 / Notices Number SR–NASDAQ–2012–078 on the subject line. SECURITIES AND EXCHANGE COMMISSION Paper Comments [Release No. 34–67296; File No. SR–C2– 2012–019] • 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–2012–078. 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 10:00 a.m. and 3:00 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–2012–078 and should be submitted on or before August 3, 2012. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.13 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–17096 Filed 7–12–12; 8:45 am] srobinson on DSK4SPTVN1PROD with NOTICES BILLING CODE 8011–01–P 13 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 17:08 Jul 12, 2012 Jkt 226001 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 June 28, 2012. Correction In notice document 2012–16375, appearing on pages 39757–39758, in the issue of Thursday, July 5, 2012, make the following correction: 1. On page 39758, in the third column, on the thirty-fourth line, ‘‘June 26, 2012’’ should read ‘‘July 26, 2012’’. [FR Doc. C1–2012–16375 Filed 7–12–12; 8:45 am] BILLING CODE 1505–01–D SMALL BUSINESS ADMINISTRATION Interagency Task Force on Veterans Small Business Development U.S. Small Business Administration. ACTION: Notice of open Federal Interagency Task Force meeting. AGENCY: The SBA is issuing this notice to announce the location, date, time, and agenda for the fourth public meeting of the Interagency Task Force on Veterans Small Business Development. The meeting will be open to the public. DATES: Friday, August 10, 2012, from 9 a.m. to 12 Noon in the Eisenhower Conference Room, Side A, located on the 2nd floor. ADDRESSES: U.S. Small Business Administration, 409 3rd Street SW., Washington, DC 20416. SUPPLEMENTARY INFORMATION: Pursuant to section 10(a)(2) of the Federal Advisory Committee Act (5 U.S.C., Appendix 2), SBA announces the meeting of the Interagency Task Force on Veterans Small Business Development. The Task Force is established pursuant to Executive Order 13540 and focused on coordinating the efforts of Federal agencies to improve capital, business development opportunities and pre-established Federal contracting goals for small business concerns owned and controlled by veterans (VOB’s) and service-disabled veterans (SDVOSB’S). Moreover, the Task Force shall coordinate administrative and SUMMARY: PO 00000 Frm 00123 Fmt 4703 Sfmt 4703 regulatory activities and develop proposals relating to ‘‘six focus areas’’: (1) Access to capital (loans, surety bonding and franchising); (2) Ensure achievement of pre-established contracting goals, including mentor ´ ´ protege and matching with contracting opportunities; (3) Increase the integrity of certifications of status as a small business; (4) Reducing paperwork and administrative burdens in accessing business development and entrepreneurship opportunities; (5) Increasing and improving training and counseling services; and (6) Making other improvements to support veteran’s business development by the Federal government. On November 1, 2011, the Interagency Task Force on Veterans Small Business Development submitted its first report to the President, which included 18 recommendations that were applicable to the ‘‘six focus areas’’ identified above. The purpose of the meeting is scheduled as a full Task Force meeting. The agenda will include a status update of recommendations presented in the November 1, 2011 Task Force Report to the President. In addition, the Task Force will allow time to obtain public comment from individuals and representatives of organizations regarding the areas of focus. The meeting is open to the public; however, advance notice of attendance is requested. Anyone wishing to attend and/or make a presentation to the Task Force must contact Raymond B. Snyder, by August 6, 2012, by email in order to be placed on the agenda. Comments for the Record should be applicable to either the ‘‘six focus areas’’ of the Task Force or the recommendations presented in the Report to the President and emailed prior to the meeting for inclusion in the public record, verbal presentations; however, will be limited to five minutes in the interest of time and to accommodate as many presenters as possible. Written comments should be emailed to Raymond B. Snyder, Deputy Associate Administrator, Office of Veterans Business Development, U.S. Small Business Administration, 409 3rd Street SW., Washington, DC 20416, at the email address for the Task Force, vetstaskforce@sba.gov. Additionally, if you need accommodations because of a disability or require additional information, please contact Raymond B. Snyder, Designated Federal Official for the Task Force at (202) 205–6773; or by email at: raymond.snyder@sba.gov, SBA, Office FOR FURTHER INFORMATION CONTACT: E:\FR\FM\13JYN1.SGM 13JYN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 77, Number 135 (Friday, July 13, 2012)]
[Notices]
[Pages 41467-41472]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-17096]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67376; File No. SR-NASDAQ-2012-078]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Extend Fee Pilot Program for NASDAQ Last Sale

July 9, 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 27, 2012, The NASDAQ Stock Market LLC (``NASDAQ'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a 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.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

NASDAQ is proposing to extend for three months the fee pilot
pursuant to which NASDAQ distributes the NASDAQ Last Sale (``NLS'')
market data products. NLS allows data distributors to have access to
real-time market data for a capped fee, enabling those distributors to
provide free access to the data to millions of individual investors via
the internet and television. Specifically, NASDAQ offers the ``NASDAQ
Last Sale for NASDAQ'' and ``NASDAQ Last Sale for NYSE/Amex'' data
feeds containing last sale activity in U.S. equities within the NASDAQ
Market Center and reported to the FINRA/NASDAQ Trade Reporting Facility
(``FINRA/NASDAQ TRF''), which is jointly operated by NASDAQ and the
Financial Industry Regulatory Authority (``FINRA''). The purpose of
this proposal is to extend the existing pilot program for three months,
from July 1, 2012 to September 30, 2012.
This pilot program supports the aspiration of Regulation NMS to
increase the availability of proprietary data by allowing market forces
to determine the amount of proprietary market data information that is
made available to the public and at what price. During the pilot
period, the program has vastly increased the availability of NASDAQ
proprietary market data to individual investors. Based upon data from
NLS distributors, NASDAQ believes that since its launch in July 2008,
the NLS data has been viewed by over 50,000,000 investors on Web sites
operated by Google, Interactive Data, and Dow Jones, among others.
The text of the proposed rule change is below. Proposed new
language is in italics; proposed deletions are in brackets.

7039. NASDAQ Last Sale Data Feeds

(a) For a three month pilot period commencing on [April] July 1,
2012, NASDAQ shall offer two proprietary data feeds containing real-
time last sale information for trades executed on NASDAQ or reported to
the NASDAQ/FINRA Trade Reporting Facility.
(1)-(2) No change.
(b)-(c) No change.

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

In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item III below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.

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

1. Purpose

Prior to the launch of NLS, public investors that wished to view
market data to monitor their portfolios generally had two choices: (1)
Pay for real-time market data or (2) use free data that is 15 to 20
minutes delayed. To increase consumer choice, NASDAQ proposed a pilot
to offer access to real-time market data to data distributors for a
capped fee, enabling those distributors to disseminate the data at no
cost to millions of internet users and television viewers. NASDAQ now
proposes a three-month extension of that pilot program, subject to the
same fee structure as is applicable today.\3\
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\3\ NASDAQ previously stated that it would file a proposed rule
change to make the NLS pilot fees permanent. NASDAQ has also
informed Commission staff that it is consulting with FINRA to
develop a proposed rule change by FINRA to allow inclusion of FINRA/
NASDAQ TRF data in NLS on a permanent basis. Based on the progress
of these discussions, NASDAQ expects that it and FINRA will both
submit filings to make NLS permanent during 2012.
---------------------------------------------------------------------------

NLS consists of two separate ``Level 1'' products containing last
sale activity within the NASDAQ market and reported to the jointly-
operated FINRA/NASDAQ TRF. First, the ``NASDAQ Last Sale for NASDAQ''
data product is a real-time data feed that provides real-time last sale
information including execution price, volume, and time for executions
occurring within the NASDAQ system as well as those reported to the
FINRA/NASDAQ TRF. Second, the ``NASDAQ Last Sale for NYSE/Amex'' data
product provides real-time last sale information including execution
price, volume, and time for NYSE- and NYSE Amex-securities executions
occurring within the NASDAQ system as well as those reported to the
FINRA/NASDAQ TRF. By contrast, the securities information

[[Page 41468]]

processors (``SIPs'') that provide ``core'' data consolidate last sale
information from all exchanges and trade reporting facilities
(``TRFs''). Thus, NLS replicates a subset of the information provided
by the SIPs.
NASDAQ established two different pricing models, one for clients
that are able to maintain username/password entitlement systems and/or
quote counting mechanisms to account for usage, and a second for those
that are not. Firms with the ability to maintain username/password
entitlement systems and/or quote counting mechanisms are eligible for a
specified fee schedule for the NASDAQ Last Sale for NASDAQ Product and
a separate fee schedule for the NASDAQ Last Sale for NYSE/Amex Product.
Firms that are unable to maintain username/password entitlement systems
and/or quote counting mechanisms also have multiple options for
purchasing the NASDAQ Last Sale data. These firms choose between a
``Unique Visitor'' model for internet delivery or a ``Household'' model
for television delivery. Unique Visitor and Household populations must
be reported monthly and must be validated by a third-party vendor or
ratings agency approved by NASDAQ at NASDAQ's sole discretion. In
addition, to reflect the growing confluence between these media
outlets, NASDAQ offered a reduction in fees when a single distributor
distributes NASDAQ Last Sale Data Products via multiple distribution
mechanisms.
NASDAQ also established a cap on the monthly fee, currently set at
$50,000 per month for all NASDAQ Last Sale products. The fee cap
enables NASDAQ to compete effectively against other exchanges that also
offer last sale data for purchase or at no charge.
As with the distribution of other NASDAQ proprietary products, all
distributors of the NASDAQ Last Sale for NASDAQ and/or NASDAQ Last Sale
for NYSE/Amex products pay a single $1,500/month NASDAQ Last Sale
Distributor Fee in addition to any applicable usage fees. The $1,500
monthly fee applies to all distributors and does not vary based on
whether the distributor distributes the data internally or externally
or distributes the data via both the internet and television.
2. Statutory Basis
NASDAQ believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\4\ in general, and with Section
6(b)(4) of the Act,\5\ in particular, in that it provides an equitable
allocation of reasonable fees among users and recipients of the data.
In adopting Regulation NMS, the Commission granted self-regulatory
organizations (``SROs'') and broker-dealers (``BDs'') increased
authority and flexibility to offer new and unique market data to the
public. It was believed that this authority would expand the amount of
data available to consumers, and also spur innovation and competition
for the provision of market data.
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\4\ 15 U.S.C. 78f.
\5\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

NASDAQ believes that its NASDAQ Last Sale market data products are
precisely the sort of market data product that the Commission
envisioned when it adopted Regulation NMS. The Commission concluded
that Regulation NMS--by lessening regulation of the market in
proprietary data--would itself further the Act's goals of facilitating
efficiency and competition:

[E]fficiency is promoted when broker-dealers who do not need the
data beyond the prices, sizes, market center identifications of the
NBBO and consolidated last sale information are not required to
receive (and pay for) such data. The Commission also believes that
efficiency is promoted when broker-dealers may choose to receive
(and pay for) additional market data based on their own internal
analysis of the need for such data.\6\
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\6\ Securities Exchange Act Release No. 51808 (June 9, 2005), 70
FR 37496 (June 29, 2005).

By removing unnecessary regulatory restrictions on the ability of
exchanges to sell their own data, Regulation NMS advanced the goals of
the Act and the principles reflected in its legislative history. If the
free market should determine whether proprietary data is sold to BDs at
all, it follows that the price at which such data is sold should be set
---------------------------------------------------------------------------
by the market as well.

The recent decision of the United States Court of Appeals for the
District of Columbia Circuit in NetCoalition v. SEC, 615 F.3d 525 (D.C.
Cir. 2010), upheld the Commission's reliance upon competitive markets
to set reasonable and equitably allocated fees for market data. ``In
fact, the legislative history indicates that the Congress intended that
the market system `evolve through the interplay of competitive forces
as unnecessary regulatory restrictions are removed' and that the SEC
wield its regulatory power `in those situations where competition may
not be sufficient,' such as in the creation of a `consolidated
transactional reporting system.' NetCoalition, at 535 (quoting H.R.
Rep. No. 94-229, at 92 (1975), as reprinted in 1975 U.S.C.C.A.N. 321,
323). The court agreed with the Commission's conclusion that ``Congress
intended that `competitive forces should dictate the services and
practices that constitute the U.S. national market system for trading
equity securities.' ''\7\
---------------------------------------------------------------------------

\7\ NetCoalition, at 535.
---------------------------------------------------------------------------

The Court in NetCoalition, while upholding the Commission's
conclusion that competitive forces may be relied upon to establish the
fairness of prices, nevertheless concluded that the record in that case
did not adequately support the Commission's conclusions as to the
competitive nature of the market for NYSEArca's data product at issue
in that case. As explained below in NASDAQ's Statement on Burden on
Competition, however, NASDAQ believes that there is substantial
evidence of competition in the marketplace for data that was not in the
record in the NetCoalition case, and that the Commission is entitled to
rely upon such evidence in concluding that the fees established in this
filing are the product of competition, and therefore in accordance with
the relevant statutory standards.\8\ Moreover, NASDAQ further notes
that the product at issue in this filing--a NASDAQ last sale data
product that replicates a subset of the information available through
``core'' data products whose fees have been reviewed and approved by
the SEC--is quite different from the NYSEArca depth-of-book data
product at issue in NetCoalition. Accordingly, any findings of the
court with respect to that product may not be relevant to the product
at issue in this filing.
---------------------------------------------------------------------------

\8\ It should also be noted that Section 916 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank
Act'') has amended paragraph (A) of Section 19(b)(3) of the Act, 15
U.S.C. 78s(b)(3), to make it clear that all exchange fees, including
fees for market data, may be filed by exchanges on an immediately
effective basis. Although this change in the law does not alter the
Commission's authority to evaluate and ultimately disapprove
exchange rules if it concludes that they are not consistent with the
Act, it unambiguously reflects a conclusion that market data fee
changes do not require prior Commission review before taking effect,
and that a proceeding with regard to a particular fee change is
required only if the Commission determines that it is necessary or
appropriate to suspend the fee and institute such a proceeding.
---------------------------------------------------------------------------

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

NASDAQ does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended. NASDAQ's ability to
price its Last Sale Data Products is constrained by (1) competition
between exchanges and

[[Page 41469]]

other trading platforms that compete with each other in a variety of
dimensions; (2) the existence of inexpensive real-time consolidated
data and market-specific data and free delayed consolidated data; and
(3) the inherent contestability of the market for proprietary last sale
data.
The market for proprietary last sale data products is currently
competitive and inherently contestable because there is fierce
competition for the inputs necessary to the creation of proprietary
data and strict pricing discipline for the proprietary products
themselves. Numerous exchanges compete with each other for listings,
trades, and market data itself, providing virtually limitless
opportunities for entrepreneurs who wish to produce and distribute
their own market data. This proprietary data is produced by each
individual exchange, as well as other entities, in a vigorously
competitive market.
Transaction execution and proprietary data products are
complementary in that market data is both an input and a byproduct of
the execution service. In fact, market data and trade execution are a
paradigmatic example of joint products with joint costs. The decision
whether and on which platform to post an order will depend on the
attributes of the platform where the order can be posted, including the
execution fees, data quality and price, and distribution of its data
products. Without trade executions, exchange data products cannot
exist. Moreover, data products are valuable to many end users only
insofar as they provide information that end users expect will assist
them or their customers in making trading decisions.
The costs of producing market data include not only the costs of
the data distribution infrastructure, but also the costs of designing,
maintaining, and operating the exchange's transaction execution
platform and the cost of regulating the exchange to ensure its fair
operation and maintain investor confidence. The total return that a
trading platform earns reflects the revenues it receives from both
products and the joint costs it incurs. Moreover, the operation of the
exchange is characterized by high fixed costs and low marginal costs.
This cost structure is common in content and content distribution
industries such as software, where developing new software typically
requires a large initial investment (and continuing large investments
to upgrade the software), but once the software is developed, the
incremental cost of providing that software to an additional user is
typically small, or even zero (e.g., if the software can be downloaded
over the internet after being purchased).\9\ In NASDAQ's case, it is
costly to build and maintain a trading platform, but the incremental
cost of trading each additional share on an existing platform, or
distributing an additional instance of data, is very low. Market
information and executions are each produced jointly (in the sense that
the activities of trading and placing orders are the source of the
information that is distributed) and are each subject to significant
scale economies. In such cases, marginal cost pricing is not feasible
because if all sales were priced at the margin, NASDAQ would be unable
to defray its platform costs of providing the joint products.
---------------------------------------------------------------------------

\9\ See William J. Baumol and Daniel G. Swanson, ``The New
Economy and Ubiquitous Competitive Price Discrimination: Identifying
Defensible Criteria of Market Power,'' Antitrust Law Journal, Vol.
70, No. 3 (2003).
---------------------------------------------------------------------------

An exchange's BD customers view the costs of transaction executions
and of data as a unified cost of doing business with the exchange. A BD
will direct orders to a particular exchange only if the expected
revenues from executing trades on the exchange exceed net transaction
execution costs and the cost of data that the BD chooses to buy to
support its trading decisions (or those of its customers). The choice
of data products is, in turn, a product of the value of the products in
making profitable trading decisions. If the cost of the product exceeds
its expected value, the BD will choose not to buy it. Moreover, as a BD
chooses to direct fewer orders to a particular exchange, the value of
the product to that BD decreases, for two reasons. First, the product
will contain less information, because executions of the BD's trading
activity will not be reflected in it. Second, and perhaps more
important, the product will be less valuable to that BD because it does
not provide information about the venue to which it is directing its
orders. Data from the competing venue to which the BD is directing
orders will become correspondingly more valuable.
Similarly, in the case of products such as NLS that are distributed
through market data vendors, the vendors provide price discipline for
proprietary data products because they control the primary means of
access to end users. Vendors impose price restraints based upon their
business models. For example, vendors such as Bloomberg and Reuters
that assess a surcharge on data they sell may refuse to offer
proprietary products that end users will not purchase in sufficient
numbers. Internet portals, such as Google, impose a discipline by
providing only data that will enable them to attract ``eyeballs'' that
contribute to their advertising revenue. Retail BDs, such as Schwab and
Fidelity, offer their customers proprietary data only if it promotes
trading and generates sufficient commission revenue. Although the
business models may differ, these vendors' pricing discipline is the
same: they can simply refuse to purchase any proprietary data product
that fails to provide sufficient value. NASDAQ and other producers of
proprietary data products must understand and respond to these varying
business models and pricing disciplines in order to market proprietary
data products successfully. Moreover, NASDAQ believes that products
such as NLS can enhance order flow to NASDAQ by providing more
widespread distribution of information about transactions in real time,
thereby encouraging wider participation in the market by investors with
access to the internet or television. Conversely, the value of such
products to distributors and investors decreases if order flow falls,
because the products contain less content.
Analyzing the cost of market data distribution in isolation from
the cost of all of the inputs supporting the creation of market data
will inevitably underestimate the cost of the data. Thus, because it is
impossible to create data without a fast, technologically robust, and
well-regulated execution system, system costs and regulatory costs
affect the price of market data. It would be equally misleading,
however, to attribute all of the exchange's costs to the market data
portion of an exchange's joint product. Rather, all of the exchange's
costs are incurred for the unified purposes of attracting order flow,
executing and/or routing orders, and generating and selling data about
market activity. The total return that an exchange earns reflects the
revenues it receives from the joint products and the total costs of the
joint products.
Competition among trading platforms can be expected to constrain
the aggregate return each platform earns from the sale of its joint
products, but different platforms may choose from a range of possible,
and equally reasonable, pricing strategies as the means of recovering
total costs. NASDAQ pays rebates to attract orders, charges relatively
low prices for market information and charges relatively high prices
for accessing posted liquidity. Other platforms may choose a strategy
of paying lower liquidity rebates to attract orders, setting relatively
low prices for accessing posted liquidity, and setting relatively high
prices for

[[Page 41470]]

market information. Still others may provide most data free of charge
and rely exclusively on transaction fees to recover their costs.
Finally, some platforms may incentivize use by providing opportunities
for equity ownership, which may allow them to charge lower direct fees
for executions and data.
In this environment, there is no economic basis for regulating
maximum prices for one of the joint products in an industry in which
suppliers face competitive constraints with regard to the joint
offering. Such regulation is unnecessary because an ``excessive'' price
for one of the joint products will ultimately have to be reflected in
lower prices for other products sold by the firm, or otherwise the firm
will experience a loss in the volume of its sales that will be adverse
to its overall profitability. In other words, an increase in the price
of data will ultimately have to be accompanied by a decrease in the
cost of executions, or the volume of both data and executions will
fall.
The level of competition and contestability in the market is
evident in the numerous alternative venues that compete for order flow,
including thirteen SRO markets, as well as internalizing BDs and
various forms of alternative trading systems (``ATSs''), including dark
pools and electronic communication networks (``ECNs''). Each SRO market
competes to produce transaction reports via trade executions, and two
FINRA-regulated TRFs compete to attract internalized transaction
reports. It is common for BDs to further and exploit this competition
by sending their order flow and transaction reports to multiple
markets, rather than providing them all to a single market. Competitive
markets for order flow, executions, and transaction reports provide
pricing discipline for the inputs of proprietary data products.
The large number of SROs, TRFs, BDs, and ATSs that currently
produce proprietary data or are currently capable of producing it
provides further pricing discipline for proprietary data products. Each
SRO, TRF, ATS, and BD is currently permitted to produce proprietary
data products, and many currently do or have announced plans to do so,
including NASDAQ, NYSE, NYSEAmex, NYSEArca, BATS, and Direct Edge.
Any ATS or BD can combine with any other ATS, BD, or multiple ATSs
or BDs to produce joint proprietary data products. Additionally, order
routers and market data vendors can facilitate single or multiple BDs'
production of proprietary data products. The potential sources of
proprietary products are virtually limitless.
The fact that proprietary data from ATSs, BDs, and vendors can by-
pass SROs is significant in two respects. First, non-SROs can compete
directly with SROs for the production and sale of proprietary data
products, as BATS and Arca did before registering as exchanges by
publishing proprietary book data on the Internet. Second, because a
single order or transaction report can appear in a core data product,
an SRO proprietary product, and/or a non-SRO proprietary product, the
data available in proprietary products is exponentially greater than
the actual number of orders and transaction reports that exist in the
marketplace. Indeed, in the case of NLS, the data provided through that
product appears both in (i) real-time core data products offered by the
SIPs for a fee, and (ii) free SIP data products with a 15-minute time
delay, and finds a close substitute in last-sale products of competing
venues.
In addition to the competition and price discipline described
above, the market for proprietary data products is also highly
contestable because market entry is rapid, inexpensive, and profitable.
The history of electronic trading is replete with examples of entrants
that swiftly grew into some of the largest electronic trading platforms
and proprietary data producers: Archipelago, Bloomberg Tradebook,
Island, RediBook, Attain, TracECN, BATS Trading and Direct Edge. Today,
BATS and Direct Edge provide data at no charge in order to attract
order flow, and use market data revenue rebates from the resulting
executions to maintain low execution charges for their users. A
proliferation of dark pools and other ATSs operate profitably with
fragmentary shares of consolidated market volume.
Regulation NMS, by deregulating the market for proprietary data,
has increased the contestability of that market. While BDs have
previously published their proprietary data individually, Regulation
NMS encourages market data vendors and BDs to produce proprietary
products cooperatively in a manner never before possible. Multiple
market data vendors already have the capability to aggregate data and
disseminate it on a profitable scale, including Bloomberg and Thomson
Reuters.
Moreover, consolidated data provides two additional measures of
pricing discipline for proprietary data products that are a subset of
the consolidated data stream. First, the consolidated data is widely
available in real-time at $1 per month for non-professional users.
Second, consolidated data is also available at no cost with a 15- or
20- minute delay. Because consolidated data contains marketwide
information, it effectively places a cap on the fees assessed for
proprietary data (such as last sale data) that is simply a subset of
the consolidated data. The mere availability of low-cost or free
consolidated data provides a powerful form of pricing discipline for
proprietary data products that contain data elements that are a subset
of the consolidated data, by highlighting the optional nature of
proprietary products.
The competitive nature of the market for products such as NLS is
borne out by the performance of the market. In May 2008, the internet
portal Yahoo! began offering its Web site viewers real-time last sale
data (as well as best quote data) provided by BATS Trading. In
response, in June 2008, NASDAQ launched NLS, which was initially
subject to an ``enterprise cap'' of $100,000 for customers receiving
only one of the NLS products, and $150,000 for customers receiving both
products. The majority of NASDAQ's sales were at the capped level. In
early 2009, BATS expanded its offering of free data to include depth-
of-book data. Also in early 2009, NYSEArca announced the launch of a
competitive last sale product with an enterprise price of $30,000 per
month. In response, NASDAQ combined the enterprise cap for the NLS
products and reduced the cap to $50,000 (i.e., a reduction of $100,000
per month). Although each of these products offers only a specific
subset of data available from the SIPs, NASDAQ believes that the
products are viewed as substitutes for each other and for core last-
sale data, rather than as products that must be obtained in tandem. For
example, while the internet portal Yahoo! continues to disseminate only
the BATS last sale product, Google disseminates only NASDAQ's product.
In this environment, a super-competitive increase in the fees
charged for either transactions or data has the potential to impair
revenues from both products. ``No one disputes that competition for
order flow is `fierce'.'' NetCoalition at 24. The existence of fierce
competition for order flow implies a high degree of price sensitivity
on the part of BDs with order flow, since they may readily reduce costs
by directing orders toward the lowest-cost trading venues. A BD that
shifted its order flow from one platform to another in response to
order execution price differentials would both reduce the value of that
platform's market data and reduce its own need to consume data from the
disfavored platform. If a

[[Page 41471]]

platform increases its market data fees, the change will affect the
overall cost of doing business with the platform, and affected BDs will
assess whether they can lower their trading costs by directing orders
elsewhere and thereby lessening the need for the more expensive data.
Similarly, increases in the cost of NLS would impair the willingness of
distributors to take a product for which there are numerous
alternatives, impacting NLS data revenues, the value of NLS as a tool
for attracting order flow, and ultimately, the volume of orders routed
to NASDAQ and the value of its other data products.
In establishing the price for the NASDAQ Last Sale Products, NASDAQ
considered the competitiveness of the market for last sale data and all
of the implications of that competition. NASDAQ believes that it has
considered all relevant factors and has not considered irrelevant
factors in order to establish fair, reasonable, and not unreasonably
discriminatory fees and an equitable allocation of fees among all
users. The existence of numerous alternatives to NLS, including real-
time consolidated data, free delayed consolidated data, and proprietary
data from other sources ensures that NASDAQ cannot set unreasonable
fees, or fees that are unreasonably discriminatory, without losing
business to these alternatives. Accordingly, NASDAQ believes that the
acceptance of the NLS product in the marketplace demonstrates the
consistency of these fees with applicable statutory standards.

C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others

Three comment letters were filed regarding the proposed rule change
as originally published for comment NASDAQ responded to these comments
in a letter dated December 13, 2007. Both the comment letters and
NASDAQ's response are available on the SEC Web site at https://www.sec.gov/comments/sr-nasdaq-2006-060/nasdaq2006060.shtml. In
addition, in response to prior filings to extend the NLS pilot,\10\ the
Securities Industry and Financial Markets Association (``SIFMA'') and
NetCoalition filed comment letters contending that the SEC should
suspend and institute disapproval proceedings with respect to the
filing. Last year, SIFMA and NetCoalition filed a petition seeking
review by the United States Court of Appeals for the District of
Columbia Circuit with respect to the NLS pricing pilots in effect from
July 1, 2011 through September 30, 2011 and from October 1, 2011
through December 31, 2011. These appeals have been stayed pending
resolution of the consolidated case NetCoalition v. SEC, Nos. 10-1421,
10-1422, 11-1001, and 11-1065 (``NetCoalition II'').
---------------------------------------------------------------------------

\10\ Securities Exchange Act Release No. 65488 (October 5,
2011), 76 FR 63334 (October 21, 2011) (SR-NASDAQ-2011-132);
Securities Exchange Act Release No. 64856 (July 12, 2011), 76 FR
41845 (July 15, 2011) (SR-NASDAQ-2011-092); Securities Exchange Act
Release No. 64188 (April 5, 2011), 76 FR 20054 (April 11, 2011) (SR-
NASDAQ-2011-044).
---------------------------------------------------------------------------

The letters submitted by SIFMA and NetCoalition incorrectly assert
that the original NetCoalition case stands for the proposition that the
Commission must review cost data to substantiate a determination that
competitive forces constrain the price of market data. In fact, the
court held the opposite:

The petitioners believe that the SEC's market-based approach is
prohibited under the Exchange Act because the Congress intended
``fair and reasonable'' to be determined using a cost-based
approach. The SEC counters that, because it has statutorily-granted
flexibility in evaluating market data fees, its market-based
approach is fully consistent with the Exchange Act. We agree with
the SEC.\11\
---------------------------------------------------------------------------

\11\ NetCoalition, 615 F3d. at 534. While the court noted that
cost data could sometimes be relevant in determining the
reasonableness of fees, it acknowledged that submission of cost data
may be inappropriate where there are ``difficulties in calculating
the direct costs * * * of market data,'' Id. at 539. That is the
case here, due to the fact that the fixed costs of market data
production are inseparable from the fixed costs of providing a
trading platform, and the marginal costs of market data production
are minimal or even zero. Because the costs of providing execution
services and market data are not unique to either of the provided
services, there is no meaningful way to allocate these costs among
the two ``joint products''--and any attempt to do so would result in
inherently arbitrary cost allocations.
The court explicitly acknowledged that the ``joint product''
theory set forth by NASDAQ's economic experts in NetCoalition (and
also described in this filing) could explain the competitive dynamic
of the market and explain why consideration of cost data would be
unavailing. The court found, however, that the Commission could not
rely on the theory because it was not in the Commission's record.
Id. at 541 n.16. For the purpose of providing a complete explanation
of the theory, NASDAQ is further submitting as Exhibit 3 to this
filing a study that was submitted to the Commission in SR-NASDAQ-
2011-010. See Statement of Janusz Ordover and Gustavo Bamberger at
2-17 (December 29, 2010).
---------------------------------------------------------------------------

SIFMA and NetCoalition further contend the prior filing lacked
evidence supporting a conclusion that the market for NLS is
competitive, asserting that arguments about competition for order flow
and substitutability were rejected in NetCoalition. While the court did
determine that the record before it was not sufficient to allow it to
endorse those theories on the facts of that case, the court did not
itself make any conclusive findings about the actual presence or
absence of competition or the accuracy of these theories: rather, it
simply made a finding about the state of the SEC's record. Moreover,
analysis about competition in the market for depth-of-book data is only
tangentially relevant to the market for last sale data. As discussed
above and in the prior filing, perfect and partial substitutes for NLS
exist in the form of real-time core market data, free delayed core
market data, and the last sale products of competing venues, additional
competitive entry is possible, and evidence of competition is readily
apparent in the pricing behavior of the venues offering last sale
products and the consumption patterns of their customers. Thus,
although NASDAQ believes that the competitive nature of the market for
all market data, including depth-of-book data, will ultimately be
established, SIFMA and NetCoalition's letters not only mischaracterize
the NetCoalition decision, they also fail to address the
characteristics of the product at issue and the evidence already
presented.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act.\12\ 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.
---------------------------------------------------------------------------

\12\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File

[[Page 41472]]

Number SR-NASDAQ-2012-078 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-2012-078. 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
10:00 a.m. and 3:00 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-2012-078 and should
be submitted on or before August 3, 2012.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

\13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-17096 Filed 7-12-12; 8:45 am]
BILLING CODE 8011-01-P

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