Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Modify NASDAQ Connectivity Options and Fees, 49308-49311 [2013-19508]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 78, Number 156 (Tuesday, August 13, 2013)]
[Notices]
[Pages 49308-49311]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-19508]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-70129; File No. SR-NASDAQ-2013-099]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify NASDAQ Connectivity Options and Fees

August 7, 2013.
    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 July 25, 2013 The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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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

    The Exchange proposes to modify NASDAQ connectivity options and 
fees. The text of the proposed rule change is available at https://nasdaq.cchwallstreet.com/, at the Exchange's principal office, and at 
the Commission's Public Reference Room.

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

    In its filing with the Commission, 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 these 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 aspects of such 
statements.

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

1. Purpose
    The Exchange proposes to modify Rule 7034(b) regarding connectivity 
to NASDAQ. Specifically, the Exchange proposes to establish 
connectivity and

[[Page 49309]]

installation fees for a 10Gb Ultra low latency fiber connection option, 
and provide a waiver of installation fees for subscriptions through 
August 31, 2013.
    The Exchange currently offers various bandwidth options for 
connectivity to NASDAQ, including a 40Gb fiber connection, a 10Gb fiber 
connection, a 1Gb fiber connection, and a 1Gb copper connection.\3\ In 
keeping with changes in technology, the Exchange now proposes to 
provide a second 10Gb fiber connection offering, which uses new ultra-
low latency switches.\4\ A switch is a type of network hardware that 
acts as the ``gatekeeper'' for all of a co-located client's orders sent 
to the System \5\ at the NASDAQ co-location facility and orders them in 
sequence for entry into the System for execution. Each of NASDAQ's 
current connection offerings use different switches between the 
offerings, but the switches are of uniform type within each offering. 
As a consequence, all co-located client subscribers to a particular 
connectivity option receive the same latency in terms of the 
capabilities of their switches. The 10Gb Ultra offering uses a new 
ultra-low latency switch, which provides faster processing of orders 
sent to it in comparison to the current switch in use for co-location 
connectivity. As a consequence, co-located clients needing only 10Gb of 
bandwidth, but that seek faster processing of those orders as they 
enter NASDAQ's co-location facility now have the option to subscribe to 
a faster and more efficient connection to the Exchange.\6\
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    \3\ Rule 7034(b).
    \4\ The term ``Latency'' for these purposes is a measure of the 
time it takes for an order to enter into a switch and then exit for 
entry into the System.
    \5\ As defined by Rule 4751(a).
    \6\ The Exchange is not offering a low latency option for other 
bandwidth connections at this time, but may do so in the future.
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    The Exchange proposes a monthly subscription fee of $15,000 for a 
10Gb Ultra connection, and a one-time installation fee of $1,500, which 
is identical to the 40Gb fiber connectivity option. NASDAQ believes 
that the pricing is reflective of the value the option will provide and 
the hardware and other infrastructure and maintenance costs to NASDAQ 
associated with offering technology that is at the forefront of the 
industry. The growth in the size of consolidated and proprietary data 
feeds has resulted in demand for faster processing of message traffic, 
and ultra-low latency switches meet this demand by decreasing the time 
individual orders are processed and market data is transmitted by these 
new switches. The Exchange's proposal provides the co-located client 
the option for faster switch processing, which is highly-valued among 
some market participants. NASDAQ notes that other markets have adopted 
low-latency connectivity options for their clients. For example, the 
International Securities Exchange LLC (``ISE'') offers a 10Gb low 
latency Ethernet connectivity option to its clients, which provides a 
``higher speed network to access [ISE's] Optimise trading system.'' \7\
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    \7\ See Securities Exchange Act Release No. 66525 (March 7, 
2012), 77 FR 14847 (March 13, 2012) (SR-ISE-2012-09).
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    The Exchange also proposes to provide a waiver of the installation 
fees for client orders of 10Gb Ultra fiber connectivity to NASDAQ 
completed between the effectiveness of this proposal and August 31, 
2013. The Exchange is providing the waiver to assist its co-located 
clients in upgrading to lower latency connections to meet the growing 
needs of co-located clients' business operations. NASDAQ is adding text 
to the rule that makes it clear that the connectivity option also 
provides connection to the markets of NASDAQ OMX BX, Inc. (``BX'') and 
NASDAQ OMX PHLX LLC (``Phlx). NASDAQ is deleting text that refers to an 
installation fee waiver time period for 10Gb and 40Gb fiber 
connections, which has since expired.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\8\ in general, and with Section 6(b)(4) of the Act,\9\ 
in particular, in that it provides for the equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using any facility or system which the Exchange operates 
or controls. The Exchange also believes the proposal furthers the 
objectives of Section 6(b)(5) of the Act \10\ in that it is designed to 
promote just and equitable principles of trade, 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 and is not designed to permit unfair discrimination between 
customer, issuers, brokers and dealers.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(4).
    \10\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that its proposal is consistent with Section 
6(b)(4) of the Act because the fees assessed for 10Gb Ultra fiber 
connectivity fee allow the Exchange to cover the costs associated with 
the purchase of new, state of the art switches for this new offering. 
Because the switches are best in breed, they are priced at a premium, 
the cost of which NASDAQ must bear. NASDAQ is offering 10Gb Ultra fiber 
connectivity at the same price as 40Gb fiber connectivity. Both the 
proposed 10Gb Ultra fiber connectivity and 40Gb fiber connectivity 
represent the best performance available to co-located clients. 40Gb 
fiber connectivity provides the greatest bandwidth available on NASDAQ, 
which is important for co-located clients that have high order flow and 
ingest large amounts of market data and demand the greatest bandwidth 
possible to handle such message flow. Some co-located clients, however, 
do not have bandwidth demands that would require 40Gb fiber bandwidth 
but rather put a premium on reducing latency. The 10Gb Ultra fiber 
connectivity it designed to meet this demand. As a consequence, both 
40Gb and 10Gb Ultra fiber connectivity represent the best connectivity 
NASDAQ offers in terms of bandwidth and latency, respectively.
    NASDAQ believes that the proposed one-time installation fee is 
consistent with Section 6(b)(4) of the Act because it is identical to 
the installation fees assessed for 40Gb fiber connectivity under the 
rule. NASDAQ notes that it will incur the same costs associated with 
setting up a subscriber with either 40Gb fiber or 10Gb Ultra fiber 
connectivity. As a consequence, NASDAQ believes that it is reasonable 
to assess the same installation fee as 40Gb fiber. The Exchange also 
believes that its proposal to waive temporarily the 10Gb Ultra fiber 
connection installation fee is reasonable because it will assist its 
co-located clients in upgrading to lower latency connections to meet 
the growing needs of the co-located clients' business operations at a 
time in the industry when speed continues to be a driver of the U.S. 
securities markets. Moreover, the Exchange notes that it has previously 
waived the installation fees for the 10Gb and 40Gb fiber connections 
for a limited time after these connectivity options were first 
introduced.\11\
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    \11\ See Securities Exchange Act Release No. 66428 (February 21, 
2012), 77 FR 11602 (February 27, 2012) (SR-NASDAQ-2012-028).
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    In addition to covering costs, the proposed fees will allow the 
Exchange to recoup costs associated with providing the 10Gb Ultra fiber 
connection and provide the Exchange a profit while providing customers 
the possibility of reducing the number of their connections to the 
Exchange. As discussed above, ISE offers different

[[Page 49310]]

connectivity options with respect to latency and NYSE Arca, Inc. offers 
what NASDAQ believes is a similar connectivity option, yet both options 
do not provide the breadth of connectivity at the same latency as 
NASDAQ's proposed 10Gb Ultra fiber connectivity option.\12\ NASDAQ 
notes that the 10Gb Ultra fiber option provides connectivity to seven 
of the NASDAQ OMX Group's U.S. markets (specifically, the cash equities 
and options markets operated by NASDAQ, BX, and Phlx, and the NASDAQ 
OMX Futures Exchange), whereas the offerings of other exchanges provide 
far fewer.\13\ Moreover, as new leading-edge technology, the switches 
to be used for 10Gb Ultra fiber connectivity have lower latency than 
the switches currently in use by other markets. For these reasons, the 
Exchange believes the proposed fees for 10Gb Ultra fiber connectivity 
to NASDAQ are reasonable.
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    \12\ NYSE Arca charges $10,000 per month for a 10Gb LCN 
(Liquidity Center Network) Connection. See https://usequities.nyx.com/sites/usequities.nyx.com/files/nyse_arca_marketplace_fees_1.3.2012.pdf, page 13. Although similar, NASDAQ's 
10Gb Ultra connection provides even lower latency connectivity to a 
larger number of markets, which represents the premium over the NYSE 
Arca 10Gb LCN connectivity option.
    \13\ The ISE connectivity offering provides access to one market 
and the NYSE Arca connectivity offering provides connectivity to the 
four markets of NYSE Euronext.
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    The Exchange also believes the proposed 10Gb Ultra fiber 
installation and connectivity fees are equitably allocated in that all 
co-located clients that voluntarily select this service option will be 
charged the same amount to cover the hardware, installation, testing 
and connection costs to maintain and manage the enhanced connection. 
The proposed fees allow the Exchange to recoup costs associated with 
providing the 10Gb Ultra fiber connection and provide the Exchange a 
profit while providing customers with the most efficient connection to 
the System in terms of latency. All co-located clients have the option 
to select this voluntary co-location connectivity option; however, 
NASDAQ is not eliminating any existing connectivity options. 
Accordingly, a co-located client may elect not to subscribe to the 10Gb 
Ultra fiber connectivity option and retain the option to which it is 
currently subscribed.
    The Exchange also believes the proposal furthers the objectives of 
Section 6(b)(5) of the Act \14\ in that it is designed to promote just 
and equitable principles of trade, 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 and is not 
designed to permit unfair discrimination between customer, issuers, 
brokers and dealers. The 10Gb Ultra fiber connectivity option assists 
co-located clients in making their network connectivity more efficient 
by reducing the time orders take to reach the System once sent from 
their co-located server and also the time that market data takes to 
reach their co-located server. Speed and efficiency are important 
drivers of the U.S. securities markets and NASDAQ is offering a co-
location connectivity solution that promotes these drivers by providing 
state of the art technology that is available to all co-located 
clients. The Exchange believes the enhanced 10Gb Ultra connection will 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system because NASDAQ will provide state 
of the art switching technology to market participants, which will 
improve the speed and efficiency of processing orders arriving at the 
market from clients' co-located servers.
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    \14\ 15 U.S.C. 78f(b)(5).
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    The Exchange also believes that the reduction in latencies 
attributed to the enhanced 10Gb Ultra connection option serves to 
protect investors and the public interest. The reduction in latency 
will provide investors with the most efficient means of processing 
orders once they reach the Exchange. Higher bandwidth options like 
NASDAQ's current 10Gb and 40Gb fiber connectivity and the proposed 10Gb 
Ultra fiber option also remove the potential for data spikes and data 
gapping issues that result from the transmission of the growing size of 
the consolidated and proprietary market data feeds. Such data spiking 
and data gapping issues have the potential for disrupting the 
marketplace which could negatively impact investors as well as the 
public interest.
    The Exchange also believes the proposed installation and 
subscription fees for the 10Gb Ultra fiber connectivity option are not 
unfairly discriminatory because all clients have the option to 
subscribe to co-locate with NASDAQ and subscribe to the 10Gb Ultra 
connection. There is no differentiation among co-located clients with 
regard to the fees charged for these services. The Exchange believes 
the proposal to waive the 10Gb Ultra fiber connection installation fee 
is not unfairly discriminatory because the waiver of fees is provided 
to all co-located clients that volunteer for this particular service 
option during the prescribed timeframe, and there is no differentiation 
among co-located clients with regard to the waiver of fees for this 
option.

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

    The Exchange 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. 
Specifically, the Exchange believes that the changes will promote 
competition by offering co-located clients an additional connectivity 
option that will enhance their trading operations and ultimately bring 
greater speed and efficiency to trading in the marketplace.

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

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (1) 
Significantly affect the protection of investors or the public 
interest; (2) impose any significant burden on competition; and (3) by 
its terms does not become operative for 30 days after the date of this 
filing, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest, 
the proposed rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \15\ and Rule 19b-4(f)(6) thereunder.\16\
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    \15\ 15 U.S.C. 78s(b)(3)(A).
    \16\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires a self-regulatory organization to provide the Commission 
with written notice of its intent to file the proposed rule change, 
along with a brief description and text of 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 met this requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative for 30 days after the date of filing. However, 
Rule 19b-4(f)(6)(iii) permits the Commission to designate a shorter 
time if such action is consistent with the protection of investors and 
the public interest. The Exchange has asked the Commission to waive the 
30-day operative delay so that the proposal may become operative 
immediately upon filing. The Commission believes that waiving the 30-
day operative delay is consistent with the protection of investors and 
the public interest so that NASDAQ can

[[Page 49311]]

immediately offer the 10GB Ultra connectivity to those clients that 
believe it can enhance the efficiency of their trading.\17\ 
Accordingly, the Commission hereby grants the Exchange's request and 
designates the proposal operative upon filing.
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    \17\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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 necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.

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-2013-099 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-2013-099. 
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-2013-099 and should be submitted on or before September 3, 2013.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-19508 Filed 8-12-13; 8:45 am]
BILLING CODE 8011-01-P