Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Managed Data Solution for Non-Display Usage, 19942-19947 [2014-07993]

Download as PDF 19942 Federal Register / Vol. 79, No. 69 / Thursday, April 10, 2014 / Notices sroberts on DSK5SPTVN1PROD with NOTICES execution of Multi-Class Complex Orders, which will benefit investors. Further, enhancing the audit trail with respect to Multi-Class Complex Orders promotes transparency and aids in surveillance, thereby protecting investors. The Exchange also believes the proposed rule change is consistent with Section 6(b)(1) of the Act,9 which provides that the Exchange be organized and have the capacity to be able to carry out the purposes of the Act and to enforce compliance by the Exchange’s Trading Permit Holders and persons associated with its Trading Permit Holders with the Act, the rules and regulations thereunder, and the rules of the Exchange. Enhancing the audit trail with respect to Multi-Class Complex Orders will allow the Exchange to better enforce compliance by the Exchange’s TPHs and persons associated with its TPHs with the Act, the rules and regulations thereunder, and the rules of the Exchange. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others B. Self-Regulatory Organization’s Statement on Burden on Competition CBOE does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes that automating the Multi-Class Complex Order creation process for all MultiClass Complex Orders promotes fair and orderly markets, as well as assists the Exchange in its ability to effectively attract order flow and liquidity to its market, and ultimately benefits all CBOE TPHs and all investors. The Exchange does not believe that the proposed rule change will impose any burden on intramarket competition that is not necessary or appropriate in furtherance of the purposes of the Act because Multi-Class Complex Orders are available to all market participants through CBOE TPHs. The Exchange does not believe that the proposed rule change will impose any burden on intermarket competition that is not necessary or appropriate in furtherance of the purposes of the Act because, again, Multi-Class Complex Orders are available to all market participants through CBOE TPHs, which makes CBOE a more effective marketplace. Further, the proposed changes only affect trading on CBOE. To the extent that the proposed changes make CBOE more attractive to market participants at other exchanges, such market participants may elect to become CBOE market participants. IV. Solicitation of Comments 9 15 U.S.C. 78f(b)(1). VerDate Mar<15>2010 18:14 Apr 09, 2014 Jkt 232001 The Exchange neither solicited nor received comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period up to 90 days (i) as the Commission may designate if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the Exchange consents, the Commission will: A. By order approve or disapprove such proposed rule change, or B. institute proceedings to determine whether the proposed rule change should be disapproved. Electronic Comments • Use the Commission’s Internet comment form (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CBOE–2014–026 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–CBOE–2014–026. 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 (http://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 Frm 00078 Fmt 4703 Sfmt 4703 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.10 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–07991 Filed 4–9–14; 8:45 am] BILLING CODE 8011–01–P 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: PO 00000 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 20549–1090 on official business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of such filing also will be available for inspection and copying at the principal offices of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–CBOE– 2014–026, and should be submitted on or before May 1, 2014. SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71874; File No. SR– NASDAQ–2014–029] Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Managed Data Solution for NonDisplay Usage April 4, 2014. 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 March 21, 2014, The NASDAQ Stock Market LLC (‘‘NASDAQ’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change to modify rules of the NASDAQ Options Market, LLC (‘‘NOM’’) as described in Items I, II, and III, below, which Items have been prepared by NASDAQ. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change NASDAQ proposes to add new Section 11 (Managed Data Solutions) to the NOM rule book to establish 10 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\10APN1.SGM 10APN1 Federal Register / Vol. 79, No. 69 / Thursday, April 10, 2014 / Notices Managed Data Solution fees for NonDisplay Usage. While the changes proposed herein are effective upon filing, the Exchange has designated that the amendments be operative on April 1, 2014. The text of the proposed rule change is available on the Exchange’s Web site at http:// www.nasdaq.cchwallstreet.com, at the principal office of the Exchange, 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. 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 Statutory Basis for, the Proposed Rule Change sroberts on DSK5SPTVN1PROD with NOTICES 1. Purpose The purpose of the proposed rule change is to modify Chapter XV (Options Pricing) by adding proposed new Section 11 in the NOM rule book to establish Managed Data Solution fees. The Exchange is proposing to create a new data distribution model (a Managed Data Solution for Non-Display Usage) to further the distribution of Best of NASDAQ Options and Itch to Trade Options (‘‘BONO and ITTO’’), (together ‘‘NOM data’’). The proposed Managed Data Solution for Non-Display Usage is similar to data distribution models currently in use and aligns the Exchange with other markets.3 3 See Securities Exchange Act Release Nos. 70748 (October 23, 2013), 78 FR 64569 (October 29, 2013) (SR–Phlx–2013–105) (notice of filing and immediate effectiveness of proposed rule change to establish non-display Managed Data Solution for Phlx); 70269 (August 27, 2013), 78 FR 54336 (September 3, 2013) (SR–NASDAQ–2013–106) (notice of filing and immediate effectiveness of proposed rule change to establish non-display Managed Data Solution for NASDAQ); and 69182 (March 19, 2013), 78 FR 18378 (March 26, 2013) (SR–Phlx–2013–28) (notice of filing and immediate effectiveness of proposed rule change to establish non-display Managed Data Solution for Phlx equities market PSX). See also Securities Exchange Act Release No. 69041 (March 5, 2013), 78 FR 15791 (March 12, 2013) (SR–BX–2013–018) (notice of filing and immediate effectiveness of proposed rule change to establish Managed Data Solution for BX). VerDate Mar<15>2010 18:14 Apr 09, 2014 Jkt 232001 The Managed Data Solution proposal offers a delivery method to firms seeking simplified market data administration. The Managed Data Solution for Non-Display Usage may be offered by Distributors 4 externally distributing data to clients and/or client organizations that are using the NOM data internally for Non-Display Usage. This new pricing and administrative option is in response to industry demand, as well as due to changes in the technology used to distribute market data. As such, rather than substantive changes the proposal reflects current data distribution practices in the industry. Distributors offering Managed Data Solutions for Non-Display Usage continue to be fee liable for the applicable distributor, annual administrative and other applicable fees for the receipt and distribution of NOM data. This Managed Data Solution for NonDisplay Usage is a delivery option that will assess a new, innovative fee schedule to Distributors of NOM data that provide data feed solutions such as an Application Programming Interface (API) or similar automated delivery solutions to Recipients for Non-Display Usage with only limited entitlement controls (e.g., usernames and/or passwords) (‘‘Managed Data Recipients’’). However, the Distributor must first agree to reformat, redisplay and/or alter the NOM data prior to retransmission, but not to affect the integrity of the NOM data and not to render it inaccurate, unfair, uninformative, fictitious, misleading, or discriminatory. A Managed Data Solution for Non-Display Usage is any retransmission data product containing NOM data offered by a Distributor where the Distributor manages and monitors, but does not control, the information and the Recipient of a Managed Data Solution may use the information for internal Non-Display purposes only and may not distribute the information outside of their organization. However, the Distributor does maintain contracts with the Managed Data Recipients and is liable for any unauthorized use by the Managed Data Recipients under a Managed Data Solution. Currently, the Exchange does not distinguish between Managed Data Solution Recipients and a recipient of an uncontrolled data product. Some Distributors believe that the Managed Data Solution for Non-Display Usage is a viable alternative to an uncontrolled 4 ‘‘Distributor’’ shall mean the same as in NOM Chapter XV, Section 4(b). Proposed Chapter XV, Section 11(b). PO 00000 Frm 00079 Fmt 4703 Sfmt 4703 19943 data product. Some Distributors have even delayed deploying new NOM data offerings, pending the initiation of Managed Data Solutions for NonDisplay Usage. Thus, offering a Managed Data Solution fee schedule would not only result in the Exchange offering lower fees for existing Managed Data Recipients utilizing a Managed Data Solution, but will allow new Distributors to deliver Managed Data Solutions to new clients, thereby increasing transparency of the market. The Exchange proposes to establish a monthly Managed Data Solution Administration fee and a monthly Subscriber 5 fee for Distributors and Subscribers that adopt the Managed Data Solution for Non-Display Usage.6 The proposed fees for Managed Data Solutions products for Non-Display Usage—ITTO would be $500/mo per Distributor and $125/mo per Subscriber; and for Non-Display Usage—BONO would be $500/mo per Distributor and $125/mo per Subscriber.7 The Exchange proposes to establish a Managed Data Solution for Non-Display Usage only, as is done on other markets. The Exchange believes that the proposal is in line with current market practice.8 2. Statutory Basis The Exchange believes that the proposed rule change is consistent with the provisions of Section 6 of the Act,9 in general, and with Section 6(b)(4) of the Act,10 in particular, in that it provides an equitable allocation of reasonable fees among Subscribers and Recipients of NOM 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 5 ‘‘Subscriber’’ shall mean a device or computer terminal or an automated service which is entitled to receive Information. Proposed Chapter XV Section 11(c). 6 Without a Managed Data Solution as proposed herein, the current fee for internal distribution that is not a Managed Data Solution but rather an uncontrolled NOM data product with a distributor fee of $1,500 per month would apply (along with a $5 or $10 professional subscriber fee). Per the proposal for the Managed Data Solution, on the other hand, the Managed Data Recipient fee for Non-Display internal use of NOM Orders managed data would be $125 per Subscriber for each of ITTO and BONO, thereby providing a reduced cost option where the data is for Non-Display internal use only. 7 The proposed monthly fee would be in addition to the monthly Market Data Distributor fee of $2,000 (for external usage) currently set forth in the Options Schedule in NOM Chapter XV for recipients of BONO and ITTO options data feeds. 8 The Exchange believes that most firms, as an example, currently use BONO and ITTO options data feeds in non-display format. 9 15 U.S.C. 78f. 10 15 U.S.C. 78f(b)(4). E:\FR\FM\10APN1.SGM 10APN1 19944 Federal Register / Vol. 79, No. 69 / Thursday, April 10, 2014 / Notices public. It was believed that this authority would expand the amount of data available to consumers, and also spur innovation and competition for the provision of market data. The Commission concluded that Regulation NMS—by lessening the regulation of the market in proprietary data—would itself further the Act’s goals of facilitating efficiency and competition: sroberts on DSK5SPTVN1PROD with NOTICES [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.11 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 decision of the United States Court of Appeals for the District of Columbia Circuit in NetCoaliton v. SEC, 615 F.3d 525 (D.C. Cir. 2010) (‘‘NetCoalition I’’), upheld the Commission’s reliance upon competitive markets to set reasonable and equitably allocated fees for market data. ‘‘In fact, the legislative history indicates that the Congress intended that the market system ‘evolve through the interplay of competitive forces as unnecessary regulatory restrictions are removed’ and that the SEC wield its regulatory power ‘in those situations where competition may not be sufficient,’ such as in the creation of a ‘consolidated transactional reporting system.’ NetCoaltion I, 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.’ ’’ 12 The court in NetCoalition I, while upholding the Commission’s conclusion that competitive forces may be relied upon to establish the fairness of prices, nevertheless concluded that the record 11 Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005). 12 NetCoalition I, at 535. VerDate Mar<15>2010 18:14 Apr 09, 2014 Jkt 232001 in that case did not adequately support the Commission’s conclusions as to the competitive nature of the market for NYSE Arca’s data product at issue in that case. As explained below in the Exchange’s Statement on Burden on Competition, however, the Exchange believes that there is substantial evidence of competition in the marketplace for data that was not in the record in the NetCoalition I 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.13 Moreover, the Exchange further notes that the product at issue in this filing—NOM Managed Data Solutions for Non-Display Usage fees— is quite different from the NYSE Arca depth-of-book data product at issue in NetCoalition I. 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 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. The Exchange’s ability to price its Managed Data Solution products for Non-Display Usage is constrained by (1) competition between exchanges and 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 this data. The market for proprietary 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 13 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. PO 00000 Frm 00080 Fmt 4703 Sfmt 4703 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).14 In the Exchange’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, the Exchange would be 14 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). E:\FR\FM\10APN1.SGM 10APN1 sroberts on DSK5SPTVN1PROD with NOTICES Federal Register / Vol. 79, No. 69 / Thursday, April 10, 2014 / Notices 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 this 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. The Exchange 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, the Exchange believes that products such as this can enhance order flow to the Exchange, thereby encouraging wider participation in the VerDate Mar<15>2010 18:14 Apr 09, 2014 Jkt 232001 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. For example, some platform may choose to pay rebates to attract orders, charge relatively low prices for market information (or provide information free of charge) and charge relatively high prices for accessing posted liquidity. Other platforms may choose a strategy of paying lower liquidity rebates to attract orders, setting relatively low prices for accessing posted liquidity and setting relatively high prices for 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 PO 00000 Frm 00081 Fmt 4703 Sfmt 4703 19945 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 Trade Reporting Facilities (‘‘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 Stock Market LLC, New York Stock Exchange, The NYSE MKT LLC, NYSE Arca, Inc., BATS Exchange, Inc., 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 BD production of proprietary data products. The potential sources of proprietary products are virtually limitless. Market data vendors provide another form of price discipline for proprietary data products because they control the primary means of access to end Subscribers. Vendors impose price restraints based upon their business models. For example, vendors such as Bloomberg and Thomson Reuters that assess a surcharge on data they sell may refuse to offer proprietary products that end Subscribers will not purchase in sufficient numbers. Internet portals, such as Google, impose a discipline by providing only data that will enable them to attract ‘‘eyeballs’’ that contribute to their advertising revenue. Retail broker-dealers, such as Schwab and Fidelity, offer their customers proprietary data only if it promotes E:\FR\FM\10APN1.SGM 10APN1 sroberts on DSK5SPTVN1PROD with NOTICES 19946 Federal Register / Vol. 79, No. 69 / Thursday, April 10, 2014 / Notices 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. The Exchange and other producers of proprietary data products must understand and respond to these varying business models and pricing disciplines in order to market proprietary data products successfully. In addition to the competition and price discipline described above, the market for proprietary data products is also highly contestable because market entry is rapid, inexpensive, and profitable. The history of electronic trading is replete with examples of entrants that swiftly grew into some of the largest electronic trading platforms and proprietary data producers: Archipelago, Bloomberg Tradebook, Island, RediBook, Attain, TracECN, BATS Trading and Direct Edge. A proliferation of dark pools and other ATSs operate profitably with fragmentary shares of consolidated market volume. Regulation NMS, by deregulating the market for proprietary data, has increased the contestability of that market. While 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. Competition among platforms has driven the Exchange continually to improve its platform data offerings and to cater to customers’ data needs. For example, the Exchange has developed and maintained multiple delivery mechanisms (e.g., IP, multi-cast) that enable customers to receive data in the form and manner they prefer and at the lowest cost to them. The Exchange has created products like Depth Data and Top of Market Data, because offering data in multiple formatting allows the Exchange to better fit customer needs. The Exchange offers data via multiple extranet providers, thereby helping to reduce network and total cost for its data products. The Exchange has developed an online administrative system to provide customers transparency into their data feed requests and streamline data usage reporting. Despite these enhancements and a dramatic increase in message traffic, the Exchange’s fees for market data have VerDate Mar<15>2010 18:14 Apr 09, 2014 Jkt 232001 remained flat. In fact, as a percent of total Subscriber costs, Exchange data fees have fallen relative to other data usage costs—including bandwidth, programming, and infrastructure—that have risen. The same holds true for execution services; despite numerous enhancements to the Exchange’s trading platform, absolute and relative trading costs have declined. Platform competition has intensified as new entrants have emerged, constraining prices for both executions and for data. The vigor of competition for proprietary information is significant and the Exchange believes that this proposal itself clearly evidences such competition. The Exchange is offering a new pricing model in order to keep pace with changes in the industry and evolving customer needs. It is entirely optional and is geared towards attracting new customers, as well as retaining existing customers. The Exchange has witnessed competitors creating new products and innovative pricing in this space over the course of the past year. The Exchange continues to see firms challenge its pricing on the basis of the Exchange’s explicit fees being higher than the zeropriced fees from other competitors such as BATS. In all cases, firms make decisions on how much and what types of data to consume on the basis of the total cost of interacting with the Exchange or other exchanges. Of course, the explicit data fees are but one factor in a total platform analysis. Some competitors have lower transactions fees and higher data fees, and others are vice versa. The market for this proprietary information is highly competitive and continually evolves as products develop and change. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act.15 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 15 15 PO 00000 U.S.C. 78s(b)(3)(A)(ii). Frm 00082 Fmt 4703 Sfmt 4703 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 (http://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– NASDAQ–2014–029 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–NASDAQ–2014–029. 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 (http://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–2014–029 and should be submitted on or before May 1, 2014. E:\FR\FM\10APN1.SGM 10APN1 Federal Register / Vol. 79, No. 69 / Thursday, April 10, 2014 / Notices For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.16 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–07993 Filed 4–9–14; 8:45 am] BILLING CODE 8011–01–P A. Self-Regulatory Organization’s Statement of the Purpose of, and the Statutory Basis for, the Proposed Rule Change SECURITIES AND EXCHANGE COMMISSION [Release No. 34–71879; File No. SR–NYSE– 2014–15] Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Amending Its Price List To Introduce a New Credit for Certain Retail Providing Liquidity on the Exchange April 4, 2014. Pursuant to Section 19(b)(1) 1 of the Securities Exchange Act of 1934 (‘‘Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that, on March 24, 2014, New York Stock Exchange LLC (‘‘NYSE’’ 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 selfregulatory organization. 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 The Exchange proposes to amend its Price List to introduce a new credit for certain retail providing liquidity on the Exchange. The Exchange proposes to implement the fee change effective April 1, 2014. The text of the proposed rule change is available on the Exchange’s Web site at www.nyse.com, at the principal office of the Exchange, and at the Commission’s Public Reference Room. sroberts on DSK5SPTVN1PROD with NOTICES II. Self-Regulatory Organization’s Statement of the Purpose of, and the 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 16 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 15 U.S.C. 78a. 3 17 CFR 240.19b–4. 1 15 VerDate Mar<15>2010 18:14 Apr 09, 2014 Jkt 232001 of those statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant parts of such statements. 1. Purpose The Exchange proposes to amend its Price List to introduce a new credit for certain retail providing liquidity on the Exchange.4 The Exchange proposes to implement the fee change effective April 1, 2014. The Exchange currently operates the Retail Liquidity Program as a pilot program that is designed to attract additional retail order flow to the Exchange for NYSE-listed securities while also providing the potential for price improvement to such order flow.5 Retail order flow is submitted through the Retail Liquidity Program as a distinct order type called a ‘‘Retail Order,’’ which is defined in Rule 107C(a)(3) as an agency order or a riskless principal order that meets the criteria of Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) Rule 5320.03 that originates from a natural person and is submitted to the Exchange by a Retail Member Organization (‘‘RMO’’), provided that no change is made to the terms of the order with respect to price or side of market and the order does not originate from a trading algorithm or any other computerized methodology.6 An execution of a Retail Order is always considered to remove liquidity, whether against contra-side interest in the Retail Liquidity Program or against the Book.7 As described in the Price List, executions of Retail Orders receive a credit of $0.0005 per share if executed against Retail Price Improvement Orders (‘‘RPIs’’) or Mid-Point Passive Liquidity (‘‘MPL’’) Orders and are otherwise charged according to standard fees 4 The proposed pricing would only apply to securities priced $1.00 or greater. 5 See Rule 107C. See also Securities Exchange Act Release No. 67347 (July 3, 2012), 77 FR 40673 (July 10, 2012) (SR–NYSE–2011–55). 6 RMO is defined in Rule 107C(a)(2) as a member organization (or a division thereof) that has been approved by the Exchange under Rule 107C to submit Retail Orders. 7 A Retail Order is an Immediate or Cancel Order. See Rule 107C(a)(3). See also Rule 107C(k) for a description of the manner in which a member or member organization may designate how a Retail Order will interact with available contra-side interest. PO 00000 Frm 00083 Fmt 4703 Sfmt 4703 19947 applicable to non-Retail Orders if executed against the Book.8 The Exchange proposes to introduce a new credit of $0.0030 per share for executions of orders designated as ‘‘retail’’ that provide liquidity on the Book.9 An order properly designated as ‘‘retail’’ would be required to satisfy the requirements of Rule 107C(a)(3), but would not be submitted as a Retail Order within the Retail Liquidity Program and therefore would not need to be submitted by an RMO.10 Designation of an order as ‘‘retail’’ for purposes of the proposed new credit would be separate and distinct from submission of a Retail Order for purposes of the Retail Liquidity Program, despite the characteristics being identical (i.e., they must each satisfy the requirements in Rule 107C(a)(3)). The Exchange proposes to permit members and member organizations to designate orders as ‘‘retail’’ for the purposes of the proposed $0.0030 credit either (1) by means of a specific tag in the order entry message or (2) by designating a particular member or member organization mnemonic used at the Exchange as a ‘‘retail mnemonic.’’ A member or member organization would be required to attest, in a form and/or manner prescribed by the Exchange, that substantially all orders submitted to the Exchange satisfy the requirements of Rule 107C(a)(3).11 8 RPI is defined in Rule 107C(a)(4) and consists of non-displayed interest in NYSE-listed securities that is priced better than the best protected bid (‘‘PBB’’) or best protected offer (‘‘PBO’’), as such terms are defined in Regulation NMS Rule 600(b)(57), by at least $0.001 and that is identified as such. MPL Order is defined in Rule 13 as an undisplayed limit order that automatically executes at the mid-point of the protected best bid or offer (‘‘PBBO’’). 9 The existing rates in the Price List would apply to executions of MPL Orders (e.g., $0.0015 per share). Similarly, the existing rates in the Price List would apply to executions of Non-Displayed Reserve Orders (e.g., $0.0010 per share). A Supplemental Liquidity Provider (‘‘SLP’’) market maker (‘‘SLMM’’) could designate orders as ‘‘retail’’ and be eligible for the proposed new credit. Orders designated as ‘‘retail’’ that provide liquidity would count toward a member’s or member organization’s overall level of providing volume for purposes of other pricing on the Exchange that is based on such levels (e.g., the Tier 1, Tier 2 and Tier 3 Adding Credits). 10 The RMO aspect of Rule 107C(a)(3) would not be considered when determining whether an order designated as ‘‘retail’’ satisfies the requirements thereunder. 11 This would be similar to the process under the Retail Liquidity Program, whereby an RMO must attest, in a form prescribed by the Exchange, that substantially all orders submitted as Retail Orders will qualify as such under Rule 107C. See Rule 107C(b)(C). This would also be similar to the manner in which an Exchange Trading Permit (‘‘ETP’’) Holder on NYSE Arca Equities, Inc. (‘‘NYSE Arca Equities’’) may designate orders as E:\FR\FM\10APN1.SGM Continued 10APN1

Agencies

[Federal Register Volume 79, Number 69 (Thursday, April 10, 2014)]
[Notices]
[Pages 19942-19947]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-07993]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71874; File No. SR-NASDAQ-2014-029]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Managed Data Solution for Non-Display Usage

April 4, 2014.
    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 March 21, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change to modify rules of 
the NASDAQ Options Market, LLC (``NOM'') as described in Items I, II, 
and III, below, which Items have been prepared by NASDAQ. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ proposes to add new Section 11 (Managed Data Solutions) to 
the NOM rule book to establish

[[Page 19943]]

Managed Data Solution fees for Non-Display Usage.
    While the changes proposed herein are effective upon filing, the 
Exchange has designated that the amendments be operative on April 1, 
2014.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://www.nasdaq.cchwallstreet.com, at the principal 
office of the Exchange, 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. 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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to modify Chapter XV 
(Options Pricing) by adding proposed new Section 11 in the NOM rule 
book to establish Managed Data Solution fees. The Exchange is proposing 
to create a new data distribution model (a Managed Data Solution for 
Non-Display Usage) to further the distribution of Best of NASDAQ 
Options and Itch to Trade Options (``BONO and ITTO''), (together ``NOM 
data'').
    The proposed Managed Data Solution for Non-Display Usage is similar 
to data distribution models currently in use and aligns the Exchange 
with other markets.\3\
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release Nos. 70748 (October 23, 
2013), 78 FR 64569 (October 29, 2013) (SR-Phlx-2013-105) (notice of 
filing and immediate effectiveness of proposed rule change to 
establish non-display Managed Data Solution for Phlx); 70269 (August 
27, 2013), 78 FR 54336 (September 3, 2013) (SR-NASDAQ-2013-106) 
(notice of filing and immediate effectiveness of proposed rule 
change to establish non-display Managed Data Solution for NASDAQ); 
and 69182 (March 19, 2013), 78 FR 18378 (March 26, 2013) (SR-Phlx-
2013-28) (notice of filing and immediate effectiveness of proposed 
rule change to establish non-display Managed Data Solution for Phlx 
equities market PSX). See also Securities Exchange Act Release No. 
69041 (March 5, 2013), 78 FR 15791 (March 12, 2013) (SR-BX-2013-018) 
(notice of filing and immediate effectiveness of proposed rule 
change to establish Managed Data Solution for BX).
---------------------------------------------------------------------------

    The Managed Data Solution proposal offers a delivery method to 
firms seeking simplified market data administration. The Managed Data 
Solution for Non-Display Usage may be offered by Distributors \4\ 
externally distributing data to clients and/or client organizations 
that are using the NOM data internally for Non-Display Usage. This new 
pricing and administrative option is in response to industry demand, as 
well as due to changes in the technology used to distribute market 
data. As such, rather than substantive changes the proposal reflects 
current data distribution practices in the industry. Distributors 
offering Managed Data Solutions for Non-Display Usage continue to be 
fee liable for the applicable distributor, annual administrative and 
other applicable fees for the receipt and distribution of NOM data.
---------------------------------------------------------------------------

    \4\ ``Distributor'' shall mean the same as in NOM Chapter XV, 
Section 4(b). Proposed Chapter XV, Section 11(b).
---------------------------------------------------------------------------

    This Managed Data Solution for Non-Display Usage is a delivery 
option that will assess a new, innovative fee schedule to Distributors 
of NOM data that provide data feed solutions such as an Application 
Programming Interface (API) or similar automated delivery solutions to 
Recipients for Non-Display Usage with only limited entitlement controls 
(e.g., usernames and/or passwords) (``Managed Data Recipients''). 
However, the Distributor must first agree to reformat, redisplay and/or 
alter the NOM data prior to retransmission, but not to affect the 
integrity of the NOM data and not to render it inaccurate, unfair, 
uninformative, fictitious, misleading, or discriminatory. A Managed 
Data Solution for Non-Display Usage is any retransmission data product 
containing NOM data offered by a Distributor where the Distributor 
manages and monitors, but does not control, the information and the 
Recipient of a Managed Data Solution may use the information for 
internal Non-Display purposes only and may not distribute the 
information outside of their organization. However, the Distributor 
does maintain contracts with the Managed Data Recipients and is liable 
for any unauthorized use by the Managed Data Recipients under a Managed 
Data Solution.
    Currently, the Exchange does not distinguish between Managed Data 
Solution Recipients and a recipient of an uncontrolled data product. 
Some Distributors believe that the Managed Data Solution for Non-
Display Usage is a viable alternative to an uncontrolled data product. 
Some Distributors have even delayed deploying new NOM data offerings, 
pending the initiation of Managed Data Solutions for Non-Display Usage. 
Thus, offering a Managed Data Solution fee schedule would not only 
result in the Exchange offering lower fees for existing Managed Data 
Recipients utilizing a Managed Data Solution, but will allow new 
Distributors to deliver Managed Data Solutions to new clients, thereby 
increasing transparency of the market.
    The Exchange proposes to establish a monthly Managed Data Solution 
Administration fee and a monthly Subscriber \5\ fee for Distributors 
and Subscribers that adopt the Managed Data Solution for Non-Display 
Usage.\6\ The proposed fees for Managed Data Solutions products for 
Non-Display Usage--ITTO would be $500/mo per Distributor and $125/mo 
per Subscriber; and for Non-Display Usage--BONO would be $500/mo per 
Distributor and $125/mo per Subscriber.\7\ The Exchange proposes to 
establish a Managed Data Solution for Non-Display Usage only, as is 
done on other markets. The Exchange believes that the proposal is in 
line with current market practice.\8\
---------------------------------------------------------------------------

    \5\ ``Subscriber'' shall mean a device or computer terminal or 
an automated service which is entitled to receive Information. 
Proposed Chapter XV Section 11(c).
    \6\ Without a Managed Data Solution as proposed herein, the 
current fee for internal distribution that is not a Managed Data 
Solution but rather an uncontrolled NOM data product with a 
distributor fee of $1,500 per month would apply (along with a $5 or 
$10 professional subscriber fee). Per the proposal for the Managed 
Data Solution, on the other hand, the Managed Data Recipient fee for 
Non-Display internal use of NOM Orders managed data would be $125 
per Subscriber for each of ITTO and BONO, thereby providing a 
reduced cost option where the data is for Non-Display internal use 
only.
    \7\ The proposed monthly fee would be in addition to the monthly 
Market Data Distributor fee of $2,000 (for external usage) currently 
set forth in the Options Schedule in NOM Chapter XV for recipients 
of BONO and ITTO options data feeds.
    \8\ The Exchange believes that most firms, as an example, 
currently use BONO and ITTO options data feeds in non-display 
format.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\9\ in general, and with 
Section 6(b)(4) of the Act,\10\ in particular, in that it provides an 
equitable allocation of reasonable fees among Subscribers and 
Recipients of NOM 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

[[Page 19944]]

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.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(4).
---------------------------------------------------------------------------

    The Commission concluded that Regulation NMS--by lessening the 
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.\11\
---------------------------------------------------------------------------

    \11\ 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 decision of the United States Court of Appeals for the District 
of Columbia Circuit in NetCoaliton v. SEC, 615 F.3d 525 (D.C. Cir. 
2010) (``NetCoalition I''), upheld the Commission's reliance upon 
competitive markets to set reasonable and equitably allocated fees for 
market data. ``In fact, the legislative history indicates that the 
Congress intended that the market system `evolve through the interplay 
of competitive forces as unnecessary regulatory restrictions are 
removed' and that the SEC wield its regulatory power `in those 
situations where competition may not be sufficient,' such as in the 
creation of a `consolidated transactional reporting system.' 
NetCoaltion I, 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.' '' \12\
---------------------------------------------------------------------------

    \12\ NetCoalition I, at 535.
---------------------------------------------------------------------------

    The court in NetCoalition I, 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 NYSE Arca's data product at issue 
in that case. As explained below in the Exchange's Statement on Burden 
on Competition, however, the Exchange believes that there is 
substantial evidence of competition in the marketplace for data that 
was not in the record in the NetCoalition I 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.\13\ 
Moreover, the Exchange further notes that the product at issue in this 
filing--NOM Managed Data Solutions for Non-Display Usage fees--is quite 
different from the NYSE Arca depth-of-book data product at issue in 
NetCoalition I. Accordingly, any findings of the court with respect to 
that product may not be relevant to the product at issue in this 
filing.
---------------------------------------------------------------------------

    \13\ 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.
---------------------------------------------------------------------------

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. The 
Exchange's ability to price its Managed Data Solution products for Non-
Display Usage is constrained by (1) competition between exchanges and 
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 this data.
    The market for proprietary 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).\14\ In the Exchange'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, the 
Exchange would be

[[Page 19945]]

unable to defray its platform costs of providing the joint products.
---------------------------------------------------------------------------

    \14\ 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 this 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. The 
Exchange 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, the Exchange believes that products such as this can enhance 
order flow to the Exchange, 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. For example, some platform may choose to pay rebates to 
attract orders, charge relatively low prices for market information (or 
provide information free of charge) and charge relatively high prices 
for accessing posted liquidity. Other platforms may choose a strategy 
of paying lower liquidity rebates to attract orders, setting relatively 
low prices for accessing posted liquidity and setting relatively high 
prices for 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 Trade Reporting Facilities (``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 Stock Market LLC, New York Stock Exchange, The NYSE 
MKT LLC, NYSE Arca, Inc., BATS Exchange, Inc., 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 BD 
production of proprietary data products. The potential sources of 
proprietary products are virtually limitless.
    Market data vendors provide another form of price discipline for 
proprietary data products because they control the primary means of 
access to end Subscribers. Vendors impose price restraints based upon 
their business models. For example, vendors such as Bloomberg and 
Thomson Reuters that assess a surcharge on data they sell may refuse to 
offer proprietary products that end Subscribers will not purchase in 
sufficient numbers. Internet portals, such as Google, impose a 
discipline by providing only data that will enable them to attract 
``eyeballs'' that contribute to their advertising revenue. Retail 
broker-dealers, such as Schwab and Fidelity, offer their customers 
proprietary data only if it promotes

[[Page 19946]]

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. The Exchange and other 
producers of proprietary data products must understand and respond to 
these varying business models and pricing disciplines in order to 
market proprietary data products successfully.
    In addition to the competition and price discipline described 
above, the market for proprietary data products is also highly 
contestable because market entry is rapid, inexpensive, and profitable. 
The history of electronic trading is replete with examples of entrants 
that swiftly grew into some of the largest electronic trading platforms 
and proprietary data producers: Archipelago, Bloomberg Tradebook, 
Island, RediBook, Attain, TracECN, BATS Trading and Direct Edge. A 
proliferation of dark pools and other ATSs operate profitably with 
fragmentary shares of consolidated market volume.
    Regulation NMS, by deregulating the market for proprietary data, 
has increased the contestability of that market. While 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.
    Competition among platforms has driven the Exchange continually to 
improve its platform data offerings and to cater to customers' data 
needs. For example, the Exchange has developed and maintained multiple 
delivery mechanisms (e.g., IP, multi-cast) that enable customers to 
receive data in the form and manner they prefer and at the lowest cost 
to them. The Exchange has created products like Depth Data and Top of 
Market Data, because offering data in multiple formatting allows the 
Exchange to better fit customer needs. The Exchange offers data via 
multiple extranet providers, thereby helping to reduce network and 
total cost for its data products. The Exchange has developed an online 
administrative system to provide customers transparency into their data 
feed requests and streamline data usage reporting.
    Despite these enhancements and a dramatic increase in message 
traffic, the Exchange's fees for market data have remained flat. In 
fact, as a percent of total Subscriber costs, Exchange data fees have 
fallen relative to other data usage costs--including bandwidth, 
programming, and infrastructure--that have risen. The same holds true 
for execution services; despite numerous enhancements to the Exchange's 
trading platform, absolute and relative trading costs have declined. 
Platform competition has intensified as new entrants have emerged, 
constraining prices for both executions and for data.
    The vigor of competition for proprietary information is significant 
and the Exchange believes that this proposal itself clearly evidences 
such competition. The Exchange is offering a new pricing model in order 
to keep pace with changes in the industry and evolving customer needs. 
It is entirely optional and is geared towards attracting new customers, 
as well as retaining existing customers.
    The Exchange has witnessed competitors creating new products and 
innovative pricing in this space over the course of the past year. The 
Exchange continues to see firms challenge its pricing on the basis of 
the Exchange's explicit fees being higher than the zero-priced fees 
from other competitors such as BATS. In all cases, firms make decisions 
on how much and what types of data to consume on the basis of the total 
cost of interacting with the Exchange or other exchanges. Of course, 
the explicit data fees are but one factor in a total platform analysis. 
Some competitors have lower transactions fees and higher data fees, and 
others are vice versa. The market for this proprietary information is 
highly competitive and continually evolves as products develop and 
change.

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

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\15\ At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.
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    \15\ 15 U.S.C. 78s(b)(3)(A)(ii).
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2014-029 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2014-029. 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 (http://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-2014-029 and 
should be submitted on or before May 1, 2014.


[[Page 19947]]


    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-07993 Filed 4-9-14; 8:45 am]
BILLING CODE 8011-01-P