Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing of Proposed Rule Change Regarding NASDAQ Last Sale Plus, 29370-29376 [2015-12280]
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Federal Register / Vol. 80, No. 98 / Thursday, May 21, 2015 / Notices
sufficient financial resources to
withstand, at a minimum, a default by
the participant family to which it has
the largest exposure in extreme but
plausible market conditions. The
Commission believes that this proposal
is consistent with Exchange Act Rule
17Ad–22(b)(3) 28 because the Monthly
Clearing Fund Sizing Procedure and
Financial Resource Monitoring and Call
Procedure should ensure that OCC can
obtain sufficient financial resources in a
timely manner to withstand a default of
the Clearing Member or Clearing
Member Group presenting it the largest
exposure.
By using a peak five-day rolling
average and extending the look-back
period from one to three calendar
months, the Monthly Clearing Fund
Sizing Procedure should be more
responsive than OCC’s existing resizing
formula to sudden increases in exposure
and less sensitive to short-run
reductions in exposure that could
inappropriately reduce the overall size
of the clearing fund. Furthermore, the
prudential margin of safety, which is
currently $1.8 billion, will provide an
additional buffer to absorb potential
future exposures that may not be
observed during the look-back period. In
addition, the Financial Resource
Monitoring and Call Procedure will
establish a process by which OCC will
be able to respond to increases in
exposure on an intra-month basis. In
doing so, the Commission believes the
Financial Resource Monitoring and Call
Procedure should ensure that a balance
is struck between mutualizing the
burden of the additional financial
resources across all Clearing Members,
while also requiring the Clearing
Member or Clearing Member Group
causing the increased exposure to bear
the burden.
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III. Conclusion
It is therefore noticed, pursuant to
Section 806(e)(1)(I) of the Payment,
Clearing and Settlement Supervision
Act,29 that the Commission does not
object to advance notice proposal (SR–
OCC–2014–811) and that OCC is
authorized to implement the proposal as
of the date of this notice or the date of
an order by the Commission approving
a proposed rule change that reflects rule
changes that are consistent with this
advance notice proposal (SR–OCC–
2015–009), whichever is later.
28 Id.
29 12
U.S.C. 5465(e)(1)(I).
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By the Commission.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 2015–12293 Filed 5–20–15; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–74972; File No. SR–
NASDAQ–2015–055]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing of Proposed Rule Change
Regarding NASDAQ Last Sale Plus
May 15, 2015.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 2 thereunder,
notice is hereby given that, on May 11,
2015, The NASDAQ Stock Market LLC
(‘‘NASDAQ’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘SEC’’ or ‘‘Commission’’)
the proposed rule change as described
in Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 7039 (NASDAQ Last Sale Data
Feed) with language regarding NASDAQ
Last Sale (‘‘NLS’’) Plus (‘‘NLS Plus’’), a
comprehensive data feed offered by
NASDAQ OMX Information LLC.3 NLS
Plus allows data distributors to access
the three last sale products offered by
each of NASDAQ OMX’s three U.S.
equity markets.4 NLS Plus also reflects
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 NASDAQ OMX Information LLC is a subsidiary
of The NASDAQ OMX Group, Inc. (‘‘NASDAQ
OMX’’).
4 The NASDAQ OMX U.S. equity markets include
The NASDAQ Stock Market (‘‘NASDAQ’’),
NASDAQ OMX BX (‘‘BX’’), and NASDAQ OMX
PSX (‘‘PSX’’) (together known as the ‘‘NASDAQ
OMX equity markets’’). PSX and BX will shortly file
companion proposals regarding NLS Plus.
NASDAQ’s last sale product, NASDAQ Last Sale,
includes last sale information from the FINRA/
NASDAQ Trade Reporting Facility (‘‘FINRA/
NASDAQ TRF’’), which is jointly operated by
NASDAQ and the Financial Industry Regulatory
Authority (‘‘FINRA’’). Accordingly, NASDAQ
expects that FINRA will submit a proposed change
to FINRA Rule 7640A with respect to NLS Plus. See
Securities Exchange Act Release No. 71350 (January
17, 2014), 79 FR 4218 (January 24, 2014) (SR–
FINRA–2014–002). For proposed rule changes
submitted with respect to NASDAQ Last Sale, BX
Last Sale, and PSX Last Sale, see, e.g., Securities
Exchange Act Release Nos. 57965 (June 16, 2008),
2 17
PO 00000
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Sfmt 4703
cumulative consolidated volume
(‘‘consolidated volume’’) of real-time
trading activity across all U.S.
exchanges for Tape C securities 5 and
15-minute delayed information for Tape
A and Tape B securities.6 Thus, in
offering NLS Plus, NASDAQ OMX
Information LLC is, as discussed below,
acting as a redistributor of last sale
products already offered by NASDAQ,
BX, and PSX and volume information
provided by the securities information
processors for Tape A, B, and C. This
proposal is being filed by the Exchange
to explain the scope of the NLS Plus
data feed offering and in light of a recent
approval order on behalf of several
affiliated exchanges regarding a similar
data product.7
The text of the proposed rule change
is available on the Exchange’s Web site
at https://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 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.
73 FR 35178, (June 20, 2008) (SR–NASDAQ–2006–
060) (order approving NASDAQ Last Sale data feeds
pilot); 61112 (December 4, 2009), 74 FR 65569,
(December 10, 2009) (SR–BX–2009–077) (notice of
filing and immediate effectiveness regarding BX
Last Sale data feeds); and 62876 (September 9,
2010), 75 FR 56624, (September 16, 2010) (SR–
Phlx–2010–120) (notice of filing and immediate
effectiveness regarding PSX Last Sale data feeds).
5 Tape C securities are disseminated pursuant to
the NASDAQ Unlisted Trading Privileges (‘‘UTP’’)
Plan.
6 Tape A and Tape B securities are disseminated
pursuant to the Security Industry Automation
Corporation’s (‘‘SIAC’’) Consolidated Tape
Association Plan/Consolidated Quotation System,
or CTA/CQS (‘‘CTA’’).
7 See Securities Exchange Act Release No. 73918
(December 23, 2014), 79 FR 78920 (December 31,
2014) (SR–BATS–2014–055; SR–BYX–2014–030;
SR–EDGA–2014–25; SR–EDGX–2014–25) (order
approving market data product called BATS One
Feed being offered by four affiliated exchanges). See
also Securities Exchange Act Release No. 73553
(November 6, 2014), 79 FR 67491 (November 13,
2014) (SR–NYSE–2014–40) (order granting approval
to establish the NYSE Best Quote & Trades (‘‘BQT’’)
Data Feed).
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Federal Register / Vol. 80, No. 98 / Thursday, May 21, 2015 / Notices
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The purpose of this proposal is to
amend Rule 7039 by adding new section
(d) regarding NLS Plus. NLS Plus allows
data distributors to access last sale
products offered by each of NASDAQ
OMX’s three equity exchanges. Thus,
NLS Plus includes all transactions from
all of NASDAQ OMX’s equity markets,
as well as FINRA/NASDAQ TRF data
that is included in the current NLS
product. In addition, NLS Plus features
total cross-market volume information
at the issue level, thereby providing
redistribution of consolidated volume
information from the securities
information processors (‘‘SIPs’’) for
Tape A, B, and C securities.8 Thus, NLS
Plus covers all securities listed on
NASDAQ and New York Stock
Exchange (‘‘NYSE’’) (now under the
Intercontinental Exchange (‘‘ICE’’)
umbrella), as well as US ‘‘regional’’
exchanges such as NYSE MKT, NYSE
Arca, and BATS (also known as BATS/
Direct Edge).9 The Exchange will, as
discussed below, file a separate
proposal regarding the NLS Plus fee
structure.
NASDAQ has offered NLS Plus since
2010 via NASDAQ OMX Information
LLC. NASDAQ OMX Information LLC is
a subsidiary of NASDAQ OMX Group,
Inc., separate and apart from The
NASDAQ Stock Market LLC. As such,
NASDAQ OMX Information LLC
redistributes last sale data that has been
the subject of a proposed rule change
filed with the Commission at prices that
also have been the subject of a proposed
rule change filed with the Commission.
As discussed below, NASDAQ OMX
Information LLC distributes no data that
is not equally available to all market
data vendors.10
The primary purpose of NASDAQ
OMX Information LLC is to combine
publicly available data from the three
filed last sale products of the NASDAQ
OMX equity markets and from the
network processors for the ease and
convenience of market data users and
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8 This
will reflect real-time trading activity for
Tape C securities and 15-minute delayed
information for Tape A and Tape B securities.
9 Registered U.S. exchanges are listed at https://
www.sec.gov/divisions/marketreg/
mrexchanges.shtml.
10 NLS Plus is and has been described online at
https://nasdaqtrader.com/
Trader.aspx?id=DPUSdata#ls. See also https://
nasdaqtrader.com/content/technicalsupport/
specifications/dataproducts/
NLSPlusSpecification.pdf, which provides detail
about how NLS Plus functions.
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vendors, and ultimately the investing
public. In that role, the function of
NASDAQ OMX Information LLC is
analogous to that of other market data
vendors, and it has no competitive
advantage over other market data
vendors. For example, NASDAQ OMX
Information LLC receives data from the
exchange that is available to other
market data vendors, with the same
information distributed to NASDAQ
OMX Information LLC at the same time
it is distributed to other vendors (that is,
NASDAQ OMX Information LLC has
neither a speed nor an information
differential). Through this structure,
NASDAQ OMX Information LLC
performs precisely the same functions
as Bloomberg, Thomson Reuters, and
dozens of other market data vendors.
The contents of NLS Plus in large part
mimic those of NLS set forth in
NASDAQ Rule 7039. Currently, NLS in
Rule 7039 consists of two separate data
products containing last sale activity
within the NASDAQ market and
reported to the jointly-operated FINRA/
NASDAQ TRF; these products are
available via two separate data
channels. First, as described in Rule
7039, the ‘‘NLS for NASDAQ’’ data
product is a real-time data channel that
provides real-time last sale information
including execution price, volume, and
time for executions occurring within the
NASDAQ system as well as those
reported to the FINRA/NASDAQ TRF.
Second, the product known as ‘‘NLS for
NYSE/NYSE MKT’’ provides real-time
last sale information over a second data
channel including execution price,
volume, and time for NYSE- and NYSE
MKT-securities executions occurring
within the NASDAQ system as well as
those reported to the FINRA/NASDAQ
TRF. By contrast, the SIPs that provide
‘‘core’’ data consolidate last sale
information from all exchanges and
TRFs. Thus, NLS replicates a subset of
the information provided by the SIPs.
NASDAQ currently maintains several
pricing models, for NLS, including an
enterprise license. NLS Plus also
includes comparable information from
BX Last Sale (BX Rule 7039) and PSX
Last Sale (NASDAQ OMX PSX Fees
Chapter VIII).
The Proposal
The Exchange proposes to add NLS
Plus to Rule 7039, which currently
describes the NLS data feed offering, to
fully reflect NLS Plus. As described
more fully below, NLS Plus is a
comprehensive data feed offered by
NASDAQ OMX Information LLC that
disseminates last sale data as well as
consolidated volume of NASDAQ equity
markets and the TRF in real-time, and
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29371
consolidated volume for Tape A and
Tape B securities on a 15-minute
delayed basis. Similar to NLS, NLS Plus
offers data for all U.S. equities via two
separate data channels: The first data
channel reflects NASDAQ, BX, and PSX
trades with real-time consolidated
volume for NASDAQ-listed securities;
and the second data channel reflects
NASDAQ, BX, and PSX trades with
delayed consolidated volume for NYSE,
NYSE MKT, NYSE Arca and BATSlisted securities.11 NLS Plus, like NLS,
is used by industry professionals and
retail investors looking for a cost
effective, easy-to-administer, high
quality market data product with the
characteristics of NLS Plus. The
provision of multiple options for
investors to receive market data was a
primary goal of the market data
amendments adopted by Regulation
NMS.12 Finally, NLS Plus provides
investors with options for receiving
market data that parallel products
currently offered by BATS and BATS Y,
EDGA, and EDGX and NYSE equity
exchanges.13
In addition to last sale information,
NLS Plus also disseminates the
following data elements: Trade Price,
Trade Size, Sale Condition Modifiers,
Cumulative Consolidated Market
Volume, End of Day Trade Summary,
Adjusted Closing Price, IPO
Information, and Bloomberg ID (together
the ‘‘data elements’’). NLS Plus also
features and disseminates the following
messages: Market Wide Circuit Breaker,
Reg SHO Short Sale Price Test
Restricted Indicator, Trading Action,
Symbol Directory, Adjusted Closing
Price, and End of Day Trade Summary
(together the ‘‘messages’’).14 The
11 These NLS Plus channels are each made up of
a series of sequenced messages so that each message
is variable in length based on the message type and
is typically delivered using a higher level protocol.
NLS Plus Channel 1 contains NASDAQ trades with
real time consolidated volume for NASDAQ listed
(Tape C) securities. NLS Plus Channel 2 contains
NASDAQ trades with delayed (15 minutes)
consolidated volume for NYSE, NYSE Market,
NYSE Arca, and BATS listed (Tape A and Tape B)
securities.
12 However, the Exchange notes that under Rule
603 of Regulation NMS, see 17 CFR 242.603(c), NLS
Plus cannot be substituted for consolidated data in
all instances in which consolidated data is used and
certain subscribers are still required to purchase
consolidated data for trading and order-routing
purposes. See Securities Exchange Act Release No.
51808 (June 9, 2005), 70 FR 37496, at 37503 (June
29, 2005) (Regulation NMS Adopting Release).
13 See supra note 7.
14 The Reg SHO Short Sale Price Test Restricted
Indicator message is disseminated intra-day when
a security has a price drop of 10% or more from
the adjusted prior day’s NASDAQ Official Closing
Price. Trading Action indicates the current trading
status of a security to the trading community, and
indicates when a security is halted, paused,
E:\FR\FM\21MYN1.SGM
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overwhelming majority of these data
elements and messages are exactly the
same as, and in fact are sourced from,
NLS, BX Last Sale, and PSX Last Sale.
Only two data elements (consolidated
volume and Bloomberg ID) are, as
discussed below, sourced from other
publicly accessible or obtainable
resources.
Consolidated volume reflects the
consolidated volume at the time that the
NLS Plus trade message is generated,
and includes the volume for the issue
symbol as reported on the consolidated
market data feed. The consolidated
volume is based on the real-time trades
reported via the UTP Trade Data Feed
(‘‘UTDF’’) and delayed trades reported
via CTA. NASDAQ OMX calculates the
real-time trading volume for its trading
venues, and then adds the real-time
trading volume for the other (nonNASDAQ OMX) trading venues as
reported via the UTDF data feed. For
non-NASDAQ-listed issues, the
consolidated volume is based on trades
reported via SIAC’s Consolidated Tape
System (‘‘CTS’’) for the issue symbol.
The Exchange calculates the real-time
trading volume for its trading venues,
and then adds the 15-minute delayed
trading volume for the other (nonNASDAQ OMX) trading venues as
reported via the CTS data feed.15 The
second data point that is not sourced
from NLS, BX Last Sale, and PSX Last
Sale is Bloomberg ID. This composite ID
is a component of Bloomberg’s Open
Symbology and acts as a global security
identifier that Bloomberg assigns to
securities, and is available free of
charge.16
NLS Plus may be received by itself or
in combination with NASDAQ Basic.17
released for quotation, and released for trading.
Symbol Directory is disseminated at the start of
each trading day for all active NASDAQ and nonNASDAQ-listed security symbols. Adjusted Closing
Price is disseminated at the start of each trading day
for all active symbols in the NASDAQ system, and
reflects the previous trading day’s official closing
price adjusted for any applicable corporate actions;
if there were no corporate actions, however, the
previous day’s official closing price is used. End of
Day Trade Summary is disseminated at the close of
each trading day, as a summary for all active
NASDAQ- and non-NASDAQ-listed securities. IPO
Information reflects IPO general administrative
messages from the UTP and CTA Level 1 feeds for
Initial Public Offerings for all NASDAQ- and nonNASDAQ-listed securities.
15 In order to distribute data derived from UTDF
and CTA, NASDAQ OMX must pay monthly
redistributor fees. However, because these fees are
paid on an enterprise-wide basis and NASDAQ
OMX includes such derived data in other data
products, the use of the data in NLS Plus does not
result in an additional incremental cost.
16 See https://bsym.bloomberg.com/sym/pages/
bbgid-fact-sheet.pdf; https://bsym.bloomberg.com/
sym/pages/NASDAQ_Adopts_BSYM.pdf.
17 As provided in Rule 7047, NASDAQ Basic
provides the information contained in NLS,
together with NASDAQ’s best bid and best offer.
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In the latter case, the subscriber receives
all of the elements contained in NLS
Plus as well as the best bid and best
offer information provided by NASDAQ
Basic.
The Exchange believes that market
data distributors may use the NLS Plus
data feed to feed stock tickers, portfolio
trackers, trade alert programs, time and
sale graphs, and other display systems.
The Exchange also proposes two
housekeeping changes. In the Rule 7039
title, the Exchange adds the phrase ‘‘and
NASDAQ Last Sale Plus’’ to make it
clear that the rule refers to NLS and NLS
Plus. And in section (a), the Exchange
adds the phrase ‘‘NASDAQ Last Sale’’ to
make it clear that section (a) ([sic] like
sections (b) and (c) refers to NLS. These
changes are non-substantive.
With respect to latency, the path for
distribution by the Exchange of NLS
Plus is not faster than the path for
distribution that would be used by a
market data vendor to distribute an
independently created NLS Plus-like
product. As such, the proposed NLS
Plus data feed is a data product that a
competing market data vendor could
create and sell without being in a
disadvantaged position relative to the
Exchange. In recognition that the
Exchange is the source of its own
market data and with BX and PSX being
equity markets owned by NASDAQ
OMX, the Exchange represents that the
source of the market data it would use
to create proposed NLS Plus is available
to other vendors. In fact, the
overwhelming majority of the data
elements and messages 18 in NLS Plus
are exactly the same as, and in fact are
sourced from, NLS, BX Last Sale, and
PSX Last Sale, each of which is
available to other market data
vendors.19 The Exchange, BX, and PSX
will continue to make available these
individual underlying data elements,
and thus, the source of the market data
that the Exchange would use to create
the proposed NLS Plus is the same as
what is available to other market data
vendors.
In order to create NLS Plus, the
system creating and supporting NLS
Plus receives the individual data feeds
from each of the NASDAQ OMX equity
markets and, in turn, aggregates and
summarizes that data to create NLS Plus
and then distribute it to end users. This
is the same process that a competing
market data vendor would undergo
should it want to create a market data
product similar to NLS Plus to
18 See
text related to note 14 supra.
two data elements are, as discussed
above, sourced from other publicly accessible or
obtainable resources.
19 Only
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distribute to its end users. A competing
market data vendor could receive the
individual data feeds from each of the
NASDAQ OMX equity markets at the
same time the system creating and
supporting NLS Plus would for it to
create NLS Plus. Therefore, a competing
market data vendor could, as discussed,
obtain the underlying data elements
from the NASDAQ OMX equity markets
on the same latency basis as the system
that would be performing the
aggregation and consolidation of
proposed NLS Plus, and provide a
similar product to its customers with
the same latency they could achieve by
purchasing NLS Plus from the
Exchange. As such, the Exchange would
not have any unfair advantage over
competing market data vendors with
respect to NLS Plus. Moreover, in terms
of NLS itself, the Exchange would
access the underlying feed from the
same point as would a market data
vendor; as discussed, the Exchange
would not have a speed advantage.
Likewise, NLS Plus would not have any
`
speed advantage vis-a-vis competing
market data vendors with respect to
access to end user customers.
With regard to cost, upon approval of
this NLS Plus proposal the Exchange
will file a separate proposal with the
Commission regarding fees, which
would be designed to ensure that
vendors could compete with the
Exchange by creating a similar product
as NLS Plus. The Exchange expects that
the pricing will reflect the incremental
cost of the aggregation and
consolidation function for NLS Plus,
and would not be lower than the cost to
a vendor creating a competing product,
including the cost of receiving the
underlying data feeds. The pricing the
Exchange would charge clients for NLS
Plus would enable a vendor to receive
the underlying data feeds and offer a
similar product on a competitive basis
and with no greater cost than the
Exchange. For these reasons, the
Exchange believes that vendors could
readily offer a product similar to NLS
Plus on a competitive basis at a similar
cost.
As described in more detail below,
the Exchange believes that the NLS Plus
data offering benefits the public and
investors and that the proposal is
consistent with the Act.
2. Statutory Basis
NASDAQ believes that the proposed
rule change is consistent with the
provisions of Section 6 of the Act,20 in
general, and with Section 6(b)(5) of the
20 15
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U.S.C. 78f.
21MYN1
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Federal Register / Vol. 80, No. 98 / Thursday, May 21, 2015 / Notices
Act,21 in particular, in that the proposal
is designed to prevent fraudulent and
manipulative acts and practices, to
promote just and equitable principles of
trade, to foster cooperation and
coordination with persons engaged in
regulating, clearing, settling, processing
information with respect to, and
facilitating transactions in securities, to
remove impediments to and perfect the
mechanism of a free and open market
and a national market system, and, in
general, to protect investors and the
public interest.
The purpose of the proposed rule
change is to add section (d) to Rule 7039
regarding the NLS Plus data offering.
NASDAQ believes that the proposal
facilitates transactions in securities,
removes impediments to and perfects
the mechanism of a free and open
market and a national market system,
and, in general, protects investors and
the public interest by making permanent
the availability of an additional means
by which investors may access
information about securities
transactions, thereby providing
investors with additional options for
accessing information that may help to
inform their trading decisions. Given
that Section 11A the Act 22 requires the
dissemination of last sale reports in core
data, NASDAQ believes that the
inclusion of the same data in NLS Plus
is also consistent with the Act.
NASDAQ notes that the Commission
has recently approved a data product on
several exchanges that is similar to NLS
Plus, and specifically determined that
the approved data product was
consistent with the Act.23 NLS Plus
simply provides market participants
with an additional option for receiving
market data that has already been the
subject of a proposed rule change and
that is available from myriad market
data vendors.
In adopting Regulation NMS, the
Commission granted SROs and brokerdealers (‘‘BDs’’) increased authority and
flexibility to offer new and unique
market data to the public. It was
believed that this authority would
expand the amount of data available to
consumers, and also spur innovation
and competition for the provision of
market data. NASDAQ believes that its
NLS Plus market data product is
precisely the sort of market data product
that the Commission envisioned when it
adopted Regulation NMS. The
Commission concluded that Regulation
NMS—by deregulating the market in
proprietary data—would itself further
21 15
U.S.C. 78f(b)(5).
U.S.C. 78k–1.
23 See supra note 7.
22 15
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the Act’s goals of facilitating efficiency
and competition:
[E]fficiency is promoted when brokerdealers who do not need the data beyond the
prices, sizes, market center identifications of
the NBBO and consolidated last sale
information are not required to receive (and
pay for) such data. The Commission also
believes that efficiency is promoted when
broker-dealers may choose to receive (and
pay for) additional market data based on their
own internal analysis of the need for such
data.24
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.
NASDAQ will file a separate proposal
regarding NLS Plus fees.25 The decision
of the United States Court of Appeals for
the District of Columbia Circuit in
NetCoalition v. SEC, 615 F.3d 525 (D.C.
Cir. 2010) (‘‘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.’ NetCoalition 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.’ ’’ 26
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
24 See
Securities Exchange Act Release No. 51808
(June 9, 2005), 70 FR 37496 (June 29, 2005).
25 The Exchange expects that the fee structure for
NLS Plus will reflect an amount that is no less than
the cost to a market data vendor to obtain all the
underlying feeds, plus an amount to be determined
that would reflect the value of the aggregation and
consolidation function.
26 NetCoalition I, at 535.
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NYSE Arca’s data product at issue in
that case. As explained below in
NASDAQ’s Statement on Burden on
Competition, however, NASDAQ
believes that there is substantial
evidence of competition in the
marketplace for data that was not in the
record in the NetCoalition I case, and
that the Commission is entitled to rely
upon such evidence in concluding fees
are the product of competition, and
therefore in accordance with the
relevant statutory standards.27
Moreover, NASDAQ further notes that
the product at issue in this filing—a last
sale data product that replicates a subset
of the information available through
‘‘core’’ data products whose fees have
been reviewed and approved by the
SEC—is quite different from the 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.
Moreover, data products such as NLS
Plus are a means by which exchanges
compete to attract order flow. To the
extent that exchanges are successful in
such competition, they earn trading
revenues and also enhance the value of
their data products by increasing the
amount of data they are able to provide.
Conversely, to the extent that exchanges
are unsuccessful, the inputs needed to
add value to data products are
diminished. Accordingly, the need to
compete for order flow places
substantial pressure upon exchanges to
keep their fees for both executions and
data reasonable.
The Exchange believes that, for the
reasons given, the proposal is consistent
with the Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
NASDAQ does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, as amended.
As is true of all NASDAQ’s non-core
data products, NASDAQ’s ability to
offer and price NLS Plus 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
27 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. See also NetCoalition v. SEC, 715 F.3d 342
(D.C. Cir. 2013) (‘‘NetCoalition II’’) (finding no
jurisdiction to review Commission’s nonsuspension of immediately effective fee changes).
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inexpensive real-time consolidated data
and market-specific data and free
delayed consolidated data; and (3) the
inherent contestability of the market for
proprietary last sale data.
In addition, as described in detail
above, NLS Plus competes directly with
a myriad of similar products and
potential products of market data
vendors. NASDAQ OMX Information
LLC was constructed specifically to
establish a level playing field with
market data vendors and to preserve fair
competition between them. Therefore,
NASDAQ OMX Information LLC
receives NLS, BX Last Sale, and PSX
Last Sale from each NASDAQ-operated
exchange in the same manner, at the
same speed, and reflecting the same fees
as for all market data vendors.
Therefore, NASDAQ Information LLC
has no competitive advantage with
respect to these last sale products and
NASDAQ commits to maintaining this
level playing field in the future. In other
words, NASDAQ will continue to
disseminate separately the underlying
last sale products to avoid creating a
latency differential between NASDAQ
OMX Information LLC and other market
data vendors, and to avoid creating a
pricing advantage for NASDAQ OMX
Information LLC.
NLS Plus joins the existing market for
proprietary last sale data products that
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.
Similarly, with respect to the FINRA/
NASDAQ TRF data that is a component
of NLS and NLS Plus, allowing
exchanges to operate TRFs has
permitted them to earn revenues by
providing technology and data in
support of the non-exchange segment of
the market. This revenue opportunity
has also resulted in fierce competition
between the two current TRF operators,
with both TRFs charging extremely low
trade reporting fees and rebating the
majority of the revenues they receive
from core market data to the parties
reporting trades.
Transaction execution and proprietary
data products are complementary in that
market data is both an input and a
byproduct of the execution service. In
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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).28 In
NASDAQ’s case, it is costly to build and
maintain a trading platform, but the
incremental cost of trading each
additional share on an existing platform,
or distributing an additional instance of
data, is very low. Market information
and executions are each produced
jointly (in the sense that the activities of
trading and placing orders are the
source of the information that is
distributed) and are each subject to
significant scale economies. In such
cases, marginal cost pricing is not
feasible because if all sales were priced
at the margin, NASDAQ would be
unable to defray its platform costs of
providing the joint products. Similarly,
data products cannot make use of TRF
trade reports without the raw material of
the trade reports themselves, and
28 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).
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therefore necessitate the costs of
operating, regulating,29 and maintaining
a trade reporting system, costs that must
be covered through the fees charged for
use of the facility and sales of associated
data.
An exchange’s BD customers view the
costs of transaction executions and of
data as a unified cost of doing business
with the exchange. A BD will direct
orders to a particular exchange only if
the expected revenues from executing
trades on the exchange exceed net
transaction execution costs and the cost
of data that the BD chooses to buy to
support its trading decisions (or those of
its customers). The choice of data
products is, in turn, a product of the
value of the products in making
profitable trading decisions. If the cost
of the product exceeds its expected
value, the BD will choose not to buy it.
Moreover, as a BD chooses to direct
fewer orders to a particular exchange,
the value of the product to that BD
decreases, for two reasons. First, the
product will contain less information,
because executions of the BD’s trading
activity will not be reflected in it.
Second, and perhaps more important,
the product will be less valuable to that
BD because it does not provide
information about the venue to which it
is directing its orders. Data from the
competing venue to which the BD is
directing orders will become
correspondingly more valuable.
Similarly, in the case of products such
as NLS Plus 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. Exchanges,
29 It should be noted that the costs of operating
the FINRA/NASDAQ TRF borne by NASDAQ
include regulatory charges paid by NASDAQ to
FINRA.
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TRFs, and other producers of
proprietary data products must
understand and respond to these
varying business models and pricing
disciplines in order to market
proprietary data products successfully.
Moreover, NASDAQ believes that
products such as NLS Plus can enhance
order flow to NASDAQ by providing
more widespread distribution of
information about transactions in real
time, thereby encouraging wider
participation in the market by investors
with access to the internet or television.
Conversely, the value of such products
to distributors and investors decreases if
order flow falls, because the products
contain less content.
Competition among trading platforms
can be expected to constrain the
aggregate return each platform earns
from the sale of its joint products, but
different platforms may choose from a
range of possible, and equally
reasonable, pricing strategies as the
means of recovering total costs.
NASDAQ pays rebates to attract orders,
charges relatively low prices for market
information and charges relatively high
prices for accessing posted liquidity.
Other platforms may choose a strategy
of paying lower liquidity rebates to
attract orders, setting relatively low
prices for accessing posted liquidity,
and setting relatively high prices for
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
eleven SRO markets, as well as
internalizing BDs and various forms of
alternative trading systems (‘‘ATSs’’),
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including dark pools and electronic
communication networks (‘‘ECNs’’).
Each SRO market competes to produce
transaction reports via trade executions,
and two FINRA-regulated TRFs compete
to attract internalized transaction
reports. It is common for BDs to further
and exploit this competition by sending
their order flow and transaction reports
to multiple markets, rather than
providing them all to a single market.
Competitive markets for order flow,
executions, and transaction reports
provide pricing discipline for the inputs
of proprietary data products.
The large number of SROs, TRFs, BDs,
and ATSs that currently produce
proprietary data or are currently capable
of producing it provides further pricing
discipline for proprietary data products.
Each SRO, TRF, ATS, and BD is
currently permitted to produce
proprietary data products, and many
currently do or have announced plans to
do so, including NASDAQ, NYSE,
NYSE MKT, NYSE Arca, and BATS/
Direct Edge.
Any ATS or BD can combine with any
other ATS, BD, or multiple ATSs or BDs
to produce joint proprietary data
products. Additionally, order routers
and market data vendors can facilitate
single or multiple BDs’ production of
proprietary data products. The potential
sources of proprietary products are
virtually limitless. Notably, the
potential sources of data include the
BDs that submit trade reports to TRFs
and that have the ability to consolidate
and distribute their data without the
involvement of FINRA or an exchangeoperated TRF.
The fact that proprietary data from
ATSs, BDs, and vendors can by-pass
SROs is significant in two respects.
First, non-SROs can compete directly
with SROs for the production and sale
of proprietary data products, as BATS
and NYSE Arca did before registering as
exchanges by publishing proprietary
book data on the internet. Second,
because a single order or transaction
report can appear in a core data product,
an SRO proprietary product, and/or a
non-SRO proprietary product, the data
available in proprietary products is
exponentially greater than the actual
number of orders and transaction
reports that exist in the marketplace.
Indeed, in the case of NLS Plus, the data
provided through that product appears
both in (i) real-time core data products
offered by the SIPs for a fee, (ii) free SIP
data products with a 15-minute time
delay, and (iii) individual exchange data
products, and finds a close substitute in
last-sale products of competing venues.
In addition to the competition and
price discipline described above, the
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29375
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 BATS/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. In Europe, Cinnober
aggregates and disseminates data from
over 40 brokers and multilateral trading
facilities.30
In the case of TRFs, the rapid entry of
several exchanges into this space in
2006–2007 following the development
and Commission approval of the TRF
structure demonstrates the
contestability of this aspect of the
market.31 Given the demand for trade
reporting services that is itself a byproduct of the fierce competition for
transaction executions—characterized
notably by a proliferation of ATSs and
BDs offering internalization—any supracompetitive increase in the fees
associated with trade reporting or TRF
data would shift trade report volumes
from one of the existing TRFs to the
other 32 and create incentives for other
TRF operators to enter the space.
Alternatively, because BDs reporting to
TRFs are themselves free to consolidate
the market data that they report, the
market for over-the-counter data itself,
separate and apart from the markets for
execution and trade reporting services—
is fully contestable.
Moreover, consolidated data provides
two additional measures of pricing
discipline for proprietary data products
30 See https://www.cinnober.com/boat-tradereporting.
31 The low cost exit of two TRFs from the market
is also evidence of a contestable market, because
new entrants are reluctant to enter a market where
exit may involve substantial shut-down costs.
32 It should be noted that the FINRA/NYSE TRF
has, in recent weeks, received reports for almost
10% of all over-the-counter volume in NMS stocks.
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that are a subset of the consolidated data
stream. First, the consolidated data is
widely available in real-time at $1 per
month for non-professional users.
Second, consolidated data is also
available at no cost with a 15- or 20minute delay. Because consolidated
data contains marketwide information,
it effectively places a cap on the fees
assessed for proprietary data (such as
last sale data) that is simply a subset of
the consolidated data. The mere
availability of low-cost or free
consolidated data provides a powerful
form of pricing discipline for
proprietary data products that contain
data elements that are a subset of the
consolidated data, by highlighting the
optional nature of proprietary products.
The competitive nature of the market
for products such as NLS Plus is borne
out by the performance of the market. In
May 2008, the internet portal Yahoo!
began offering its Web site viewers realtime last sale data (as well as best quote
data) provided by BATS. In response, in
June 2008, NASDAQ launched NLS,
which was initially subject to an
‘‘enterprise cap’’ of $100,000 for
customers receiving only one of the NLS
products, and $150,000 for customers
receiving both products. The majority of
NASDAQ’s sales were at the capped
level. In early 2009, BATS expanded its
offering of free data to include depth-ofbook data. Also in early 2009, NYSE
Arca announced the launch of a
competitive last sale product with an
enterprise price of $30,000 per month.
In response, NASDAQ combined the
enterprise cap for the NLS products and
reduced the cap to $50,000 (i.e., a
reduction of $100,000 per month).
Although each of these products offers
only a specific subset of data available
from the SIPs, NASDAQ believes that
the products are viewed as substitutes
for each other and for core last-sale data,
rather than as products that must be
obtained in tandem. For example, while
Yahoo! and Google now both
disseminate NASDAQ’s product, several
other major content providers, including
MSN and Morningstar, use the BATS
product. Moreover, further evidence of
competition can be observed in the
recently-developed BATS One Feed and
BQT feed.33
In this environment, a supercompetitive increase in the fees charged
for either transactions or data has the
potential to impair revenues from both
products. ‘‘No one disputes that
competition for order flow is ‘fierce’.’’
NetCoalition I at 539. The existence of
fierce competition for order flow
implies a high degree of price sensitivity
33 See
supra note 7.
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on the part of BDs with order flow, since
they may readily reduce costs by
directing orders toward the lowest-cost
trading venues. A BD that shifted its
order flow from one platform to another
in response to order execution price
differentials would both reduce the
value of that platform’s market data and
reduce its own need to consume data
from the disfavored platform. If a
platform increases its market data fees,
the change will affect the overall cost of
doing business with the platform, and
affected BDs will assess whether they
can lower their trading costs by
directing orders elsewhere and thereby
lessening the need for the more
expensive data. Similarly, increases in
the cost of NLS Plus would impair the
willingness of distributors to take a
product for which there are numerous
alternatives, impacting NLS Plus data
revenues, the value of NLS Plus as a tool
for attracting order flow, and ultimately,
the volume of orders routed to NASDAQ
and the value of its other data products.
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
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
shall: (a) By order approve or
disapprove such proposed rule change,
or (b) institute proceedings to determine
whether the proposed rule change
should be disapproved.
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–2015–055 on the subject line.
Fmt 4703
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All submissions should refer to File
Number SR–NASDAQ–2015–055. 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–2015–055 and should be
submitted on or before June 11, 2015.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.34
Robert W. Errett,
Deputy Secretary.
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:
Frm 00078
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE.,
Washington, DC 20549–1090.
[FR Doc. 2015–12280 Filed 5–20–15; 8:45 am]
IV. Solicitation of Comments
PO 00000
Paper Comments
SECURITIES AND EXCHANGE
COMMISSION
Submission for OMB Review;
Comment Request
Upon Written Request, Copies Available
From: Securities and Exchange
Commission, Office of FOIA Services,
100 F Street NE., Washington, DC
20549–2736.
Extension:
34 17
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]]>Agencies
[Federal Register Volume 80, Number 98 (Thursday, May 21, 2015)]
[Notices]
[Pages 29370-29376]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-12280]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-74972; File No. SR-NASDAQ-2015-055]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change Regarding NASDAQ Last Sale
Plus
May 15, 2015.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that, on May 11, 2015, The NASDAQ Stock Market LLC (``NASDAQ'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
Exchange. 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
The Exchange proposes to amend Rule 7039 (NASDAQ Last Sale Data
Feed) with language regarding NASDAQ Last Sale (``NLS'') Plus (``NLS
Plus''), a comprehensive data feed offered by NASDAQ OMX Information
LLC.\3\ NLS Plus allows data distributors to access the three last sale
products offered by each of NASDAQ OMX's three U.S. equity markets.\4\
NLS Plus also reflects cumulative consolidated volume (``consolidated
volume'') of real-time trading activity across all U.S. exchanges for
Tape C securities \5\ and 15-minute delayed information for Tape A and
Tape B securities.\6\ Thus, in offering NLS Plus, NASDAQ OMX
Information LLC is, as discussed below, acting as a redistributor of
last sale products already offered by NASDAQ, BX, and PSX and volume
information provided by the securities information processors for Tape
A, B, and C. This proposal is being filed by the Exchange to explain
the scope of the NLS Plus data feed offering and in light of a recent
approval order on behalf of several affiliated exchanges regarding a
similar data product.\7\
---------------------------------------------------------------------------
\3\ NASDAQ OMX Information LLC is a subsidiary of The NASDAQ OMX
Group, Inc. (``NASDAQ OMX'').
\4\ The NASDAQ OMX U.S. equity markets include The NASDAQ Stock
Market (``NASDAQ''), NASDAQ OMX BX (``BX''), and NASDAQ OMX PSX
(``PSX'') (together known as the ``NASDAQ OMX equity markets''). PSX
and BX will shortly file companion proposals regarding NLS Plus.
NASDAQ's last sale product, NASDAQ Last Sale, includes last sale
information from the FINRA/NASDAQ Trade Reporting Facility (``FINRA/
NASDAQ TRF''), which is jointly operated by NASDAQ and the Financial
Industry Regulatory Authority (``FINRA''). Accordingly, NASDAQ
expects that FINRA will submit a proposed change to FINRA Rule 7640A
with respect to NLS Plus. See Securities Exchange Act Release No.
71350 (January 17, 2014), 79 FR 4218 (January 24, 2014) (SR-FINRA-
2014-002). For proposed rule changes submitted with respect to
NASDAQ Last Sale, BX Last Sale, and PSX Last Sale, see, e.g.,
Securities Exchange Act Release Nos. 57965 (June 16, 2008), 73 FR
35178, (June 20, 2008) (SR-NASDAQ-2006-060) (order approving NASDAQ
Last Sale data feeds pilot); 61112 (December 4, 2009), 74 FR 65569,
(December 10, 2009) (SR-BX-2009-077) (notice of filing and immediate
effectiveness regarding BX Last Sale data feeds); and 62876
(September 9, 2010), 75 FR 56624, (September 16, 2010) (SR-Phlx-
2010-120) (notice of filing and immediate effectiveness regarding
PSX Last Sale data feeds).
\5\ Tape C securities are disseminated pursuant to the NASDAQ
Unlisted Trading Privileges (``UTP'') Plan.
\6\ Tape A and Tape B securities are disseminated pursuant to
the Security Industry Automation Corporation's (``SIAC'')
Consolidated Tape Association Plan/Consolidated Quotation System, or
CTA/CQS (``CTA'').
\7\ See Securities Exchange Act Release No. 73918 (December 23,
2014), 79 FR 78920 (December 31, 2014) (SR-BATS-2014-055; SR-BYX-
2014-030; SR-EDGA-2014-25; SR-EDGX-2014-25) (order approving market
data product called BATS One Feed being offered by four affiliated
exchanges). See also Securities Exchange Act Release No. 73553
(November 6, 2014), 79 FR 67491 (November 13, 2014) (SR-NYSE-2014-
40) (order granting approval to establish the NYSE Best Quote &
Trades (``BQT'') Data Feed).
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The text of the proposed rule change is available on the Exchange's
Web site at https://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 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.
[[Page 29371]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The purpose of this proposal is to amend Rule 7039 by adding new
section (d) regarding NLS Plus. NLS Plus allows data distributors to
access last sale products offered by each of NASDAQ OMX's three equity
exchanges. Thus, NLS Plus includes all transactions from all of NASDAQ
OMX's equity markets, as well as FINRA/NASDAQ TRF data that is included
in the current NLS product. In addition, NLS Plus features total cross-
market volume information at the issue level, thereby providing
redistribution of consolidated volume information from the securities
information processors (``SIPs'') for Tape A, B, and C securities.\8\
Thus, NLS Plus covers all securities listed on NASDAQ and New York
Stock Exchange (``NYSE'') (now under the Intercontinental Exchange
(``ICE'') umbrella), as well as US ``regional'' exchanges such as NYSE
MKT, NYSE Arca, and BATS (also known as BATS/Direct Edge).\9\ The
Exchange will, as discussed below, file a separate proposal regarding
the NLS Plus fee structure.
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\8\ This will reflect real-time trading activity for Tape C
securities and 15-minute delayed information for Tape A and Tape B
securities.
\9\ Registered U.S. exchanges are listed at https://www.sec.gov/divisions/marketreg/mrexchanges.shtml.
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NASDAQ has offered NLS Plus since 2010 via NASDAQ OMX Information
LLC. NASDAQ OMX Information LLC is a subsidiary of NASDAQ OMX Group,
Inc., separate and apart from The NASDAQ Stock Market LLC. As such,
NASDAQ OMX Information LLC redistributes last sale data that has been
the subject of a proposed rule change filed with the Commission at
prices that also have been the subject of a proposed rule change filed
with the Commission. As discussed below, NASDAQ OMX Information LLC
distributes no data that is not equally available to all market data
vendors.\10\
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\10\ NLS Plus is and has been described online at https://nasdaqtrader.com/Trader.aspx?id=DPUSdata#ls. See also https://nasdaqtrader.com/content/technicalsupport/specifications/dataproducts/NLSPlusSpecification.pdf, which provides detail about
how NLS Plus functions.
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The primary purpose of NASDAQ OMX Information LLC is to combine
publicly available data from the three filed last sale products of the
NASDAQ OMX equity markets and from the network processors for the ease
and convenience of market data users and vendors, and ultimately the
investing public. In that role, the function of NASDAQ OMX Information
LLC is analogous to that of other market data vendors, and it has no
competitive advantage over other market data vendors. For example,
NASDAQ OMX Information LLC receives data from the exchange that is
available to other market data vendors, with the same information
distributed to NASDAQ OMX Information LLC at the same time it is
distributed to other vendors (that is, NASDAQ OMX Information LLC has
neither a speed nor an information differential). Through this
structure, NASDAQ OMX Information LLC performs precisely the same
functions as Bloomberg, Thomson Reuters, and dozens of other market
data vendors.
The contents of NLS Plus in large part mimic those of NLS set forth
in NASDAQ Rule 7039. Currently, NLS in Rule 7039 consists of two
separate data products containing last sale activity within the NASDAQ
market and reported to the jointly-operated FINRA/NASDAQ TRF; these
products are available via two separate data channels. First, as
described in Rule 7039, the ``NLS for NASDAQ'' data product is a real-
time data channel that provides real-time last sale information
including execution price, volume, and time for executions occurring
within the NASDAQ system as well as those reported to the FINRA/NASDAQ
TRF. Second, the product known as ``NLS for NYSE/NYSE MKT'' provides
real-time last sale information over a second data channel including
execution price, volume, and time for NYSE- and NYSE MKT-securities
executions occurring within the NASDAQ system as well as those reported
to the FINRA/NASDAQ TRF. By contrast, the SIPs that provide ``core''
data consolidate last sale information from all exchanges and TRFs.
Thus, NLS replicates a subset of the information provided by the SIPs.
NASDAQ currently maintains several pricing models, for NLS, including
an enterprise license. NLS Plus also includes comparable information
from BX Last Sale (BX Rule 7039) and PSX Last Sale (NASDAQ OMX PSX Fees
Chapter VIII).
The Proposal
The Exchange proposes to add NLS Plus to Rule 7039, which currently
describes the NLS data feed offering, to fully reflect NLS Plus. As
described more fully below, NLS Plus is a comprehensive data feed
offered by NASDAQ OMX Information LLC that disseminates last sale data
as well as consolidated volume of NASDAQ equity markets and the TRF in
real-time, and consolidated volume for Tape A and Tape B securities on
a 15-minute delayed basis. Similar to NLS, NLS Plus offers data for all
U.S. equities via two separate data channels: The first data channel
reflects NASDAQ, BX, and PSX trades with real-time consolidated volume
for NASDAQ-listed securities; and the second data channel reflects
NASDAQ, BX, and PSX trades with delayed consolidated volume for NYSE,
NYSE MKT, NYSE Arca and BATS-listed securities.\11\ NLS Plus, like NLS,
is used by industry professionals and retail investors looking for a
cost effective, easy-to-administer, high quality market data product
with the characteristics of NLS Plus. The provision of multiple options
for investors to receive market data was a primary goal of the market
data amendments adopted by Regulation NMS.\12\ Finally, NLS Plus
provides investors with options for receiving market data that parallel
products currently offered by BATS and BATS Y, EDGA, and EDGX and NYSE
equity exchanges.\13\
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\11\ These NLS Plus channels are each made up of a series of
sequenced messages so that each message is variable in length based
on the message type and is typically delivered using a higher level
protocol. NLS Plus Channel 1 contains NASDAQ trades with real time
consolidated volume for NASDAQ listed (Tape C) securities. NLS Plus
Channel 2 contains NASDAQ trades with delayed (15 minutes)
consolidated volume for NYSE, NYSE Market, NYSE Arca, and BATS
listed (Tape A and Tape B) securities.
\12\ However, the Exchange notes that under Rule 603 of
Regulation NMS, see 17 CFR 242.603(c), NLS Plus cannot be
substituted for consolidated data in all instances in which
consolidated data is used and certain subscribers are still required
to purchase consolidated data for trading and order-routing
purposes. See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496, at 37503 (June 29, 2005) (Regulation NMS
Adopting Release).
\13\ See supra note 7.
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In addition to last sale information, NLS Plus also disseminates
the following data elements: Trade Price, Trade Size, Sale Condition
Modifiers, Cumulative Consolidated Market Volume, End of Day Trade
Summary, Adjusted Closing Price, IPO Information, and Bloomberg ID
(together the ``data elements''). NLS Plus also features and
disseminates the following messages: Market Wide Circuit Breaker, Reg
SHO Short Sale Price Test Restricted Indicator, Trading Action, Symbol
Directory, Adjusted Closing Price, and End of Day Trade Summary
(together the ``messages'').\14\ The
[[Page 29372]]
overwhelming majority of these data elements and messages are exactly
the same as, and in fact are sourced from, NLS, BX Last Sale, and PSX
Last Sale. Only two data elements (consolidated volume and Bloomberg
ID) are, as discussed below, sourced from other publicly accessible or
obtainable resources.
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\14\ The Reg SHO Short Sale Price Test Restricted Indicator
message is disseminated intra-day when a security has a price drop
of 10% or more from the adjusted prior day's NASDAQ Official Closing
Price. Trading Action indicates the current trading status of a
security to the trading community, and indicates when a security is
halted, paused, released for quotation, and released for trading.
Symbol Directory is disseminated at the start of each trading day
for all active NASDAQ and non-NASDAQ-listed security symbols.
Adjusted Closing Price is disseminated at the start of each trading
day for all active symbols in the NASDAQ system, and reflects the
previous trading day's official closing price adjusted for any
applicable corporate actions; if there were no corporate actions,
however, the previous day's official closing price is used. End of
Day Trade Summary is disseminated at the close of each trading day,
as a summary for all active NASDAQ- and non-NASDAQ-listed
securities. IPO Information reflects IPO general administrative
messages from the UTP and CTA Level 1 feeds for Initial Public
Offerings for all NASDAQ- and non-NASDAQ-listed securities.
---------------------------------------------------------------------------
Consolidated volume reflects the consolidated volume at the time
that the NLS Plus trade message is generated, and includes the volume
for the issue symbol as reported on the consolidated market data feed.
The consolidated volume is based on the real-time trades reported via
the UTP Trade Data Feed (``UTDF'') and delayed trades reported via CTA.
NASDAQ OMX calculates the real-time trading volume for its trading
venues, and then adds the real-time trading volume for the other (non-
NASDAQ OMX) trading venues as reported via the UTDF data feed. For non-
NASDAQ-listed issues, the consolidated volume is based on trades
reported via SIAC's Consolidated Tape System (``CTS'') for the issue
symbol. The Exchange calculates the real-time trading volume for its
trading venues, and then adds the 15-minute delayed trading volume for
the other (non-NASDAQ OMX) trading venues as reported via the CTS data
feed.\15\ The second data point that is not sourced from NLS, BX Last
Sale, and PSX Last Sale is Bloomberg ID. This composite ID is a
component of Bloomberg's Open Symbology and acts as a global security
identifier that Bloomberg assigns to securities, and is available free
of charge.\16\
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\15\ In order to distribute data derived from UTDF and CTA,
NASDAQ OMX must pay monthly redistributor fees. However, because
these fees are paid on an enterprise-wide basis and NASDAQ OMX
includes such derived data in other data products, the use of the
data in NLS Plus does not result in an additional incremental cost.
\16\ See https://bsym.bloomberg.com/sym/pages/bbgid-fact-sheet.pdf; https://bsym.bloomberg.com/sym/pages/NASDAQ_Adopts_BSYM.pdf.
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NLS Plus may be received by itself or in combination with NASDAQ
Basic.\17\ In the latter case, the subscriber receives all of the
elements contained in NLS Plus as well as the best bid and best offer
information provided by NASDAQ Basic.
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\17\ As provided in Rule 7047, NASDAQ Basic provides the
information contained in NLS, together with NASDAQ's best bid and
best offer.
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The Exchange believes that market data distributors may use the NLS
Plus data feed to feed stock tickers, portfolio trackers, trade alert
programs, time and sale graphs, and other display systems.
The Exchange also proposes two housekeeping changes. In the Rule
7039 title, the Exchange adds the phrase ``and NASDAQ Last Sale Plus''
to make it clear that the rule refers to NLS and NLS Plus. And in
section (a), the Exchange adds the phrase ``NASDAQ Last Sale'' to make
it clear that section (a) ([sic] like sections (b) and (c) refers to
NLS. These changes are non-substantive.
With respect to latency, the path for distribution by the Exchange
of NLS Plus is not faster than the path for distribution that would be
used by a market data vendor to distribute an independently created NLS
Plus-like product. As such, the proposed NLS Plus data feed is a data
product that a competing market data vendor could create and sell
without being in a disadvantaged position relative to the Exchange. In
recognition that the Exchange is the source of its own market data and
with BX and PSX being equity markets owned by NASDAQ OMX, the Exchange
represents that the source of the market data it would use to create
proposed NLS Plus is available to other vendors. In fact, the
overwhelming majority of the data elements and messages \18\ in NLS
Plus are exactly the same as, and in fact are sourced from, NLS, BX
Last Sale, and PSX Last Sale, each of which is available to other
market data vendors.\19\ The Exchange, BX, and PSX will continue to
make available these individual underlying data elements, and thus, the
source of the market data that the Exchange would use to create the
proposed NLS Plus is the same as what is available to other market data
vendors.
---------------------------------------------------------------------------
\18\ See text related to note 14 supra.
\19\ Only two data elements are, as discussed above, sourced
from other publicly accessible or obtainable resources.
---------------------------------------------------------------------------
In order to create NLS Plus, the system creating and supporting NLS
Plus receives the individual data feeds from each of the NASDAQ OMX
equity markets and, in turn, aggregates and summarizes that data to
create NLS Plus and then distribute it to end users. This is the same
process that a competing market data vendor would undergo should it
want to create a market data product similar to NLS Plus to distribute
to its end users. A competing market data vendor could receive the
individual data feeds from each of the NASDAQ OMX equity markets at the
same time the system creating and supporting NLS Plus would for it to
create NLS Plus. Therefore, a competing market data vendor could, as
discussed, obtain the underlying data elements from the NASDAQ OMX
equity markets on the same latency basis as the system that would be
performing the aggregation and consolidation of proposed NLS Plus, and
provide a similar product to its customers with the same latency they
could achieve by purchasing NLS Plus from the Exchange. As such, the
Exchange would not have any unfair advantage over competing market data
vendors with respect to NLS Plus. Moreover, in terms of NLS itself, the
Exchange would access the underlying feed from the same point as would
a market data vendor; as discussed, the Exchange would not have a speed
advantage. Likewise, NLS Plus would not have any speed advantage vis-
[agrave]-vis competing market data vendors with respect to access to
end user customers.
With regard to cost, upon approval of this NLS Plus proposal the
Exchange will file a separate proposal with the Commission regarding
fees, which would be designed to ensure that vendors could compete with
the Exchange by creating a similar product as NLS Plus. The Exchange
expects that the pricing will reflect the incremental cost of the
aggregation and consolidation function for NLS Plus, and would not be
lower than the cost to a vendor creating a competing product, including
the cost of receiving the underlying data feeds. The pricing the
Exchange would charge clients for NLS Plus would enable a vendor to
receive the underlying data feeds and offer a similar product on a
competitive basis and with no greater cost than the Exchange. For these
reasons, the Exchange believes that vendors could readily offer a
product similar to NLS Plus on a competitive basis at a similar cost.
As described in more detail below, the Exchange believes that the
NLS Plus data offering benefits the public and investors and that the
proposal is consistent with the Act.
2. Statutory Basis
NASDAQ believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\20\ in general, and with
Section 6(b)(5) of the
[[Page 29373]]
Act,\21\ in particular, in that the proposal is designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principles of trade, to foster cooperation and coordination
with persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system, and, in general, to
protect investors and the public interest.
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78f.
\21\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
The purpose of the proposed rule change is to add section (d) to
Rule 7039 regarding the NLS Plus data offering. NASDAQ believes that
the proposal facilitates transactions in securities, removes
impediments to and perfects the mechanism of a free and open market and
a national market system, and, in general, protects investors and the
public interest by making permanent the availability of an additional
means by which investors may access information about securities
transactions, thereby providing investors with additional options for
accessing information that may help to inform their trading decisions.
Given that Section 11A the Act \22\ requires the dissemination of last
sale reports in core data, NASDAQ believes that the inclusion of the
same data in NLS Plus is also consistent with the Act.
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------
NASDAQ notes that the Commission has recently approved a data
product on several exchanges that is similar to NLS Plus, and
specifically determined that the approved data product was consistent
with the Act.\23\ NLS Plus simply provides market participants with an
additional option for receiving market data that has already been the
subject of a proposed rule change and that is available from myriad
market data vendors.
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\23\ See supra note 7.
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In adopting Regulation NMS, the Commission granted SROs and broker-
dealers (``BDs'') increased authority and flexibility to offer new and
unique market data to the public. It was believed that this authority
would expand the amount of data available to consumers, and also spur
innovation and competition for the provision of market data. NASDAQ
believes that its NLS Plus market data product is precisely the sort of
market data product that the Commission envisioned when it adopted
Regulation NMS. The Commission concluded that Regulation NMS--by
deregulating the market in proprietary data--would itself further the
Act's goals of facilitating efficiency and competition:
[E]fficiency is promoted when broker-dealers who do not need the
data beyond the prices, sizes, market center identifications of the
NBBO and consolidated last sale information are not required to
receive (and pay for) such data. The Commission also believes that
efficiency is promoted when broker-dealers may choose to receive
(and pay for) additional market data based on their own internal
analysis of the need for such data.\24\
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\24\ See 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.
NASDAQ will file a separate proposal regarding NLS Plus fees.\25\
The decision of the United States Court of Appeals for the District of
Columbia Circuit in NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010)
(``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.' NetCoalition 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.' '' \26\
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\25\ The Exchange expects that the fee structure for NLS Plus
will reflect an amount that is no less than the cost to a market
data vendor to obtain all the underlying feeds, plus an amount to be
determined that would reflect the value of the aggregation and
consolidation function.
\26\ NetCoalition I, at 535.
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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 NASDAQ's Statement on Burden on
Competition, however, NASDAQ believes that there is substantial
evidence of competition in the marketplace for data that was not in the
record in the NetCoalition I case, and that the Commission is entitled
to rely upon such evidence in concluding fees are the product of
competition, and therefore in accordance with the relevant statutory
standards.\27\ Moreover, NASDAQ further notes that the product at issue
in this filing--a last sale data product that replicates a subset of
the information available through ``core'' data products whose fees
have been reviewed and approved by the SEC--is quite different from the
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.
---------------------------------------------------------------------------
\27\ 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. See also NetCoalition v. SEC, 715 F.3d 342 (D.C.
Cir. 2013) (``NetCoalition II'') (finding no jurisdiction to review
Commission's non-suspension of immediately effective fee changes).
---------------------------------------------------------------------------
Moreover, data products such as NLS Plus are a means by which
exchanges compete to attract order flow. To the extent that exchanges
are successful in such competition, they earn trading revenues and also
enhance the value of their data products by increasing the amount of
data they are able to provide. Conversely, to the extent that exchanges
are unsuccessful, the inputs needed to add value to data products are
diminished. Accordingly, the need to compete for order flow places
substantial pressure upon exchanges to keep their fees for both
executions and data reasonable.
The Exchange believes that, for the reasons given, the proposal is
consistent with the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
NASDAQ does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended. As is true of all
NASDAQ's non-core data products, NASDAQ's ability to offer and price
NLS Plus 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
[[Page 29374]]
inexpensive real-time consolidated data and market-specific data and
free delayed consolidated data; and (3) the inherent contestability of
the market for proprietary last sale data.
In addition, as described in detail above, NLS Plus competes
directly with a myriad of similar products and potential products of
market data vendors. NASDAQ OMX Information LLC was constructed
specifically to establish a level playing field with market data
vendors and to preserve fair competition between them. Therefore,
NASDAQ OMX Information LLC receives NLS, BX Last Sale, and PSX Last
Sale from each NASDAQ-operated exchange in the same manner, at the same
speed, and reflecting the same fees as for all market data vendors.
Therefore, NASDAQ Information LLC has no competitive advantage with
respect to these last sale products and NASDAQ commits to maintaining
this level playing field in the future. In other words, NASDAQ will
continue to disseminate separately the underlying last sale products to
avoid creating a latency differential between NASDAQ OMX Information
LLC and other market data vendors, and to avoid creating a pricing
advantage for NASDAQ OMX Information LLC.
NLS Plus joins the existing market for proprietary last sale data
products that 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. Similarly, with respect to the FINRA/NASDAQ TRF
data that is a component of NLS and NLS Plus, allowing exchanges to
operate TRFs has permitted them to earn revenues by providing
technology and data in support of the non-exchange segment of the
market. This revenue opportunity has also resulted in fierce
competition between the two current TRF operators, with both TRFs
charging extremely low trade reporting fees and rebating the majority
of the revenues they receive from core market data to the parties
reporting trades.
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).\28\ In NASDAQ's case, it is
costly to build and maintain a trading platform, but the incremental
cost of trading each additional share on an existing platform, or
distributing an additional instance of data, is very low. Market
information and executions are each produced jointly (in the sense that
the activities of trading and placing orders are the source of the
information that is distributed) and are each subject to significant
scale economies. In such cases, marginal cost pricing is not feasible
because if all sales were priced at the margin, NASDAQ would be unable
to defray its platform costs of providing the joint products.
Similarly, data products cannot make use of TRF trade reports without
the raw material of the trade reports themselves, and therefore
necessitate the costs of operating, regulating,\29\ and maintaining a
trade reporting system, costs that must be covered through the fees
charged for use of the facility and sales of associated data.
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\28\ 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).
\29\ It should be noted that the costs of operating the FINRA/
NASDAQ TRF borne by NASDAQ include regulatory charges paid by NASDAQ
to FINRA.
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An exchange's BD customers view the costs of transaction executions
and of data as a unified cost of doing business with the exchange. A BD
will direct orders to a particular exchange only if the expected
revenues from executing trades on the exchange exceed net transaction
execution costs and the cost of data that the BD chooses to buy to
support its trading decisions (or those of its customers). The choice
of data products is, in turn, a product of the value of the products in
making profitable trading decisions. If the cost of the product exceeds
its expected value, the BD will choose not to buy it. Moreover, as a BD
chooses to direct fewer orders to a particular exchange, the value of
the product to that BD decreases, for two reasons. First, the product
will contain less information, because executions of the BD's trading
activity will not be reflected in it. Second, and perhaps more
important, the product will be less valuable to that BD because it does
not provide information about the venue to which it is directing its
orders. Data from the competing venue to which the BD is directing
orders will become correspondingly more valuable.
Similarly, in the case of products such as NLS Plus 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.
Exchanges,
[[Page 29375]]
TRFs, and other producers of proprietary data products must understand
and respond to these varying business models and pricing disciplines in
order to market proprietary data products successfully. Moreover,
NASDAQ believes that products such as NLS Plus can enhance order flow
to NASDAQ by providing more widespread distribution of information
about transactions in real time, thereby encouraging wider
participation in the market by investors with access to the internet or
television. Conversely, the value of such products to distributors and
investors decreases if order flow falls, because the products contain
less content.
Competition among trading platforms can be expected to constrain
the aggregate return each platform earns from the sale of its joint
products, but different platforms may choose from a range of possible,
and equally reasonable, pricing strategies as the means of recovering
total costs. NASDAQ pays rebates to attract orders, charges relatively
low prices for market information and charges relatively high prices
for accessing posted liquidity. Other platforms may choose a strategy
of paying lower liquidity rebates to attract orders, setting relatively
low prices for accessing posted liquidity, and setting relatively high
prices for 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 eleven SRO markets, as well as internalizing BDs and various
forms of alternative trading systems (``ATSs''), including dark pools
and electronic communication networks (``ECNs''). Each SRO market
competes to produce transaction reports via trade executions, and two
FINRA-regulated TRFs compete to attract internalized transaction
reports. It is common for BDs to further and exploit this competition
by sending their order flow and transaction reports to multiple
markets, rather than providing them all to a single market. Competitive
markets for order flow, executions, and transaction reports provide
pricing discipline for the inputs of proprietary data products.
The large number of SROs, TRFs, BDs, and ATSs that currently
produce proprietary data or are currently capable of producing it
provides further pricing discipline for proprietary data products. Each
SRO, TRF, ATS, and BD is currently permitted to produce proprietary
data products, and many currently do or have announced plans to do so,
including NASDAQ, NYSE, NYSE MKT, NYSE Arca, and BATS/Direct Edge.
Any ATS or BD can combine with any other ATS, BD, or multiple ATSs
or BDs to produce joint proprietary data products. Additionally, order
routers and market data vendors can facilitate single or multiple BDs'
production of proprietary data products. The potential sources of
proprietary products are virtually limitless. Notably, the potential
sources of data include the BDs that submit trade reports to TRFs and
that have the ability to consolidate and distribute their data without
the involvement of FINRA or an exchange-operated TRF.
The fact that proprietary data from ATSs, BDs, and vendors can by-
pass SROs is significant in two respects. First, non-SROs can compete
directly with SROs for the production and sale of proprietary data
products, as BATS and NYSE Arca did before registering as exchanges by
publishing proprietary book data on the internet. Second, because a
single order or transaction report can appear in a core data product,
an SRO proprietary product, and/or a non-SRO proprietary product, the
data available in proprietary products is exponentially greater than
the actual number of orders and transaction reports that exist in the
marketplace. Indeed, in the case of NLS Plus, the data provided through
that product appears both in (i) real-time core data products offered
by the SIPs for a fee, (ii) free SIP data products with a 15-minute
time delay, and (iii) individual exchange data products, and finds a
close substitute in last-sale products of competing venues.
In addition to the competition and price discipline described
above, the market for proprietary data products is also highly
contestable because market entry is rapid, inexpensive, and profitable.
The history of electronic trading is replete with examples of entrants
that swiftly grew into some of the largest electronic trading platforms
and proprietary data producers: Archipelago, Bloomberg Tradebook,
Island, RediBook, Attain, TracECN, BATS Trading and BATS/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. In Europe, Cinnober aggregates and disseminates data from over
40 brokers and multilateral trading facilities.\30\
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\30\ See https://www.cinnober.com/boat-trade-reporting.
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In the case of TRFs, the rapid entry of several exchanges into this
space in 2006-2007 following the development and Commission approval of
the TRF structure demonstrates the contestability of this aspect of the
market.\31\ Given the demand for trade reporting services that is
itself a by-product of the fierce competition for transaction
executions--characterized notably by a proliferation of ATSs and BDs
offering internalization--any supra-competitive increase in the fees
associated with trade reporting or TRF data would shift trade report
volumes from one of the existing TRFs to the other \32\ and create
incentives for other TRF operators to enter the space. Alternatively,
because BDs reporting to TRFs are themselves free to consolidate the
market data that they report, the market for over-the-counter data
itself, separate and apart from the markets for execution and trade
reporting services--is fully contestable.
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\31\ The low cost exit of two TRFs from the market is also
evidence of a contestable market, because new entrants are reluctant
to enter a market where exit may involve substantial shut-down
costs.
\32\ It should be noted that the FINRA/NYSE TRF has, in recent
weeks, received reports for almost 10% of all over-the-counter
volume in NMS stocks.
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Moreover, consolidated data provides two additional measures of
pricing discipline for proprietary data products
[[Page 29376]]
that are a subset of the consolidated data stream. First, the
consolidated data is widely available in real-time at $1 per month for
non-professional users. Second, consolidated data is also available at
no cost with a 15- or 20- minute delay. Because consolidated data
contains marketwide information, it effectively places a cap on the
fees assessed for proprietary data (such as last sale data) that is
simply a subset of the consolidated data. The mere availability of low-
cost or free consolidated data provides a powerful form of pricing
discipline for proprietary data products that contain data elements
that are a subset of the consolidated data, by highlighting the
optional nature of proprietary products.
The competitive nature of the market for products such as NLS Plus
is borne out by the performance of the market. In May 2008, the
internet portal Yahoo! began offering its Web site viewers real-time
last sale data (as well as best quote data) provided by BATS. In
response, in June 2008, NASDAQ launched NLS, which was initially
subject to an ``enterprise cap'' of $100,000 for customers receiving
only one of the NLS products, and $150,000 for customers receiving both
products. The majority of NASDAQ's sales were at the capped level. In
early 2009, BATS expanded its offering of free data to include depth-
of-book data. Also in early 2009, NYSE Arca announced the launch of a
competitive last sale product with an enterprise price of $30,000 per
month. In response, NASDAQ combined the enterprise cap for the NLS
products and reduced the cap to $50,000 (i.e., a reduction of $100,000
per month). Although each of these products offers only a specific
subset of data available from the SIPs, NASDAQ believes that the
products are viewed as substitutes for each other and for core last-
sale data, rather than as products that must be obtained in tandem. For
example, while Yahoo! and Google now both disseminate NASDAQ's product,
several other major content providers, including MSN and Morningstar,
use the BATS product. Moreover, further evidence of competition can be
observed in the recently-developed BATS One Feed and BQT feed.\33\
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\33\ See supra note 7.
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In this environment, a super-competitive increase in the fees
charged for either transactions or data has the potential to impair
revenues from both products. ``No one disputes that competition for
order flow is `fierce'.'' NetCoalition I at 539. The existence of
fierce competition for order flow implies a high degree of price
sensitivity on the part of BDs with order flow, since they may readily
reduce costs by directing orders toward the lowest-cost trading venues.
A BD that shifted its order flow from one platform to another in
response to order execution price differentials would both reduce the
value of that platform's market data and reduce its own need to consume
data from the disfavored platform. If a platform increases its market
data fees, the change will affect the overall cost of doing business
with the platform, and affected BDs will assess whether they can lower
their trading costs by directing orders elsewhere and thereby lessening
the need for the more expensive data. Similarly, increases in the cost
of NLS Plus would impair the willingness of distributors to take a
product for which there are numerous alternatives, impacting NLS Plus
data revenues, the value of NLS Plus as a tool for attracting order
flow, and ultimately, the volume of orders routed to NASDAQ and the
value of its other data products.
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
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 shall: (a) By order approve
or disapprove such proposed rule change, or (b) institute proceedings
to determine whether the proposed rule change should be disapproved.
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-2015-055 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-2015-055. 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-2015-055 and should
be submitted on or before June 11, 2015.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
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\34\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-12280 Filed 5-20-15; 8:45 am]
BILLING CODE 8011-01-P
