Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Exchange Rule 7037, 2261-2265 [2018-00524]

Download as PDF Federal Register / Vol. 83, No. 10 / Tuesday, January 16, 2018 / Notices C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others No written comments were either solicited or received. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act.11 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is: (i) Necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: daltland on DSKBBV9HB2PROD with NOTICES 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– GEMX–2017–63 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–GEMX–2017–63. 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 website (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 website 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. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–GEMX–2017–63, and should be submitted on or before February 6, 2018. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.12 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–00523 Filed 1–12–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–82467; File No. SR– NASDAQ–2017–134] Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend Exchange Rule 7037 January 9, 2018. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on December 26, 2017, 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 Exchange Rule 7037 to reflect substantial enhancements to the data 12 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 11 15 U.S.C. 78s(b)(3)(A)(ii). VerDate Sep<11>2014 22:48 Jan 12, 2018 Jkt 244001 PO 00000 Frm 00131 Fmt 4703 Sfmt 4703 2261 feeds underlying FilterView since the current fees were set in 2006. Specifically, the Exchange proposes to modify the monthly subscription fee for FilterView from $500 to $750 per month per subset of data. The proposal is described further below. While these amendments are effective upon filing, the Exchange has designated the proposed amendments to be operative on January 1, 2018. The text of the proposed rule change is available on the Exchange’s website 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. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose The Exchange proposes to adjust the fee schedule for FilterView to reflect substantial enhancements to its underlying data feeds since the current fee was set in 2006.3 Specifically, the Exchange proposes to change the monthly subscription fee for FilterView from $500 to $750 per month per subset of data. FilterView FilterView allows market data Distributors to receive a subset of any other real-time data feed offered by the Exchange, allowing Distributors to control information processing costs by lowering the bandwidth required to process Exchange data. FilterView is commonly purchased in two types: NLS FilterView and Nasdaq NOIView. NLS FilterView separates Nasdaq Last Sale (‘‘NLS’’) 4 data into two distinct data 3 See Securities Exchange Act Release No. 54286 (August 8, 2006), 71 FR 46955 (August 15, 2006) (SR–NASDAQ–2006–028). 4 NLS is a market data product that contains realtime last sale information for trades executed on the Continued E:\FR\FM\16JAN1.SGM 16JAN1 2262 Federal Register / Vol. 83, No. 10 / Tuesday, January 16, 2018 / Notices streams: (i) NLS data from the Nasdaq execution system, and (ii) NLS data from the FINRA/Nasdaq Trade Trade [sic] Reporting Facility (‘‘TRF’’) system. Nasdaq NOIView distributes order imbalance information from Nasdaq TotalView 5 in the minutes leading up to the Nasdaq Opening and Closing Crosses. This includes an indicative clearing price and net order imbalance in the Nasdaq execution system. Proposed Change daltland on DSKBBV9HB2PROD with NOTICES As a result of substantial enhancements to the data feeds underlying FilterView since the current fee was set in 2006, the Exchange proposes to change its monthly subscription fee from $500 to $750 per month per subset of data. The value of Nasdaq FilterView, a subset of other market data feeds, is inextricably connected to trade execution: Market data feeds require trade orders to provide useful information, and investors utilize such data to make trading decisions. Over the eleven years that have elapsed since the current distribution fees were set,6 the Exchange has invested in an array of upgrades to both its trade execution and market information services, increasing the overall value of these services, including FilterView.7 These upgrades include: • Enhanced Services. In 2013 [sic], the Exchange enhanced its data feeds by: (i) Converting to binary codes to make more efficient use of bandwidth and to provide greater timestamp granularity; (ii) adding a symbol directory message to identify a security and its key characteristics; (iii) adding a new IPO message for Nasdaq-listed securities for quotation release time and IPO price; and (iv) adding the Market Wide Circuit Breaker (‘‘MWCB’’) Decline Level message to inform recipients of the setting for MWCB breach points for the trading day, and an MWCB Status Level Message to inform Exchange or reported to the FINRA/Nasdaq Trade Reporting Facility. 5 TotalView is the Exchange’s complete Depth-ofBook data feed for Nasdaq-listed securities as well as securities listed by other exchanges, and provides every eligible order at each price level for all Nasdaq members. TotalView includes the Net Order Imbalance Indicator (‘‘NOII’’), which provides data relating to buy and sell interest at the open and close of the trading day, in the context of an Initial Public Offering, and after a trading halt. 6 See Securities Exchange Act Release No. 54286 (August 8, 2006), 71 FR 46955 (August 15, 2006) (SR–NASDAQ–2006–028). 7 Many of these upgrades are common to several Nasdaq-affiliated exchanges, as improvements to the products and services of one exchange are reproduced in other exchanges. VerDate Sep<11>2014 22:48 Jan 12, 2018 Jkt 244001 data recipients when an MWCB has breached an established level.8 • Exchange Traded Managed Funds (‘‘ETMFs’’). In 2015, the Exchange modified its data feeds to accommodate ETMFs, a type of investment vehicle that combines the features of an openend mutual funds [sic] and an Exchange Traded Fund (‘‘ETF’’) to support an actively managed-investment strategy.9 ETF [sic] trading differs from other types of equity trading in that it uses a trading protocol called ‘‘Net Asset Value-Based Trading,’’ in which all bids, offers, and execution prices are expressed as a premium or discount to the ETMF’s next-determined Net Asset Value (‘‘NAV’’). This distinct pricing format requires an entirely new set of data fields in which to distribute information related to prices and trades, and the Exchange modified Nasdaq Basic to accommodate that format.10 • Nanosecond Granularity. In 2016, Nasdaq introduced a new version of QBBO [sic] which allows for timestamp granularity to the nanosecond.11 • Geographic Diversity. In 2015, all of the Nasdaq Exchanges moved their Disaster Recover [sic] (‘‘DR’’) center from Ashburn, Virginia, to Chicago Illinois. As a result, customers can both receive market data and send orders through the Chicago facility, potentially reducing overall networking costs. Adding such geographic diversity helps protect the market in the event of a catastrophic event impacting the entire East Coast.12 • Chicago ‘‘B’’ Feeds. In 2017, all of the Nasdaq exchanges added a multicast IP address for proprietary equity and options data feeds in Chicago, allowing firms the choice of having additional redundancy to ensure data continuity.13 • Adjusted Closing Price. In 2013, Nasdaq introduced the adjusted closing price as a field to reflect a security’s previous day official closing price, adjusted for corporate actions. For Nasdaq-listed securities, the Nasdaq Official Closing Price is used,14 and the 8 See https://www.nasdaqtrader.com/ TraderNews.aspx?id=dtn2013-45 and https:// www.nasdaqtrader.com/TraderNews.aspx?id= dtn2013-33. 9 See Securities Exchange Act Release No. 73562 (November 7, 2014), 79 FR 68309 (November 14, 2014) (SR–NASDAQ–2014–020) (approving the listing and trading of Exchange-Traded Managed Fund Shares). 10 See https://www.nasdaqtrader.com/ TraderNews.aspx?id=dtn2015-7. 11 See https://www.nasdaqtrader.com/ TraderNews.aspx?id=dtn2016-03. 12 See https://www.nasdaqtrader.com/ TraderNews.aspx?id=dtn2015-17. 13 See https://www.nasdaqtrader.com/ TraderNews.aspx?id=dtn2017-02. 14 Nasdaq’s closing cross process produces a tradable closing price that represents either the PO 00000 Frm 00132 Fmt 4703 Sfmt 4703 consolidated close from the security’s listing exchange is used for non-Nasdaq securities.15 • New System Event Messages. In 2013, Nasdaq began disseminating event messages to indicate the start and end of system hours.16 While these many changes were in the process of implementation, fees for Nasdaq FilterView were falling in real terms. Indeed, the proposed increase from $500 to $750 per month is at least partially offset by inflation,17 and represents only an approximately 3.75 percent annual increase over the course of the eleven years that elapsed between 2006 and 2017. The Exchange believes that the remaining increase is more than justified by the substantial upgrades described above. As a result of these upgrades, the Exchange proposes to change the monthly subscription fee for FilterView from $500 to $750 per month per subset of data. Given these specific enhancements to the data feeds underlying FilterView, and to the Exchange’s systems generally, and given the fact that the Exchange has not increased the subscription fee since 2006, the Exchange believes that the proposed fee increase is appropriate. Nasdaq FilterView is optional in that the Exchange is not required to offer it and broker-dealers are not required to purchase it. Firms can discontinue use at any time and for any reason, including an assessment of the fees charged. The proposed change does not change the cost of any other Exchange product. 2. Statutory Basis The Exchange believes that its proposal is consistent with Section 6(b) of the Act,18 in general, and furthers the objectives of Sections 6(b)(4) and 6(b)(5) of the Act,19 in particular, in that it provides for the equitable allocation of reasonable dues, fees and other charges among members and issuers and other persons using any facility, and is not designed to permit unfair discrimination between customers, issuers, brokers, or dealers. The Commission and the courts have repeatedly expressed their preference for competition over regulatory closing cross or the best available price at the time of the transaction. 15 See https://www.nasdaqtrader.com/ TraderNews.aspx?id=dtn2013-25. 16 See https://www.nasdaqtrader.com/ TraderNews.aspx?id=dtn2013-20. 17 The Consumer Price Index increased by approximately 21 percent between August 2006 and November 2017. See https://data.bls.gov/cgi-bin/ cpicalc.pl 18 15 U.S.C. 78f(b). 19 15 U.S.C. 78f(b)(4) and (5). E:\FR\FM\16JAN1.SGM 16JAN1 Federal Register / Vol. 83, No. 10 / Tuesday, January 16, 2018 / Notices daltland on DSKBBV9HB2PROD with NOTICES intervention in determining prices, products, and services in the securities markets. In Regulation NMS, while adopting a series of steps to improve the current market model, the Commission highlighted the importance of market forces in determining prices and SRO revenues and, also, recognized that current regulation of the market system ‘‘has been remarkably successful in promoting market competition in its broader forms that are most important to investors and listed companies.’’ 20 Likewise, in NetCoalition v. Securities and Exchange Commission 21 (‘‘NetCoalition’’) the D.C. Circuit upheld the Commission’s use of a market-based approach in evaluating the fairness of market data fees against a challenge claiming that Congress mandated a costbased approach.22 As the court emphasized, the Commission ‘‘intended in Regulation NMS that ‘market forces, rather than regulatory requirements’ play a role in determining the market data . . . to be made available to investors and at what cost.’’ 23 Further, ‘‘[n]o one disputes that competition for order flow is ‘fierce.’ . . . As the SEC explained, ‘[i]n the U.S. national market system, buyers and sellers of securities, and the brokerdealers that act as their order-routing agents, have a wide range of choices of where to route orders for execution’; [and] ‘no exchange can afford to take its market share percentages for granted’ because ‘no exchange possesses a monopoly, regulatory or otherwise, in the execution of order flow from broker dealers’. . . .’’ 24 The Exchange proposes to change the monthly subscription fee for FilterView from $500 to $750 per month per subset of data. The Exchange believes that the proposed fee increase is reasonable. While the Exchange has not increased such fees since 2006, the Exchange has added a number of enhancements to the data feeds underlying FilterView, as well as to the Exchange systems in general supporting FilterView. These enhancements, which are described in greater detail above, correspondingly enhance the value of FilterView. The proposed fee increase is therefore reflective of, and closely aligned to, these enhancements and the 20 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’). 21 NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010). 22 See NetCoalition, at 534–535. 23 Id. at 537. 24 Id. at 539 (quoting Securities Exchange Act Release No. 59039 (December 2, 2008), 73 FR 74770, 74782–83 (December 9, 2008) (SR– NYSEArca–2006–21)). VerDate Sep<11>2014 22:48 Jan 12, 2018 Jkt 244001 correspondingly increased value of the data feed. The proposed changes are equitable allocations of reasonable dues, fees and other charges because all recipients will be charged the same fee for the same service. The proposed changes do not permit unfair discrimination between customers, issuers, brokers, or dealers because this service will be available on a nondiscriminatory basis to all similarlysituated recipients. In adopting Regulation NMS, the Commission granted self-regulatory organizations (‘‘SROs’’) and brokerdealers (‘‘BDs’’) increased authority and flexibility to offer new and unique market data to the public. It was believed that this authority would expand the amount of data available to consumers, and also spur innovation and competition for the provision of market data. The Commission concluded that Regulation NMS—by deregulating the market in proprietary data—would itself further the Act’s goals of facilitating efficiency and competition: [E]fficiency is promoted when brokerdealers who do not need the data beyond the prices, sizes, market center identifications of the NBBO and consolidated last sale information are not required to receive (and pay for) such data. The Commission also believes that efficiency is promoted when broker-dealers may choose to receive (and pay for) additional market data based on their own internal analysis of the need for such data.25 The Commission was speaking to the question of whether BDs should be subject to a regulatory requirement to purchase data, such as depth-of-book data, that is in excess of the data provided through the consolidated tape feeds, and the Commission concluded that the choice should be left to them. Accordingly, Regulation NMS removed unnecessary regulatory restrictions on the ability of exchanges to sell their own data, thereby advancing 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. Accordingly, ‘‘the existence of significant competition provides a substantial basis for finding that the terms of an exchange’s fee proposal are equitable, fair, reasonable, and not unreasonably or unfairly discriminatory.’’ 26 The proposed fees, like all market data fees, are constrained by the Exchange’s need to compete for order flow, as discussed below, and are subject to competition from other exchanges and among broker-dealers for customers. If Nasdaq is incorrect in its assessment of price, it will lose market share as a result. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act. In terms of inter-market competition, the Exchange notes that it operates in a highly competitive market in which market participants can readily favor competing venues if they deem fee levels at a particular venue to be excessive, or rebate opportunities available at other venues to be more favorable. In such an environment, the Exchange must continually adjust its fees to remain competitive with other exchanges and with alternative trading systems that have been exempted from compliance with the statutory standards applicable to exchanges. Because competitors are free to modify their own fees in response, and because market participants may readily adjust their order routing practices, the Exchange believes that the degree to which fee changes in this market may impose any burden on competition is extremely limited. As noted above, Nasdaq FilterView most commonly includes elements of NLS and TotalView, which are both types of ‘‘non-core’’ data that provide subsets of the ‘‘core’’ quotation and last sale data provided by securities information processors under the CTA Plan and the Nasdaq UTP Plan. In 2016, an Administrative Law Judge in an application for review by the Securities Industry and Financial Markets Association of actions taken by SelfRegulatory Organizations examined whether another ‘‘non-core’’ product, Depth-of-Book data, is constrained by competitive forces.27 After a four-day hearing and presentation of substantial evidence, the administrative law judge stated that ‘‘competition plays a significant role in restraining exchange pricing of depth-of-book products’’ 28 26 Id. [sic] Securities Industry and Financial Markets Association, Initial Decision Release No. 1015, 2016 SEC LEXIS 2278 (A.L.J. June 1, 2016). 28 Id. at *92. 27 See 25 See Securities Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496 (June 29, 2005) (‘‘Regulation NMS Adopting Release’’). PO 00000 Frm 00133 Fmt 4703 Sfmt 4703 2263 E:\FR\FM\16JAN1.SGM 16JAN1 daltland on DSKBBV9HB2PROD with NOTICES 2264 Federal Register / Vol. 83, No. 10 / Tuesday, January 16, 2018 / Notices because ‘‘depth-of-book products from different exchanges function as substitutes for each other,’’ 29 and, as such, ‘‘the threat of substitution from depth-of-book customers constrains their depth-of-book prices.’’ 30 As a result, ‘‘[s]hifts in order flow and threats of shifting order flow provide a significant competitive force in the pricing of . . . depth-of-book data.’’ 31 The judge concluded that ‘‘[u]nder the standards articulated by the Commission and DC Circuit, the Exchanges have shown that they are subject to significant competitive forces in setting fees for depth-of-book data: The availability of alternatives to the Exchanges’ depth-of-book products, and the Exchanges’ need to attract order flow from market participants constrains prices.’’ 32 In addition, the administrative law judge stated that ‘‘[s]hifts in order flow and threats of shifting order flow provide a significant competitive force in the pricing of . . . depth-of-book data.’’ 33 As such, Nasdaq’s depth-of-book fees are ‘‘constrained by significant competitive forces.’’ 34 Market forces constrain the price of Nasdaq FilterView, just as they do other market data fees, in the competition among exchanges and other entities to attract order flow and in the competition among Distributors for customers. Order flow is the ‘‘life blood’’ of the exchanges. Broker-dealers currently have numerous alternative venues for their order flow, including self-regulatory organization (‘‘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. The existence of fierce competition for order flow implies a high degree of price sensitivity on the part of BDs, which may readily reduce costs by directing orders toward the lowest-cost trading venues. 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 29 Id. 30 Id. at *93 at *104. 32 Id. at *86. 33 Id. at *37. [sic] 34 Id. at *43. [sic] 35 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). 31 Id. VerDate Sep<11>2014 22:48 Jan 12, 2018 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).35 In Nasdaq’s case, it is costly to build and maintain a trading platform, but the incremental cost of trading each additional share on an existing platform, or distributing an additional instance of data, is very low. Market information and executions are each produced jointly (in the sense that the activities of trading and placing orders are the source of the information that is distributed) and are each subject to significant scale economies. In such cases, marginal cost pricing is not feasible because if all sales were priced at the margin, Nasdaq would be unable to defray its platform costs of providing the joint products. An exchange’s BD customers view the costs of transaction executions and of data as a unified cost of doing business with the exchange. A BD will disfavor a particular exchange if the expected revenues from executing trades on the exchange do not exceed net transaction execution costs and the cost of data that Jkt 244001 PO 00000 Frm 00134 Fmt 4703 Sfmt 4703 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 more orders will become correspondingly more valuable. 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.36 36 Moreover, the level of competition and contestability in the market is evident in the E:\FR\FM\16JAN1.SGM 16JAN1 Federal Register / Vol. 83, No. 10 / Tuesday, January 16, 2018 / Notices The proposed change is to increase the monthly subscription fee for FilterView from $500 to $750 per month per subset of data. The proposal will not impose any burden on competition because it is simply a price change that will not alter the overall market structure. Because the proposed fees will become one aspect of the total cost of interacting with the Exchange, the Exchange will lose revenue if these total costs prove to be excessive. Accordingly, the Exchange does not believe that the proposed changes will impair the ability of members or competing order execution venues to maintain their competitive standing in the financial markets. 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 daltland on DSKBBV9HB2PROD with NOTICES The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act.37 At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is: (i) Necessary or appropriate in the public interest; (ii) for the protection of investors; or (iii) otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission shall institute proceedings to determine whether the proposed rule should be approved or disapproved. numerous alternative venues that compete for order flow, including SRO markets, 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, IEX, and BATS/Direct Edge. 37 15 U.S.C. 78s(b)(3)(A)(ii). VerDate Sep<11>2014 22:48 Jan 12, 2018 Jkt 244001 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: • 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–2017–134 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–2017–134. 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 website (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 website 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. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NASDAQ–2017–134 and should be submitted on or before February 6, 2018. Frm 00135 Fmt 4703 For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.38 Eduardo A. Aleman, Assistant Secretary. [FR Doc. 2018–00524 Filed 1–12–18; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION Electronic Comments PO 00000 2265 Sfmt 4703 [Release No. 34–82472; File No. SR–ISE– 2018–03] Self-Regulatory Organizations; Nasdaq ISE, LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Amend the Price Level Protection Rule January 9, 2018. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on January 2, 2018, Nasdaq ISE, LLC (‘‘ISE’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’) the proposed rule change as described in Items I and II below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend Rule 714(b)(4) (Price Level Protection) to clarify the operation of the Price Level Protection. The text of the proposed rule change is available on the Exchange’s website at https://ise.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 38 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\16JAN1.SGM 16JAN1

Agencies

[Federal Register Volume 83, Number 10 (Tuesday, January 16, 2018)]
[Notices]
[Pages 2261-2265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-00524]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82467; File No. SR-NASDAQ-2017-134]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Exchange Rule 7037

January 9, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 26, 2017, 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 Exchange Rule 7037 to reflect 
substantial enhancements to the data feeds underlying FilterView since 
the current fees were set in 2006. Specifically, the Exchange proposes 
to modify the monthly subscription fee for FilterView from $500 to $750 
per month per subset of data. The proposal is described further below.
    While these amendments are effective upon filing, the Exchange has 
designated the proposed amendments to be operative on January 1, 2018.
    The text of the proposed rule change is available on the Exchange's 
website 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.

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

1. Purpose
    The Exchange proposes to adjust the fee schedule for FilterView to 
reflect substantial enhancements to its underlying data feeds since the 
current fee was set in 2006.\3\ Specifically, the Exchange proposes to 
change the monthly subscription fee for FilterView from $500 to $750 
per month per subset of data.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 54286 (August 8, 
2006), 71 FR 46955 (August 15, 2006) (SR-NASDAQ-2006-028).
---------------------------------------------------------------------------

FilterView
    FilterView allows market data Distributors to receive a subset of 
any other real-time data feed offered by the Exchange, allowing 
Distributors to control information processing costs by lowering the 
bandwidth required to process Exchange data. FilterView is commonly 
purchased in two types: NLS FilterView and Nasdaq NOIView. NLS 
FilterView separates Nasdaq Last Sale (``NLS'') \4\ data into two 
distinct data

[[Page 2262]]

streams: (i) NLS data from the Nasdaq execution system, and (ii) NLS 
data from the FINRA/Nasdaq Trade Trade [sic] Reporting Facility 
(``TRF'') system. Nasdaq NOIView distributes order imbalance 
information from Nasdaq TotalView \5\ in the minutes leading up to the 
Nasdaq Opening and Closing Crosses. This includes an indicative 
clearing price and net order imbalance in the Nasdaq execution system.
---------------------------------------------------------------------------

    \4\ NLS is a market data product that contains real-time last 
sale information for trades executed on the Exchange or reported to 
the FINRA/Nasdaq Trade Reporting Facility.
    \5\ TotalView is the Exchange's complete Depth-of-Book data feed 
for Nasdaq-listed securities as well as securities listed by other 
exchanges, and provides every eligible order at each price level for 
all Nasdaq members. TotalView includes the Net Order Imbalance 
Indicator (``NOII''), which provides data relating to buy and sell 
interest at the open and close of the trading day, in the context of 
an Initial Public Offering, and after a trading halt.
---------------------------------------------------------------------------

Proposed Change
    As a result of substantial enhancements to the data feeds 
underlying FilterView since the current fee was set in 2006, the 
Exchange proposes to change its monthly subscription fee from $500 to 
$750 per month per subset of data.
    The value of Nasdaq FilterView, a subset of other market data 
feeds, is inextricably connected to trade execution: Market data feeds 
require trade orders to provide useful information, and investors 
utilize such data to make trading decisions. Over the eleven years that 
have elapsed since the current distribution fees were set,\6\ the 
Exchange has invested in an array of upgrades to both its trade 
execution and market information services, increasing the overall value 
of these services, including FilterView.\7\ These upgrades include:
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 54286 (August 8, 
2006), 71 FR 46955 (August 15, 2006) (SR-NASDAQ-2006-028).
    \7\ Many of these upgrades are common to several Nasdaq-
affiliated exchanges, as improvements to the products and services 
of one exchange are reproduced in other exchanges.
---------------------------------------------------------------------------

     Enhanced Services. In 2013 [sic], the Exchange enhanced 
its data feeds by: (i) Converting to binary codes to make more 
efficient use of bandwidth and to provide greater timestamp 
granularity; (ii) adding a symbol directory message to identify a 
security and its key characteristics; (iii) adding a new IPO message 
for Nasdaq-listed securities for quotation release time and IPO price; 
and (iv) adding the Market Wide Circuit Breaker (``MWCB'') Decline 
Level message to inform recipients of the setting for MWCB breach 
points for the trading day, and an MWCB Status Level Message to inform 
data recipients when an MWCB has breached an established level.\8\
---------------------------------------------------------------------------

    \8\ See https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2013-45 and https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2013-33.
---------------------------------------------------------------------------

     Exchange Traded Managed Funds (``ETMFs''). In 2015, the 
Exchange modified its data feeds to accommodate ETMFs, a type of 
investment vehicle that combines the features of an open-end mutual 
funds [sic] and an Exchange Traded Fund (``ETF'') to support an 
actively managed-investment strategy.\9\ ETF [sic] trading differs from 
other types of equity trading in that it uses a trading protocol called 
``Net Asset Value-Based Trading,'' in which all bids, offers, and 
execution prices are expressed as a premium or discount to the ETMF's 
next-determined Net Asset Value (``NAV''). This distinct pricing format 
requires an entirely new set of data fields in which to distribute 
information related to prices and trades, and the Exchange modified 
Nasdaq Basic to accommodate that format.\10\
---------------------------------------------------------------------------

    \9\ See Securities Exchange Act Release No. 73562 (November 7, 
2014), 79 FR 68309 (November 14, 2014) (SR-NASDAQ-2014-020) 
(approving the listing and trading of Exchange-Traded Managed Fund 
Shares).
    \10\ See https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2015-7.
---------------------------------------------------------------------------

     Nanosecond Granularity. In 2016, Nasdaq introduced a new 
version of QBBO [sic] which allows for timestamp granularity to the 
nanosecond.\11\
---------------------------------------------------------------------------

    \11\ See https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2016-03.
---------------------------------------------------------------------------

     Geographic Diversity. In 2015, all of the Nasdaq Exchanges 
moved their Disaster Recover [sic] (``DR'') center from Ashburn, 
Virginia, to Chicago Illinois. As a result, customers can both receive 
market data and send orders through the Chicago facility, potentially 
reducing overall networking costs. Adding such geographic diversity 
helps protect the market in the event of a catastrophic event impacting 
the entire East Coast.\12\
---------------------------------------------------------------------------

    \12\ See https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2015-17.
---------------------------------------------------------------------------

     Chicago ``B'' Feeds. In 2017, all of the Nasdaq exchanges 
added a multicast IP address for proprietary equity and options data 
feeds in Chicago, allowing firms the choice of having additional 
redundancy to ensure data continuity.\13\
---------------------------------------------------------------------------

    \13\ See https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2017-02.
---------------------------------------------------------------------------

     Adjusted Closing Price. In 2013, Nasdaq introduced the 
adjusted closing price as a field to reflect a security's previous day 
official closing price, adjusted for corporate actions. For Nasdaq-
listed securities, the Nasdaq Official Closing Price is used,\14\ and 
the consolidated close from the security's listing exchange is used for 
non-Nasdaq securities.\15\
---------------------------------------------------------------------------

    \14\ Nasdaq's closing cross process produces a tradable closing 
price that represents either the closing cross or the best available 
price at the time of the transaction.
    \15\ See https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2013-25.
---------------------------------------------------------------------------

     New System Event Messages. In 2013, Nasdaq began 
disseminating event messages to indicate the start and end of system 
hours.\16\
---------------------------------------------------------------------------

    \16\ See https://www.nasdaqtrader.com/TraderNews.aspx?id=dtn2013-20.
---------------------------------------------------------------------------

    While these many changes were in the process of implementation, 
fees for Nasdaq FilterView were falling in real terms. Indeed, the 
proposed increase from $500 to $750 per month is at least partially 
offset by inflation,\17\ and represents only an approximately 3.75 
percent annual increase over the course of the eleven years that 
elapsed between 2006 and 2017. The Exchange believes that the remaining 
increase is more than justified by the substantial upgrades described 
above.
---------------------------------------------------------------------------

    \17\ The Consumer Price Index increased by approximately 21 
percent between August 2006 and November 2017. See https://data.bls.gov/cgi-bin/cpicalc.pl
---------------------------------------------------------------------------

    As a result of these upgrades, the Exchange proposes to change the 
monthly subscription fee for FilterView from $500 to $750 per month per 
subset of data. Given these specific enhancements to the data feeds 
underlying FilterView, and to the Exchange's systems generally, and 
given the fact that the Exchange has not increased the subscription fee 
since 2006, the Exchange believes that the proposed fee increase is 
appropriate.
    Nasdaq FilterView is optional in that the Exchange is not required 
to offer it and broker-dealers are not required to purchase it. Firms 
can discontinue use at any time and for any reason, including an 
assessment of the fees charged.
    The proposed change does not change the cost of any other Exchange 
product.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\18\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\19\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among members and issuers and other persons using any 
facility, and is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \18\ 15 U.S.C. 78f(b).
    \19\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

    The Commission and the courts have repeatedly expressed their 
preference for competition over regulatory

[[Page 2263]]

intervention in determining prices, products, and services in the 
securities markets. In Regulation NMS, while adopting a series of steps 
to improve the current market model, the Commission highlighted the 
importance of market forces in determining prices and SRO revenues and, 
also, recognized that current regulation of the market system ``has 
been remarkably successful in promoting market competition in its 
broader forms that are most important to investors and listed 
companies.'' \20\
---------------------------------------------------------------------------

    \20\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
---------------------------------------------------------------------------

    Likewise, in NetCoalition v. Securities and Exchange Commission 
\21\ (``NetCoalition'') the D.C. Circuit upheld the Commission's use of 
a market-based approach in evaluating the fairness of market data fees 
against a challenge claiming that Congress mandated a cost-based 
approach.\22\ As the court emphasized, the Commission ``intended in 
Regulation NMS that `market forces, rather than regulatory 
requirements' play a role in determining the market data . . . to be 
made available to investors and at what cost.'' \23\
---------------------------------------------------------------------------

    \21\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \22\ See NetCoalition, at 534-535.
    \23\ Id. at 537.
---------------------------------------------------------------------------

    Further, ``[n]o one disputes that competition for order flow is 
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . . .'' \24\
---------------------------------------------------------------------------

    \24\ Id. at 539 (quoting Securities Exchange Act Release No. 
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008) 
(SR-NYSEArca-2006-21)).
---------------------------------------------------------------------------

    The Exchange proposes to change the monthly subscription fee for 
FilterView from $500 to $750 per month per subset of data. The Exchange 
believes that the proposed fee increase is reasonable. While the 
Exchange has not increased such fees since 2006, the Exchange has added 
a number of enhancements to the data feeds underlying FilterView, as 
well as to the Exchange systems in general supporting FilterView. These 
enhancements, which are described in greater detail above, 
correspondingly enhance the value of FilterView. The proposed fee 
increase is therefore reflective of, and closely aligned to, these 
enhancements and the correspondingly increased value of the data feed. 
The proposed changes are equitable allocations of reasonable dues, fees 
and other charges because all recipients will be charged the same fee 
for the same service. The proposed changes do not permit unfair 
discrimination between customers, issuers, brokers, or dealers because 
this service will be available on a non-discriminatory basis to all 
similarly-situated recipients.
    In adopting Regulation NMS, the Commission granted self-regulatory 
organizations (``SROs'') and broker-dealers (``BDs'') increased 
authority and flexibility to offer new and unique market data to the 
public. It was believed that this authority would expand the amount of 
data available to consumers, and also spur innovation and competition 
for the provision of market data. 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.\25\
---------------------------------------------------------------------------

    \25\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (``Regulation NMS Adopting 
Release'').

The Commission was speaking to the question of whether BDs should be 
subject to a regulatory requirement to purchase data, such as depth-of-
book data, that is in excess of the data provided through the 
consolidated tape feeds, and the Commission concluded that the choice 
should be left to them. Accordingly, Regulation NMS removed unnecessary 
regulatory restrictions on the ability of exchanges to sell their own 
data, thereby advancing 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. Accordingly, ``the existence of significant competition 
provides a substantial basis for finding that the terms of an 
exchange's fee proposal are equitable, fair, reasonable, and not 
unreasonably or unfairly discriminatory.'' \26\
---------------------------------------------------------------------------

    \26\ Id. [sic]
---------------------------------------------------------------------------

    The proposed fees, like all market data fees, are constrained by 
the Exchange's need to compete for order flow, as discussed below, and 
are subject to competition from other exchanges and among broker-
dealers for customers. If Nasdaq is incorrect in its assessment of 
price, it will lose market share as a result.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. In terms of inter-market 
competition, the Exchange notes that it operates in a highly 
competitive market in which market participants can readily favor 
competing venues if they deem fee levels at a particular venue to be 
excessive, or rebate opportunities available at other venues to be more 
favorable. In such an environment, the Exchange must continually adjust 
its fees to remain competitive with other exchanges and with 
alternative trading systems that have been exempted from compliance 
with the statutory standards applicable to exchanges. Because 
competitors are free to modify their own fees in response, and because 
market participants may readily adjust their order routing practices, 
the Exchange believes that the degree to which fee changes in this 
market may impose any burden on competition is extremely limited.
    As noted above, Nasdaq FilterView most commonly includes elements 
of NLS and TotalView, which are both types of ``non-core'' data that 
provide subsets of the ``core'' quotation and last sale data provided 
by securities information processors under the CTA Plan and the Nasdaq 
UTP Plan. In 2016, an Administrative Law Judge in an application for 
review by the Securities Industry and Financial Markets Association of 
actions taken by Self-Regulatory Organizations examined whether another 
``non-core'' product, Depth-of-Book data, is constrained by competitive 
forces.\27\ After a four-day hearing and presentation of substantial 
evidence, the administrative law judge stated that ``competition plays 
a significant role in restraining exchange pricing of depth-of-book 
products'' \28\

[[Page 2264]]

because ``depth-of-book products from different exchanges function as 
substitutes for each other,'' \29\ and, as such, ``the threat of 
substitution from depth-of-book customers constrains their depth-of-
book prices.'' \30\ As a result, ``[s]hifts in order flow and threats 
of shifting order flow provide a significant competitive force in the 
pricing of . . . depth-of-book data.'' \31\ The judge concluded that 
``[u]nder the standards articulated by the Commission and DC Circuit, 
the Exchanges have shown that they are subject to significant 
competitive forces in setting fees for depth-of-book data: The 
availability of alternatives to the Exchanges' depth-of-book products, 
and the Exchanges' need to attract order flow from market participants 
constrains prices.'' \32\ In addition, the administrative law judge 
stated that ``[s]hifts in order flow and threats of shifting order flow 
provide a significant competitive force in the pricing of . . . depth-
of-book data.'' \33\ As such, Nasdaq's depth-of-book fees are 
``constrained by significant competitive forces.'' \34\
---------------------------------------------------------------------------

    \27\ See Securities Industry and Financial Markets Association, 
Initial Decision Release No. 1015, 2016 SEC LEXIS 2278 (A.L.J. June 
1, 2016).
    \28\ Id. at *92.
    \29\ Id.
    \30\ Id. at *93
    \31\ Id. at *104.
    \32\ Id. at *86.
    \33\ Id. at *37. [sic]
    \34\ Id. at *43. [sic]
---------------------------------------------------------------------------

    Market forces constrain the price of Nasdaq FilterView, just as 
they do other market data fees, in the competition among exchanges and 
other entities to attract order flow and in the competition among 
Distributors for customers. Order flow is the ``life blood'' of the 
exchanges. Broker-dealers currently have numerous alternative venues 
for their order flow, including self-regulatory organization (``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. The existence of 
fierce competition for order flow implies a high degree of price 
sensitivity on the part of BDs, which may readily reduce costs by 
directing orders toward the lowest-cost trading venues.
    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).\35\
---------------------------------------------------------------------------

    \35\ 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).
---------------------------------------------------------------------------

    In Nasdaq's case, it is costly to build and maintain a trading 
platform, but the incremental cost of trading each additional share on 
an existing platform, or distributing an additional instance of data, 
is very low. Market information and executions are each produced 
jointly (in the sense that the activities of trading and placing orders 
are the source of the information that is distributed) and are each 
subject to significant scale economies. In such cases, marginal cost 
pricing is not feasible because if all sales were priced at the margin, 
Nasdaq would be unable to defray its platform costs of providing the 
joint products.
    An exchange's BD customers view the costs of transaction executions 
and of data as a unified cost of doing business with the exchange. A BD 
will disfavor a particular exchange if the expected revenues from 
executing trades on the exchange do not 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 more 
orders will become correspondingly more valuable.
    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.\36\
---------------------------------------------------------------------------

    \36\ Moreover, the level of competition and contestability in 
the market is evident in the numerous alternative venues that 
compete for order flow, including SRO markets, 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, IEX, and BATS/Direct Edge.

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[[Page 2265]]

    The proposed change is to increase the monthly subscription fee for 
FilterView from $500 to $750 per month per subset of data. The proposal 
will not impose any burden on competition because it is simply a price 
change that will not alter the overall market structure. Because the 
proposed fees will become one aspect of the total cost of interacting 
with the Exchange, the Exchange will lose revenue if these total costs 
prove to be excessive. Accordingly, the Exchange does not believe that 
the proposed changes will impair the ability of members or competing 
order execution venues to maintain their competitive standing in the 
financial markets.

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

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\37\
---------------------------------------------------------------------------

    \37\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-NASDAQ-2017-134 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-2017-134. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2017-134 and should be submitted 
on or before February 6, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-00524 Filed 1-12-18; 8:45 am]
 BILLING CODE 8011-01-P
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