Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change To Lower the Enterprise License Fee for Broker-Dealers Distributing Nasdaq Basic to Internal Professional Subscribers as Set Forth in the Equity 7 Pricing Schedule, Section 147, and the Enterprise License Fee for Broker-Dealers Distributing Nasdaq Last Sale to Professional Subscribers at Equity 7, Section 139, 66620-66630 [2020-23148]
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Federal Register / Vol. 85, No. 203 / Tuesday, October 20, 2020 / Notices
requirement for an unhedged security
futures position from 20% to 15% and
adopt certain conforming revisions to
the security futures margin offset table.
At the meeting, the Commissions also
will consider whether to issue a request
for comment on the portfolio margining
of uncleared swaps and non-cleared
security-based swaps. The request for
comment would solicit comment on all
aspects of the portfolio margining of
uncleared swaps, non-cleared securitybased swaps, and related positions,
including on the merits, benefits, and
risks of portfolio margining these types
of positions, and on any regulatory,
legal, and operational issues associated
with portfolio margining them.
CONTACT PERSON FOR MORE INFORMATION:
For further information and to ascertain
what, if any, matters have been added,
deleted or postponed, please contact
Vanessa A. Countryman, Office of the
Secretary, at (202) 551–5400.
Dated: October 15, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020–23245 Filed 10–16–20; 11:15 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90177; File No. SR–
NASDAQ–2020–065]
Self-Regulatory Organizations; The
Nasdaq Stock Market LLC; Notice of
Filing and Immediate Effectiveness of
Proposed Rule Change To Lower the
Enterprise License Fee for BrokerDealers Distributing Nasdaq Basic to
Internal Professional Subscribers as
Set Forth in the Equity 7 Pricing
Schedule, Section 147, and the
Enterprise License Fee for BrokerDealers Distributing Nasdaq Last Sale
to Professional Subscribers at Equity
7, Section 139
October 14, 2020.
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
September 30, 2020, 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
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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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 lower the
enterprise license fee for broker-dealers
distributing Nasdaq Basic to internal
Professional Subscribers as set forth in
the Equity 7 Pricing Schedule, Section
147, and the enterprise license fee for
broker-dealers distributing Nasdaq Last
Sale (‘‘NLS’’) to Professional Subscribers
at Equity 7, Section 139.
The text of the proposed rule change
is available on the Exchange’s website at
https://listingcenter.nasdaq.com/
rulebook/nasdaq/rules, 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
Nasdaq proposes to lower the
enterprise license fee for broker-dealers
distributing Nasdaq Basic to internal
Professional Subscribers 3 from a twotiered fee of $365,000, plus $2 for any
Professional Subscribers over 16,000, to
a flat fee of $155,000. The license would
otherwise remain unchanged.
3 A ‘‘Professional Subscriber’’ is any Subscriber
other than a Non-Professional Subscriber. A ‘‘NonProfessional Subscriber’’ is ‘‘a natural person who
is not (i) registered or qualified in any capacity with
the Commission, the Commodity Futures Trading
Commission, any state securities agency, any
securities exchange or association, or (ii) any
commodities or futures contract market or
association; engaged as an ‘investment adviser’ as
that term is defined in Section 201(11) of the
Investment Advisers Act of 1940 (whether or not
registered or qualified under that Act); or (iii)
employed by a bank or other organization exempt
from registration under federal or state securities
laws to perform functions that would require
registration or qualification if such functions were
performed for an organization not so exempt.’’ See
Equity 7 Pricing Schedule, Section 147(d)(4).
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The enterprise license fee for brokerdealers distributing NLS to internal
Professional Subscribers would be
changed in a similar fashion: the twotiered fee of $365,000, plus $2 for any
Professional Subscribers over 16,000,
would be replaced with a flat fee of
$155,000. Both fee reductions are
designed to help Nasdaq compete
against other exchanges selling top-ofbook 4 market data products.
Nasdaq Basic and Nasdaq Last Sale
Nasdaq Basic is a real-time market
data product that offers best bid and
offer and last sale information for all
U.S. exchange-listed securities based on
liquidity within the Nasdaq market
center and trades reported to the
FINRA/Nasdaq Trade Reporting Facility
(‘‘TRF’’). It is a subset of the ‘‘core’’
quotation and last sale data provided by
securities information processors
(‘‘SIPs’’) distributing consolidated data
pursuant to the CTA/CQ Plan and the
UTP Plan. Nasdaq Basic is separated
into three components, which may be
purchased individually or in
combination: (i) Nasdaq Basic for
Nasdaq, which contains the best bid and
offer on the Nasdaq market center and
last sale transaction reports for Nasdaq
and the FINRA/Nasdaq TRF for Nasdaqlisted stocks; (ii) Nasdaq Basic for
NYSE, which covers NYSE-listed stocks,
and (iii) Nasdaq Basic for NYSE
American, which provides data on
stocks listed on NYSE American and
other listing venues that disseminate
quotes and trade reports on Tape B. The
specific data elements available through
Nasdaq Basic are: (i) Nasdaq Basic
Quotes (‘‘QBBO’’), the best bid and offer
and associated size available in the
Nasdaq Market Center, as well as last
sale transaction reports; (ii) Nasdaq
opening and closing prices, as well as
IPO and trading halt cross prices; and
(iii) general exchange information,
including systems status reports, trading
halt information, and a stock directory.
NLS provides real-time last sale
information for executions occurring
within the Nasdaq market center and
trades reported to the jointly-operated
FINRA/Nasdaq TRF.5 The NLS data
4 ‘‘Top-of-book’’ market data products provide
last sale information, or both last sale and best bid
and offer information to the user, without
additional ‘‘depth of book’’ data. Both Nasdaq Last
Sale and Nasdaq Basic are examples of top-of-book
products.
5 See Securities Exchange Act Release No. 57965
(June 16, 2008), 73 FR 35178 (June 20, 2008) (SR–
NASDAQ–2006–060) (proposing NLS); see also
Securities Exchange Act Release No. 57965 (June
16, 2008), 73 FR 35178 (June 20, 2008) (SR–
NASDAQ–2006–060) (approving SR–NASDAQ–
2006–060, as amended by Amendment Nos. 1 and
2, to implement NLS on a pilot basis).
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Federal Register / Vol. 85, No. 203 / Tuesday, October 20, 2020 / Notices
feed, which provides price, volume and
time of execution data for last sale
transactions, includes transaction
information for Nasdaq-listed stocks
(‘‘NLS for Nasdaq’’) and for stocks listed
on NYSE, NYSE American, and other
Tape B listing venues (‘‘NLS for NYSE/
NYSE American’’).6 This is also a noncore product that provides a subset of
the core last sale data distributed by the
SIPs under the CTA/CQ Plan and the
UTP Plan.7
Current Top-of-Book Enterprise
Licenses for Internal Professional
Subscribers
Broker-dealers may purchase Nasdaq
Basic, or Derived Data 8 therefrom, for
internal professional use for a monthly
per-Subscriber fee of $26,9 or, in lieu of
a per-Subscriber fee, purchase an
enterprise license for the internal
distribution of Nasdaq Basic to
Professional Subscribers for $365,000,
plus $2 for any Professional Subscribers
over 16,000 if an external Distributor 10
controls the display of the product.11
The license also allows the brokerdealer to display NLS data for its own
stock price and that of up to ten of its
competitors or peers on its internal
website. Separate licenses must be
purchased if more than one external
Distributor controls display of the
product. The license excludes
6 See Securities Exchange Act Release No. 57965
(June 16, 2008), 73 FR 35178 (June 20, 2008) (SR–
NASDAQ–2006–060).
7 See Securities Exchange Act Release No. 34–
82723 (February 15, 2018), 83 FR 7812 (February
22, 2018) (SR–NASDAQ–2018–010).
8 ‘‘Derived Data’’ is ‘‘pricing data or other
information that is created in whole or in part from
Nasdaq information; it cannot be reverse engineered
to recreate Nasdaq information, or be used to create
other data that is recognizable as a reasonable
substitute for Nasdaq information.’’ See Equity 7,
Section 147(d)(6).
9 See Equity 7 Pricing Schedule, Section
147(b)(1). The $26 monthly per-Subscriber fee
consists of monthly charges of $13 for Nasdaq Basic
for Nasdaq, $6.50 for Nasdaq Basic for NYSE, and
$6.50 for Nasdaq Basic for NYSE MKT.
10 ‘‘Distributor’’ refers to ‘‘any entity that receives
Nasdaq Basic data directly from Nasdaq or
indirectly through another entity and then
distributes it to one or more Subscribers. (A)
‘‘Internal Distributors’’ are Distributors that receive
Nasdaq Basic data and then distribute that data to
one or more Subscribers within the Distributor’s
own entity. (B) ‘‘External Distributors’’ are
Distributors that receive Nasdaq Basic data and then
distribute that data to one or more Subscribers
outside the Distributor’s own entity. See Equity 7,
Section 147(d)(1).
11 The additional $2 fee was introduced to defray
additional costs incurred by Nasdaq when
distributing Nasdaq Basic through an External
Distributor that controls display of the product. See
Securities Exchange Act Release No. 71507
(February 7, 2014), 79 FR 8763 (February 13, 2014)
(SR–NASDAQ–2014–011).
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Distributor fees, which are $1,500 per
month for internal distribution.12
Although NLS was initially designed
for general distribution to individual
investors,13 a broker-dealer may elect to
distribute this data to its registered
representatives through an employerprovided workstation or software
application. To allow for such usage,
Nasdaq adopted a fee schedule for
‘‘specialized usage’’ of NLS not
associated with distribution of data to
the general investing public. In general,
broker-dealers paying for specialized
usage track either the number of
Subscribers receiving data or the
number of queries for the data, and pay
the corresponding fee.
As an alternative to per-Subscriber or
per-query fees, however, a broker-dealer
may purchase an enterprise license for
internal Subscribers to receive NLS, or
Derived Data therefrom, through an
external Distributor that controls
display of the product. The fee is
$365,000 per month for up to 16,000
internal Subscribers, plus $2 for each
additional internal Subscriber over
16,000, the same fee structure as the
enterprise license for the internal
distribution of Nasdaq Basic to
Professionals. A separate enterprise
license must be purchased for each
external Distributor that controls the
display of the product. The enterprise
license does not include distributor fees.
Proposed Fee Reduction for Nasdaq
Basic and NLS Enterprise Licenses
Nasdaq proposes to reduce its
enterprise license fees for Nasdaq Basic
and NLS to bolster its ability to compete
effectively against other exchanges
selling top-of-book market data
products. Nasdaq faces fierce
competition in the multi-sided market
for exchange services, including the sale
of all market data products. In addition,
top-of-book data products—those that
provide last sale information such as
NLS, or last sale and best bid and offer
information like Nasdaq Basic—face
vigorous direct competition from the
top-of-book data products offered by
other equities exchanges, which are
substitutes.
The value of a top-of-book product
depends on the quality of the data and
how well it approximates the
12 See Equity 7 Pricing Schedule, Section
147(c)(1).
13 See Securities Exchange Act Release No. 82723
(February 15, 2018), 83 FR 7812 (February 22, 2018)
(SR-Nasdaq-2018–010) (explaining that ‘‘NLS was
designed to enable market-data ‘distributors to
provide free access to the data contained in NLS to
millions of individual investors via the internet and
television’ and was expected to ‘increase the
availability of Nasdaq proprietary market data to
individual investors.’ ’’).
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66621
consolidated National Best Bid and
Offer (‘‘NBBO’’) disseminated by the
SIPs—the better the approximation, in
terms of time and number of stocks, the
more useful the product.14 This
usefulness is determined by the amount
of order flow attracted by the
exchange—the more order flow, the
more quotes and trades, and the better
the exchange data will be able to match
the NBBO. Nasdaq faces vigorous
competition for the sale of this data,
including from the ‘‘Best Quote and
Trade’’ (‘‘BQT’’) product sold by the
NYSE-affiliated exchanges, and the
Cboe One Summary Feed.15
Nasdaq received customer feedback
requesting that it lower the price of the
professional licenses for its top-of-book
products. This feedback prompted a
reexamination of Nasdaq’s four
enterprise licenses for top-of-book data:
(i) The license for internal Professional
distribution of Nasdaq Basic to
Professionals for $365,000 per month
(the subject of this proposal); (ii) the
license for external distribution of
Nasdaq Basic to Professionals and NonProfessionals in the context of the
brokerage relationship for $100,000 per
month; 16 (iii) the license for external
distribution of NLS data to the General
Investing Public for Display Usage for
$41,500; 17 and (iv) the license for
internal and external distribution of topof-book 18 and depth-of-book 19 products
for $500,000 with a twelve-month
commitment, or a month-to-month fee
of $600,000.20
Fees for three of these four licenses
have been reduced in the last several
years. In 2016, Nasdaq lowered the fee
for external distribution of Nasdaq Basic
in the context of the brokerage
14 Nasdaq understands that many customers that
purchase SIP data do not also purchase Nasdaq
Basic because they are closely-related products.
Where customers do buy both products, they may
shift the extent to which they purchase one or the
other based on price changes, by, for example,
reducing the number of queries submitted for either
product. The SIP constrains the price of Nasdaq
Basic because no purchaser would pay an excessive
price for Nasdaq Basic when similar data is also
available from the SIP.
15 Nasdaq Basic is not a substitute for the SIP in
all use cases because Rule 603(c) of Regulation
NMS (the ‘‘Vendor Display Rule’’) prohibits a
broker-dealer from ‘‘provid[ing], in a context in
which a trading or order-routing decision can be
implemented, a display of any information with
respect to quotations for or transactions in an NMS
stock without also providing, in an equivalent
manner, a consolidated display for such stock.’’
16 See Equity 7 Pricing Schedule, Section
147(b)(5).
17 See Equity 7 Pricing Schedule, Section
139(b)(4).
18 The top-of-book products distributed under this
license are Nasdaq Basic, NLS and NLS Plus.
19 The depth-of-book products distributed under
this license are TotalView and Level 2.
20 See Equity 7 Pricing Schedule, Section 132.
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Federal Register / Vol. 85, No. 203 / Tuesday, October 20, 2020 / Notices
relationship from $350,000 to
$100,000.21 Also in 2016, the Exchange
reduced the monthly fee for the external
distribution of NLS data from $50,000 to
$41,500.22 In 2018, Nasdaq introduced
an enterprise license that substantially
lowered the cost of purchasing top-ofbook and depth-of-book data together by
replacing three separate enterprise
licenses—$365,000 for internal
distribution of Nasdaq Basic, $100,000
for external distribution in a brokerage
relationship, and $500,000 for
distribution of depth-of-book products—
with a single license for a monthly fee
of $500,000, with a twelve-month
service commitment.23
In light of customer feedback and
Nasdaq’s history of lowering fees for
top-of-book products, Nasdaq
determined that the proposed fee will
better position it to operate in the
current competitive environment. Fees
for the other three enterprise licenses
have been lowered over the course of
the last four years, while the license fee
for internal professionals has not
changed since the enterprise license was
introduced in 2014.24 Nasdaq believes
that this fourth fee reduction will allow
it to continue to compete in the market
for top-of-book products.
The new enterprise license fee will
substantially lower total and perSubscriber costs for broker-dealers with
approximately 5,962 or more internal
Professional Subscribers. All current
enterprise license purchasers will save
the difference between the current base
fee of $365,000 and the proposed fee of
$155,000 (which is $210,000 per
month), plus $2 times the number of
internal Professional Subscribers over
16,000. A broker-dealer with 17,000
internal Professional Subscribers, for
example, would save a total of $212,000
per month as compared to the current
license,25 reducing average per21 See Securities Exchange Act Release No. 79456
(December 2, 2016), 81 FR 88716 (December 8,
2016) (SR–NASDAQ–2016–162) (noting that the
‘‘price of data derived from Nasdaq Basic is
constrained by the existence of multiple substitutes
offered by numerous entities, including both
proprietary data offered by other SROs or other
entities, and non-proprietary data disseminated by
Securities Information Processors (‘SIPs’).’’).
22 See Securities Exchange Act Release No. 77578
(April 11, 2016), 81 FR 22344 (April 15, 2016) (SR–
NASDAQ–2016–048).
23 See Securities Exchange Act Release No. 83751
(July 31, 2018), 83 FR 38428 (August 6, 2018) (SR–
Nasdaq–2018–058).
24 See Securities Exchange Act Release No. 71507
(February 7, 2014), 79 FR 8763 (February 13, 2014)
(SR–NASDAQ–2014–011).
25 The broker-dealer would save the difference
between $365,000 and $155,000 ($210,000), plus an
additional $2,000 for the 1,000 Professional
Subscribers over 16,000.
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Subscriber monthly charges from
$21.60 26 to $9.12.27
In addition, a number of the mid-size
broker-dealers that currently have too
few professional subscribers to benefit
from the license would be able to
achieve substantial savings at the new,
lower rate. The ‘‘break even’’ point—i.e.,
the point at which the average perSubscriber rate of a licensee falls below
the per-Subscriber rate of $26—is
currently 14,038 internal Professional
Subscribers.28 Under the new fee
schedule, broker-dealers with as few as
5,962 internal Professional Subscribers
would be able to save money.29 A
hypothetical broker-dealer with 10,000
internal Professional Subscribers would
be able to save $105,000 per month,30
reducing per-Subscriber fees from $26 31
to $15.50.32
In addition to lowering Nasdaq’s fees,
the proposed rule change will allow
users to lower internal administrative
costs by eliminating the need to report
monthly usage. Nasdaq does not have
sufficient information about brokerdealer operations and costs to accurately
estimate these savings, but believes that
monthly savings in administrative
expenditures—as well as the improved
ability to project future expenditures
achieved by eliminating audit liability
for errors in reporting usage—to be
substantial.
Staff of the Commission’s Division of
Trading and Markets have indicated that
self-regulatory organizations (‘‘SROs’’)
proposing fee changes should provide
‘‘the projected number of purchasers
(including members, as well as nonmembers) of any new or modified
product or service . . . .’’ 33 While any
26 The hypothetical current average perSubscriber monthly charge is estimated as the
current fee of $365,000 plus $2,000 for the 1,000
Professional Subscribers over 16,000 divided by
17,000 internal Professional Subscribers.
27 The hypothetical per-Subscriber monthly
charge for the Proposal is estimated as the flat fee
of $155,000 divided by 17,000 internal Professional
Subscribers.
28 See Securities Exchange Act Release No. 71507
(February 7, 2014), 79 FR 8763 (February 13, 2014)
(SR–NASDAQ–2014–011) (explaining that the
$365,000 monthly fee for all internal subscribers,
divided by $26 monthly fee for each internal
Subscriber, is equal to 14,038).
29 This estimated cutoff point is calculated as the
Proposed license fee of $155,000 divided by the
per-Subscriber rate of $26 per month.
30 Savings are calculated as follows: 10,000
internal Professional Subscribers multiplied by $26
per-Subscriber equals $260,000. The difference
between $260,000 and $155,000 is $105,000.
31 See Equity 7 Pricing Schedule, Section
147(b)(1).
32 This figure is calculated as the proposed flat fee
of $155,000 divided by 10,000 internal Professional
Subscribers.
33 See Division of Trading and Markets, U.S.
Securities and Exchange Commission, ‘‘Staff
Guidance on SRO Filings Related to Fees (May 21,
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Sfmt 4703
broker-dealer with approximately 5,962
or more internal Subscribers will be able
to benefit from the proposed license,
Nasdaq does not know, and is unable to
ascertain with precision, the number of
internal Professional Subscribers
utilized by various broker-dealers, nor
can it anticipate the actions of its
competitors in response to the lower
enterprise license fee, and therefore
cannot project precisely the number of
expected purchasers. Nevertheless,
judging from expressions of interest and
Nasdaq’s experience in the financial
services industry, Nasdaq estimates that
between fifteen and twenty brokerdealers worldwide may elect to
purchase the license.34
2. Statutory Basis
The Exchange believes that its
Proposal is consistent with Section 6(b)
of the Act,35 in general, and furthers the
objectives of Sections 6(b)(4) and 6(b)(5)
of the Act,36 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.
As a preliminary manner, the
statutory basis for the current Nasdaq
Basic and NLS enterprise licenses have
already been explained in prior
filings.37 The Proposal lowers fees for
enterprise licenses that have already
been shown to be consistent with
Section 6(b) of the Act, and this analysis
therefore focuses on the new, lower
fees.38
2019), available at https://www.sec.gov/tm/staffguidance-sro-rule-filings-fees.
34 This estimate is based on customer
conversations and the experience and judgment of
Nasdaq staff.
35 See 15 U.S.C. 78f(b).
36 See 15 U.S.C. 78f(b)(4) and (5).
37 See, e.g., Securities Exchange Act Release No.
81697 (September 25, 2017), 82 FR 45639
(September 29, 2017) (SR–NASDAQ–2017–095);
Securities Exchange Act Release No. 72620 (July 16,
2014), 79 FR 42572 (July 22, 2014) (SR–NASDAQ–
2014–070); Securities Exchange Act Release No.
72153 (May 12, 2014), 79 FR 28575 (May 16, 2014)
(SR–NASDAQ–2014–045); Securities Exchange Act
Release No. 71507 (February 7, 2014), 79 FR 8763
(February 13, 2014) (SR–NASDAQ–2014–011); see
Securities Exchange Act Release No. 82723
(February 15, 2018), 83 FR 7812 (February 22, 2018)
(SR–Nasdaq–2018–010).
38 The statutory bases for both the Nasdaq Basic
and NLS enterprise licenses are identical. Both are
top-of-book products sold to broker-dealers for
internal distribution to Professionals. The fee
structure and use requirements are currently the
same for both, and will continue to be the same
under the Proposal. The discussion contained
herein therefore applies to both licenses.
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Federal Register / Vol. 85, No. 203 / Tuesday, October 20, 2020 / Notices
The Proposal Is an Equitable Allocation
of Reasonable Dues, Fees and Other
Charges
As the Commission and courts 39 have
recognized, ‘‘[i]f competitive forces are
operative, the self-interest of the
exchanges themselves will work
powerfully to constrain unreasonable or
unfair behavior.’’ 40 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.’’ 41
Nasdaq believes that competitive
forces constrain the price of top-of-book
products on two independent and
equally-sufficient grounds: (i)
Competition among exchanges and the
SIP for top-of-book data; and (ii)
competition among trading platforms.
The proposed fee change is a direct
competitive response to this intense,
multi-sided competition. We shall
discuss each major aspect of this
competition in turn.
Competition Over Top-of-Book Data
Sales
Nasdaq competes directly with other
exchanges in the sale of top-of-book
products, which provide best bid and
offer and last sale information for U.S.
exchange-listed securities.
Nasdaq Basic and NLS provide
choices to broker-dealers and other data
consumers by providing less than the
quantum of data provided through the
consolidated tape feeds, but at a lower
price. Thus, these products provide
broker-dealers and others with an
option to use a lesser amount of data in
circumstances where SEC Rule 603(c)
does not require a broker-dealer to
39 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)
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) (internal quotation marks
omitted). 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.’’ Id. (quoting
Securities Exchange Act Release No. 59039
(December 2, 2008), 73 FR 74770, 74,771 (December
9, 2008) (SR–NYSEArca–2006–21)).
40 See Securities Exchange Act Release No. 59039
(December 2, 2008), 73 FR 74770 (December 9,
2008) (SR–NYSEArca–2006–21).
41 Id.
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provide a consolidated display.42 All of
the top-of-book proprietary products
offered by the exchanges are readily
substitutable for each other and, in most
cases, with the consolidated information
offered by the SIPs.
All major exchange groups compete to
sell top-of-book data. Nasdaq Basic
provides data derived from liquidity
within the Nasdaq market center and
trades reported to the FINRA/Nasdaq
TRF. The NYSE BQT feed disseminates
top-of-book information from the NYSE,
NYSE American, NYSE Arca and NYSE
National exchanges.43 The Cboe One
Summary Feed provides data from the
four Cboe equities exchanges: BZX
Exchange, BYX Exchange, EDGX
Exchange and EDGA Exchange.44
Nasdaq, NYSE and Cboe compete on
price and quality. Like Nasdaq, both
NYSE 45 and Cboe 46 offer enterprise
licenses for their top-of book feeds. Cboe
touts its price in promotional
literature,47 and reduced its fee for
certain top-of-book customers just this
year.48 All of these top-of-book data
feeds, along with consolidated SIP data
(outside of the time of execution, in
which the use of consolidated SIP data
is mandated by the Vendor Display
Rule), are substitutes.49
42 See
17 CFR 242.603(c).
https://www.nyse.com/market-data/realtime/nyse-bqt.
44 See https://markets.cboe.com/us/equities/
market_data_services/#:∼:text=Cboe%20Top%20is
%20a%20real,time%20on%20a%20Cboe
%20book.&text=It%20is%20a%20real
%2Dtime,time%20on%20a%20Cboe%20book. We
note that Cboe recently proposed a fee reduction for
top-of-book data as well. See Securities Exchange
Act Release No. 86670 (August 14, 2019), 84 FR
43207 (August 20, 2019) (SR–CboeBYX–2019–012).
45 See https://www.nyse.com/market-data/realtime/nyse-bqt.
46 See https://markets.cboe.com/us/equities/
market_data_services/cboe_one/.
47 See https://markets.cboe.com/us/equities/
market_data_services/#:∼:text=Cboe%20Top%20is
%20a%20real,time%20on%20a%20Cboe
%20book.&text=It%20is%20a%20real
%2Dtime,time%20on%20a%20Cboe%20book
(‘‘The Cboe One Feed is 60% less expensive per
professional user and more than 85% less
expensive for an enterprise license for professional
users and non-professional users when compared to
a similar competitor exchange product.’’).
48 See Securities Exchange Act Release No. 88221
(February 14, 2020), 85 FR 9904 (February 20, 2020)
(SR–CboeBYX–2020–007) (stating that ‘‘the
Exchange’s top of book market data products are
among the most competitively priced in the
industry due to modest subscriber fees, and a lower
Enterprise cap . . . .’’). The filing included a table
comparing its pricing to Nasdaq Basic.
49 The exchange-based top-of-book feeds are not
a full substitute for the consolidated data
disseminated by the Securities Information
Processors because the Vendor Display Rule
prohibits a broker-dealer from ‘‘provid[ing], in a
context in which a trading or order-routing decision
can be implemented, a display of any information
with respect to quotations for or transactions in an
NMS stock without also providing, in an equivalent
43 See
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66623
Top-of-book data can be used for
many purposes—from a retail investor
casually surveying the market to
sophisticated market participants using
it for a variety of applications, such as
investment analysis, risk management,
or portfolio valuation.
The value of that data depends on its
quality and how well it approximates
the NBBO, which is determined by the
amount of order flow attracted by the
exchange—the more order flow, the
more quotes and trades, and the better
the exchange data will be able to match
the NBBO.
The fact that top-of-book products
exist at all shows that they are
substitutes for SIP data—it would be far
easier for any consumer who requires
data from all of the exchanges to
purchase SIP data alone rather than
consolidate multiple exchange feeds. It
has been suggested, however, that
market data products are
complementary products 50—i.e., that a
consumer who buys one product must
buy the other, like a video game and a
gaming console, to obtain a more useful
product. The evidence, however, shows
quite the opposite.51 If data products
were complementary, all customers
would be buying all direct feeds, with
no substitutes or substitution. In fact,
publically available data demonstrates
that 45% of alternative trading systems
(‘‘ATSs’’) 52 do not buy any direct feeds,
but rather use the SIP—some even reject
free data. The 18% of ATSs that buy
some direct feeds decide not to
purchase others.53 Exchanges charge
less for less valuable data,
demonstrating price elasticity, to the
point that some broker-dealers will not
accept data from smaller exchanges with
less order flow (even when that data is
offered for no fee) due to the fixed
developmental and systems costs
incurred by firms to enable them to
manner, a consolidated display for such stock.’’
Nevertheless, the SIP and exchange products are
substitutes for most other use cases, as the exchange
products closely follow the SIP.
50 See Letter from Ellen Greene, Managing
Director, SIFMA, to Vanessa Counterman,
Secretary, SEC at 5, n.14 (May 26, 2020), available
at https://www.sec.gov/comments/s7-03-20/s703207235189-217109.pdf.
51 See Phil Mackintosh, ‘‘Dispelling the
Complementary Product Theory for Market Data,’’
(August 20, 2020), available at https://
www.nasdaq.com/articles/dispelling-thecomplementary-product-theory-for-market-data2020-08-20.
52 ATSs are venues which are not regulated as
exchanges but nevertheless match buy and sell
orders for customers.
53 See Phil Mackintosh, ‘‘Dispelling the
Complementary Product Theory for Market Data,’’
(August 20, 2020), available at https://
www.nasdaq.com/articles/dispelling-thecomplementary-product-theory-for-market-data2020-08-20.
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receive and process data.54 Indeed,
Nasdaq’s own experience with sales of
top-of-book feeds underscores their
substitutability, as the customers whose
feedback has motivated this price
change inform Nasdaq that they will
drop Nasdaq Basic in favor of a
competing product unless a change is
made. The top-of-book data feeds sold
by the U.S. exchanges are therefore
substitutes, and exchanges compete to
sell them (as Nasdaq is attempting to do
with this proposed fee reduction).
Nasdaq’s experience is consistent
with findings by the Department of
Justice (‘‘DOJ’’) that exchanges compete
with each other for the sale of market
data. In 2011, the DOJ analyzed a
proposed transaction that would have
resulted in a combination of Nasdaq and
NYSE and found that it ‘‘would have
substantially eliminated competition for
. . . real-time proprietary equity data
products.’’ 55 Later that same year, in
suing to block a possible combination
between Deutsche Bo¨rse and NYSE
Euronext that would have brought
Direct Edge within the same exchange
group as NYSE, the DOJ cited a threat
to competition in the market for realtime equity market data as one of the
bases for its action.56
Platform Competition
The evidence shows that total returns
earned by the Exchange are constrained
by competition from other exchanges
and trading platforms. Nasdaq competes
against other exchanges to attract order
flow and trading activity, based on the
prices, incentives, product quality, and
other attributes that Nasdaq offers to
traders. This competition powerfully
constrains Nasdaq’s competitive
behavior, which is manifested through
rebates to traders, innovation, and price
decreases, among other things.
Economic efficiency is therefore
fostered by allowing Nasdaq the
flexibility to determine its optimal
prices across its portfolio of products,
including market data, connectivity and
trading services. Depending on a variety
of factors, including the reasons for the
change in market conditions, Nasdaq’s
54 A broker-dealer may decide not to accept ‘‘free’’
data because there is a cost to accepting such data
and integrating it into its trading systems.
55 See ‘‘NASDAQ OMX Group Inc. and
Intercontinental Exchange Inc. Abandon Their
Proposed Acquisition of NYSE Euronext After
Justice Department Threatens Lawsuit’’ (May 16,
2011) (available at https://www.justice.gov/opa/pr/
nasdaq-omx-group-inc-andintercontinentalexchange-inc-abandon-theirproposed-acquisition-nyse).
56 See Complaint, United States v. Deutsche Bo
¨ rse
AG and NYSE Euronext (Dec. 22, 2011) (available
at https://www.justice.gov/atr/case-document/file/
494146/download).
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optimal response to such changes can
entail price reductions for some
products or services, price increases for
other products or services, and no price
change for still others. Artificial
regulatory constraints on Nasdaq’s
pricing can dampen competition and
harm customers by constraining
Nasdaq’s ability to earn a predictable
and reasonable return on its investments
in products and technology, thus
diminishing the incentive to invest in
innovations and product enhancements
that will benefit consumers.
The fact that this market is
competitive has long been recognized by
the courts. As the D.C. Circuit stated in
NetCoalition v. Securities and Exchange
Commission, ‘‘[n]o one disputes that
competition for order flow is ‘fierce.’
. . . ‘In the U.S. national market system,
buyers and sellers of securities, and the
broker-dealers that act as their orderrouting 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’
. . . .’’ 57 Within this environment,
market participants can freely and often
do shift their order flow among the
Exchange and competing venues in
response to changes in their respective
pricing schedules.
Market data fees, including
connectivity fees and other exchange
fees, are constrained by competition
among trading platforms. Firms like
Nasdaq, NYSE, and Cboe are platform
businesses that compete on a variety of
interrelated dimensions, including the
provision of trading services, market
data, and connectivity services.
Exchanges owned by these firms
compete with each other to provide
trading services, and with a variety of
alternate trading platforms that host
over-the-counter trading. Such over-thecounter trading services are provided by
a large number of variegated entities,
including ‘‘dark pools,’’ multilateral
organizations that ‘‘pool’’ the orders of
traders and match them internally
without displaying quotations.
Guidance issued by Staff of the
Commission’s Division of Trading and
Markets states that an assertion that ‘‘an
SRO’s aggregate return across multiple
product lines, such as transactions,
market data, connectivity, and access, is
constrained by competition at the
platform level is insufficient unless
substantiated with evidence
demonstrating that the theory applies in
fact to the fee at issue.’’ 58 Thus, Staff
appears to be asserting that even if
competition between trading platforms
constrains the costs incurred by market
participants, it is irrelevant unless it can
be shown to constrain the particular fee
at issue in the filing. As detailed above,
the fee at issue in this filing is directly
constrained by competition to sell topof-book products, which is the impetus
behind this filing. Moreover, because
exchanges compete on the basis of both
price and quality, the competition to
attract orders to a trading platform is
another aspect of the competition to sell
top-of-book products, which can exist
only as a byproduct of that competition.
The quality of a top-of-book product
reflects the liquidity of the exchange
and time on the inside—i.e., order flow.
The more order flow, the more quotes
and trades, and the better the exchange
data will be able to match the NBBO.
However, because these products are
substitutes, a customer can readily
switch to a different exchange’s product,
even one of a lower quality, if fees are
raised. They can also shift order flow
toward a different product, and such
increases in order flow in turn have the
potential to boost the quality of the
competing product that they select.
Nasdaq believes, however, that the
narrow focus on the analysis of platform
competition reflected in the Staff fee
guidance misapprehends the analytical
insights offered by that theory: The vast
majority of market data consumers also
provide the raw materials that are
combined by an exchange into market
data, and therefore stand on both sides
of the platform. As a result, their overall
cost of doing business with an exchange
platform is a critical dimension on
which exchanges compete with one
another for those customers’ trades, and
imposing a governmental constraint on
the revenues associated with one aspect
of this competition will distort this
competition by impairing the ability of
exchanges to operate profitably,
reducing their incentives to invest in
innovations and other product
improvements, among other things.
Moreover, exchanges compete with one
another, in part, based on the mix of
products and services they offer,
including the various prices and
incentives they each offer to customers.
Government regulations that artificially
57 See NetCoalition v. SEC, 615 F.3d 525, 539
(D.C. Cir. 2010) (quoting Securities Exchange Act
Release No. 59039 (December 2, 2008), 73 FR
74770, 74782–83 (December 9, 2008) (SR–
NYSEArca–2006–21)).
58 See Division of Trading and Markets, U.S.
Securities and Exchange Commission, ‘‘Staff
Guidance on SRO Filings Related to Fees’’ (May 21,
2019), available at https://www.sec.gov/tm/staffguidance-sro-rule-filings-fees.
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constrain exchanges’ ability to price
their services will diminish competitive
variation, reduce customer choice, and
lead to anticompetitive effects that harm
customers. For all of these reasons,
Nasdaq believes that the analysis of the
all-in costs of doing business with
Nasdaq is highly relevant to an
appropriate competitive analysis of the
exchange marketplace. That said,
Nasdaq believes that evidence of
constraint upon the prices of market
data in general, and top-of-book
products specifically, abounds, as
described above and further described
below.
Figure 1 presents the trading shares
by platform operator at the end of 2019,
and shows that no single platform or
platform operator accounts for even 25
percent of trading in U.S. equities, and
that over-the-counter trading accounts
for a larger share of all trades than any
platform operator.
Many customers that purchase trading
and other services from an exchange are
sensitive to and concerned with the allin price of trading.59 For such
customers, what matters to their
purchasing decisions is the total outlay
relative to the quality of the various
services obtained from an exchange, as
compared to rival exchanges. Hence, a
customer’s willingness to interact with
an exchange is sensitive to the all-in
price of the various services purchased
on that exchange compared to the all-in
price available at other exchanges (as
well as the relative quality of exchange
services). Thus, the price and quality of
any service, such as market data, should
not be analyzed in isolation (i.e.,
separate from the price and quality of
other services that a customer purchases
from the exchange).
Because many customers are sensitive
to the all-in price of trading,
competition among trading platforms,
including dark pools, can be expected to
constrain the aggregate return each
platform earns from the sale of the array
of its products, including market data
and connectivity services.60 Thus, for
example, if an exchange increases the
price of one service, thereby increasing
the all-in price, competition from other
platforms would be expected to force it
to reduce the price (or increase the
rebate) of another service (all else equal)
to enable it to compete successfully
with other trading platforms. Moreover,
the low barriers to entry that exist in the
market for trading platform services
exert a further competitive constraint:
This year alone, three new exchange
59 See Statement of J. Ordover and G. Bamberger
filed with the U.S. Securities and Exchange
Commission, File No. SR–NASDAQ–2010–174, on
behalf of NASDAQ Stock Market, (Dec. 30, 2010),
¶ 38 (‘‘Even if a trading platform had some unique
information that is potentially valuable to (some)
consumers, the total price of trading on that
platform—which includes the price of market data
available from the platform that the trader elects to
purchase—is constrained by the total price of
trading on rival platforms.’’), available at https://
www.sec.gov/rules/sro/nasdaq/2012/34-66724ex3a.pdf.
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60 See Phil Mackintosh, Who Pays for Price
Discovery? (November 21, 2019), available at
https://www.nasdaq.com/articles/who-pays-forprice-discovery-2019-11-21 (providing an analysis
of the all-in cost per trade at Chart 3).
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platforms have commenced operations
or are expected to do so imminently.61
A recent study described the inverse
relationship between market data and
the price of trading services,
commenting that ‘‘[e]xchanges have [an]
incentive to cut their trading fees even
below the perfectly competitive (i.e.,
zero profit) level in order to win market
share and increase revenues from
market data and co-location [and]
connectivity,’’ 62 concluding that
‘‘regular-hours trading revenues do not
nearly cover exchange operating
expenses.63 The study reported that
exchange trading fees for high-volume
traders are often slightly negative on a
per-share per-side basis, which is
consistent with exchanges competing
intensely with one another based on the
total cost of services in order to attract
order flow.64
The inverse relationship between
market data and connectivity services
and the all-in price of trading is
demonstrated by an examination of
trends in Nasdaq’s revenue over an
eight-year period. Between 2010 and
2018, Nasdaq revenue from market data
61 The three new exchanges are the Long Term
Stock Exchange (LTSE), the Members Exchange
(MEMX) and the MIAX Pearl Equities exchange.
62 See Eric Budish, et al., Will the Market Fix the
Market? A Theory of Stock Exchange Competition
and Innovation, University of Chicago, Becker
Friedman Institute for Economics Working Paper
No. 2019–72, at 31 (May 2019), available at https://
ssrn.com/abstract=3391461 (‘‘Budish et al.’’).
63 Id. at 32.
64 Id. at 34.
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(which includes both exchange data and
other market non-exchange data
products) increased from $85.4 million
to $152.3 million, an increase of 78.4
percent in dollar terms, and 54.9
percent in inflation-adjusted terms.65
Moreover, the growth in revenues from
market data reflects the addition of
revenue from the sale of new products,
sales to new customers, incremental
sales to existing customers, and price
increases. Between 2010 and 2018, price
increases accounted for only about 35
percent of the total increase in market
data revenue. That is, about 65 percent
of the increase in market data revenue
reflects sales of new products, or
increased sales to new and existing
customers. Similarly, Nasdaq revenue
from connectivity services increased
from $103.2 million in 2010 to $167.6
million in 2018, an increase of 62.4
percent in dollar terms, and 41.0
percent in inflation-adjusted terms.
As revenue from market data and
connectivity services increased, the allin price of trading on Nasdaq fell. In
inflation-adjusted terms, the increase in
Nasdaq’s market data and connectivity
revenues almost exactly offset the
decline in its trading revenues, which
fell from $251.1 million in 2010 to
$189.6 million in 2018, a decline of 24.5
percent in dollar terms; adjusting for
inflation, trading revenues fell by 34.4
percent. Nasdaq’s total inflation65 Based on internal Nasdaq data (inflation
adjustment based on the All-Items Consumer Price
Index).
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adjusted revenues from market data,
connectivity, and trading services were
$506.4 million in 2010 and $509.5
million in 2018 (in 2018 dollars), an
increase of less than one-tenth of one
percent per year. Over the same period,
trading dollar volume on Nasdaq’s
equity exchanges increased by over 50
percent—from about $30.6 trillion in
2010 to $47.3 trillion in 2018. As a
result, the average all-in cost of
trading—that is, total Nasdaq revenues
divided by total Nasdaq trading
volume—fell by 24.9 percent between
2010 and 2018.66 In particular, the allin cost per $100,000 of trading volume
fell from $1.44 in 2010 to $1.08 in
2018.67 As shown in Figure 2, despite
the growth of market data and
connectivity revenue between 2010 and
2018, the all-in cost of trading on
Nasdaq’s exchanges (measured per
$100,000 of trading volume) declined
substantially between 2010 and 2018.
66 The all-in cost of trading relative to trading
volume is the relevant metric because, in general,
stock purchasers are indifferent to the number of
shares they purchase, and thus the all-in cost per
share traded is not a relevant ‘‘price.’’ For example,
an investor who wants to purchase $100,000 in
stock will generally be indifferent as to whether the
purchase represents 1,000 shares at $100 or 2,000
shares at $50.
67 In 2010, Nasdaq revenue equaled 0.00144
percent of trading volume on the Nasdaq equity
exchanges; in 2018, Nasdaq revenue equaled
0.00108 percent of trading volume on the Nasdaq
equity exchanges (i.e., a decline of 24.9 percent). To
make the figures easier to read, they are reported
as cost per $100,000 of trading volume.
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This demonstrates that Nasdaq’s
revenues are constrained by competition
from a variety of exchanges and other
trading platforms, and that this
competition reduced Nasdaq’s all-in
cost of trading between 2010 and 2018.
The constraint on price increases
imposed by platform competition is also
shown through an examination of
revenue growth in U.S. equity market
data. As shown in Figure 3,
approximately two-thirds of this
revenue growth reflects new customers,
new products, and new sales to
previous customers, not fee increases.
Customers who had not purchased
additional products or expanded
existing services had seen costs increase
by a compound annual growth rate
(‘‘CAGR’’) of only 2.4%, not much more
than the rate of inflation. Over that same
time period, the capacity of Nasdaq’s
matching engine more than doubled,
and latency fell drastically. A greater
portion of Nasdaq’s success in
66627
increasing revenue is therefore
attributable to selling better products to
more customers—the cornerstones of
competition—rather than increasing
fees. Thus, the portion of market data
revenues associated with price increases
shows an increase in the cost per
$100,000 of trading volume of only
0.631% per year, powerful evidence that
platform competition exerts a restraint
not only of all-in prices, but also of this
specific element of prices.68
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68 We noted above that Nasdaq’s total inflationadjusted revenues from market data, connectivity,
and trading services together increased by less than
one-tenth of one percent per year. The increase of
0.632% per year pertains only to that portion of
market data revenues associated with price
increases.
Federal Register / Vol. 85, No. 203 / Tuesday, October 20, 2020 / Notices
The evidence therefore shows that the
trading platforms operated by the
securities exchanges compete on the
basis of price (as well as innovation and
quality of service), and that competition
constrains the ability of any platform to
charge excessive fees across its platform
offerings, including their market data
products.
*
*
*
*
*
Competition—both competition
among trading platforms and in the sale
of top-of-book market data products—
constrains the price of top-of-book
market data, and 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. Competition
among platforms constrains the price of
market data through the interrelated
competition for order flow. The price of
top-of-book data is further constrained
by direct competition among exchanges
to sell top-of-book data, as illustrated by
proposals to reduce fees for three of the
four top-of-book enterprise licenses in
the past several years: (i) The enterprise
license for external distribution of
Nasdaq Basic; 69 (ii) the enterprise
69 See Securities Exchange Act Release No. 79456
(December 2, 2016), 81 FR 88716 (December 8,
2016) (SR–NASDAQ–2016–162) (noting that the
‘‘price of data derived from Nasdaq Basic is
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license for the external distribution of
NLS; 70 and (iii) the combined enterprise
license for distribution of top-of-book
and depth-of-book data.71 Nasdaq is not
alone in lowering fees to compete
against the other exchanges. Just this
year, Cboe proposed a fee reduction for
its top-of-book data.72 Competition
among platforms and competition in the
sale of specific market data products
provide independent and equallysufficient grounds for a finding that the
price of top-of-book data products are
constrained by competition.
The Proposal Does Not Permit Unfair
Discrimination
The Proposal is not unfairly
discriminatory. As previously noted, the
Nasdaq Basic enterprise license subject
to this Proposal was shown to be nondiscriminatory and otherwise consistent
constrained by the existence of multiple substitutes
offered by numerous entities, including both
proprietary data offered by other SROs or other
entities, and non-proprietary data disseminated by
Securities Information Processors (‘SIPs’).’’).
70 See Securities Exchange Act Release No. 77578
(April 11, 2016), 81 FR 22344 (April 15, 2016) (SR–
NASDAQ–2016–048).
71 See Securities Exchange Act Release No. 83751
(July 31, 2018), 83 FR 38428 (August 6, 2018) (SR–
Nasdaq–2018–058).
72 See Securities Exchange Act Release No. 86670
(August 14, 2019), 84 FR 43207 (August 20, 2019)
(SR–CboeBYX–2019–012).
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with the Act over six years ago.73 The
only difference between that initial
proposal and the change under
consideration today is that the new
license costs less and more brokerdealers will be able to benefit from the
lower prices. Enterprise licenses in
general have been widely recognized as
an effective and not unfairly
discriminatory method of distributing
market data. This applies to Nasdaq’s
enterprise licenses as well as those
offered by the NYSE and Cboe
exchanges.74
The Act does not prohibit all
distinctions among customers; only
discrimination that is unfair. It is not
unfair discrimination to charge those
Distributors that are able to reach the
largest audiences of retail investors a
lower fee for incremental investors in
order to encourage the widespread
distribution of market data. The instant
Proposal, like other enterprise licenses,
will cause top-of-book data to become
more widely available to investors. It
73 See Securities Exchange Act Release No. 71507
(February 7, 2014), 79 FR 8763 (February 13, 2014)
(SR–NASDAQ–2014–011) (initially adopting the
current enterprise license).
74 See, e.g., Sections 123(c) and 147(b); Securities
Exchange Act Release No. 82182 (November 30,
2017), 82 FR 57627 (December 6, 2017) (SR–NYSE–
2017–60) (changing an enterprise fee for NYSE BBO
and NYSE Trades).
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Federal Register / Vol. 85, No. 203 / Tuesday, October 20, 2020 / Notices
will save current enterprise license
purchasers the $210,000 per month
difference between the current base fee
of $365,000 and $155,000, plus $2 times
the number of internal Professional
Subscribers over 16,000. Broker-dealers
that do not currently purchase the
license will nevertheless benefit because
the ‘‘break even’’ point—i.e., the point
where the average per-Subscriber rate of
a licensee falls below per-Subscriber
rate of $26—will fall from 14,038 to
5,962 internal Professional
Subscribers.75 All purchasers of the
proposed license will also be able to
save in administrative expenditures by
eliminating monthly reporting
requirements and periodic review of
such reports by compliance staff.
It is of particular importance now to
expand the availability of top-of-book
data. In recent months, retail investors
have become increasingly interested in
equities markets. Many of these retail
investors will require advice and
assistance from equity market
professionals, and this license will
enable broker-dealers that serve such
clients to do so at a lower cost.
Moreover, the proposed enterprise
license will be subject to significant
competition, and that competition will
ensure that there is no unfair
discrimination. Each Distributor will be
able to accept or reject the license
depending on whether it will or will not
lower costs for that particular
Distributor, and, if the license is not
sufficiently competitive, the Exchange
may lose market share.
For all of these reasons, the Proposal
is not unreasonably discriminatory.
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. With respect
to inter-market competition—the
competition among SROs—the
Exchange’s ability to price market data
products is constrained by (i)
competition among exchanges for topof-book data; and (ii) platform
competition. With respect to intramarket competition—the competition
among consumers of exchange data—the
Exchange expects the Proposal to
promote competition through lower-cost
data.
75 See Securities Exchange Act Release No. 71507
(February 7, 2014), 79 FR 8763 (February 13, 2014)
(SR–NASDAQ–2014–011) (explaining that the
$365,000 monthly fee for all internal subscribers,
divided by $26 monthly fee for each internal
Subscriber, is equal to 14,038).
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18:08 Oct 19, 2020
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Intermarket Competition
As discussed in detail under Statutory
Basis, Nasdaq competes with other
exchanges in the sale of top-of-book
products. Because top-of-book products
provide less than the quantum of data
provided through the consolidated tape
feeds at a lower price, consumers have
the option to use a lesser amount of data
when SEC Rule 603(c) does not require
a broker-dealer to provide a
consolidated display.76
Market data fees are also constrained
by competition among trading
platforms, which compete on a variety
of dimensions, including the provision
of trading services, market data, and
connectivity services, and also with a
variety of alternate trading platforms
that host over-the-counter trading.
Because many customers are sensitive to
the all-in price of trading, competition
among trading platforms, including dark
pools, can be expected to constrain the
aggregate return each platform earns
from the sale of the array of its products,
including market data and connectivity
services. This can be shown empirically
by the inverse relationship between
revenue from market data and
connectivity services, the fall in the allin cost of trading over an eight-year
period, and other evidence discussed
under Statutory Basis.
In order to better compete for this
segment of the market, the Exchange is
proposing to reduce the cost of top-ofbook data by lowering the enterprise
license fee for internal Professional
Subscribers. The proposed price
reduction will not cause any
unnecessary or inappropriate burden on
intermarket competition, as other
exchanges and data vendors are free to
lower their prices to better compete
with the Exchange’s offering. Nasdaq’s
main competitors, in particular, offer
directly competing enterprise licenses
for their top-of-book products, and are
readily able to lower enterprise license
fees in response to Nasdaq. Indeed, the
Exchange’s decision to lower its
enterprise license fee was itself
generated by the need to compete with
other exchanges. The Proposal may in
turn generate competitive responses
from other exchanges, enhancing overall
competition.
Intramarket Competition
The Proposal will not cause any
unnecessary or inappropriate burden on
intramarket competition. In fact, it will
foster competition among broker-dealers
by lowering costs for current licensees,
while at the same time increasing the
76 See
PO 00000
17 CFR 242.603(c).
Frm 00097
Fmt 4703
number of broker-dealers able to
purchase that license. The current
enterprise license, just like all of the
enterprise licenses offered by Nasdaq’s
competitors, does not itself impose an
unnecessary or inappropriate burden on
intramarket competition. Relatively
smaller broker-dealers have fewer
internal Professional Subscribers and
therefore operate with lower fixed costs,
helping them compete with the larger
broker-dealers. Moreover, the
underlying fee of $26 per Professional
Subscriber fee has itself been shown not
to place an undue burden on
competition, and, if that fee proves to be
excessive, broker-dealers would be able
to purchase top-of-book data from one of
the Exchange’s competitors offering a
substitute product. For all of these
reasons, the Proposal will not place any
unnecessary or inappropriate burden on
intramarket competition.
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.77
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 rule-comments@
sec.gov. Please include File Number SR–
NASDAQ–2020–065 on the subject line.
77 15
Sfmt 4703
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U.S.C. 78s(b)(3)(A)(ii).
20OCN1
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Federal Register / Vol. 85, No. 203 / Tuesday, October 20, 2020 / Notices
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–2020–065. 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–2020–065 and
should be submitted on or before
November 10, 2020.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.78
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020–23148 Filed 10–19–20; 8:45 am]
BILLING CODE 8011–01–P
78 17
CFR 200.30–3(a)(12).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–90182; File No. SR–FICC–
2020–009]
Self-Regulatory Organizations; Fixed
Income Clearing Corporation; Notice of
Filing of Amendment No. 2 and Order
Granting Accelerated Approval of a
Proposed Rule Change, as Modified by
Amendment Nos. 1 and 2, To Introduce
the Margin Liquidity Adjustment
Charge and Include a Bid-Ask Charge
in the VaR Charges
October 14, 2020.
On July 30, 2020, Fixed Income
Clearing Corporation (‘‘FICC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’), pursuant
to Section 19(b)(1) of the Securities
Exchange Act of 1934 (‘‘Act’’) 1 and Rule
19b–4 thereunder,2 proposed rule
change SR–FICC–2020–009 to add two
new charges to FICC’s margin
methodologies.3 On August 13, 2020,
FICC filed Amendment No. 1 to the
proposed rule change, to make
clarifications and corrections to the
proposed rule change.4 The proposed
rule change, as modified by Amendment
No. 1, was published for public
comment in the Federal Register on
August 20, 2020,5 and the Commission
received no comments.
On August 27, 2020, FICC filed
Amendment No. 2 to the proposed rule
change to provide additional data for
the Commission to consider in
analyzing the proposed rule change.6
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 FICC also filed the proposals contained in the
proposed rule change as advance notice SR–FICC–
2020–802 with the Commission pursuant to Section
806(e)(1) of the Dodd-Frank Wall Street Reform and
Consumer Protection Act entitled the Payment,
Clearing, and Settlement Supervision Act of 2010
(‘‘Clearing Supervision Act’’), 12 U.S.C. 5465(e)(1),
and Rule 19b–4(n)(1)(i) of the Act, 17 CFR 240.19b–
4(n)(1)(i).
4 Amendment No. 1 made clarifications and
corrections to the description of the proposed rule
change and Exhibits 3 and 5 of the filing. On August
13, 2020, FICC filed Amendment No. 1 to the
advance notice to make similar clarifications and
corrections to the advance notice.
5 Securities Exchange Act Release No. 89560
(August 14, 2020), 85 FR 51503 (August 20, 2020)
(‘‘Notice’’). The advance notice, as modified by
Amendment No. 1, was published for public
comment in the Federal Register on September 4,
2020. Securities Exchange Act Release No. 89718
(September 1, 2020), 85 FR 55341 (September 4,
2020) (File No. SR–FICC–2020–802). The comment
period for the advance notice, as modified by
Amendment No. 1 closed on September 21, 2020,
and the Commission received no comments.
6 In Amendment No. 2, FICC updated Exhibit 3
to the proposed rule change to include impact
analysis data with respect to the proposed rule
change. FICC filed Exhibit 3 as a confidential
exhibit to the proposed rule change pursuant to 17
CFR 240.24b–2. On August 27, 2020, FICC filed
2 17
PO 00000
Frm 00098
Fmt 4703
Sfmt 4703
The proposed rule change, as modified
by Amendment Nos. 1 and 2, is
hereinafter referred to as the ‘‘Proposed
Rule Change.’’ On October 2, 2020,
pursuant to Section 19(b)(2) of the Act,7
the Commission designated a longer
period within which to approve,
disapprove, or institute proceedings to
determine whether to approve or
disapprove the Proposed Rule Change.8
The Commission is publishing this
notice to solicit comments on
Amendment No. 2 from interested
persons and, for the reasons discussed
below, to approve the Proposed Rule
Change on an accelerated basis.
I. Description of the Proposed Rule
Change
First, the Proposed Rule Change
would revise the FICC Government
Securities Division (‘‘GSD’’) Rulebook
(‘‘GSD Rules’’) and FICC MortgageBacked Securities Division (‘‘MBSD’’)
Clearing Rules (‘‘MBSD Rules,’’ and
together with the GSD Rules, the
‘‘Rules’’) 9 to introduce the Margin
Liquidity Adjustment Charge (‘‘MLA
Charge’’) as an additional margin
component. Second, the Proposed Rule
Change would revise the Rules, GSD
Methodology Document—GSD Initial
Market Risk Margin Model (‘‘GSD QRM
Methodology Document’’), and MBSD
Methodology and Model Operations
Document—MBSD Quantitative Risk
Model (‘‘MBSD QRM Methodology
Document,’’ and together with the GSD
QRM Methodology Document, the
‘‘QRM Methodology Documents’’) 10 to
add a bid-ask spread risk charge (‘‘BidAsk Spread Charge’’) to the margin
calculations of GSD and MBSD.
A. Background
FICC serves as a central counterparty
(‘‘CCP’’) and provider of significant
clearance and settlement services for
cash-settled U.S. Treasury and agency
securities and the non-private label
Amendment No. 2 to the advance notice to provide
similar additional data for the Commission’s
consideration. The advance notice, as amended by
Amendment Nos. 1 and 2, is hereinafter referred to
as the ‘‘Advance Notice.’’ On October 2, 2020, the
Commission published notice of filing of
Amendment No. 2 and notice of no objection to the
Advance Notice. Securities Exchange Act Release
No. 90033 (September 28, 2020), 85 FR 62348
(October 2, 2020) (File No. SR–FICC–2020–802).
7 15 U.S.C. 78s(b)(2).
8 Securities Exchange Act Release No. 90083
(October 2, 2020), 85 FR 63610 (October 8, 2020).
9 Capitalized terms not defined herein are defined
in the Rules, available at https://www.dtcc.com/
legal/rules-and-procedures.aspx.
10 FICC filed the proposed changes to the QRM
Methodology Documents as confidential exhibits to
the Advance Notice pursuant to 17 CFR 240.24b–
2.
E:\FR\FM\20OCN1.SGM
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]]>Agencies
[Federal Register Volume 85, Number 203 (Tuesday, October 20, 2020)]
[Notices]
[Pages 66620-66630]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-23148]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-90177; File No. SR-NASDAQ-2020-065]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Lower the Enterprise License Fee for Broker-Dealers Distributing Nasdaq
Basic to Internal Professional Subscribers as Set Forth in the Equity 7
Pricing Schedule, Section 147, and the Enterprise License Fee for
Broker-Dealers Distributing Nasdaq Last Sale to Professional
Subscribers at Equity 7, Section 139
October 14, 2020.
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 September 30, 2020, 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 lower the enterprise license fee for
broker-dealers distributing Nasdaq Basic to internal Professional
Subscribers as set forth in the Equity 7 Pricing Schedule, Section 147,
and the enterprise license fee for broker-dealers distributing Nasdaq
Last Sale (``NLS'') to Professional Subscribers at Equity 7, Section
139.
The text of the proposed rule change is available on the Exchange's
website at https://listingcenter.nasdaq.com/rulebook/nasdaq/rules, 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
Nasdaq proposes to lower the enterprise license fee for broker-
dealers distributing Nasdaq Basic to internal Professional Subscribers
\3\ from a two-tiered fee of $365,000, plus $2 for any Professional
Subscribers over 16,000, to a flat fee of $155,000. The license would
otherwise remain unchanged.
---------------------------------------------------------------------------
\3\ A ``Professional Subscriber'' is any Subscriber other than a
Non-Professional Subscriber. A ``Non-Professional Subscriber'' is
``a natural person who is not (i) registered or qualified in any
capacity with the Commission, the Commodity Futures Trading
Commission, any state securities agency, any securities exchange or
association, or (ii) any commodities or futures contract market or
association; engaged as an `investment adviser' as that term is
defined in Section 201(11) of the Investment Advisers Act of 1940
(whether or not registered or qualified under that Act); or (iii)
employed by a bank or other organization exempt from registration
under federal or state securities laws to perform functions that
would require registration or qualification if such functions were
performed for an organization not so exempt.'' See Equity 7 Pricing
Schedule, Section 147(d)(4).
---------------------------------------------------------------------------
The enterprise license fee for broker-dealers distributing NLS to
internal Professional Subscribers would be changed in a similar
fashion: the two-tiered fee of $365,000, plus $2 for any Professional
Subscribers over 16,000, would be replaced with a flat fee of $155,000.
Both fee reductions are designed to help Nasdaq compete against other
exchanges selling top-of-book \4\ market data products.
---------------------------------------------------------------------------
\4\ ``Top-of-book'' market data products provide last sale
information, or both last sale and best bid and offer information to
the user, without additional ``depth of book'' data. Both Nasdaq
Last Sale and Nasdaq Basic are examples of top-of-book products.
---------------------------------------------------------------------------
Nasdaq Basic and Nasdaq Last Sale
Nasdaq Basic is a real-time market data product that offers best
bid and offer and last sale information for all U.S. exchange-listed
securities based on liquidity within the Nasdaq market center and
trades reported to the FINRA/Nasdaq Trade Reporting Facility (``TRF'').
It is a subset of the ``core'' quotation and last sale data provided by
securities information processors (``SIPs'') distributing consolidated
data pursuant to the CTA/CQ Plan and the UTP Plan. Nasdaq Basic is
separated into three components, which may be purchased individually or
in combination: (i) Nasdaq Basic for Nasdaq, which contains the best
bid and offer on the Nasdaq market center and last sale transaction
reports for Nasdaq and the FINRA/Nasdaq TRF for Nasdaq-listed stocks;
(ii) Nasdaq Basic for NYSE, which covers NYSE-listed stocks, and (iii)
Nasdaq Basic for NYSE American, which provides data on stocks listed on
NYSE American and other listing venues that disseminate quotes and
trade reports on Tape B. The specific data elements available through
Nasdaq Basic are: (i) Nasdaq Basic Quotes (``QBBO''), the best bid and
offer and associated size available in the Nasdaq Market Center, as
well as last sale transaction reports; (ii) Nasdaq opening and closing
prices, as well as IPO and trading halt cross prices; and (iii) general
exchange information, including systems status reports, trading halt
information, and a stock directory.
NLS provides real-time last sale information for executions
occurring within the Nasdaq market center and trades reported to the
jointly-operated FINRA/Nasdaq TRF.\5\ The NLS data
[[Page 66621]]
feed, which provides price, volume and time of execution data for last
sale transactions, includes transaction information for Nasdaq-listed
stocks (``NLS for Nasdaq'') and for stocks listed on NYSE, NYSE
American, and other Tape B listing venues (``NLS for NYSE/NYSE
American'').\6\ This is also a non-core product that provides a subset
of the core last sale data distributed by the SIPs under the CTA/CQ
Plan and the UTP Plan.\7\
---------------------------------------------------------------------------
\5\ See Securities Exchange Act Release No. 57965 (June 16,
2008), 73 FR 35178 (June 20, 2008) (SR-NASDAQ-2006-060) (proposing
NLS); see also Securities Exchange Act Release No. 57965 (June 16,
2008), 73 FR 35178 (June 20, 2008) (SR-NASDAQ-2006-060) (approving
SR-NASDAQ-2006-060, as amended by Amendment Nos. 1 and 2, to
implement NLS on a pilot basis).
\6\ See Securities Exchange Act Release No. 57965 (June 16,
2008), 73 FR 35178 (June 20, 2008) (SR-NASDAQ-2006-060).
\7\ See Securities Exchange Act Release No. 34-82723 (February
15, 2018), 83 FR 7812 (February 22, 2018) (SR-NASDAQ-2018-010).
---------------------------------------------------------------------------
Current Top-of-Book Enterprise Licenses for Internal Professional
Subscribers
Broker-dealers may purchase Nasdaq Basic, or Derived Data \8\
therefrom, for internal professional use for a monthly per-Subscriber
fee of $26,\9\ or, in lieu of a per-Subscriber fee, purchase an
enterprise license for the internal distribution of Nasdaq Basic to
Professional Subscribers for $365,000, plus $2 for any Professional
Subscribers over 16,000 if an external Distributor \10\ controls the
display of the product.\11\ The license also allows the broker-dealer
to display NLS data for its own stock price and that of up to ten of
its competitors or peers on its internal website. Separate licenses
must be purchased if more than one external Distributor controls
display of the product. The license excludes Distributor fees, which
are $1,500 per month for internal distribution.\12\
---------------------------------------------------------------------------
\8\ ``Derived Data'' is ``pricing data or other information that
is created in whole or in part from Nasdaq information; it cannot be
reverse engineered to recreate Nasdaq information, or be used to
create other data that is recognizable as a reasonable substitute
for Nasdaq information.'' See Equity 7, Section 147(d)(6).
\9\ See Equity 7 Pricing Schedule, Section 147(b)(1). The $26
monthly per-Subscriber fee consists of monthly charges of $13 for
Nasdaq Basic for Nasdaq, $6.50 for Nasdaq Basic for NYSE, and $6.50
for Nasdaq Basic for NYSE MKT.
\10\ ``Distributor'' refers to ``any entity that receives Nasdaq
Basic data directly from Nasdaq or indirectly through another entity
and then distributes it to one or more Subscribers. (A) ``Internal
Distributors'' are Distributors that receive Nasdaq Basic data and
then distribute that data to one or more Subscribers within the
Distributor's own entity. (B) ``External Distributors'' are
Distributors that receive Nasdaq Basic data and then distribute that
data to one or more Subscribers outside the Distributor's own
entity. See Equity 7, Section 147(d)(1).
\11\ The additional $2 fee was introduced to defray additional
costs incurred by Nasdaq when distributing Nasdaq Basic through an
External Distributor that controls display of the product. See
Securities Exchange Act Release No. 71507 (February 7, 2014), 79 FR
8763 (February 13, 2014) (SR-NASDAQ-2014-011).
\12\ See Equity 7 Pricing Schedule, Section 147(c)(1).
---------------------------------------------------------------------------
Although NLS was initially designed for general distribution to
individual investors,\13\ a broker-dealer may elect to distribute this
data to its registered representatives through an employer-provided
workstation or software application. To allow for such usage, Nasdaq
adopted a fee schedule for ``specialized usage'' of NLS not associated
with distribution of data to the general investing public. In general,
broker-dealers paying for specialized usage track either the number of
Subscribers receiving data or the number of queries for the data, and
pay the corresponding fee.
---------------------------------------------------------------------------
\13\ See Securities Exchange Act Release No. 82723 (February 15,
2018), 83 FR 7812 (February 22, 2018) (SR-Nasdaq-2018-010)
(explaining that ``NLS was designed to enable market-data
`distributors to provide free access to the data contained in NLS to
millions of individual investors via the internet and television'
and was expected to `increase the availability of Nasdaq proprietary
market data to individual investors.' '').
---------------------------------------------------------------------------
As an alternative to per-Subscriber or per-query fees, however, a
broker-dealer may purchase an enterprise license for internal
Subscribers to receive NLS, or Derived Data therefrom, through an
external Distributor that controls display of the product. The fee is
$365,000 per month for up to 16,000 internal Subscribers, plus $2 for
each additional internal Subscriber over 16,000, the same fee structure
as the enterprise license for the internal distribution of Nasdaq Basic
to Professionals. A separate enterprise license must be purchased for
each external Distributor that controls the display of the product. The
enterprise license does not include distributor fees.
Proposed Fee Reduction for Nasdaq Basic and NLS Enterprise Licenses
Nasdaq proposes to reduce its enterprise license fees for Nasdaq
Basic and NLS to bolster its ability to compete effectively against
other exchanges selling top-of-book market data products. Nasdaq faces
fierce competition in the multi-sided market for exchange services,
including the sale of all market data products. In addition, top-of-
book data products--those that provide last sale information such as
NLS, or last sale and best bid and offer information like Nasdaq
Basic--face vigorous direct competition from the top-of-book data
products offered by other equities exchanges, which are substitutes.
The value of a top-of-book product depends on the quality of the
data and how well it approximates the consolidated National Best Bid
and Offer (``NBBO'') disseminated by the SIPs--the better the
approximation, in terms of time and number of stocks, the more useful
the product.\14\ This usefulness is determined by the amount of order
flow attracted by the exchange--the more order flow, the more quotes
and trades, and the better the exchange data will be able to match the
NBBO. Nasdaq faces vigorous competition for the sale of this data,
including from the ``Best Quote and Trade'' (``BQT'') product sold by
the NYSE-affiliated exchanges, and the Cboe One Summary Feed.\15\
---------------------------------------------------------------------------
\14\ Nasdaq understands that many customers that purchase SIP
data do not also purchase Nasdaq Basic because they are closely-
related products. Where customers do buy both products, they may
shift the extent to which they purchase one or the other based on
price changes, by, for example, reducing the number of queries
submitted for either product. The SIP constrains the price of Nasdaq
Basic because no purchaser would pay an excessive price for Nasdaq
Basic when similar data is also available from the SIP.
\15\ Nasdaq Basic is not a substitute for the SIP in all use
cases because Rule 603(c) of Regulation NMS (the ``Vendor Display
Rule'') prohibits a broker-dealer from ``provid[ing], in a context
in which a trading or order-routing decision can be implemented, a
display of any information with respect to quotations for or
transactions in an NMS stock without also providing, in an
equivalent manner, a consolidated display for such stock.''
---------------------------------------------------------------------------
Nasdaq received customer feedback requesting that it lower the
price of the professional licenses for its top-of-book products. This
feedback prompted a reexamination of Nasdaq's four enterprise licenses
for top-of-book data: (i) The license for internal Professional
distribution of Nasdaq Basic to Professionals for $365,000 per month
(the subject of this proposal); (ii) the license for external
distribution of Nasdaq Basic to Professionals and Non-Professionals in
the context of the brokerage relationship for $100,000 per month; \16\
(iii) the license for external distribution of NLS data to the General
Investing Public for Display Usage for $41,500; \17\ and (iv) the
license for internal and external distribution of top-of-book \18\ and
depth-of-book \19\ products for $500,000 with a twelve-month
commitment, or a month-to-month fee of $600,000.\20\
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\16\ See Equity 7 Pricing Schedule, Section 147(b)(5).
\17\ See Equity 7 Pricing Schedule, Section 139(b)(4).
\18\ The top-of-book products distributed under this license are
Nasdaq Basic, NLS and NLS Plus.
\19\ The depth-of-book products distributed under this license
are TotalView and Level 2.
\20\ See Equity 7 Pricing Schedule, Section 132.
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Fees for three of these four licenses have been reduced in the last
several years. In 2016, Nasdaq lowered the fee for external
distribution of Nasdaq Basic in the context of the brokerage
[[Page 66622]]
relationship from $350,000 to $100,000.\21\ Also in 2016, the Exchange
reduced the monthly fee for the external distribution of NLS data from
$50,000 to $41,500.\22\ In 2018, Nasdaq introduced an enterprise
license that substantially lowered the cost of purchasing top-of-book
and depth-of-book data together by replacing three separate enterprise
licenses--$365,000 for internal distribution of Nasdaq Basic, $100,000
for external distribution in a brokerage relationship, and $500,000 for
distribution of depth-of-book products--with a single license for a
monthly fee of $500,000, with a twelve-month service commitment.\23\
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\21\ See Securities Exchange Act Release No. 79456 (December 2,
2016), 81 FR 88716 (December 8, 2016) (SR-NASDAQ-2016-162) (noting
that the ``price of data derived from Nasdaq Basic is constrained by
the existence of multiple substitutes offered by numerous entities,
including both proprietary data offered by other SROs or other
entities, and non-proprietary data disseminated by Securities
Information Processors (`SIPs').'').
\22\ See Securities Exchange Act Release No. 77578 (April 11,
2016), 81 FR 22344 (April 15, 2016) (SR-NASDAQ-2016-048).
\23\ See Securities Exchange Act Release No. 83751 (July 31,
2018), 83 FR 38428 (August 6, 2018) (SR-Nasdaq-2018-058).
---------------------------------------------------------------------------
In light of customer feedback and Nasdaq's history of lowering fees
for top-of-book products, Nasdaq determined that the proposed fee will
better position it to operate in the current competitive environment.
Fees for the other three enterprise licenses have been lowered over the
course of the last four years, while the license fee for internal
professionals has not changed since the enterprise license was
introduced in 2014.\24\ Nasdaq believes that this fourth fee reduction
will allow it to continue to compete in the market for top-of-book
products.
---------------------------------------------------------------------------
\24\ See Securities Exchange Act Release No. 71507 (February 7,
2014), 79 FR 8763 (February 13, 2014) (SR-NASDAQ-2014-011).
---------------------------------------------------------------------------
The new enterprise license fee will substantially lower total and
per-Subscriber costs for broker-dealers with approximately 5,962 or
more internal Professional Subscribers. All current enterprise license
purchasers will save the difference between the current base fee of
$365,000 and the proposed fee of $155,000 (which is $210,000 per
month), plus $2 times the number of internal Professional Subscribers
over 16,000. A broker-dealer with 17,000 internal Professional
Subscribers, for example, would save a total of $212,000 per month as
compared to the current license,\25\ reducing average per-Subscriber
monthly charges from $21.60 \26\ to $9.12.\27\
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\25\ The broker-dealer would save the difference between
$365,000 and $155,000 ($210,000), plus an additional $2,000 for the
1,000 Professional Subscribers over 16,000.
\26\ The hypothetical current average per-Subscriber monthly
charge is estimated as the current fee of $365,000 plus $2,000 for
the 1,000 Professional Subscribers over 16,000 divided by 17,000
internal Professional Subscribers.
\27\ The hypothetical per-Subscriber monthly charge for the
Proposal is estimated as the flat fee of $155,000 divided by 17,000
internal Professional Subscribers.
---------------------------------------------------------------------------
In addition, a number of the mid-size broker-dealers that currently
have too few professional subscribers to benefit from the license would
be able to achieve substantial savings at the new, lower rate. The
``break even'' point--i.e., the point at which the average per-
Subscriber rate of a licensee falls below the per-Subscriber rate of
$26--is currently 14,038 internal Professional Subscribers.\28\ Under
the new fee schedule, broker-dealers with as few as 5,962 internal
Professional Subscribers would be able to save money.\29\ A
hypothetical broker-dealer with 10,000 internal Professional
Subscribers would be able to save $105,000 per month,\30\ reducing per-
Subscriber fees from $26 \31\ to $15.50.\32\
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\28\ See Securities Exchange Act Release No. 71507 (February 7,
2014), 79 FR 8763 (February 13, 2014) (SR-NASDAQ-2014-011)
(explaining that the $365,000 monthly fee for all internal
subscribers, divided by $26 monthly fee for each internal
Subscriber, is equal to 14,038).
\29\ This estimated cutoff point is calculated as the Proposed
license fee of $155,000 divided by the per-Subscriber rate of $26
per month.
\30\ Savings are calculated as follows: 10,000 internal
Professional Subscribers multiplied by $26 per-Subscriber equals
$260,000. The difference between $260,000 and $155,000 is $105,000.
\31\ See Equity 7 Pricing Schedule, Section 147(b)(1).
\32\ This figure is calculated as the proposed flat fee of
$155,000 divided by 10,000 internal Professional Subscribers.
---------------------------------------------------------------------------
In addition to lowering Nasdaq's fees, the proposed rule change
will allow users to lower internal administrative costs by eliminating
the need to report monthly usage. Nasdaq does not have sufficient
information about broker-dealer operations and costs to accurately
estimate these savings, but believes that monthly savings in
administrative expenditures--as well as the improved ability to project
future expenditures achieved by eliminating audit liability for errors
in reporting usage--to be substantial.
Staff of the Commission's Division of Trading and Markets have
indicated that self-regulatory organizations (``SROs'') proposing fee
changes should provide ``the projected number of purchasers (including
members, as well as non-members) of any new or modified product or
service . . . .'' \33\ While any broker-dealer with approximately 5,962
or more internal Subscribers will be able to benefit from the proposed
license, Nasdaq does not know, and is unable to ascertain with
precision, the number of internal Professional Subscribers utilized by
various broker-dealers, nor can it anticipate the actions of its
competitors in response to the lower enterprise license fee, and
therefore cannot project precisely the number of expected purchasers.
Nevertheless, judging from expressions of interest and Nasdaq's
experience in the financial services industry, Nasdaq estimates that
between fifteen and twenty broker-dealers worldwide may elect to
purchase the license.\34\
---------------------------------------------------------------------------
\33\ See Division of Trading and Markets, U.S. Securities and
Exchange Commission, ``Staff Guidance on SRO Filings Related to Fees
(May 21, 2019), available at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees.
\34\ This estimate is based on customer conversations and the
experience and judgment of Nasdaq staff.
---------------------------------------------------------------------------
2. Statutory Basis
The Exchange believes that its Proposal is consistent with Section
6(b) of the Act,\35\ in general, and furthers the objectives of
Sections 6(b)(4) and 6(b)(5) of the Act,\36\ 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.
---------------------------------------------------------------------------
\35\ See 15 U.S.C. 78f(b).
\36\ See 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------
As a preliminary manner, the statutory basis for the current Nasdaq
Basic and NLS enterprise licenses have already been explained in prior
filings.\37\ The Proposal lowers fees for enterprise licenses that have
already been shown to be consistent with Section 6(b) of the Act, and
this analysis therefore focuses on the new, lower fees.\38\
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\37\ See, e.g., Securities Exchange Act Release No. 81697
(September 25, 2017), 82 FR 45639 (September 29, 2017) (SR-NASDAQ-
2017-095); Securities Exchange Act Release No. 72620 (July 16,
2014), 79 FR 42572 (July 22, 2014) (SR-NASDAQ-2014-070); Securities
Exchange Act Release No. 72153 (May 12, 2014), 79 FR 28575 (May 16,
2014) (SR-NASDAQ-2014-045); Securities Exchange Act Release No.
71507 (February 7, 2014), 79 FR 8763 (February 13, 2014) (SR-NASDAQ-
2014-011); see Securities Exchange Act Release No. 82723 (February
15, 2018), 83 FR 7812 (February 22, 2018) (SR-Nasdaq-2018-010).
\38\ The statutory bases for both the Nasdaq Basic and NLS
enterprise licenses are identical. Both are top-of-book products
sold to broker-dealers for internal distribution to Professionals.
The fee structure and use requirements are currently the same for
both, and will continue to be the same under the Proposal. The
discussion contained herein therefore applies to both licenses.
---------------------------------------------------------------------------
[[Page 66623]]
The Proposal Is an Equitable Allocation of Reasonable Dues, Fees and
Other Charges
As the Commission and courts \39\ have recognized, ``[i]f
competitive forces are operative, the self-interest of the exchanges
themselves will work powerfully to constrain unreasonable or unfair
behavior.'' \40\ 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.'' \41\
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\39\ 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) 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) (internal quotation
marks omitted). 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.'' Id. (quoting Securities
Exchange Act Release No. 59039 (December 2, 2008), 73 FR 74770,
74,771 (December 9, 2008) (SR-NYSEArca-2006-21)).
\40\ See Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770 (December 9, 2008) (SR-NYSEArca-2006-21).
\41\ Id.
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Nasdaq believes that competitive forces constrain the price of top-
of-book products on two independent and equally-sufficient grounds: (i)
Competition among exchanges and the SIP for top-of-book data; and (ii)
competition among trading platforms. The proposed fee change is a
direct competitive response to this intense, multi-sided competition.
We shall discuss each major aspect of this competition in turn.
Competition Over Top-of-Book Data Sales
Nasdaq competes directly with other exchanges in the sale of top-
of-book products, which provide best bid and offer and last sale
information for U.S. exchange-listed securities.
Nasdaq Basic and NLS provide choices to broker-dealers and other
data consumers by providing less than the quantum of data provided
through the consolidated tape feeds, but at a lower price. Thus, these
products provide broker-dealers and others with an option to use a
lesser amount of data in circumstances where SEC Rule 603(c) does not
require a broker-dealer to provide a consolidated display.\42\ All of
the top-of-book proprietary products offered by the exchanges are
readily substitutable for each other and, in most cases, with the
consolidated information offered by the SIPs.
---------------------------------------------------------------------------
\42\ See 17 CFR 242.603(c).
---------------------------------------------------------------------------
All major exchange groups compete to sell top-of-book data. Nasdaq
Basic provides data derived from liquidity within the Nasdaq market
center and trades reported to the FINRA/Nasdaq TRF. The NYSE BQT feed
disseminates top-of-book information from the NYSE, NYSE American, NYSE
Arca and NYSE National exchanges.\43\ The Cboe One Summary Feed
provides data from the four Cboe equities exchanges: BZX Exchange, BYX
Exchange, EDGX Exchange and EDGA Exchange.\44\
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\43\ See https://www.nyse.com/market-data/real-time/nyse-bqt.
\44\ See https://markets.cboe.com/us/equities/
market_data_services/
#:~:text=Cboe%20Top%20is%20a%20real,time%20on%20a%20Cboe%20book.&text
=It%20is%20a%20real%2Dtime,time%20on%20a%20Cboe%20book. We note that
Cboe recently proposed a fee reduction for top-of-book data as well.
See Securities Exchange Act Release No. 86670 (August 14, 2019), 84
FR 43207 (August 20, 2019) (SR-CboeBYX-2019-012).
---------------------------------------------------------------------------
Nasdaq, NYSE and Cboe compete on price and quality. Like Nasdaq,
both NYSE \45\ and Cboe \46\ offer enterprise licenses for their top-of
book feeds. Cboe touts its price in promotional literature,\47\ and
reduced its fee for certain top-of-book customers just this year.\48\
All of these top-of-book data feeds, along with consolidated SIP data
(outside of the time of execution, in which the use of consolidated SIP
data is mandated by the Vendor Display Rule), are substitutes.\49\
---------------------------------------------------------------------------
\45\ See https://www.nyse.com/market-data/real-time/nyse-bqt.
\46\ See https://markets.cboe.com/us/equities/market_data_services/cboe_one/.
\47\ See https://markets.cboe.com/us/equities/
market_data_services/
#:~:text=Cboe%20Top%20is%20a%20real,time%20on%20a%20Cboe%20book.&text
=It%20is%20a%20real%2Dtime,time%20on%20a%20Cboe%20book (``The Cboe
One Feed is 60% less expensive per professional user and more than
85% less expensive for an enterprise license for professional users
and non-professional users when compared to a similar competitor
exchange product.'').
\48\ See Securities Exchange Act Release No. 88221 (February 14,
2020), 85 FR 9904 (February 20, 2020) (SR-CboeBYX-2020-007) (stating
that ``the Exchange's top of book market data products are among the
most competitively priced in the industry due to modest subscriber
fees, and a lower Enterprise cap . . . .''). The filing included a
table comparing its pricing to Nasdaq Basic.
\49\ The exchange-based top-of-book feeds are not a full
substitute for the consolidated data disseminated by the Securities
Information Processors because the Vendor Display Rule prohibits a
broker-dealer from ``provid[ing], in a context in which a trading or
order-routing decision can be implemented, a display of any
information with respect to quotations for or transactions in an NMS
stock without also providing, in an equivalent manner, a
consolidated display for such stock.'' Nevertheless, the SIP and
exchange products are substitutes for most other use cases, as the
exchange products closely follow the SIP.
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Top-of-book data can be used for many purposes--from a retail
investor casually surveying the market to sophisticated market
participants using it for a variety of applications, such as investment
analysis, risk management, or portfolio valuation.
The value of that data depends on its quality and how well it
approximates the NBBO, which is determined by the amount of order flow
attracted by the exchange--the more order flow, the more quotes and
trades, and the better the exchange data will be able to match the
NBBO.
The fact that top-of-book products exist at all shows that they are
substitutes for SIP data--it would be far easier for any consumer who
requires data from all of the exchanges to purchase SIP data alone
rather than consolidate multiple exchange feeds. It has been suggested,
however, that market data products are complementary products \50\--
i.e., that a consumer who buys one product must buy the other, like a
video game and a gaming console, to obtain a more useful product. The
evidence, however, shows quite the opposite.\51\ If data products were
complementary, all customers would be buying all direct feeds, with no
substitutes or substitution. In fact, publically available data
demonstrates that 45% of alternative trading systems (``ATSs'') \52\ do
not buy any direct feeds, but rather use the SIP--some even reject free
data. The 18% of ATSs that buy some direct feeds decide not to purchase
others.\53\ Exchanges charge less for less valuable data, demonstrating
price elasticity, to the point that some broker-dealers will not accept
data from smaller exchanges with less order flow (even when that data
is offered for no fee) due to the fixed developmental and systems costs
incurred by firms to enable them to
[[Page 66624]]
receive and process data.\54\ Indeed, Nasdaq's own experience with
sales of top-of-book feeds underscores their substitutability, as the
customers whose feedback has motivated this price change inform Nasdaq
that they will drop Nasdaq Basic in favor of a competing product unless
a change is made. The top-of-book data feeds sold by the U.S. exchanges
are therefore substitutes, and exchanges compete to sell them (as
Nasdaq is attempting to do with this proposed fee reduction).
---------------------------------------------------------------------------
\50\ See Letter from Ellen Greene, Managing Director, SIFMA, to
Vanessa Counterman, Secretary, SEC at 5, n.14 (May 26, 2020),
available at https://www.sec.gov/comments/s7-03-20/s70320-7235189-217109.pdf.
\51\ See Phil Mackintosh, ``Dispelling the Complementary Product
Theory for Market Data,'' (August 20, 2020), available at https://www.nasdaq.com/articles/dispelling-the-complementary-product-theory-for-market-data-2020-08-20.
\52\ ATSs are venues which are not regulated as exchanges but
nevertheless match buy and sell orders for customers.
\53\ See Phil Mackintosh, ``Dispelling the Complementary Product
Theory for Market Data,'' (August 20, 2020), available at https://www.nasdaq.com/articles/dispelling-the-complementary-product-theory-for-market-data-2020-08-20.
\54\ A broker-dealer may decide not to accept ``free'' data
because there is a cost to accepting such data and integrating it
into its trading systems.
---------------------------------------------------------------------------
Nasdaq's experience is consistent with findings by the Department
of Justice (``DOJ'') that exchanges compete with each other for the
sale of market data. In 2011, the DOJ analyzed a proposed transaction
that would have resulted in a combination of Nasdaq and NYSE and found
that it ``would have substantially eliminated competition for . . .
real-time proprietary equity data products.'' \55\ Later that same
year, in suing to block a possible combination between Deutsche
B[ouml]rse and NYSE Euronext that would have brought Direct Edge within
the same exchange group as NYSE, the DOJ cited a threat to competition
in the market for real-time equity market data as one of the bases for
its action.\56\
---------------------------------------------------------------------------
\55\ See ``NASDAQ OMX Group Inc. and Intercontinental Exchange
Inc. Abandon Their Proposed Acquisition of NYSE Euronext After
Justice Department Threatens Lawsuit'' (May 16, 2011) (available at
https://www.justice.gov/opa/pr/nasdaq-omx-group-inc-and-intercontinentalexchange-inc-abandon-their-proposed-acquisition-nyse).
\56\ See Complaint, United States v. Deutsche B[ouml]rse AG and
NYSE Euronext (Dec. 22, 2011) (available at https://www.justice.gov/atr/case-document/file/494146/download).
---------------------------------------------------------------------------
Platform Competition
The evidence shows that total returns earned by the Exchange are
constrained by competition from other exchanges and trading platforms.
Nasdaq competes against other exchanges to attract order flow and
trading activity, based on the prices, incentives, product quality, and
other attributes that Nasdaq offers to traders. This competition
powerfully constrains Nasdaq's competitive behavior, which is
manifested through rebates to traders, innovation, and price decreases,
among other things. Economic efficiency is therefore fostered by
allowing Nasdaq the flexibility to determine its optimal prices across
its portfolio of products, including market data, connectivity and
trading services. Depending on a variety of factors, including the
reasons for the change in market conditions, Nasdaq's optimal response
to such changes can entail price reductions for some products or
services, price increases for other products or services, and no price
change for still others. Artificial regulatory constraints on Nasdaq's
pricing can dampen competition and harm customers by constraining
Nasdaq's ability to earn a predictable and reasonable return on its
investments in products and technology, thus diminishing the incentive
to invest in innovations and product enhancements that will benefit
consumers.
The fact that this market is competitive has long been recognized
by the courts. As the D.C. Circuit stated in NetCoalition v. Securities
and Exchange Commission, ``[n]o one disputes that competition for order
flow is `fierce.' . . . `In 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' . . . .'' \57\ Within this environment, market participants
can freely and often do shift their order flow among the Exchange and
competing venues in response to changes in their respective pricing
schedules.
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\57\ See NetCoalition v. SEC, 615 F.3d 525, 539 (D.C. Cir. 2010)
(quoting Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)).
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Market data fees, including connectivity fees and other exchange
fees, are constrained by competition among trading platforms. Firms
like Nasdaq, NYSE, and Cboe are platform businesses that compete on a
variety of interrelated dimensions, including the provision of trading
services, market data, and connectivity services. Exchanges owned by
these firms compete with each other to provide trading services, and
with a variety of alternate trading platforms that host over-the-
counter trading. Such over-the-counter trading services are provided by
a large number of variegated entities, including ``dark pools,''
multilateral organizations that ``pool'' the orders of traders and
match them internally without displaying quotations.
Guidance issued by Staff of the Commission's Division of Trading
and Markets states that an assertion that ``an SRO's aggregate return
across multiple product lines, such as transactions, market data,
connectivity, and access, is constrained by competition at the platform
level is insufficient unless substantiated with evidence demonstrating
that the theory applies in fact to the fee at issue.'' \58\ Thus, Staff
appears to be asserting that even if competition between trading
platforms constrains the costs incurred by market participants, it is
irrelevant unless it can be shown to constrain the particular fee at
issue in the filing. As detailed above, the fee at issue in this filing
is directly constrained by competition to sell top-of-book products,
which is the impetus behind this filing. Moreover, because exchanges
compete on the basis of both price and quality, the competition to
attract orders to a trading platform is another aspect of the
competition to sell top-of-book products, which can exist only as a
byproduct of that competition. The quality of a top-of-book product
reflects the liquidity of the exchange and time on the inside--i.e.,
order flow. The more order flow, the more quotes and trades, and the
better the exchange data will be able to match the NBBO. However,
because these products are substitutes, a customer can readily switch
to a different exchange's product, even one of a lower quality, if fees
are raised. They can also shift order flow toward a different product,
and such increases in order flow in turn have the potential to boost
the quality of the competing product that they select.
---------------------------------------------------------------------------
\58\ See Division of Trading and Markets, U.S. Securities and
Exchange Commission, ``Staff Guidance on SRO Filings Related to
Fees'' (May 21, 2019), available at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees.
---------------------------------------------------------------------------
Nasdaq believes, however, that the narrow focus on the analysis of
platform competition reflected in the Staff fee guidance misapprehends
the analytical insights offered by that theory: The vast majority of
market data consumers also provide the raw materials that are combined
by an exchange into market data, and therefore stand on both sides of
the platform. As a result, their overall cost of doing business with an
exchange platform is a critical dimension on which exchanges compete
with one another for those customers' trades, and imposing a
governmental constraint on the revenues associated with one aspect of
this competition will distort this competition by impairing the ability
of exchanges to operate profitably, reducing their incentives to invest
in innovations and other product improvements, among other things.
Moreover, exchanges compete with one another, in part, based on the mix
of products and services they offer, including the various prices and
incentives they each offer to customers. Government regulations that
artificially
[[Page 66625]]
constrain exchanges' ability to price their services will diminish
competitive variation, reduce customer choice, and lead to
anticompetitive effects that harm customers. For all of these reasons,
Nasdaq believes that the analysis of the all-in costs of doing business
with Nasdaq is highly relevant to an appropriate competitive analysis
of the exchange marketplace. That said, Nasdaq believes that evidence
of constraint upon the prices of market data in general, and top-of-
book products specifically, abounds, as described above and further
described below.
Figure 1 presents the trading shares by platform operator at the
end of 2019, and shows that no single platform or platform operator
accounts for even 25 percent of trading in U.S. equities, and that
over-the-counter trading accounts for a larger share of all trades than
any platform operator.
[GRAPHIC] [TIFF OMITTED] TN20OC20.001
Many customers that purchase trading and other services from an
exchange are sensitive to and concerned with the all-in price of
trading.\59\ For such customers, what matters to their purchasing
decisions is the total outlay relative to the quality of the various
services obtained from an exchange, as compared to rival exchanges.
Hence, a customer's willingness to interact with an exchange is
sensitive to the all-in price of the various services purchased on that
exchange compared to the all-in price available at other exchanges (as
well as the relative quality of exchange services). Thus, the price and
quality of any service, such as market data, should not be analyzed in
isolation (i.e., separate from the price and quality of other services
that a customer purchases from the exchange).
---------------------------------------------------------------------------
\59\ See Statement of J. Ordover and G. Bamberger filed with the
U.S. Securities and Exchange Commission, File No. SR-NASDAQ-2010-
174, on behalf of NASDAQ Stock Market, (Dec. 30, 2010), ] 38 (``Even
if a trading platform had some unique information that is
potentially valuable to (some) consumers, the total price of trading
on that platform--which includes the price of market data available
from the platform that the trader elects to purchase--is constrained
by the total price of trading on rival platforms.''), available at
https://www.sec.gov/rules/sro/nasdaq/2012/34-66724-ex3a.pdf.
---------------------------------------------------------------------------
Because many customers are sensitive to the all-in price of
trading, competition among trading platforms, including dark pools, can
be expected to constrain the aggregate return each platform earns from
the sale of the array of its products, including market data and
connectivity services.\60\ Thus, for example, if an exchange increases
the price of one service, thereby increasing the all-in price,
competition from other platforms would be expected to force it to
reduce the price (or increase the rebate) of another service (all else
equal) to enable it to compete successfully with other trading
platforms. Moreover, the low barriers to entry that exist in the market
for trading platform services exert a further competitive constraint:
This year alone, three new exchange
[[Page 66626]]
platforms have commenced operations or are expected to do so
imminently.\61\
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\60\ See Phil Mackintosh, Who Pays for Price Discovery?
(November 21, 2019), available at https://www.nasdaq.com/articles/who-pays-for-price-discovery-2019-11-21 (providing an analysis of
the all-in cost per trade at Chart 3).
\61\ The three new exchanges are the Long Term Stock Exchange
(LTSE), the Members Exchange (MEMX) and the MIAX Pearl Equities
exchange.
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A recent study described the inverse relationship between market
data and the price of trading services, commenting that ``[e]xchanges
have [an] incentive to cut their trading fees even below the perfectly
competitive (i.e., zero profit) level in order to win market share and
increase revenues from market data and co-location [and]
connectivity,'' \62\ concluding that ``regular-hours trading revenues
do not nearly cover exchange operating expenses.\63\ The study reported
that exchange trading fees for high-volume traders are often slightly
negative on a per-share per-side basis, which is consistent with
exchanges competing intensely with one another based on the total cost
of services in order to attract order flow.\64\
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\62\ See Eric Budish, et al., Will the Market Fix the Market? A
Theory of Stock Exchange Competition and Innovation, University of
Chicago, Becker Friedman Institute for Economics Working Paper No.
2019-72, at 31 (May 2019), available at https://ssrn.com/abstract=3391461 (``Budish et al.'').
\63\ Id. at 32.
\64\ Id. at 34.
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The inverse relationship between market data and connectivity
services and the all-in price of trading is demonstrated by an
examination of trends in Nasdaq's revenue over an eight-year period.
Between 2010 and 2018, Nasdaq revenue from market data (which includes
both exchange data and other market non-exchange data products)
increased from $85.4 million to $152.3 million, an increase of 78.4
percent in dollar terms, and 54.9 percent in inflation-adjusted
terms.\65\ Moreover, the growth in revenues from market data reflects
the addition of revenue from the sale of new products, sales to new
customers, incremental sales to existing customers, and price
increases. Between 2010 and 2018, price increases accounted for only
about 35 percent of the total increase in market data revenue. That is,
about 65 percent of the increase in market data revenue reflects sales
of new products, or increased sales to new and existing customers.
Similarly, Nasdaq revenue from connectivity services increased from
$103.2 million in 2010 to $167.6 million in 2018, an increase of 62.4
percent in dollar terms, and 41.0 percent in inflation-adjusted terms.
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\65\ Based on internal Nasdaq data (inflation adjustment based
on the All-Items Consumer Price Index).
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As revenue from market data and connectivity services increased,
the all-in price of trading on Nasdaq fell. In inflation-adjusted
terms, the increase in Nasdaq's market data and connectivity revenues
almost exactly offset the decline in its trading revenues, which fell
from $251.1 million in 2010 to $189.6 million in 2018, a decline of
24.5 percent in dollar terms; adjusting for inflation, trading revenues
fell by 34.4 percent. Nasdaq's total inflation-adjusted revenues from
market data, connectivity, and trading services were $506.4 million in
2010 and $509.5 million in 2018 (in 2018 dollars), an increase of less
than one-tenth of one percent per year. Over the same period, trading
dollar volume on Nasdaq's equity exchanges increased by over 50
percent--from about $30.6 trillion in 2010 to $47.3 trillion in 2018.
As a result, the average all-in cost of trading--that is, total Nasdaq
revenues divided by total Nasdaq trading volume--fell by 24.9 percent
between 2010 and 2018.\66\ In particular, the all-in cost per $100,000
of trading volume fell from $1.44 in 2010 to $1.08 in 2018.\67\ As
shown in Figure 2, despite the growth of market data and connectivity
revenue between 2010 and 2018, the all-in cost of trading on Nasdaq's
exchanges (measured per $100,000 of trading volume) declined
substantially between 2010 and 2018.
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\66\ The all-in cost of trading relative to trading volume is
the relevant metric because, in general, stock purchasers are
indifferent to the number of shares they purchase, and thus the all-
in cost per share traded is not a relevant ``price.'' For example,
an investor who wants to purchase $100,000 in stock will generally
be indifferent as to whether the purchase represents 1,000 shares at
$100 or 2,000 shares at $50.
\67\ In 2010, Nasdaq revenue equaled 0.00144 percent of trading
volume on the Nasdaq equity exchanges; in 2018, Nasdaq revenue
equaled 0.00108 percent of trading volume on the Nasdaq equity
exchanges (i.e., a decline of 24.9 percent). To make the figures
easier to read, they are reported as cost per $100,000 of trading
volume.
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[[Page 66627]]
[GRAPHIC] [TIFF OMITTED] TN20OC20.002
This demonstrates that Nasdaq's revenues are constrained by competition
from a variety of exchanges and other trading platforms, and that this
competition reduced Nasdaq's all-in cost of trading between 2010 and
2018.
The constraint on price increases imposed by platform competition
is also shown through an examination of revenue growth in U.S. equity
market data. As shown in Figure 3, approximately two-thirds of this
revenue growth reflects new customers, new products, and new sales to
previous customers, not fee increases. Customers who had not purchased
additional products or expanded existing services had seen costs
increase by a compound annual growth rate (``CAGR'') of only 2.4%, not
much more than the rate of inflation. Over that same time period, the
capacity of Nasdaq's matching engine more than doubled, and latency
fell drastically. A greater portion of Nasdaq's success in increasing
revenue is therefore attributable to selling better products to more
customers--the cornerstones of competition--rather than increasing
fees. Thus, the portion of market data revenues associated with price
increases shows an increase in the cost per $100,000 of trading volume
of only 0.631% per year, powerful evidence that platform competition
exerts a restraint not only of all-in prices, but also of this specific
element of prices.\68\
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\68\ We noted above that Nasdaq's total inflation-adjusted
revenues from market data, connectivity, and trading services
together increased by less than one-tenth of one percent per year.
The increase of 0.632% per year pertains only to that portion of
market data revenues associated with price increases.
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[[Page 66628]]
[GRAPHIC] [TIFF OMITTED] TN20OC20.003
The evidence therefore shows that the trading platforms operated by
the securities exchanges compete on the basis of price (as well as
innovation and quality of service), and that competition constrains the
ability of any platform to charge excessive fees across its platform
offerings, including their market data products.
* * * * *
Competition--both competition among trading platforms and in the
sale of top-of-book market data products--constrains the price of top-
of-book market data, and 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.
Competition among platforms constrains the price of market data through
the interrelated competition for order flow. The price of top-of-book
data is further constrained by direct competition among exchanges to
sell top-of-book data, as illustrated by proposals to reduce fees for
three of the four top-of-book enterprise licenses in the past several
years: (i) The enterprise license for external distribution of Nasdaq
Basic; \69\ (ii) the enterprise license for the external distribution
of NLS; \70\ and (iii) the combined enterprise license for distribution
of top-of-book and depth-of-book data.\71\ Nasdaq is not alone in
lowering fees to compete against the other exchanges. Just this year,
Cboe proposed a fee reduction for its top-of-book data.\72\ Competition
among platforms and competition in the sale of specific market data
products provide independent and equally-sufficient grounds for a
finding that the price of top-of-book data products are constrained by
competition.
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\69\ See Securities Exchange Act Release No. 79456 (December 2,
2016), 81 FR 88716 (December 8, 2016) (SR-NASDAQ-2016-162) (noting
that the ``price of data derived from Nasdaq Basic is constrained by
the existence of multiple substitutes offered by numerous entities,
including both proprietary data offered by other SROs or other
entities, and non-proprietary data disseminated by Securities
Information Processors (`SIPs').'').
\70\ See Securities Exchange Act Release No. 77578 (April 11,
2016), 81 FR 22344 (April 15, 2016) (SR-NASDAQ-2016-048).
\71\ See Securities Exchange Act Release No. 83751 (July 31,
2018), 83 FR 38428 (August 6, 2018) (SR-Nasdaq-2018-058).
\72\ See Securities Exchange Act Release No. 86670 (August 14,
2019), 84 FR 43207 (August 20, 2019) (SR-CboeBYX-2019-012).
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The Proposal Does Not Permit Unfair Discrimination
The Proposal is not unfairly discriminatory. As previously noted,
the Nasdaq Basic enterprise license subject to this Proposal was shown
to be non-discriminatory and otherwise consistent with the Act over six
years ago.\73\ The only difference between that initial proposal and
the change under consideration today is that the new license costs less
and more broker-dealers will be able to benefit from the lower prices.
Enterprise licenses in general have been widely recognized as an
effective and not unfairly discriminatory method of distributing market
data. This applies to Nasdaq's enterprise licenses as well as those
offered by the NYSE and Cboe exchanges.\74\
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\73\ See Securities Exchange Act Release No. 71507 (February 7,
2014), 79 FR 8763 (February 13, 2014) (SR-NASDAQ-2014-011)
(initially adopting the current enterprise license).
\74\ See, e.g., Sections 123(c) and 147(b); Securities Exchange
Act Release No. 82182 (November 30, 2017), 82 FR 57627 (December 6,
2017) (SR-NYSE-2017-60) (changing an enterprise fee for NYSE BBO and
NYSE Trades).
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The Act does not prohibit all distinctions among customers; only
discrimination that is unfair. It is not unfair discrimination to
charge those Distributors that are able to reach the largest audiences
of retail investors a lower fee for incremental investors in order to
encourage the widespread distribution of market data. The instant
Proposal, like other enterprise licenses, will cause top-of-book data
to become more widely available to investors. It
[[Page 66629]]
will save current enterprise license purchasers the $210,000 per month
difference between the current base fee of $365,000 and $155,000, plus
$2 times the number of internal Professional Subscribers over 16,000.
Broker-dealers that do not currently purchase the license will
nevertheless benefit because the ``break even'' point--i.e., the point
where the average per-Subscriber rate of a licensee falls below per-
Subscriber rate of $26--will fall from 14,038 to 5,962 internal
Professional Subscribers.\75\ All purchasers of the proposed license
will also be able to save in administrative expenditures by eliminating
monthly reporting requirements and periodic review of such reports by
compliance staff.
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\75\ See Securities Exchange Act Release No. 71507 (February 7,
2014), 79 FR 8763 (February 13, 2014) (SR-NASDAQ-2014-011)
(explaining that the $365,000 monthly fee for all internal
subscribers, divided by $26 monthly fee for each internal
Subscriber, is equal to 14,038).
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It is of particular importance now to expand the availability of
top-of-book data. In recent months, retail investors have become
increasingly interested in equities markets. Many of these retail
investors will require advice and assistance from equity market
professionals, and this license will enable broker-dealers that serve
such clients to do so at a lower cost.
Moreover, the proposed enterprise license will be subject to
significant competition, and that competition will ensure that there is
no unfair discrimination. Each Distributor will be able to accept or
reject the license depending on whether it will or will not lower costs
for that particular Distributor, and, if the license is not
sufficiently competitive, the Exchange may lose market share.
For all of these reasons, the Proposal is not unreasonably
discriminatory.
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. With respect to inter-market
competition--the competition among SROs--the Exchange's ability to
price market data products is constrained by (i) competition among
exchanges for top-of-book data; and (ii) platform competition. With
respect to intra-market competition--the competition among consumers of
exchange data--the Exchange expects the Proposal to promote competition
through lower-cost data.
Intermarket Competition
As discussed in detail under Statutory Basis, Nasdaq competes with
other exchanges in the sale of top-of-book products. Because top-of-
book products provide less than the quantum of data provided through
the consolidated tape feeds at a lower price, consumers have the option
to use a lesser amount of data when SEC Rule 603(c) does not require a
broker-dealer to provide a consolidated display.\76\
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\76\ See 17 CFR 242.603(c).
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Market data fees are also constrained by competition among trading
platforms, which compete on a variety of dimensions, including the
provision of trading services, market data, and connectivity services,
and also with a variety of alternate trading platforms that host over-
the-counter trading. Because many customers are sensitive to the all-in
price of trading, competition among trading platforms, including dark
pools, can be expected to constrain the aggregate return each platform
earns from the sale of the array of its products, including market data
and connectivity services. This can be shown empirically by the inverse
relationship between revenue from market data and connectivity
services, the fall in the all-in cost of trading over an eight-year
period, and other evidence discussed under Statutory Basis.
In order to better compete for this segment of the market, the
Exchange is proposing to reduce the cost of top-of-book data by
lowering the enterprise license fee for internal Professional
Subscribers. The proposed price reduction will not cause any
unnecessary or inappropriate burden on intermarket competition, as
other exchanges and data vendors are free to lower their prices to
better compete with the Exchange's offering. Nasdaq's main competitors,
in particular, offer directly competing enterprise licenses for their
top-of-book products, and are readily able to lower enterprise license
fees in response to Nasdaq. Indeed, the Exchange's decision to lower
its enterprise license fee was itself generated by the need to compete
with other exchanges. The Proposal may in turn generate competitive
responses from other exchanges, enhancing overall competition.
Intramarket Competition
The Proposal will not cause any unnecessary or inappropriate burden
on intramarket competition. In fact, it will foster competition among
broker-dealers by lowering costs for current licensees, while at the
same time increasing the number of broker-dealers able to purchase that
license. The current enterprise license, just like all of the
enterprise licenses offered by Nasdaq's competitors, does not itself
impose an unnecessary or inappropriate burden on intramarket
competition. Relatively smaller broker-dealers have fewer internal
Professional Subscribers and therefore operate with lower fixed costs,
helping them compete with the larger broker-dealers. Moreover, the
underlying fee of $26 per Professional Subscriber fee has itself been
shown not to place an undue burden on competition, and, if that fee
proves to be excessive, broker-dealers would be able to purchase top-
of-book data from one of the Exchange's competitors offering a
substitute product. For all of these reasons, the Proposal will not
place any unnecessary or inappropriate burden on intramarket
competition.
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.\77\
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\77\ 15 U.S.C. 78s(b)(3)(A)(ii).
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At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is: (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-2020-065 on the subject line.
[[Page 66630]]
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-2020-065. 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-2020-065 and should be submitted
on or before November 10, 2020.
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\78\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\78\
J. Matthew DeLesDernier,
Assistant Secretary.
[FR Doc. 2020-23148 Filed 10-19-20; 8:45 am]
BILLING CODE 8011-01-P
