Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Disapproving Proposed Rule Change To Increase Fees for Certain Market Data and Connectivity Products and To Maintain the Current Fees for Such Products if Members Meet a Minimum Average Daily Displayed Volume Threshold, 95822-95832 [2024-28258]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 89, Number 232 (Tuesday, December 3, 2024)]
[Notices]
[Pages 95822-95832]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-28258]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-101766; File No. SR-NASDAQ-2024-016]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Disapproving Proposed Rule Change To Increase Fees for Certain Market 
Data and Connectivity Products and To Maintain the Current Fees for 
Such Products if Members Meet a Minimum Average Daily Displayed Volume 
Threshold

November 26, 2024.

I. Introduction

    On March 22, 2024, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to increase fees for certain 
market data and connectivity products and to maintain the current fees 
for such products if members meet a minimum average daily displayed 
volume threshold (``Proposal'').\3\ The proposed rule change was 
immediately effective upon filing with the Commission pursuant to 
Section 19(b)(3)(A) of the Exchange Act.\4\ The proposed rule change 
was published for comment in the Federal Register on April 5, 2024.\5\ 
The Commission has received comment letters on the proposed rule change 
and a letter responding to comments from Nasdaq.\6\ On May 21, 2024, 
the Commission issued an order temporarily suspending the proposed rule 
change pursuant to Section 19(b)(3)(C) of the Exchange Act \7\ and 
simultaneously instituting proceedings under Section 19(b)(2)(B) of the 
Exchange Act \8\ to determine whether to approve or disapprove the 
proposed rule change.\9\ On October 1, 2024, the Commission designated 
a longer period for Commission action on the proposed rule change.\10\ 
This order disapproves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 99879 (April 1, 
2024), 89 FR 24070 (``Notice'').
    \4\ 15 U.S.C. 78s(b)(3)(A). A proposed rule change may take 
effect upon filing with the Commission if it is designated by the 
exchange as ``establishing or changing a due, fee, or other charge 
imposed by the self-regulatory organization on any person, whether 
or not the person is a member of the self-regulatory organization.'' 
15 U.S.C. 78s(b)(3)(A)(ii).
    \5\ See Notice, supra note 3. As part of the Proposal, the 
Exchange included an Exhibit 3 containing a paper in support of its 
proposed rule change written by Nasdaq Economic Research. See Phil 
Mackintosh & Michael Normyle, Nasdaq Economic Research, ``How 
Exchanges Compete: An Economic Analysis of Platform Competition'' 
(February 2024), available at https://www.sec.gov/files/rules/sro/nasdaq/2024/34-99879-ex3.pdf (``Nasdaq Paper'').
    \6\ Comments received on the Proposal are available at https://www.sec.gov/comments/sr-nasdaq-2024-016/srnasdaq2024016.htm. All 
comments received opposed the proposed rule change.
    \7\ 15 U.S.C. 78s(b)(3)(C).
    \8\ 15 U.S.C. 78s(b)(2)(B).
    \9\ See Securities Exchange Act Release No. 100188, 89 FR 46243 
(May 28, 2024) (``Order Instituting Proceedings'').
    \10\ See Securities Exchange Act Release No. 101224, 89 FR 81129 
(October 7, 2024).
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    This order disapproves the proposed rule change because, as 
discussed below, the Exchange has not met its burden under the Exchange 
Act and the Commission's Rules of Practice to demonstrate that the 
Proposal is consistent with the requirements of Sections 6(b)(4), 
(b)(5), and (b)(8) of the Exchange Act, in particular the requirements 
that the rules of a national securities exchange ``provide for the 
equitable allocation of reasonable dues, fees, and other charges among 
its members and issuers and other persons using its facilities,'' not 
be ``designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers,'' and ``not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of [the Exchange Act];'' as well as Section 11A of the Exchange Act and 
Rules 603(a)(1) and 603(a)(2) of Regulation NMS which, among other 
things, require the Exchange to distribute market data on terms that 
are ``fair and reasonable'' and ``not unreasonably 
discriminatory.''\11\
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    \11\ 15 U.S.C. 78f(b)(4), (5), and (8), 15 U.S.C. 78k-
1(a)(1)(C)(i)-(iv), 17 CFR 242.603(a)(1) and 17 CFR 242.603(a)(2).
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II. Description of the Proposed Rule Change and Exchange's 
Representations

    As described in more detail in the Notice and Order Instituting 
Proceedings, the Exchange proposes to increase non-member and member 
firm fees for Non-Display Usage \12\ of depth-of-book data and the fees 
for the Exchange's 40Gb and 10Gb Ultra high-speed connections to the 
Exchange. However, the Exchange proposes to continue to charge the 
current fees for

[[Page 95823]]

Non-Display Usage of depth-of-book data and the 40Gb and 10Gb Ultra 
high-speed connections to member firms that meet a minimum average 
daily displayed volume (``Minimum ADV''). The Exchange proposes Minimum 
ADV to mean the introduction by a member firm of at least one million 
shares of added executed displayed liquidity on average per trading day 
in all securities through one or more of the member firm's market 
participant identifiers (``MPIDs'') on Nasdaq.\13\ Average daily volume 
is calculated as the total volume of shares executed for all added 
displayed orders in all securities during the trading month divided by 
the number of trading days in that month, averaged over the six-month 
period preceding the billing month, or the date the firm became a 
member, whichever is shorter.\14\ New members will be deemed to meet 
the Minimum ADV for the first month of operation.\15\ Minimum ADV 
excludes sponsored access by a member on behalf of a third party.\16\
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    \12\ See Notice, supra note 3, at 24070 (stating that Non-
Display Usage is any method of accessing Nasdaq U.S. information 
that involves access or use by a machine or automated device without 
access or use of a display by a natural person and providing 
examples of Non-Display Usage). The Exchange also states that, 
although either top-of-book or depth-of-book data can be used for 
Non-Display Usage, the Proposal modifies fees for depth-of-book data 
only. See id. (citing Equity 7, Section 123 (Nasdaq Depth-of-Book 
data)).
    \13\ See Notice, supra note 3, at 24070.
    \14\ See Notice, supra note 3, at 24070-71.
    \15\ See Notice, supra note 3, at 24071.
    \16\ See Notice, supra note 3, at 24071.
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    The Exchange currently assesses non-member and member firms Non-
Display Usage fees for depth-of-book data on a per-subscriber or per-
firm basis with monthly fees of $375 per subscriber for 1-39 
subscribers; $15,000 per firm for 40-99 subscribers; $30,000 per firm 
for 100-249 subscribers; and $75,000 per firm for 250 or more 
subscribers.\17\ The Exchange currently assesses monthly fees of 
$21,100 for the 40Gb fiber connection and $15,825 for the 10Gb Ultra 
connection to the Nasdaq equities and options exchanges.\18\ The 
Exchange proposes to maintain these fees for member firms that meet the 
Minimum ADV.\19\ Under the Proposal, non-member firms and member firms 
that do not meet the Minimum ADV would pay higher monthly fees of $500 
per subscriber for 1-39 subscribers; $20,000 per firm for 40-99 
subscribers; $40,000 per firm for 100-249 subscribers; and $100,000 per 
firm for 250 or more subscribers.\20\ Non-member firms and member firms 
that do not meet the Minimum ADV would also pay higher monthly fees of 
$23,700 for the 40Gb fiber connection and $17,800 for the 10Gb Ultra 
connection.\21\
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    \17\ See Notice, supra note 3, at 24070. ``Subscriber'' is 
defined as a device or computer terminal or an automated service 
which is entitled to receive information. See id.
    \18\ See Notice, supra note 3, at 24070.
    \19\ See Notice, supra note 3, at 24070.
    \20\ See Notice, supra note 3, at 24070.
    \21\ See Notice, supra note 3, at 24070.
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    The Exchange states that the Minimum ADV is set at a level that any 
member should be able to meet without significant effort.\22\ The 
Exchange also states that, because the Minimum ADV applies to displayed 
liquidity only, the proposed rule should not impact the best execution 
obligations of any member.\23\ The Exchange states that, if all its 
members were to meet the Minimum ADV, the proposed rule would add an 
incremental 60-80 million shares to Nasdaq's accessible liquidity.\24\ 
The Exchange proposes higher fees for non-members that do not post 
displayed liquidity to the market because, according to the Exchange, 
non-members do not directly contribute order flow to the Exchange, but 
nevertheless benefit from that order flow through tighter spreads, 
better prices, and the other advantages of a more liquid platform.\25\
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    \22\ See Notice, supra note 3, at 24071.
    \23\ See Notice, supra note 3, at 24071.
    \24\ See Notice, supra note 3, at 24071.
    \25\ See Notice, supra note 3, at 24071.
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III. Discussion and Commission Findings

A. Applicable Standard of Review

    Under Section 19(b)(2)(C) of the Exchange Act,\26\ the Commission 
shall approve the proposed rule change of a self-regulatory 
organization (``SRO'') if the Commission finds that the proposed rule 
change is consistent with the requirements of the Exchange Act and the 
applicable rules and regulations thereunder; if it does not make such a 
finding, the Commission shall disapprove the proposed rule change. 
Additionally, under Rule 700(b)(3) of the Commission's Rules of 
Practice, the ``burden to demonstrate that a proposed rule change is 
consistent with [the Exchange Act] and the rules and regulations issued 
thereunder . . . is on the self-regulatory organization that proposed 
the rule change.'' \27\ The description of a proposed rule change, its 
purpose and operation, its effect, and a legal analysis of its 
consistency with applicable requirements must be sufficiently detailed 
and specific to support an affirmative Commission finding.\28\ Any 
failure of an SRO to provide this information may result in the 
Commission not having a sufficient basis to make an affirmative finding 
that a proposed rule change is consistent with the Exchange Act and the 
applicable rules and regulations issued thereunder that are applicable 
to the SRO.\29\ Moreover, ``unquestioning reliance'' on an SRO's 
representations in a proposed rule change is not sufficient to justify 
Commission approval of a proposed rule change.\30\
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    \26\ 15 U.S.C. 78s(b)(3)(C).
    \27\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR 
201.700(b)(3).
    \28\ See id.
    \29\ See id.
    \30\ Susquehanna Int'l Group, LLP v. Securities and Exchange 
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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    In the Order Instituting Proceedings, the Commission expressed 
concern, among other things, that the Proposal may fail to satisfy the 
standards under the Exchange Act and the rules thereunder that require 
market data and connectivity fees to be reasonable, equitably 
allocated, not unfairly discriminatory, and not an undue burden on 
competition.\31\ In reviewing the proposed rule change, the Commission 
has analyzed information provided by the Exchange and issues raised by 
commenters. Based on the information before the Commission, for each of 
the reasons discussed below (whether viewed independently or in 
combination), the Commission is unable to find that the Exchange has 
met its burden to show that the proposed rule change is consistent with 
the Exchange Act and the applicable rules and regulations thereunder, 
including Exchange Act Sections 6(b)(4), 6(b)(5), 6(b)(8), 11A and 
Rules 603(a)(1) and 603(a)(2) of Regulation NMS, and is therefore 
unable to find that the Proposal is consistent with the Exchange Act.
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    \31\ See Order Instituting Proceedings, supra note 9, at 46249.
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B. The Exchange Has Not Met Its Burden To Demonstrate That the Proposal 
Is an Equitable Allocation of Reasonable Fees, Is Not Designed To 
Permit Unfair Discrimination, and Does Not Impose Any Burden on 
Competition Not Necessary or Appropriate in Furtherance of the Exchange 
Act

1. Reasonable Fees and ``Platform Competition''
a. Exchange Statements
    As discussed in greater detail in the Notice, Nasdaq states that 
exchanges, like all trading venues, ``compete as platforms,'' \32\ and 
that all the elements of the platform--trade executions, market data, 
connectivity, membership,

[[Page 95824]]

and listings--operate in concert.\33\ Specifically, the Exchange states 
that trade executions increase the value of market data; market data 
functions as an advertisement for on-exchange trading; listings 
increase the value of trade executions and market data; and greater 
liquidity on the exchange enhances the value of ports and colocation 
services.\34\ The Exchange continues that reliance on competitive 
solutions is fundamental to the Exchange Act, and that where 
significant competitive forces constrain fees, fee levels meet the 
Exchange Act's standard for the ``equitable allocation of reasonable 
dues, fees, and other charges among members and issuers and other 
persons using its facilities,'' \35\ unless there is a substantial 
countervailing basis to find that a fee does not meet some other 
requirement of the Exchange Act.\36\ The Exchange states that evidence 
of what it calls ``platform competition'' demonstrates that each 
exchange product is sold in a competitive environment, and its fees 
will be an equitable allocation of reasonable dues, fees, and other 
charges, provided that nothing about the product or its fee structure 
impairs competition.\37\
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    \32\ Nasdaq states that, as explained in the Nasdaq Paper, 
exchanges are multi-sided platforms, whose value is dependent on 
attracting users to multiple sides of the platform. See Notice, 
supra note 3, at 24071. The Exchange states that issuers need 
investors, and every trade requires two sides to trade, and to make 
its platform attractive to multiple constituencies, an exchange must 
consider inter-side externalities, meaning demand for one set of 
platform services depends on the demand for other services. See id.
    \33\ See Notice, supra note 3, at 24071.
    \34\ See Notice, supra note 3, at 24071.
    \35\ See Notice, supra note 3, at 24071 and 15 U.S.C. 78f(b)(4).
    \36\ See Notice, supra note 3, at 24071 (citing the staff 
document ``Staff Guidance on SRO Rule filings Relating to Fees'' 
(May 21, 2019), available at https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees (``Staff Fee Guidance'') (``If significant 
competitive forces constrain the fee at issue, fee levels will be 
presumed to be fair and reasonable, and the inquiry is whether there 
is a substantial countervailing basis to find that the fee terms 
nevertheless fail to meet an applicable requirement of the Exchange 
Act (e.g., that fees are equitably allocated, not unfairly 
discriminatory, and not an undue burden on competition).'')). Staff 
documents represent the views of Commission staff and are not a 
rule, regulation, or statement of the Commission. The Commission has 
neither approved nor disapproved the content of staff documents, 
and, like all staff documents, they have no legal force or effect, 
do not alter or amend the applicable law, and create no new or 
additional obligations for any person.
    \37\ See Notice, supra note 3, at 24071. The Exchange further 
states that nothing in the Exchange Act requires proof of product-
by-product competition, and Congress directed the Commission to 
``rely on `competition, whenever possible, in meeting its regulatory 
responsibilities for overseeing the SROs and the national market 
system.' '' See id. (citing NetCoalition v. SEC, 715 F.3d 342, 534-
35 (D.C. Cir. 2013); H.R. Rep. No. 94-229 at 92 (1975) (``[I]t is 
the intent of the conferees that the national market system evolve 
through the interplay of competitive forces as unnecessary 
regulatory restrictions are removed.'')). The Exchange also states 
that the Commission and the courts have repeatedly expressed their 
preference for competition over regulatory intervention to determine 
prices, products, and services in the securities markets and states 
that the Commission has highlighted the importance of market forces 
in determining prices and SRO revenues. See id. (citing Securities 
Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499 
(June 29, 2005) (``Regulation NMS Adopting Release'') (the national 
market system ``has been remarkably successful in promoting market 
competition in its broader forms that are most important to 
investors and listed companies.''). The Exchange further states that 
the Commission has long relied on competitive forces to determine 
whether a fee proposal is equitable, fair, reasonable, and not 
unreasonably or unfairly discriminatory ``[i]f significant 
competitive forces constrain the fee at issue, fee levels will be 
presumed to be fair and reasonable . . . .'' See id. (citing Staff 
Fee Guidance). The Exchange also cites to a 2008 Commission Order 
stating ``[i]f competitive forces are operative, the self-interest 
of the exchanges themselves will work powerfully to constrain 
unreasonable or unfair behavior.'' See id. (citing Securities 
Exchange Act Release No. 59039 (December 2, 2008), 73 FR 74770 
(December 9, 2008) (SR-NYSEArca-2006-21)). The Exchange explains 
that, 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'' and states that Commission 
Staff have indicated that they would only look at factors outside of 
the competitive market if a ``proposal lacks persuasive evidence 
that the proposed fee is constrained by significant competitive 
forces.'' See Notice, supra note 3, at 24071. As discussed in 
Sections III.B.1.c. and III.B.2.c. below, the Commission does not 
find that Nasdaq has sufficiently demonstrated that the proposed 
fees are subject to competition. In addition, the Exchange states 
that, in the Staff Fee Guidance, the Staff indicated that ``[w]hen 
reviewing rule filing proposals . . . [it] is mindful of recent 
opinions by the D.C. Circuit,'' including Susquehanna International 
Group, LLP v. SEC, 866 F.3d 442 (D.C. Cir. 2017). See Notice, supra 
note 3, at 24072. However, the Exchange states that the decision of 
the U.S. Court of Appeals for the District of Columbia Circuit 
(``D.C. Circuit'') in Susquehanna is irrelevant to the Commission's 
review of immediately effective SRO fee filings. See id. The 
Exchange states that Susquehanna involved the Commission's approval 
of a rule proposed under Section 19(b)(2) of the Exchange Act, not 
its evaluation of whether to temporarily suspend an SRO's 
immediately effective fee filing under Section 19(b)(3). See id. The 
Exchange states that a comparison of Sections 19(b)(2) and 19(b)(3) 
of the Exchange Act makes clear that the Commission is not required 
to undertake the same independent review, and make the same findings 
and determinations, for Section 19(b)(3) filings that it must for 
Section 19(b)(2) filings and, Section 19(b)(2) requires the 
Commission to ``find[ ] that [a] proposed rule change is consistent 
with the'' Exchange Act before approving the rule. 15 U.S.C. 
78s(b)(2)(C)(i). The Exchange states that Section 19(b)(3), by 
contrast, imbues the Commission with discretion, stating that it 
``may temporarily suspend'' an immediately effective rule filing 
where ``it appears to the Commission that such action is necessary 
or appropriate.'' See id. The Exchange further states that, as the 
Supreme Court has explained, statutes stating that an agency 
``may''--but need not--take certain action are ``written in the 
language of permission and discretion.'' See id. (citing S. Ry. Co. 
v. Seaboard Allied Milling, 442 U.S. 444, 455 (1979); see also 
Crooker v. SEC, 161 F.2d 944, 949 (1st Cir. 1947) (per curiam)). The 
Exchange states that the ``contrast'' between Sections 19(b)(2) and 
19(b)(3), ``reflects the fundamental difference in the way Congress 
intended for different types of rules to be treated'' and ``while 
the Commission's authority to suspend a fee under Subsection (3)(C) 
is permissive, its duties under Subsection (2) are stated in 
mandatory terms. See Notice, supra note 3, at 24072 (citing Brief of 
Respondent SEC, NetCoalition v. SEC, 715 F.3d 342-43 (D.C. Cir. 
2013) (Nos. 10-1421 et al.).''). Thus, the Exchange states that 
neither Susquehanna, nor Section 19(b)(3) of the Exchange Act, 
requires the Commission to make independent findings that an 
immediately effective SRO fee filing such as this one is consistent 
with the Exchange Act and that to the degree that the Susquehanna 
decision is applicable to any Commission action, however, the court 
held that the Commission is required to ``itself find or determine'' 
that a proposal meets statutory requirements, explaining that the 
Commission is ``obligated to make an independent review'' of an 
SRO's proposal, and not rely solely on the work of the SRO. See id. 
(citing 866 F.3d at 4). When the Commission suspends an immediately 
effective rule filing, ``Section 19(b)(3) [of the Exchange Act] 
requires that the Commission institute proceedings to determine 
whether the proposed rule change should be approved or disapproved 
under Section 19(b)(2)(B) [of the Exchange Act],'' and the 
``Exchange Act's requirements for approving a proposed rule change 
apply equally, regardless of whether the proposed rule were 
initially filed pursuant to Section 19(b)(2) or 19(b)(3) [of the 
Exchange Act].'' See Securities Exchange Act Release No. 88493 
(March 27, 2020), 85 FR 18617, 18622 (April 2, 2020) (``BOX 
Order''). Consistent with that approach, the Commission critically 
evaluated the representations made and conclusions drawn by Nasdaq 
in the Proposal and determined based on the record that Nasdaq has 
failed to meet its burden to demonstrate that the Proposal is 
consistent with the Exchange Act, as set forth in Sections 
III.B.1.c. and III.B.2.c. below.
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    The Exchange states that the Proposal to increase connectivity and 
market data fees for firms that do not meet the Minimum ADV is designed 
to promote competition by providing an incentive for members to provide 
displayed liquidity, thus attracting investors and increasing the 
overall interest in and value of the platform, enhancing and enriching 
the market data distributed to the industry.\38\ The Exchange states 
that this will also enable it to offer investors a more robust, lower-
cost trading experience through tighter spreads and more efficient 
trading, placing it in a better competitive position relative to other 
exchanges and trading venues.\39\ The Exchange states that nothing in 
the Exchange Act requires the examination of fees in isolation and that 
the equitable allocation of reasonable dues, fees, and other charges 
among members and issuers refers generally to ``reasonable dues, fees, 
and other charges'' as a whole, not individual fees.\40\
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    \38\ See Notice, supra note 3, at 24071.
    \39\ See Notice, supra note 3, at 24071. The Exchange further 
states that, to the degree that the additional liquidity is moved 
from off-exchange venues to on-exchange platforms, overall market 
transparency will improve as well. See id.
    \40\ See Notice, supra note 3, at 24072.
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    The Exchange states that the fact that the market for order flow is 
competitive has long been recognized by the courts.\41\ In addition, 
the Exchange

[[Page 95825]]

states that competition is not just limited to order flow.\42\ The 
Exchange states that ``platform competition'' constrains platform fees 
and results in ``all-in'' costs becoming equal across platforms, and 
that evidence that ``all-in'' costs to users have equalized is evidence 
that competition constrains prices ``at a platform level.'' \43\ 
According to the Exchange, because platform competition can be 
demonstrated solely by examining and comparing ``all-in'' costs to 
users, there is no need for the Exchange to analyze platform 
returns.\44\ Nasdaq states that data presented in the Nasdaq Paper 
shows that the combination of explicit ``all-in'' costs to trade and 
other implicit costs has largely equalized the cost to trade across 
venues.\45\ Nasdaq states that this is a function of the fact that, if 
the ``all-in'' cost to the user of interacting with an exchange 
``exceeds market price,'' customers can and do shift their purchases 
and trading activity to other exchanges; therefore, an exchange must 
adjust one or more of its fees to attract customers.\46\
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    \41\ See Notice, supra note 3, at 24072 (citing NetCoalition, 
615 F.3d at 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)) (``No one disputes that 
competition for order flow is `fierce.' . . . As the SEC explained, 
`[i]n the U.S. national market system, buyers and sellers of 
securities, and the broker-dealers that act as their order-routing 
agents, have a wide range of choices of where to route orders for 
execution'; [and] `no exchange can afford to take its market share 
percentages for granted' because `no exchange possesses a monopoly, 
regulatory or otherwise, in the execution of order flow from broker 
dealers.' '')).
    \42\ See Notice, supra note 3, at 24072.
    \43\ See Notice, supra note 3, at 24072, n.22.
    \44\ See Notice, supra note 3, at 24072, n.22. Nasdaq states 
that the Staff Fee Guidance states that platform competition 
requires that the ``overall return of the platform, rather than the 
return of any particular fees charged to a type of customer, . . . 
be used to assess the competitiveness of the platform's market,'' 
and that ``[a]n SRO that wishes to rely on total platform theory 
must provide evidence demonstrating that competitive forces are 
sufficient to constrain the SRO's aggregate return across the 
platform.'' See id. (citing Staff Fee Guidance; Exchange's 
emphasis). The Exchange states that it does not know, and cannot 
determine, whether returns (as opposed to fees) are equalized across 
platforms, because it does not have detailed cost information from 
other exchanges. See id. The statement that the Exchange does not 
know, and cannot determine, whether returns (as opposed to fees) are 
equalized across platforms is not relevant given that the Exchange 
has elected to seek to establish that equal fees (i.e., ``all-in'' 
costs) across platforms is evidence of competitive constraint on 
platforms. See Section III.B.1.c. infra addressing the merit of the 
Exchange's argument that equal ``all-in'' costs is evidence of 
competition between platforms. In addition, the Staff Fee Guidance 
does not state that knowledge of the returns of other platforms is 
needed when using platform theory to demonstrate a competitive 
environment. Rather, the Staff Fee Guidance highlights relevant 
evidence regarding a platform's own returns. For example, the Staff 
Fee Guidance states ``[a]n SRO that wishes to rely on total platform 
theory must provide evidence demonstrating that competitive forces 
are sufficient to constrain the SRO's aggregate return across the 
platform. In this context, at a minimum an SRO must present data and 
analysis demonstrating that its aggregate return is constrained by 
competition at the platform level. Examples of relevant data would 
include evidence of the SRO's sources and amounts of revenues, 
costs, and gross return of the entire platform. More specifically, 
an analysis of baseline revenues, costs, and profitability (before 
the proposed fee change) and the expected revenues, costs, and 
profitability (following the proposed fee change) would provide 
helpful data and analysis to support a finding that competitive 
forces are operating on the entire platform.'' See Staff Fee 
Guidance, supra note 36 (emphasis added).
    \45\ See Notice, supra note 3, at 24072. See also Nasdaq Paper, 
supra note 5.
    \46\ See Notice, supra note 3, at 24072.
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    The Exchange states that different exchanges engage in a variety of 
business models and offer an array of pricing options to appeal to 
different customer types; specifically, that the largest exchanges 
operate maker-taker platforms, offering rebates to attract trading 
liquidity, which allows them to maintain actionable quotes with high 
liquidity and offer high-quality market data.\47\ The Exchange further 
states that the negative price charged to liquidity providers through 
rebates is part of the platform because it serves to create features 
attractive to other participants, including oftentimes tight spreads, 
actionable and lit quotes, and more valuable market data.\48\ The 
Exchange states that there are a wide range of other pricing models and 
product offerings among the dozens of lit and unlit trading venues that 
compete in the marketplace.\49\ The Exchange further states that 
different strategies among exchanges also manifest in the pricing of 
other services, such as market data and connectivity, noting that some 
exchanges charge for such services, while others charge little or 
nothing (typically because the exchange is new or has little 
liquidity), just as some exchanges charge a fee per trade, while others 
pay rebates.\50\
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    \47\ See Notice, supra note 3, at 24072.
    \48\ See Notice, supra note 3, at 24072. The Exchange states 
that, in contrast, inverted venues have the opposite price 
structure--liquidity providers pay to add liquidity, while liquidity 
takers earn a rebate--these platforms offer less liquidity, but 
better queue priority, faster fills, and lower effective spreads for 
investors. See id.
    \49\ See Notice, supra note 3, at 24072.
    \50\ See Notice, supra note 3, at 24072.
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    In assessing competition for exchange services, the Exchange states 
that both explicit costs, such as fees for trading, market data, and 
connectivity, and implicit cost of trading on an exchange must be 
considered, and that ``[t]he realized spread, or markout, captures the 
implicit cost to trade on a platform.'' \51\ The Exchange further 
states that, considering both the explicit costs charged by exchanges 
for their various joint products and the implicit costs incurred by 
traders to trade on various exchanges, as set forth in the Nasdaq 
Paper, the data show that ``all-in'' trading costs across exchanges are 
largely equalized, regardless of different trading strategies offered 
by each platform for each individual service.\52\ The Exchange states 
that this serves to show that ``platform competition'' has resulted in 
a competitive environment in the market for exchange services, in which 
trading platforms are constrained by other platforms' offerings, taking 
into consideration the ``all-in'' cost of interacting with the 
platform.\53\ The Exchange further states that this constraint is a 
natural consequence of competition and that no exchange platform can 
charge excessive fees and expect to remain competitive, thereby 
constraining fees on all products sold as part of the platform.\54\ The 
Exchange finally states that the existence of ``platform competition'' 
also explains why some consumers route orders to the exchange with the 
highest explicit trading costs even though other exchanges offer free 
or a net rebate for trading.\55\
---------------------------------------------------------------------------

    \51\ The Exchange states that the concept of markout was created 
by market makers trying to capture the spread while providing a two-
sided (bid and offer) market. See Notice, supra note 3, at 24072. 
The Exchange states that, for market makers, being filled on the bid 
or the offer can cause a loss if the fill changes market prices. See 
id. (stating as an example, a fill on a market maker's bid just as 
the stock price falls results in a ``virtual loss,'' because the 
market maker has a long position with a new bid lower than the 
fill). The Exchange states that negative markouts can be beneficial. 
See id. (stating as an example, if an institutional investor is 
working a large buy order, negative markouts represent fills as the 
market falls, allowing later orders to be placed sooner, and likely 
at a better price, reducing the opportunity costs as well as 
explicit cost of building the position). The Exchange further states 
that data suggests that market participants employ sophisticated 
analytic tools to weigh the cost of immediate liquidity and lower 
opportunity costs against better spread capture (lower markouts) and 
explicit trading costs. See Notice, supra note 3, at 24073. The 
Exchange states that, as discussed in greater detail in the Nasdaq 
Paper, the venues with the highest explicit costs--typically 
inverted and fee-fee venues--have the lowest implicit costs from 
markouts and vice versa. See id. The Exchange also states that 
higher positive markouts mean more spread capture, but those venues 
also tend to have the highest explicit costs, and provide the least 
liquidity, and positive externalities, to the market. See id.
    \52\ See Notice, supra note 3, at 24073.
    \53\ See Notice, supra note 3, at 24073.
    \54\ See Notice, supra note 3, at 24073.
    \55\ The Exchange states that empirical evidence also shows that 
market data is more valuable from exchanges with more liquidity. 
According to the Exchange, many customers decide not to take data 
from smaller markets, even though they are free or much lower cost 
than larger markets. See Notice, supra note 3, at 24073.
---------------------------------------------------------------------------

    The Exchange states that exchange customers are differentiated in 
the value they place on the different products offered by exchanges and 
in their willingness to pay for those products on both a firm-wide and 
a per-transaction

[[Page 95826]]

basis; for example, individual customers ``multi-home,'' meaning they 
are customers on multiple platforms, and are thus able to route 
different trades to different platforms to take advantage of favorable 
opportunities offered on a trade-to-trade basis.\56\ The Exchange 
states that exchanges compete by offering differentiated packages of 
pricing and products to attract different categories of customer, and 
that consumers will ``vote with their feet,'' incentivizing platforms 
to supply an array of pricing and product offerings that suit diverse 
consumer needs far more effectively than a uniform, one-size-fits-some 
rigid product offering.\57\ The Exchange further states that if an 
exchange misprices a particular product such that its total return is 
boosted above competitive levels, competing exchanges will quickly 
attract customer volume through more attractive ``all-in'' trading 
costs.\58\ In addition, the Exchange states that if a particular 
package of pricing and products is not attractive to a sufficient 
volume of customers in a particular category, those customers may elect 
not to purchase the service and that this is why exchanges compete at a 
product level, as well as based on ``all-in'' trading costs.\59\
---------------------------------------------------------------------------

    \56\ See Notice, supra note 3, at 24073.
    \57\ See Notice, supra note 3, at 24073.
    \58\ See Notice, supra note 3, at 24073.
    \59\ See Notice, supra note 3, at 24073.
---------------------------------------------------------------------------

    The Exchange states that the number of transactions completed on 
non-exchange venues has been growing, that ``allowing exchanges to 
compete as platforms'' will help exchanges compete against non-exchange 
venues, and, to the extent order flow is shifted from non-exchange to 
exchange venues, overall market transparency will improve.\60\ The 
Exchange states that exchanges have a unique role to play in market 
transparency because they publish an array of pre- and post-trade data 
that non-exchange venues, almost entirely, do not. The Exchange also 
states that the Proposal will contribute to market quality because it 
will help bring new order flow to the Exchange, and greater displayed 
liquidity on the Exchange offers investors deeper, more liquid markets 
and execution opportunities.\61\ The Exchange states that increased 
order flow benefits investors by deepening the Exchange's liquidity 
pool, potentially providing greater execution incentives and 
opportunities, offering additional flexibility for all investors to 
enjoy cost savings, supporting the quality of price discovery, 
promoting market transparency, and lowering spreads between bids and 
offers and thereby lowering investor costs.\62\ The Exchange states 
that, to the degree that liquidity is attracted from dark venues, that 
liquidity also increases transparency for the market overall, providing 
investors with more information about market trends.\63\
---------------------------------------------------------------------------

    \60\ See Notice, supra note 3, at 24073 (citing Regulation NMS: 
Minimum Pricing Increments, Access Fees, and Transparency of Better 
Price Orders, Securities Exchange Act Release No. 96494 (File No. 
S7-30-22) and stating that non-exchange venues rely on market data 
distributed by exchanges to set prices and greater transparency 
allows both exchange and non-exchange venues to operate more 
effectively and efficiently).
    \61\ See Notice, supra note 3, at 24074.
    \62\ See Notice, supra note 3, at 24074.
    \63\ See Notice, supra note 3, at 24074.
---------------------------------------------------------------------------

    The Exchange states that ``allowing exchanges to compete 
effectively as platforms'' has other positive network effects: larger 
trading platforms offer lower average trading costs and, as trading 
platforms attract more liquidity, bid-ask spreads tighten, search costs 
fall (by limiting the number of venues that a customer needs to check 
to assess the market), and connection costs decrease, as customers have 
no need to connect to all venues.\64\ The Exchange states that the 
Proposal will help members that meet the Minimum ADV maintain lower 
costs and will benefit them through the many positive externalities 
associated with a more liquid exchange.\65\
---------------------------------------------------------------------------

    \64\ In addition, the Exchange states that its experience shows 
that fewer customers connect with smaller trading venues than with 
larger venues. See Notice, supra note 3, at 24073.
    \65\ See Notice, supra note 3, at 24074.
---------------------------------------------------------------------------

    The Exchange states that smaller established trading platforms 
provide specialized services that cater to individual customer needs, 
but that these specialized services help the smaller exchanges grow by 
driving liquidity to their platforms, and, if they are successful, 
achieve the economies of scale that benefit the larger enterprises.\66\ 
The Exchange states that, in line with its claim that the total costs 
of interacting with an exchange are roughly equal, smaller exchanges 
offset higher trading costs with lower connectivity, market data, or 
other fees.\67\ The Exchange states that, while the mix of fees will 
change as exchanges grow, the ``all-in'' cost of interacting with the 
exchange remains roughly the same.\68\
---------------------------------------------------------------------------

    \66\ See Notice, supra note 3, at 24073.
    \67\ See Notice, supra note 3, at 24073.
    \68\ See Notice, supra note 3, at 24073.
---------------------------------------------------------------------------

    The Exchange states that the competition among exchanges as trading 
platforms, as well as the competition between exchanges and alternative 
trading venues, constrain exchanges from charging excessive fees for 
any exchange products, including trading, listings, ports, and market 
data.\69\ The Exchange also states that the fees that arise from the 
competition among trading platforms may be too low because they fail to 
reflect the benefits to the market as a whole of exchange products and 
services, allowing other venues to free-ride on these investments by 
the exchange platforms, increasing fragmentation and search costs.\70\ 
The Exchange states that, as long as total returns are constrained by 
competitive forces, there is no regulatory basis to be concerned with 
pricing of particular elements offered on a platform and that 
regulatory constraints in this environment are likely to reduce 
consumer welfare by constraining certain exchanges from offering 
packages of pricing and products that would be attractive to certain 
sets of consumers, thus impeding competition with venues that are not 
subject to the same regulatory limitations and reducing the benefits of 
competition to customers.\71\
---------------------------------------------------------------------------

    \69\ See Notice, supra note 3, at 24074.
    \70\ See Notice, supra note 3, at 24074.
    \71\ See Notice, at 24074 (emphasis original). See also Letter 
from John M. Yetter, Vice President and Senior Deputy General 
Counsel, Nasdaq, to Vanessa Countryman, Secretary, Commission, dated 
July 19, 2024 (``Nasdaq Response Letter''), at 8.
---------------------------------------------------------------------------

b. Opposing Comments and Exchange Response
    All commenters oppose the Proposal.\72\ Multiple commenters state 
that the Exchange mischaracterizes the Proposal as a discount instead 
of a possible fee increase.\73\ Commenters state that the Proposal 
would raise fees on a number of Nasdaq market data and connectivity 
products and one commenter states that no Nasdaq member or non-member 
would benefit from lower fees under the Proposal; instead, some market 
participants would be charged higher fees.\74\ Commenters also state 
that the Proposal, including the Nasdaq Paper, does not include 
sufficient or meaningful data or justification to support the fee 
increase

[[Page 95827]]

or the tying of costs from one product, market data, to another 
product, transactions.\75\ Commenters disagree with the Proposal's 
claim that, due to ``platform competition,'' the Commission does not 
need to look at the data for these specific fees, and state that the 
Exchange has not offered any relevant facts or analysis to support the 
imposition of these specific increased fees.\76\ One commenter states 
that the increase of 33% appears to be arbitrary, rather than the 
result of changes to explicit costs and rigorous analysis,\77\ and 
another commenter states that the Proposal fails to provide an analysis 
to support the reasonableness of the fee increases.\78\ One commenter 
states that the Exchange has not shared any analysis of how many, what 
types, and how firms will be impacted by the proposed fee change, which 
makes it difficult to provide meaningful comment on this aspect of the 
Proposal.\79\
---------------------------------------------------------------------------

    \72\ See Letters from Tyler Gellasch, President and CEO, Healthy 
Markets Association, to Vanessa Countryman, Secretary, Commission, 
dated April 24, 2024 (``HMA Letter''); Adrian Griffiths, Head of 
Market Structure, MEMX LLC to Vanessa Countryman, Secretary, 
Commission, dated June 12, 2024 (``MEMX Letter''); and Ellen Greene, 
Managing Director, Equities and Options Market Structure and Joseph 
Corcoran, Managing Director, Associate General Counsel, Securities 
Industry and Financial Markets Association to Vanessa Countryman, 
Secretary, Commission, dated May 17, 2024 (``SIFMA Letter'').
    \73\ See HMA Letter, supra note 72, at 4; MEMX Letter, supra 
note 72, at 2; SIFMA Letter, supra note 72, at 2.
    \74\ See HMA Letter, supra note 72, at 4; MEMX Letter, supra 
note 72, at 2-3; SIFMA Letter, supra note 72, at 2.
    \75\ See HMA Letter, supra note 72, at 4-5; MEMX Letter, supra 
note 72, at 3-6; SIFMA Letter, supra note 72, at 3-5.
    \76\ See HMA Letter, supra note 72, at 4-5; SIFMA Letter, supra 
note 72, at 4-5.
    \77\ See HMA Letter, supra note 72, at 5.
    \78\ See SIFMA Letter, supra note 72, at 5.
    \79\ See SIFMA Letter, supra note 72, at 6. This specific 
commenter states that the Proposal ``did not include the number or 
size of members that currently trade in volumes that meet the 
definition of the proposed term `Minimum ADV,' how many additional 
members it would expect to cross the threshold as a result of the [ 
] Proposal, or comparison of these statistics at various volume 
threshold levels.'' Id. at 8.
---------------------------------------------------------------------------

    Commenters also state that the Exchange has not demonstrated that 
``platform competition'' constrains the specific market data and 
connectivity fees subject to the Proposal. One commenter states that 
the Proposal and the Nasdaq Paper do not address how the fees for the 
specific products are constrained by ``platform competition,'' how the 
purported competition impacts the levels at which the Exchange has 
determined to set the proposed fees for these products, whether there 
are reasonable substitutes for the relevant products, any revenue or 
cost analysis to demonstrate the need for the increased fees, or any 
evidence that the increased fees would not result in supra-competitive 
profits for the Exchange.\80\ This same commenter also states that the 
evidence offered in the Nasdaq Paper is insufficient to demonstrate 
that the Exchange has been subject to significant competitive forces in 
setting the fees. The commenter states that they, along with other 
market participants, have previously provided evidence that rebuts the 
argument that ``platform competition'' constrains an exchange's market 
data fees and demonstrates that an exchange's decision to offer 
multiple products (trading services and market-data products) does not 
constrain prices in the manner contemplated when a platform facilitates 
a multi-sided transaction.\81\ The commenter specifically states that 
it has provided evidence to the Commission that shows that, while 
trading on various exchanges can be substitutable, trade data from 
various exchanges is not.\82\ The commenter states that the prices that 
exchanges charge for trading are roughly reasonable, while the prices 
for trading data have in some cases increased significantly in the past 
years with no apparent competition-based reason.\83\ Another commenter 
states that the Proposal's reliance on platform theory ignores the 
Exchange's pricing power for its market data products.\84\
---------------------------------------------------------------------------

    \80\ See SIFMA Letter, supra note 72, at 5.
    \81\ See SIFMA Letter, supra note 72, at 4. The commenter cites 
to two reports, see Lawrence R. Glosten, ``Economics of the Stock 
Exchange Business: Proprietary Market Data'' (January 2020) and 
Expand & SIFMA, ``An Analysis of Market Data Fees'' (August 2018), 
available at https://www.sifma.org/wp-content/uploads/2019/01/Expand-and-SIFMA-An-Analysis-of-Market-Data-Fees-08-2018.pdf.
    \82\ See SIFMA Letter, supra note 72, at 4 (citing Glosten, 
``Economics of the Stock Exchange Business; Proprietary Market 
Data,'' at 4, supra note 81).
    \83\ See SIFMA Letter, supra note 72, at 4.
    \84\ See HMA Letter, supra note 72, at 5.
---------------------------------------------------------------------------

    A different commenter states that the data and analysis in the 
Proposal and the Nasdaq Paper do not establish that ``platform 
competition'' constrains the Exchange's fees, that competitive forces 
are sufficient to constrain the Exchange's aggregate return across the 
platform, or that market participants can avoid purchasing the 
Exchange's services if the price of those services, either individually 
or as a whole, is unreasonable.\85\ The commenter states that the data 
provided by the Exchange does not include evidence that would be 
relevant to demonstrate ``platform competition,'' including evidence of 
its sources and amounts of revenues, costs, and the gross return of the 
entire platform.\86\ The commenter states that, at most, Nasdaq's 
analysis shows that certain other large exchange groups may similarly 
charge unreasonable fees today, free of competitive constraints felt by 
smaller exchanges with lower fees that Nasdaq largely ignores in its 
analysis.\87\
---------------------------------------------------------------------------

    \85\ See MEMX Letter, supra note 72, at 3. The commenter is 
another national securities exchange and states that other 
exchanges, including the commenter, have justified their non-
transaction fees by providing detailed financial information to the 
Commission.
    \86\ See MEMX Letter, supra note 72, at 3-4 (citing Staff Fee 
Guidance, supra note 36).
    \87\ See MEMX Letter, supra note 72, at 4. The commenter states 
that the analysis provided by Nasdaq generally reflects the 2021 
data related to trading on exchanges operated by the three incumbent 
exchange groups and one independent exchange with a unique market 
model (IEX) and that data about the cost of trading on new maker/
taker exchanges that compete more directly with the three incumbent 
exchange groups, including the commenter and MIAX Pearl, LLC, are 
excluded from various analysis. Id. at 4 n.14. Additionally, the 
commenter states that the data on trading on all three independent 
U.S. equities exchanges is stale and does not reflect relevant 
changes made by each of those markets in the last three years. Id.
---------------------------------------------------------------------------

    The Exchange submitted a Response Letter, which reiterates many of 
the arguments made in the Proposal.\88\ The

[[Page 95828]]

Exchange states that reliance on competitive solutions is fundamental 
to the Exchange Act and that the Nasdaq Paper and its supporting 
evidence demonstrate that the proposed fees are subject to competitive 
forces and will enhance competition and benefit investors by 
incentivizing liquidity on the Exchange.\89\ The Exchange states that 
the services in the Proposal are inextricable from the operation of 
exchanges as a platform and the competitiveness of these fees must be 
analyzed ``at the platform level'' rather than by positing the 
existence of a product-by-product market existing in isolation from the 
platform.\90\ The Exchange also again states its belief that the 
Commission and the courts have expressed a preference for competition 
over regulatory intervention to determine prices, products, and 
services in the securities market.\91\ The Exchange states that 
regulatory constraints in this environment are likely to reduce 
consumer welfare by constraining certain exchanges from offering 
packages of pricing and products that would be attractive to certain 
sets of consumers, thus impeding competition with venues that are not 
subject to the same regulatory limitations and reducing the benefits of 
competition to consumers.\92\ The Exchange also states that its 
research shows that the combination of ``all-in'' costs to trade and 
other implicit costs has largely equalized the cost to trade across 
venues, which demonstrates that competition has helped constrain 
fees.\93\ The Exchange states that allowing ``platform competition'' 
means that the exchanges will be better able to compete against non-
exchange venues, and, to the degree order flow is shifted from non-
exchange to exchange venues, overall market transparency is improved 
which enables non-exchange venues to provide more accurate pricing to 
their customers, and play their own role in capital formation more 
efficiently and effectively.\94\
---------------------------------------------------------------------------

    \88\ See Nasdaq Response Letter, supra note 71. In the Response 
Letter, Nasdaq also raised certain procedural issues. See id. at 4, 
20-22. The Exchange states that the Commission itself, and not staff 
acting under delegated authority, must act within the statutorily 
prescribed timing requirements of the Dodd-Frank Act, or the 
proposal will be deemed approved. See id. at 4 and 21. This argument 
lacks merit. See BOX Order, supra note 37, at 18625. The Exchange 
also states that if staff, under delegated authority, disapprove the 
proposal prior the statutorily provided time limit, and then the 
Commission exercises its discretionary right to review, either on 
its own initiative or upon petition, then the staff's disapproval 
will not constitute action by the Commission, and thus, unless the 
Commission makes a final determination of the proposal within the 
statutory prescribed 240-day period, then the proposal is considered 
to have been deemed approved. See Nasdaq Response Letter, supra note 
71, at 21-22. Orders issued by delegated authority ``are issued will 
the full authority of the Commission and are signed by the 
Secretary's office on behalf of the Commission.'' See Securities 
Exchange Act Release Nos. 93229 (October 1, 2021), 86 FR 55873, 
55879 (October 7, 2021) (SR-CboeBZX-2020-053) (``CboeBZX Order'') 
and 93230 (October 1, 2021), 86 FR 55881, 55887 (October 7, 2021) 
(SR-CboeBZX-2020-070). Section 4A of the Exchange Act authorizes the 
Commission to delegate certain functions, including the approval or 
disapproval of a proposed rule change under Section 19, to a 
``division of the Commission,'' 15 U.S.C. 78d-1(a), and the 
Commission's Rules of Practice are clear that ``an action made 
pursuant to delegated authority shall have immediate effect and be 
deemed the action of the Commission.'' See Commission Rule of 
Practice 431(e), 17 CFR 201.431(e). See also, e.g., Rule of Practice 
430(c), 17 CFR 201.430(c) (referring to ``a final order entered 
pursuant to [delegated authority]''); Rule of Practice 431(f), 17 
CFR 201.431(f) (giving an order by delegated authority operative 
effect, even when review has been sought, until a person receives 
actual notice that it was been stayed, modified, or reversed on 
review). Furthermore, as the Commission has stated, Congress was 
aware of the Commission's ability to delegate authority to approve 
SRO rule filings when the time restrictions in Exchange Act Section 
19(b)(2)(D) were enacted; and, to construe Section 19(b)(2), as 
Nasdaq does, to require Commission review of an order by delegated 
authority to be completed within 240 days ``would undermine both the 
specific deadlines set forth in the statute and the Commission's 
ability to delegate functions'' and such a construction is not 
necessary to fulfill Congress's purpose in enacting the deadlines to 
``streamline'' the rule filing process. See, e.g., BOX Order, supra 
note 37, at 18625-26 and Securities Exchange Act Release No. 82727 
(February 15, 2018), 83 FR 7793, 7799 (February 22, 2017).
    \89\ See Nasdaq Response Letter, supra note 71, at 1-2.
    \90\ See Nasdaq Response Letter, supra note 71, at 5 n.18.
    \91\ See Nasdaq Response Letter, supra note 71, at 5.
    \92\ See Nasdaq Response Letter, supra note 71, at 8.
    \93\ See Nasdaq Response Letter, supra note 71, at 7. The 
Response Letter also states that ``if the all-in cost to the user of 
interacting with an exchange--taking into account the amount of 
liquidity on the exchange--exceeds market price, customers shift 
purchases away from that exchange, and therefore the exchange must 
adjust one or more of its fees to attract customers. The `all-in' 
cost includes not only explicit costs, such as fees for trading, 
market data, and connectivity, but also the implicit costs of 
trading on an exchange.'' Id.
    \94\ See Nasdaq Response Letter, supra note 71, at 14.
---------------------------------------------------------------------------

    The Exchange states that ``platform competition'' has constrained 
market data fees over the last two decades, because customers can and 
routinely do shift their purchases to another national securities 
exchange in response to competitive pricing alternatives and that fees 
have been constrained because customers have a choice in market data 
and connectivity.\95\ Nasdaq states that the fact that customers are 
turning to other sources for their data needs demonstrates that there 
is a competitive constraint on the fees that an exchange can 
charge.\96\ Nasdaq states that customers similarly have a choice in 
whether they purchase connectivity services and that of all the 
customers on the Exchange, only 4% purchase any colocation services at 
all, and only 22% purchase depth-of-book information.\97\
---------------------------------------------------------------------------

    \95\ See Nasdaq Response Letter, supra note 71, at 9, 11. In 
2022, for example, Nasdaq reported that the introduction of fees for 
the five MRX data feeds caused an approximately 15% reduction in the 
number of customers with access to those feeds. Nasdaq states that 
it has also had cancellations of BX and PSX data feeds because the 
liquidity available on those exchanges has been insufficient to 
support the cost of market data. Id.
    \96\ See Nasdaq Response Letter, supra note 71, at 11. Nasdaq 
states that, as an example, 54% (15 out of 28) of market 
participants report on Form ATS-N that they purchase proprietary 
real time market data, while the remaining market participants rely 
on the Securities Information Processors (``SIPs'') for market 
information. Id.
    \97\ See Nasdaq Response Letter, supra note 71, at 12. The 
Exchange states that, while most of their top 25 customers purchase 
colocation services, that percentage drops below 60% for the next 
top 25, drops to only about 20% for the next 50, and approaches zero 
for most other customers. Id.
---------------------------------------------------------------------------

c. Analysis of ``Platform Competition'' Arguments in the Proposal \98\
---------------------------------------------------------------------------

    \98\ As an initial matter, this proposed fee change would be an 
increase for all non-members and members who do not attain the 
required Minimum ADV. The Exchange refers to the proposed rule 
change as a fee increase in its Response Letter. See Nasdaq Response 
Letter, supra note 71, at 4.
---------------------------------------------------------------------------

    As described above, Nasdaq states that exchanges are multi-sided 
platforms, whose value is dependent on attracting users to multiple 
sides of the platform.\99\ Nasdaq's justification that the Proposal 
provides for reasonable fees as required by Section 6(b)(4) of the 
Exchange Act, is that the Exchange is a platform that is subject to 
competition from other exchanges and trading venues ``at the platform 
level'' (not just the product level).\100\ Nasdaq states that this 
competition constrains fees for all of the products that the platform 
produces because the products are sold in a competitive environment 
(i.e., the competitive platform environment, not necessarily a 
competitive product environment).\101\ Accordingly, Nasdaq states that 
any fee for a product of its platform is reasonable, ``provided that 
nothing about the product or its fee structure impairs competition.'' 
\102\
---------------------------------------------------------------------------

    \99\ See Notice, supra note 3, at 24071.
    \100\ See Notice, supra note 3, at 24072-73.
    \101\ See Notice, supra note 3, at 24072.
    \102\ See Notice, supra note 3, at 24071.
---------------------------------------------------------------------------

    Nasdaq states that a result of ``platform competition'' is that the 
``all-in'' costs (both explicit and implicit costs) for a user to 
interact with an exchange are largely equal across exchanges because, 
if an exchange ``exceeds market price'' for its package of products, 
customers can and do shift their purchases and trading activity to 
other exchanges.\103\ Nasdaq states that ``platform competition'' can 
be demonstrated by examining the ``all-in'' costs to users and the 
Nasdaq Paper seeks to demonstrate that the ``all-in'' costs to users 
are largely equal across platforms.\104\ Accordingly, the Proposal 
relies on the Nasdaq Paper and its analysis of user costs to attempt to 
demonstrate that competition between exchanges constrains fees and, in 
turn, that the proposed fees are reasonable.
---------------------------------------------------------------------------

    \103\ See Notice, supra note 3, at 24072.
    \104\ See Notice, supra note 3, at 24072, n.22, and Nasdaq 
Paper, supra note 5.
---------------------------------------------------------------------------

    The Exchange does not explain how equal ``all-in'' user costs to 
trade across all exchanges establish that the Exchange's fees for the 
market data and connectivity products subject to the Proposal are 
subject to competitive constraint. Even assuming that ``all-in'' user 
costs reflect the prices that users pay, equal ``all-in'' users costs 
would not be sufficient to establish the presence of sufficient 
competitive forces that would constrain the level of the Exchange's 
proposed fees for the market data and connectivity products subject to 
the Proposal and ensure that such fees are reasonable.\105\ This is 
because a concentrated market where firms have significant market power 
can also have equal prices.\106\ As a result, establishing that prices 
are equal across firms does not establish the degree of competition 
between these firms. Accordingly, the Commission agrees with the 
opposing commenters' statements above that

[[Page 95829]]

Nasdaq has not demonstrated that the specific market data and 
connectivity fees subject to the Proposal are constrained by 
competition.\107\ Therefore, the Commission finds that Nasdaq has 
failed to meet its burden under the Exchange Act to demonstrate that 
the proposed fees are reasonable as required under Section 6(b)(4) of 
the Exchange Act.
---------------------------------------------------------------------------

    \105\ See also MEMX Letter, supra note 72, at 4 (``[e]ven taken 
at face value, at most Nasdaq's analysis shows that certain other 
large exchange groups may similarly charge unreasonable fees 
today'').
    \106\ See, e.g., W. Kip Viscusi, Joseph E. Harrington, Jr., & 
David E.M. Sappington, Economics of Regulation and Antitrust (5th 
ed. 2018), at 128-130 and 177-178. See also supra notes 82-84 and 
accompanying text (commenters stating that there is a lack of 
competition for exchange market data products and that Nasdaq has 
pricing power for its market data products).
    \107\ See HMA Letter, supra note 72, at 4-5; MEMX Letter, supra 
note 72, at 3-6; SIFMA Letter, supra note 72, at 3-5 (stating that 
``neither the proposal or the [Nasdaq Paper] demonstrate that 
platform competition constrains the specific market data and co-
located connectivity fees as issue in the [Proposal].'').
---------------------------------------------------------------------------

    The evidence that Nasdaq provides is flawed in other ways as well. 
Nasdaq's two-step analysis,\108\ which it states shows that competition 
equalizes ``all-in'' user costs across exchanges, uses a methodology 
that does not allow those costs to be compared accurately across 
exchanges. Nasdaq first claims to examine explicit ``all-in'' user 
costs and finds that these costs vary significantly across 
exchanges.\109\ Nasdaq then adds implicit costs for users to trade on 
each venue, which Nasdaq claims broadly equalizes costs to the user 
across venues.\110\ Nasdaq's analysis of explicit ``all-in'' user costs 
across exchanges uses a methodology to determine user costs by taking 
the annual revenues ``per category'' of costs for each exchange group 
and dividing by the total number of trades for each exchange group, 
respectively.\111\ This methodology to determine user costs as revenue 
normalized ``per trade'' (i.e., annual exchange revenue per cost 
category/total annual trades for the exchange) does not allow for an 
accurate comparison of an individual trader's ``all-in'' costs across 
exchanges--where there are potentially very different order flow levels 
and average order sizes that vary by trader.
---------------------------------------------------------------------------

    \108\ See Nasdaq Paper, supra note 5, at 60.
    \109\ See Nasdaq Paper, supra note 5, at 59-60. In an updated 
version of the analysis, Nasdaq states that instead, using updated 
data, competition has essentially equalized the explicit ``all-in'' 
costs of the three largest exchange families. See Nasdaq Letter at 
11. This analysis does not change the Commission's view that 
Nasdaq's analysis of ``all-in'' costs is flawed. First, even if 
explicit costs are ``equalized'' across these three exchanges in 
2022, they were shown to vary significantly in the older version of 
the analysis from 2021. It is not clear whether Nasdaq is showing 
that the exchange was not subject to the same degree of competition 
in 2021 and 2022, or if there was a mistake in the 2021 analysis. 
Comparing the updated analysis to the previous one at the least 
shows that their results are not particularly robust over time. 
Additionally, even if the updated figure is the ``correct'' one, 
there is no evidence that the costs from the updated figures are 
also equalized once implicit costs are considered.
    \110\ See Nasdaq Paper, supra note 5, at 60.
    \111\ See Nasdaq Paper, supra note 5, at 60 (Figure 2: 2021 All-
In Cost to Trade by Exchange); and Nasdaq Response Letter, supra 
note 71, at 11 (Figure 2: 2002 Estimated All-In Cost to Trade). 
These categories include revenues related to colocation and ports, 
data, SIP revenue, and trading, as well as estimated data center 
costs.
---------------------------------------------------------------------------

    As Nasdaq acknowledges, connectivity and data costs are fixed costs 
\112\--meaning that, all else being equal, these costs will be the same 
regardless of the number of transactions effected by the trader. First, 
dividing fixed costs by the number of trades will make these costs for 
exchanges that execute more trades appear lower than for exchanges that 
execute fewer trades, even when it is not the case. For example, 
consider a trader that purchases fiber connections to three exchanges 
(A, B and C), each of which costs $20,000 per month and are otherwise 
identical. The trader executes a 100-share order on each exchange. 
Assume that this is the only trade executed on Exchange A, while 
Exchange B executes a single additional 9,900-share order from a 
different trader, and Exchange C executes 99 additional 100-share 
orders, again from different traders. Following Nasdaq's methodology, 
this would create the misleading result of connectivity costs (per 
trade) of $20,000 on Exchange A, $10,000 on Exchange B, and $200 on 
Exchange C, which does not reflect the fact that the trader paid the 
same $20,000 to connect to and execute an identical trade on each 
exchange. Second, since variable costs are typically assessed on a per-
share, and not per-trade, basis, Nasdaq's methodology will similarly 
make user costs for exchanges with a smaller number of trades appear 
higher, all else equal.\113\ Accordingly, Nasdaq's methodology for 
measuring explicit user costs does not provide for an accurate 
comparison of such costs across exchanges.\114\
---------------------------------------------------------------------------

    \112\ See, e.g., Nasdaq Paper, supra note 5, at 71 (referencing 
``market data, connectivity, and other fixed costs''); and at 75 
(referencing ``the cost of market data and other fixed costs'').
    \113\ To see this, consider the example from above and assume 
that each exchange charges a liquidity take fee of $0.001 per share. 
The trader's actual total transaction cost for each 100-share order 
would be $0.10 on each exchange. However, Nasdaq's methodology would 
calculate user transaction costs as $5 on Exchange B (i.e., the 
exchange's total transaction revenue-$0.001 * 10,000 executed shares 
= $10-divided by the number of trades, which is 2).
    \114\ The issues with using ``per-trade'' costs are illustrated 
by ``Figure 1: Industry-Wide All-In Cost to Trade'' in the Nasdaq 
Response Letter which shows a drop in Nasdaq's ``all-in'' cost 
measure (defined as revenues divided by trades) since 2019 and which 
Nasdaq states shows that the explicit all-in costs per trade have 
fallen industry-wide since 2019 (excluding markouts). See Nasdaq 
Response Letter, supra note 71, at 10. However, Nasdaq does not 
acknowledge that this same figure also shows that there was a 
significant increase in trading volume in 2019. Nasdaq does not 
address the likelihood that, unless there was a particularly 
significant drop in revenues beginning in 2019, this ``drop'' in the 
ratio of revenues to trades was most likely driven by an increase in 
the number of trades (i.e., the denominator) rather than a decrease 
in revenues (i.e., the numerator).
---------------------------------------------------------------------------

    Additionally, Nasdaq draws unsupported conclusions from certain 
intermediate steps in its reasoning. Many of Nasdaq's arguments 
conflate the fact that exchanges are able to attract customers despite 
different business models as evidence that competition constrains 
``all-in'' user costs.\115\ For example, in reference to ``Table 1: 
Heatmap of Different Exchange Models and Their Characteristics,'' 
Nasdaq assumes that the ability of exchanges with different business 
models and cost structures to attract customers means that all-in costs 
``must'' be constrained by competition.\116\ However, the ability of an 
exchange to attract customers to its market data and connectivity 
products is not evidence of competition for those products; the same 
result could also hold were the exchange to have market power or be a 
monopolist for its market data and connectivity products.
---------------------------------------------------------------------------

    \115\ See, e.g., Nasdaq Paper, supra note 5, at 67 (stating that 
``U.S. exchanges operate a number of different platform business 
models today, and each is able to attract customers and compete,'' 
and ``how do all these different business models compete unless all-
in costs to users are constrained?'').
    \116\ See Nasdaq Paper, supra note 5, at 68 (Table 1: Heatmap of 
Different Exchange Models and Their Characteristics).
---------------------------------------------------------------------------

    Nasdaq then goes on to discuss how different exchanges ``compete'' 
(i.e., attract customers) despite their vastly different explicit 
costs, and it concludes that it must be the case that ``all-in'' user 
costs at some point must equalize (i.e., through implicit costs) 
\117\--questioning why else a customer would choose to purchase from a 
more expensive exchange when a cheaper one is available. This 
discussion ignores the fact that disparate prices are also consistent 
with certain products of the exchanges simply being different; and 
potentially different enough such that some products, such as the 
market data and connectivity products subject to the Proposal, do not 
even compete. Therefore, this line of reasoning does not provide 
support for the role Nasdaq presents for implicit costs, which in any 
case is never empirically demonstrated, as discussed below.
---------------------------------------------------------------------------

    \117\ See also Nasdaq Paper, supra note 5, at 60, stating that 
``implicit costs explain how venues with far higher explicit costs 
manage to compete with seemingly much cheaper venues'' and at 61, 
stating that ``[t]aking all explicit costs to trade into account, 
however, reveals significant differences across exchanges . . . Such 
a sizeable disparity suggests that there is another factor that 
keeps these exchanges in competition.''
---------------------------------------------------------------------------

    In order for the Exchange to rely on its proposition that ``all-
in'' costs to

[[Page 95830]]

users being equal across exchanges implies that there is competition 
between exchanges that constrains fees across exchange products, the 
Exchange must at least establish that the ``all-in'' costs to users 
across exchanges are in fact largely equal. The Exchange claims to have 
demonstrated that users' ``all-in'' costs are largely equal across 
trading venues,\118\ including explicit costs related to connectivity, 
data, and transactions in its discussion, as well as implicit 
transaction costs, as measured by realized spreads.\119\ Nasdaq states 
that ``[d]emonstrating that exchanges compete at the platform level, 
and that [`]all-in['] costs to the user are already constrained by that 
competition, requires a two-step analysis.'' \120\ First, Nasdaq claims 
to analyze the ``all-in'' explicit costs for the user to trade across 
exchanges, which Nasdaq states vary significantly.\121\ Second, Nasdaq 
claims to analyze the implicit costs for a user to trade on each venue, 
which Nasdaq states broadly equalizes the costs to users across 
venues.\122\ Nasdaq's claim that ``all-in'' costs to users are largely 
equal across exchanges, which Nasdaq claims is a sign of competition 
between platforms constraining fees for the market data and 
connectivity products subject to the Proposal, cannot be verified by 
the supplied data. This is because the Exchange's figures do not 
combine all of the costs the Exchange claims are relevant to a user's 
decision to trade on a given exchange.\123\ For example, in the Nasdaq 
Paper, ``Figure 2: 2021 All-In Cost to Trade by Exchange'' \124\ 
includes data, connectivity, and explicit transaction costs, but not 
implicit transaction costs; ``Figure 3: Per-Trade Markouts and Net 
Transaction Fees by Exchange,'' \125\ ``Figure 4: All-In Trading Costs 
by Venue,'' \126\ and ``Table 1: Heatmap of Different Exchange Models 
and Their Characteristics'' \127\ include explicit and implicit 
transaction costs but not data or connectivity costs; ``Figure 6: 
Maker-Taker Venues Have Most Time at NBBO and Highest value data'' 
\128\ and ``Figure 7: The SIP incentive structure rewards venues that 
contribute most to the NBBO'' \129\ purport to establish a link between 
data fees and transaction volumes, showing a large variation in data-
related fees and revenues across trading venues, but do not combine 
this with information about other costs.\130\ The Exchange has not 
provided a figure that combines all costs, both implicit and explicit 
and both transaction-related and data/connectivity-related, that the 
Exchange itself states are part of a user's decision to participate on 
a trading venue. It is also not clear how the figures provided by 
Nasdaq should be combined,\131\ or whether the figures provided by 
Nasdaq are calculated using the same units.\132\
---------------------------------------------------------------------------

    \118\ See, e.g., Notice, supra note 3, at 24072 (stating that 
``[d]ata shows that the combination of explicit all-in costs to 
trade and other implicit costs has largely equalized the cost to 
trade across venues.'') and Nasdaq Paper, supra note 5, at 60 
(stating that ``it is clear . . . that all-in costs to users are 
roughly equal across exchanges.''), and at 81 (stating that ``[a]s 
we have shown . . . , platform competition has already resulted in 
rough equalization of all-in costs for users across exchange 
venues.'').
    \119\ See, e.g., Notice, supra note 3, at 24072, and Nasdaq 
Paper, supra note 5, at 59 (stating that ``[c]ustomers consider the 
all-in cost for them to trade at each venue, including the explicit 
costs of trading, connectivity, membership, and data,'' and that 
``implicit costs to trade cannot be overlooked in assessing 
competition.'').
    \120\ See Nasdaq Paper, supra note 5, at 59.
    \121\ See Nasdaq Paper, supra note 5, at 59.
    \122\ See Nasdaq Paper, supra note 5, at 60.
    \123\ See Nasdaq Paper, supra note 5, at 60-72.
    \124\ See Nasdaq Paper, supra note 5, at 60 (Figure 2: 2021 All-
In Cost to Trade by Exchange).
    \125\ See Nasdaq Paper, supra note 5, at 62 (Figure 3: Per-Trade 
Markouts and Net Transaction Fees by Exchange).
    \126\ See Nasdaq Paper, supra note 5, at 65 (Figure 4: All-In 
Trading Costs by Venue).
    \127\ See Nasdaq Paper, supra note 5, at 68 (Table 1: Heatmap of 
Different Exchange Models and Their Characteristics).
    \128\ See Nasdaq Paper, supra note 5, at 70 (Figure 6: Maker-
Taker Venues Have Most Time at NBBO and Highest value data).
    \129\ See Nasdaq Paper, supra note 5, at 71 (Figure 7: The SIP 
incentive structure rewards venues that contribute most to the 
NBBO).
    \130\ Similarly, Nasdaq included in its response letter a 
``Figure 1: Industry-Wide All-In Cost to Trade'' that purports to 
show changes in industry-wide explicit costs to trade over time, 
during the period from 2017-2021, but does not include implicit 
costs, and furthermore does not allow for a comparison of costs 
across individual exchanges. Nasdaq Response Letter, supra note 71, 
at 10.
    \131\ Nasdaq's implicit cost analysis and explicit cost analysis 
do not clearly reflect the costs incurred by similar groups of 
traders so cannot be combined. For example, while the connectivity 
and market data costs in Figure 2 are presumably incurred by all 
traders that connect to the exchange, the analysis of realized 
spreads in Figure 3 only considers the estimated fees/rebates paid 
by a ``large market marker.'' See id. Furthermore, as Nasdaq 
acknowledges, ``markouts,'' i.e., realized spreads, measure the 
theoretical profitability from the perspective of a liquidity 
provider, which represents a cost to the liquidity taker. See Nasdaq 
Paper, supra note 5, at 61 n.35. As such, they reflect a cost 
incurred by one group of market participants on an exchange, but the 
theoretical profits of another group.
    \132\ For example, while Figure 2, Figure 3, and Table 1 are 
presented in units of ``mils'' (i.e., 1/1,000th of a dollar); Figure 
4 is presented in basis points (i.e., 0.01 percentage points). See 
Nasdaq Paper, supra note 5, at 60-72. In addition, while Figures 2 
and 3 are presented ``per trade,'' it is not clear whether Table 1 
and Figure 4 are presented per trade or per share. See id.
---------------------------------------------------------------------------

    Because Nasdaq has not sufficiently demonstrated that ``all-in'' 
costs to users across exchanges are in fact largely equal, which Nasdaq 
claims is the fundamental basis for its finding that it is subject to 
competition for all of its joint platform products, the Commission is 
unable to find that Nasdaq has met its burden to demonstrate that the 
proposed fees are reasonable as required by Section 6(b)(4) of the 
Exchange Act.
2. Equitable Allocation of Reasonable Fees, Unfair Discrimination, and 
Burden on Competition
a. Exchange Arguments
    The Exchange states that the proposed fees are equitable and 
reasonable because they will be subject to competition.\133\ The 
Exchange states that the Proposal is not unfairly discriminatory and 
that Non-Display Usage of depth-of-book data and the Exchange's 40Gb 
and 10Gb Ultra high-speed connections will be offered to all members 
and non-members on like terms.\134\ The Exchange states that incentive 
programs have been widely adopted by exchanges, and are reasonable, 
equitable, and non-discriminatory because they are open on an equal 
basis to similarly situated members and provide additional benefits or 
discounts that are reasonably related to the value to an exchange's 
market quality and activity.\135\ The Exchange also states that the 
Proposal is not unfairly discriminatory with respect to either members 
or non-members as it is not unfair to charge more to firms that do not 
directly contribute order flow to the Exchange, but nevertheless 
benefit from that order flow through tighter spreads, better prices, 
and the other advantages of a more liquid platform.\136\ The Exchange 
states that all members that meet the ADV threshold will be charged 
lower fees and Nasdaq offers rebates to members that offer displayed 
liquidity.\137\ The Exchange states that, with these rebates, any 
member--even smaller members--should have the ability to post 
sufficient displayed liquidity to meet the ADV threshold.\138\ The 
Exchange also states that the Proposal is not unfairly discriminatory 
with respect to non-members that are broker-dealers because they have 
the option of becoming members to obtain the lower fees, and because 
they realize the benefits of higher liquidity, including tighter 
spreads and better prices, and it is not unfair discrimination to 
charge a higher fee for that benefit.\139\ The Exchange further states 
that the Proposal is not unfairly

[[Page 95831]]

discriminatory with respect to non-member firms that are not broker-
dealers, such as market data vendors and index providers, because they 
also benefit from the value that the additional liquidity generated by 
this Proposal will provide to the trading platform.\140\ The Exchange 
states that discounts for specific categories of market participants 
are well-established, and include non-professional fees, broker-dealer 
enterprise licenses, and a media enterprise license.\141\
---------------------------------------------------------------------------

    \133\ See Notice, supra note 3, at 24074.
    \134\ See Notice, supra note 3, at 24074.
    \135\ See Notice, supra note 3, at 24073.
    \136\ See Notice, supra note 3, at 24074.
    \137\ See Notice, supra note 3, at 24074.
    \138\ See Notice, supra note 3, at 24074.
    \139\ See Notice, supra note 3, at 24074.
    \140\ See Notice, supra note 3, at 24074.
    \141\ See also Notice, supra note 3, at 24074 (citing as an 
example The Nasdaq Stock Market, Price List--U.S. Equities, 
available at https://www.nasdaqtrader.com/Trader.aspx?id=DPUSData 
(providing discounts for Non-Professional subscribers for Nasdaq 
TotalView and other market data products, enterprise licenses for 
broker-dealers for multiple market data products, and a digital 
media enterprise license for Nasdaq Basic)).
---------------------------------------------------------------------------

b. Opposing Comments and Exchange Response
    Multiple commenters state that the Proposal is unfairly 
discriminatory, as well as an undue burden on competition, and 
inconsistent with a past Commission order disapproving a similar Nasdaq 
proposed rule change.\142\ One commenter states that the Proposal is an 
example of Nasdaq leveraging its market power to reduce competition 
``by offering discounts on overpriced services'' to Nasdaq members who 
route order flow to Nasdaq.\143\
---------------------------------------------------------------------------

    \142\ See HMA Letter, supra note 72, at 6-8 and SIFMA Letter, 
supra note 72, at 3 (both citing portions of Release No. 65362 
(September 20, 2011), 76 FR 59466 (September 26, 2011) (SR-NASDAQ-
2011-010) (Order Disapproving a Proposed Rule Change to Link Market 
Data Fees and Transaction Execution Fees) (``NASDAQ-2011-010 
Disapproval Order'') (specifically citing the Commission statements 
that ``[t]he Commission also does not believe NASDAQ has 
demonstrated that the incremental step of linking the pricing of 
trade executions and market data is an equitable allocation of fees, 
or is not unfairly or unreasonably discriminatory . . . exchanges 
that do not provide market data, or that already do not charge any 
participant for market data, would not be able to respond to 
NASDAQ's proposal with a similar pricing scheme,'' ``preventing the 
linking of market data fees to trade executions will help bolster 
competitive forces in the area of market data, because exchange 
market data fees must appeal simultaneously to market participants 
that trade directly on an exchange and those that do not trade 
directly on an exchange . . . . The Commission believes it is 
important to preserve competitive forces for market data as much as 
possible,'' and ``The Commission is similarly concerned about 
placing an undue burden on competition in the execution services 
market. NASDAQ's proposal would allow it to use significant 
discounts on fees for its market data products as an inducement to 
attract order flow rather than relying on the quality of its 
transaction services and the level of its transaction fees to 
compete for orders. NASDAQ states that any competitor exchange could 
choose to respond to the proposed pricing by NASDAQ by offering its 
own discounts on its data products.''). See also MEMX Letter, supra 
note 72, at 5-8 (further questioning why the Exchange would file 
such a similar proposal to the one that was disapproved in 2011, and 
states that the Proposal may be a pre-emptive response to 
anticipated changes to Regulation NMS and its market structure rules 
limiting transaction-based incentives as it would potentially 
preserve the ability for incumbent exchanges to influence market 
participant routing behavior and stating that the Proposal ``offers 
a potential end run around such changes by allowing larger incumbent 
exchanges to provide `incentives' through increasing fees charged 
for related services and then `discount[ing]' those fees for firms 
that meet specified volume thresholds'' which would ``preserve the 
ability for incumbent exchanges to influence market participant 
routing behavior in a world where explicitly transaction-based 
incentives are more difficult to offer due to regulatory 
constraints'' and ``[s]maller exchanges that price their services 
fairly, as required by the [Exchange] Act, would not be able to 
provide comparable incentives as the incentives are predicated on 
charging excessive fees that are then reduced for market 
participants that route order flow to the exchange implementing the 
fee instead of one of many competitive execution venues.'').
    \143\ See MEMX Letter, supra note 72, at 2.
---------------------------------------------------------------------------

    One commenter states that any Nasdaq member trading less than the 
proposed Minimum ADV would be disadvantaged by having to pay higher 
connectivity fees or by having to alter its order routing in a way that 
the current volume on Nasdaq suggests would be sub-optimal for 
business, creating a massive burden on competition, and discriminating 
against those who cannot or do not qualify, as well as other trading 
venues.\144\ Another commenter states that non-members will always pay 
higher fees as well as members who do not meet the threshold, which 
benefits the larger members on the Exchange, and the Exchange itself, 
at the expense of smaller members and non-members and creates a 
significant competitive imbalance in the markets for the relevant 
market data and connectivity services.\145\ Another commenter similarly 
states that the Proposal is an undue burden on competition and 
discriminates against those who are not members or who cannot meet the 
Minimum ADV as market data and connectivity are indispensable to 
broker-dealers and other market participants.\146\
---------------------------------------------------------------------------

    \144\ See HMA Letter, supra note 72, at 5. This same commenter 
states that ``[i]n the face of that reality, Nasdaq's wholly 
unsupported claim that these fees, in particular, should be 
permitted because they are somehow part of an overall competitive 
environment rings hollow.'' Id.
    \145\ See SIFMA Letter, supra note 72, at 3 and 5 (also stating 
that there is not sufficient information or analysis provided in the 
Proposal to overcome these concerns).
    \146\ See MEMX Letter, supra note 72, at 5-6 (also stating that 
the fact that the Minimum ADV required is low does not make the 
Proposal any less unfairly discriminatory or anti-competitive).
---------------------------------------------------------------------------

    In response, Nasdaq states that there is nothing inherently unfair 
or discriminatory about offering different prices to different 
categories of customers based on the type or quantity of the service 
purchases, including providing incentives to certain customers to 
direct more order flow to an exchange.\147\ Nasdaq further states that 
offering pricing incentives to attract customer orders is 
procompetitive behavior and states that Commission ``has approved 
differential pricing on numerous prior occasions.'' \148\ Nasdaq states 
that a prohibition against all differential pricing would suppress 
competition and harm buyers because the sellers would likely respond by 
not making any price cuts at all to avoid the cost of extending them to 
all buyers, which would in effect establish an artificial price 
floor.\149\ Nasdaq states that differentiation and variation in product 
offerings are hallmarks of competition and beneficial to customers and 
consumer welfare.\150\ Nasdaq also states that the Minimum ADV is 
reasonable because the burden on any member is expected to be minor and 
such a burden is offset by the significant benefit to all market 
participants of more efficient trading and lower costs.\151\
---------------------------------------------------------------------------

    \147\ See Nasdaq Response Letter, supra note 71, at 15.
    \148\ See Nasdaq Response Letter, supra note 71, at 16-17. 
Nasdaq states that Commission ``has acknowledged that exchanges can 
offer different prices to `particular classes of subscribers' based 
on market conditions such as `their economic circumstances and their 
needs for and use of . . . information.' '' Id. at 17 (citing 
Concept Release, Regulation of Market Information Fees and Revenues, 
64 FR 70613, 70630 (December 17, 1999).
    \149\ See Nasdaq Response Letter, supra note 71, at 16.
    \150\ See Nasdaq Response Letter, supra note 71, at 17.
    \151\ See Nasdaq Response Letter, supra note 71, at 19.
---------------------------------------------------------------------------

    Nasdaq reiterates that the Proposal is neither unfairly 
discriminatory to a non-member broker-dealer because the non-member 
broker-dealers have the option of becoming members to obtain the 
proposed lowered fee and they also realize the benefits of more 
liquidity on the exchange, nor to non-member firms that are not broker-
dealers since those non-members also benefit from the additional 
liquidity expected by the Proposal.\152\ Finally, Nasdaq states that 
the Proposal does not place an undue burden on competition and that 
providing discounts is not anti-competitive,\153\ and that bundled 
discounts are also pro-competitive.\154\
---------------------------------------------------------------------------

    \152\ See Nasdaq Response Letter, supra note 71, at 19-20.
    \153\ See Nasdaq Response Letter, supra note 71, at 20 (stating 
that courts are wary about claims that offering discounts is anti-
competitive because lower prices benefit customers regardless of how 
those prices are set, as long as they are above predatory levels).
    \154\ See Nasdaq Response Letter, supra note 71, at 20.

---------------------------------------------------------------------------

[[Page 95832]]

c. Analysis of Arguments Regarding Equitable Allocation, Unfair 
Discrimination, and Burden on Competition Not Necessary or Appropriate
    Nasdaq proposes to increase fees for certain market data and 
connectivity products and to maintain the current fees for such 
products if members meet the Minimum ADV. The Proposal would thereby 
link the level of Nasdaq trading volume (i.e., executed displayed 
volume) to the level of fees for Nasdaq market data and connectivity 
products. In disapproving a prior Nasdaq proposal to link market data 
pricing to transaction volume, the Commission cited its previous 
statement that the Exchange Act precludes exchanges from adopting terms 
for market data distribution that unfairly discriminate by favoring 
participants in an exchange's market or penalizing participants in 
other markets.\155\ Nasdaq has not demonstrated that the incremental 
step of linking the pricing of market data and connectivity to Nasdaq 
trading volume (i.e., the Minimum ADV) is an equitable allocation of 
fees as required by Section 6(b)(4) of the Exchange Act, is not 
unfairly discriminatory as required by Section 6(b)(5) of the Exchange 
Act, and is consistent with Section 11A of the Exchange Act and Rules 
603(a)(1) and 603(a)(2) of Regulation NMS which, among other things, 
require the Exchange to distribute market data on terms that are ``fair 
and reasonable'' and ``not unreasonably discriminatory.'' Nasdaq states 
that the marketplace is intensely competitive, and states that 
competitive forces ensure that the Proposal is equitable and not 
unfairly discriminatory. The Proposal would result in market 
participants paying different fees for the same market data from Nasdaq 
depending on the amount of their executed displayed volume on the 
Exchange.\156\ Thus, the Proposal adopts terms for market data 
distribution that unfairly discriminate by favoring participants in an 
exchange's market or penalizing participants in other markets.\157\
---------------------------------------------------------------------------

    \155\ See NASDAQ-2011-010 Disapproval Order, supra note 142. 
``[A]n exchange proposal that seeks to penalize market participants 
for trading in markets other than the proposing exchange would 
present a substantial countervailing basis for finding unreasonable 
and unfair discrimination and likely would prevent the Commission 
from approving an exchange proposal.'' See Securities Exchange Act 
Release No. 59039 (December 2, 2008), 73 FR 74770, 74791 (December 
9, 2008) (SR-NYSEArca-2006-21) (Order Setting Aside Action by 
Delegated Authority and Approving Proposed Rule Change Relating to 
NYSE Arca Data), vacated and remanded by NetCoalition v. SEC, No. 
09-1042 (D.C. Cir. 2010) but on other grounds.
    \156\ The Commission agrees with the commenter who states that 
the absence of an analysis of how many, what types, and how firms 
will be impacted by the proposed fee change makes it difficult to 
evaluate the proposed Minimum ADV threshold. See SIFMA Letter, supra 
note 72, at 6. This specific commenter states that the Proposal 
``did not include the number or size of members that currently trade 
in volumes that meet the definition of the proposed term `Minimum 
ADV,' how many additional members it would expect to cross the 
threshold as a result of the [ ] Proposal, or comparison of these 
statistics at various volume threshold levels.'' Id.
    \157\ See supra note 155.
---------------------------------------------------------------------------

    The Commission is concerned that the Proposal would result in an 
inequitable allocation of fees and unfairly discriminate against market 
participants who are users of market data and connectivity but are not 
significant users of execution services and do not meet the Minimum ADV 
requirement, and thus would not qualify for the lower market data and 
connectivity fees. This could include, for example, market participants 
who divide their liquidity provision among multiple exchanges that 
trade NMS stocks, or that utilize market data but do not trade on 
Nasdaq, and thus do not provide sufficient executed displayed volume to 
Nasdaq to qualify for the lower market data fees. In this regard, the 
Commission is concerned that linking market data and connectivity fees 
to executed displayed volume would essentially allow Nasdaq to charge 
significantly higher fees for market data and connectivity to market 
participants that choose to provide liquidity at other exchanges, by 
charging them more than those Nasdaq members that meet the Minimum ADV 
on Nasdaq. By requiring market participants to become members of the 
Exchange (and then meet the Minimum ADV) to receive the proposed 
pricing benefit for market data and connectivity, the Proposal would 
penalize market participants for not being a member of the Exchange and 
thus the Proposal would adopt terms for market data distribution that 
would unfairly discriminate against those market participants that 
cannot or will not become members of the Exchange.
    Nasdaq has not demonstrated that the incremental step of linking 
the pricing of market data and connectivity to Nasdaq trading volume 
(i.e., the Minimum ADV) would not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of the Exchange 
Act as required by Section 6(b)(8) of the Exchange Act. As discussed 
above, Nasdaq states it currently faces intense ``competition as a 
platform,'' and that its proposal is providing an incentive for members 
who provide a requisite level of liquidity lower fees for market data 
and connectivity.\158\ Nasdaq states that ``[p]roviding discounts is 
not anti-competitive'' and states its view that ``courts have also 
deemed `bundled' discounts, like the Proposal, to be pro-competitive.'' 
\159\ Nasdaq acknowledges, however, that a bundled discount might harm 
competition `when it is offered by firms holding or on the verge of 
gaining monopoly power in the relevant market.' '' \160\ However, 
Nasdaq has not adequately articulated why the linking of market data 
and connectivity fees to the Minimum ADV will not negatively impact the 
competition that exists today in the market for order flow. The 
Proposal would allow Nasdaq to use a significant discount on the fee 
for its market data product as an inducement to attract liquidity 
rather than relying on the quality of its transaction services to 
compete for displayed liquidity. As discussed above, Nasdaq fails to 
demonstrate that its market data and connectivity products are subject 
to competitive forces, and preventing the linking of market data fees 
to executed displayed volume will help prevent exchanges from using 
their advantages in the area of market data to reduce competitive 
forces in the market for order flow.\161\
---------------------------------------------------------------------------

    \158\ See Notice, supra note 3, at 24071.
    \159\ See Nasdaq Response Letter, supra note 71, at 20.
    \160\ See Nasdaq Response Letter, supra note 71, at 20.
    \161\ See supra notes 82-84 and accompanying text (commenters 
stating that there is a lack of competition for exchange market data 
products and that Nasdaq has pricing power for its market data 
products).
---------------------------------------------------------------------------

IV. Conclusion

    For the reasons set forth above, the Commission does not find that 
the proposed rule change is consistent with the Exchange Act and the 
rules and regulations thereunder applicable to a national securities 
exchange, and, in particular, with Sections 6(b)(4), 6(b)(5), 6(b)(8), 
and 11A of the Exchange Act and with Rules 603(a)(1) and 603(a)(2) of 
Regulation NMS thereunder.
    It is therefore ordered, pursuant to Section 19(b)(3)(C) of the 
Exchange Act,\162\ that File No. SR-NASDAQ-2024-016, be and hereby is, 
disapproved. 
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    \162\ 15 U.S.C. 78s(b)(3)(C).
    \163\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\163\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-28258 Filed 12-2-24; 8:45 am]
BILLING CODE 8011-01-P