
[Federal Register: January 27, 2009 (Volume 74, Number 16)]
[Notices]               
[Page 4799-4800]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27ja09-74]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59266; File No. SR-NASDAQ-2008-016]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving Proposed Rule Change To Create the Nasdaq Market Pathfinders 
Service and Establish Fees for the Service

January 16, 2009.

I. Introduction and Description of the Proposal

    On June 27, 2008, The NASDAQ Stock Market LLC (``Nasdaq'') filed 
with the Securities and Exchange Commission (``Commission''), pursuant 
to Section 19(b)(1) of the Securities Exchange Act of 1934 (``Act'') 
\1\ and Rule 19b-4 thereunder,\2\ a proposed rule change that would 
establish the Nasdaq Market Pathfinders Service (``Service'') and 
establish fees for the Service. The Service will allow subscribers to 
view a real time data product that tracks the aggregated market 
activity of certain market participants who are aggressively buying 
and/or selling. Nasdaq proposes to offer new subscribers a 30-day 
waiver of the user fees for the Service. After the conclusion of the 
waiver period, subscribers may avail themselves of three different 
subscription options at varying prices.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published in the Federal Register on 
July 17, 2008.\3\ The Commission received one comment on the 
proposal.\4\ Nasdaq responded to the comment letter on September 18, 
2008.\5\ The Commission is approving the proposed rule change.
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    \3\ See Securities Exchange Act Release No. 58145 (July 11, 
2008), 73 FR 41143.
    \4\ See August 7, 2008 letter from Ira D. Hammerman, Senior 
Managing Director and General Counsel, Securities Industry and 
Financial Markets Association (``SIFMA''), to Florence Harmon, 
Acting Secretary, Commission (``SIFMA Letter'').
    \5\ See September 18, 2008 letter from Jeffrey S. Davis, Deputy 
General Counsel and Vice President, Nasdaq, to Florence Harmon, 
Acting Secretary, Commission (``Nasdaq Letter'').
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II. Summary of Comment Letter

    The commenter suggests that the Commission cannot approve the 
proposed rule change for the following reasons:

--Nasdaq is proposing to make commercial use of data supplied to it in 
Nasdaq's capacity as a regulatory body, despite the Commission's 
previous statement that, with regard to OATS information, it does not 
believe such data should be used for non-regulatory purposes unless the 
data is made available to other market participants on the same terms 
under which it is provided to Nasdaq.\6\
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    \6\ SIFMA Letter at 2, quoting the Commission's order approving 
Nasdaq's exchange application. See Securities Exchange Act Release 
No. 53128 (January 13, 2006), 71 FR 3550 (January 23, 2006) (File 
No. 10-131), in text following footnote 136.
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--Nasdaq has failed to provide a detailed discussion of the data or 
analytics to be included in the Service. SIFMA stated that several 
firms have expressed concern with the proposal's potential to 
compromise the confidentiality of the transacting party's trading 
strategies or provide misinformation as to a transacting party.
--SIFMA questions whether the Service will provide a means to reverse 
engineer the algorithms and strategies Nasdaq members have created, or 
whether the impact on such algorithms and strategies will be such as to 
render them useless.
--SIFMA also raised a procedural concern, stating that Nasdaq is 
proposing to create a proprietary product that uses data its members 
are required to submit without compensation; no other exchange or 
market data vendor can replicate this product because necessary 
elements are not available to anyone but Nasdaq; and no cost data is 
provided to allow an opportunity to determine if the fees are fair and 
reasonable.

III. Nasdaq's Response to the Comment Letter

    In response to the SIFMA Letter, Nasdaq made the following points:

--SIFMA inaccurately claims that Nasdaq is collecting data in its 
capacity as a regulatory body and using it for commercial purposes, 
stating that the Service does not use OATS information, but instead 
relies on trade information sent directly and only from the Nasdaq 
Matching Engine.
--The Service will not operate in a manner that permits users to 
distinguish between short and long sales; the Service will not 
compromise the confidentiality of the transacting party's trading 
strategies, nor provide misinformation as to a transacting party 
because there are filters in place to prevent this from occurring.
--The Service will not provide a means to reverse engineer the 
algorithms and strategies Nasdaq members have created, nor will it 
affect those

[[Page 4800]]

algorithms and strategies in such a way as to render them useless.
--The Service is a sentiment indicator that would provide users with an 
indication of how a specific type of market participant feels about 
certain securities, making available to the public information that is 
sometimes referred to as ``the word on the street'' as compiled from 
order flow on the trading desks of large broker-dealers.
--Nasdaq believes that it has provided adequate justification for the 
fees.

IV. Discussion and Commission Findings

    The Commission has reviewed carefully the proposed rule change, the 
comment letter, and Nasdaq's response to the comment letter, and finds 
that the proposed rule change is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to a 
national securities exchange \7\ and, in particular, Section 6(b)(4) of 
the Act,\8\ which requires, among other things, that Nasdaq's rules 
provide for the equitable allocation of reasonable dues, fees and other 
charges among members and issuers and other persons using any facility 
or system which Nasdaq operates or controls, and that it not unfairly 
discriminate between customers, issuers, brokers or dealers. The 
Commission believes that the proposed rule change is consistent with 
these statutory standards.
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    \7\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(4).
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    Nasdaq has represented that the Service is a voluntary one, and 
that the information provided to subscribers is not comprised of data 
that broker-dealers are obligated to provide to Nasdaq for regulatory 
purposes because of Nasdaq's status as a self-regulatory organization. 
Additionally, broker-dealers do not need the Service to perform their 
duties, so the decision to purchase the Service is truly voluntary and 
dependent upon each broker-dealer's business model. Finally, because 
the Service is voluntary, Nasdaq has met the statutory standard by 
pricing the Service according to free market principles; indeed, if 
Nasdaq priced the Service too high, broker-dealers could simply opt not 
to purchase the Service. The Commission believes that Nasdaq's fees for 
the Service are both reasonable and equitably allocated.\9\ 
Additionally, the Commission does not believe that the Pathfinder 
Service will allow reverse engineering of the algorithms and strategies 
created by Nasdaq members; Nasdaq has explained the various ways the 
information is filtered, and has stated that such filtering will 
prevent this from occurring.
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    \9\ The proposal meets the criteria, formulated by the 
Commission in connection with the petition filed by NetCoalition, 
for approval of proposed rule changes concerning the distribution of 
non-core market data. See Securities Exchange Act Release Nos. 59039 
(December 2, 2008), 73 FR 74770 (December 9, 2008) (SR-NYSEArca-
2006-21) and 55011 (December 27, 2006) (order granting petition for 
review of SR-NYSEArca-2006-21). In its order issued in connection 
with the NetCoalition petition, the Commission stated that 
``reliance on competitive forces is the most appropriate and 
effective means to assess whether the terms for the distribution of 
non-core data are equitable, fair and reasonable, and not 
unreasonably discriminatory.'' 73 FR at 74781-82. As such, 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.'' Id. at 74782. If an exchange ``was subject to 
significant competitive forces in setting the terms of a proposal,'' 
a proposal will be approved unless the Commission determines that 
``there is a substantial countervailing basis to find that the terms 
nevertheless fail to meet an applicable requirement of the Exchange 
Act or the rules thereunder.'' Id. at 74781.
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act 
\10\, that the proposed rule change (SR-NASDAQ-2008-016) be, and it 
hereby is, approved.
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    \10\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
Florence E. Harmon,
Deputy Secretary.
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    \11\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E9-1674 Filed 1-26-09; 8:45 am]

BILLING CODE 8011-01-P
