
[Federal Register: July 19, 2010 (Volume 75, Number 137)]
[Notices]               
[Page 41916-41918]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr19jy10-127]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62490; File No. SR-NASDAQ-2010-078]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of a Proposed Rule Change as Modified by Amendment No. 
1 Thereto To Modify Rule 7019 Governing Market Data Distribution Fees

July 13, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 29, 2010, The NASDAQ Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. On July 
13, 2010, Nasdaq filed Amendment No. 1 to the proposed rule change. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change as amended from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to modify Rule 7019 governing market data 
distribution fees to harmonize distributor and direct access fees for 
depth products.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.\3\
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    \3\ Changes are marked to the rule text that appears in the 
electronic Nasdaq Manual found at http://
nasdaqomx.cchwallstreet.com.
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* * * * *
7019. Market Data Distributor Fees
    (a) No change.
    (b) The charge to be paid by Distributors of the following Nasdaq 
Market Center real time data feeds shall be:

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                                                           Monthly direct    Monthly internal   Monthly external
                                                             access fee      distributor fee    distributor fee
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Issue Specific Data
Dynamic Intraday
NASDAQ-listed security depth entitlements [TotalView]..             $2,000             $1,000             $2,500
Non NASDAQ-listed security depth entitlements                        1,000                500              1,250
 [OpenView]............................................
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     (c)-(d) No change.
* * * * *

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    Nasdaq is proposing to modify Rule 7019 governing market data 
distribution fees to harmonize the depth distributor fees by including 
Level 2, also known as NQDS, into the current fee (TotalView) for 
Nasdaq-listed securities. Currently, the data feed that contains the 
Nasdaq Level 2 entitlement and OpenView entitlement includes 
distributor fees for non-Nasdaq listed securities (under the OpenView 
entitlement) but does not include distributor fees for Nasdaq listed 
securities as TotalView does. Harmonization of the depth distributor 
fee entitlement for Nasdaq-listed securities on the Level 2 data 
product, consistent with other Nasdaq depth products such as TotalView, 
ensures product and policy consistency. As mentioned above, the Nasdaq 
Level 2 data feed contains two different entitlements (the OpenView 
entitlement and Level 2 entitlement). The data feed is the physical 
stream of data, whereas the entitlement is the subscription for which 
customers sign-up.
    The Nasdaq Level 2 entitlement was created in 1983 at a time that 
all real-time products fell under the auspices of the UTP Plan. 
Subsequently, Nasdaq created a separate security information processor 
for UTP data in 2002 and petitioned the SEC to remove the Level 2 
entitlement from the UTP Plan. When Nasdaq received exchange status in 
2006, Level 2 data was removed from the UTP plan. Currently, the Level 
2 data feed carries top-of-file exchange participant quotations for 
both Nasdaq and Consolidated Quotation System issues. This information 
is also carried in TotalView along with the full participant quotes. As 
such, Level 2 is a subset of TotalView data.
    Like Nasdaq's other products, the Level 2 data feed is fed directly 
by the Nasdaq execution system and is offered in a full range of 
network protocols just as with TotalView. Meaning the Nasdaq Level 2 
data feed uses the same system infrastructure as TotalView and as such, 
the entitlement for the distributor fees should be the same.
    In addition to the new distributor fees, Nasdaq is looking to 
expand the direct access fee to customers who subscribe to the Level 2 
entitlement. As with the disparity in the TotalView distributor fee, 
customers who only access the Level 2 information through the Level 2 
entitlement directly from the Exchange are not charged a direct access 
fee (as ``Direct Access'' is defined in Nasdaq Rule 7019). Nasdaq is 
seeking to remedy this so that these customers are

[[Page 41917]]

charged the same direct access fee as are customers of TotalView and 
OpenView. It is important to note that customers will only be charged 
one direct access fee for Nasdaq listed securities and one direct 
access fee for non-Nasdaq listed securities mimicking the TotalView and 
OpenView direct access entitlements.
    The Exchange believes that the harmonization of the distributor fee 
and direct access fee makes Nasdaq's depth distributor fees and direct 
access fees consistent across products and allows Nasdaq to assess a 
fair price for the value delivered among all of Nasdaq's depth 
products. Firms would only pay one distributor fee and one direct 
access fee for a non-Nasdaq listed securities entitlement, regardless 
of the number of feeds consumed. Additionally, Firms would only pay one 
distributor fee and one direct access fee for a Nasdaq listed 
securities entitlement, regardless of the number of feeds consumed. 
This proposed rule change also has no affect on professional and non-
professional user fees as this change is designed for the harmonization 
of distributor and direct access fees only.
    If the Commission approves the filing in August 2010 but after 
August 1, 2010, the distributor fees as set forth herein will be in 
effect and cover the full month and will not be prorated.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\4\ in general and with Section 
6(b)(4) of the Act,\5\ as stated above, in that it provides an 
equitable allocation of reasonable fees among users and recipients of 
Nasdaq data. In adopting Regulation NMS, the Commission granted self-
regulatory organizations and broker-dealers increased authority and 
flexibility to offer new and unique market data to the public. It was 
believed that this authority would expand the amount of data available 
to consumers, and also spur innovation and competition for the 
provision of market data.
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    \4\ 15 U.S.C. 78f.
    \5\ 15 U.S.C. 78f(b)(4).
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    The proposed rule change in this instance appears to be precisely 
the sort of rule change that the Commission envisioned when it adopted 
Regulation NMS. The Commission concluded that Regulation NMS--by 
deregulating the market in proprietary data--would itself further the 
Act's goals of facilitating efficiency and competition:

    [E]fficiency is promoted when broker-dealers who do not need the 
data beyond the prices, sizes, market center identifications of the 
NBBO and consolidated last sale information are not required to 
receive (and pay for) such data. The Commission also believes that 
efficiency is promoted when broker-dealers may choose to receive 
(and pay for) additional market data based on their own internal 
analysis of the need for such data.\6\
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    \6\ Securities Exchange Act Release No. 51808 (June 9, 2005), 70 
FR 37496 (June 29, 2005).

    By removing ``unnecessary regulatory restrictions'' on the ability 
of exchanges to sell their own data, Regulation NMS advanced the goals 
of the Act and the principles reflected in its legislative history. If 
the free market should determine whether, proprietary data is sold to 
broker-dealers at all, it follows that the price at which such data is 
sold should be set by the market as well.

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

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. As the Commission 
has recognized,\7\ the market for transaction execution and routing 
services is highly competitive, and the market for proprietary data 
products is complementary to it, since the ultimate goal of such 
products is to attract further order flow to an exchange. Thus, 
exchanges lack the ability to set fees for executions or data at 
inappropriately high levels. Order flow is immediately transportable to 
other venues in response to differences in cost or value. Similarly, if 
data fees are set at inappropriate levels, customers that control order 
flow will not make use of the data and will be more inclined to send 
order flow to exchanges providing data at fees they consider more 
reasonable.
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    \7\ Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770 (December 9, 2008) (SR-NYSEArca-2006-21).
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    The market for market data products is currently competitive and 
inherently contestable because there is fierce competition for the 
inputs necessary to the creation of proprietary data and strict pricing 
discipline for the proprietary products themselves. Numerous exchanges 
compete with each other for listings, trades, and market data itself, 
providing virtually limitless opportunities for entrepreneurs who wish 
to produce and distribute their own market data. This proprietary data 
is produced by each individual exchange, as well as other entities, in 
a vigorously competitive market.
    With regard to the market for executions, broker-dealers currently 
have numerous alternative venues for their order flow, including 
multiple competing self-regulatory organization (``SRO'') markets, as 
well as broker-dealers (``BDs'') and aggregators such as the Direct 
Edge and LavaFlow electronic communications network (``ECN''). Each SRO 
market competes to produce transaction reports via trade executions, 
and FINRA-regulated Trade Reporting Facilities (``TRFs'') compete to 
attract internalized transaction reports. It is common for BDs to 
further and exploit this competition by sending their order flow and 
transaction reports to multiple markets, rather than providing them all 
to a single market.
    Competitive markets for order flow, executions, and transaction 
reports provide pricing discipline for the inputs of proprietary data 
products. The large number of SROs, TRFs, and ECNs that currently 
produce proprietary data or are currently capable of producing it 
provides further pricing discipline for proprietary data products. Each 
SRO, TRF, ECN and BD is currently permitted to produce proprietary data 
products, and many currently do or have announced plans to do so, 
including Nasdaq, NYSE, Alternext, NYSEArca, and BATS.
    Any ECN or BD can combine with any other ECN, broker-dealer, or 
multiple ECNs or BDs to produce jointly proprietary data products. 
Additionally, non-broker-dealers such as order routers like LAVA, as 
well as market data vendors can facilitate single or multiple broker-
dealers' production of proprietary data products. The potential sources 
of proprietary products are virtually limitless.
    The fact that proprietary data from ECNs, BDs, and vendors can by-
pass SROs is significant in two respects. First, non-SROs can compete 
directly with SROs for the production and sale of proprietary data 
products, as BATS and Arca did before registering as exchanges by 
publishing proprietary book data on the Internet. Second, because a 
single order or transaction report can appear in an SRO proprietary 
product, a non-SRO proprietary product, or both, the data available in 
proprietary products is exponentially greater than the actual number of 
orders and transaction reports that exist in the marketplace writ 
large.
    Market data vendors provide another form of price discipline for 
proprietary data products because they control the primary means of 
access to end users. Vendors impose price restraints based upon their 
business models. For example, vendors such as Bloomberg and Reuters 
that assess a surcharge on data they sell may refuse to offer 
proprietary products that end users will

[[Page 41918]]

not purchase in sufficient numbers. Internet portals, such as Google, 
impose a discipline by providing only that data which will enable them 
to attract ``eyeballs'' that contribute to their advertising revenue. 
Retail broker-dealers, such as Schwab and Fidelity, offer their 
customers proprietary data only if it promotes trading and generates 
sufficient commission revenue. Although the business models may differ, 
these vendors' pricing discipline is the same: They can simply refuse 
to purchase any proprietary data product that fails to provide 
sufficient value. Nasdaq and other producers of proprietary data 
products must understand and respond to these varying business models 
and pricing disciplines in order to successfully market proprietary 
data products.
    In addition to the competition and price discipline described 
above, the market for proprietary data products is also highly 
contestable because market entry is rapid, inexpensive, and profitable. 
The history of electronic trading is replete with examples entrants 
that swiftly grew into some of the largest electronic trading platforms 
and proprietary data producers: Archipelago, Bloomberg Tradebook, 
Island, RediBook, Attain, TracECN, and BATS Trading. Several ECNs have 
existed profitably for many years with a minimal share of trading, 
including Bloomberg Tradebook and NexTrade.
    Regulation NMS, by deregulating the market for proprietary data, 
has increased the contestability of that market. While broker-dealers 
have previously published their proprietary data individually, 
Regulation NMS encourages market data vendors and broker-dealers to 
produce proprietary products cooperatively in a manner never before 
possible. Multiple market data vendors already have the capability to 
aggregate data and disseminate it on a profitable scale, including 
Bloomberg, Reuters and Thomson. New entrants are already on the 
horizon, including ``Project BOAT,'' a consortium of financial 
institutions that is assembling a cooperative trade collection facility 
in Europe. These institutions are active in the United States and could 
rapidly and profitably export the Project Boat technology to exploit 
the opportunities offered by Regulation NMS.
    In establishing the price for market data products, Nasdaq 
considered the competitiveness of the market for market data and all of 
the implications of that competition. Nasdaq believes that it has 
considered all relevant factors and has not considered irrelevant 
factors in order to establish a fair, reasonable, and not unreasonably 
discriminatory fee and an equitable allocation of fees among all users.

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

    No written comments were either solicited or received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2010-078 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2010-078. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for Web site 
viewing and printing in the Commission's Public Reference Room, on 
official business days between the hours of 10 a.m. and 3 p.m. Copies 
of the filing also will be available for inspection and copying at the 
principal office of the Exchange. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NASDAQ-2010-078 and should be submitted on or before 
August 9, 2010.
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    \8\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-17493 Filed 7-16-10; 8:45 am]
BILLING CODE 8010-01-P

