
[Federal Register Volume 76, Number 117 (Friday, June 17, 2011)]
[Notices]
[Pages 35498-35503]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-15015]



[[Page 35498]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-64652; File No. SR-NASDAQ-2011-075]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Regarding BONO SM and ITTO Market Data

June 13, 2011.
    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 May 31, 2011, The NASDAQ Stock Market LLC (``NASDAQ'') filed with 
the Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by NASDAQ. The Commission is publishing this 
notice to solicit comments on the proposed rule change 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 changes to add new Rule 7054 (NASDAQ Options Market 
Data Distributor Fees) setting forth the fees for options market data 
feeds known as Best of NASDAQ Options and NASDAQ ITCH to Trade Options.
    While the proposed fee changes are effective upon filing, the 
Exchange has designated these changes to be operative on July 1, 2011.
    The text of the proposed rule change is available at http://www.nasdaq.cchwallstreet.com, at NASDAQ's principal office, and at the 
Commission's Public Reference Room.

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

    In its filing with the Commission, NASDAQ 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. NASDAQ has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    The Exchange proposes to add new Rule 7054 setting forth the fees 
for options market data feeds known as Best of NASDAQ Options (``BONO 
SM'') and NASDAQ ITCH to Trade Options (``ITTO'').
Background
    The Exchange recently modified Chapter VI, Section 1(a)(3) of the 
NASDAQ Options Market (``NOM'') Rules to specify the names and content 
of the two data feeds that are the subject of this filing, BONO 
SM and ITTO.\3\
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    \3\ Securities Exchange Act Release No. 63983 (February 25, 
2011), 76 FR 12178 (March 4, 2011) (SR-NASDAQ-2011-032) (notice of 
filing and immediate effectiveness to offer, among other things, 
BONO SM and ITTO market data for free). The filing also 
offered NASDAQ Options Depth at Price (DAP) and NASDAQ Options Net 
Order Imbalance (NOIView) for free; this proposal does not affect 
the DAP and NOIView data feeds. Chapter VI, Section 1(a)(3) states 
generally that the NOM trading system includes data feeds that can 
be used to display without attribution to Participants' MPIDs 
Displayed Orders on both the bid and offer side of the market for 
price levels then within the NASDAQ Options Market using the minimum 
price variation applicable to that security.
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    ITTO is currently described in the Exchange's option rules at 
subsection (a)(3)(B) of Chapter VI, Section 1 as a data feed that 
provides quotation information for individual orders on the NOM book, 
last sale information for trades executed on NOM, and Order Imbalance 
Information as set forth in NOM Rules Chapter VI, Section 8. ITTO is 
the options equivalent of the NASDAQ TotalView/ITCH data feed that 
NASDAQ offers under NASDAQ Rule 7023 with respect to equities traded on 
NASDAQ. As with TotalView, members use ITTO to ``build'' their view of 
the NOM book by adding individual orders that appear on the feed, and 
subtracting individual orders that are executed.
    BONO SM is currently described in subsection (a)(3)(A) 
of Chapter VI, Section 1 as a data feed that provides the NOM Best Bid 
and Offer (``NBBO'') and last sale information for trades executed on 
NOM. The NBBO and last sale information are identical to the 
information that NOM sends the Options Price Regulatory Authority 
(``OPRA'') and which OPRA disseminates via the consolidated data feed 
for options. BONO is the options equivalent of the NASDAQ Basic data 
feed offered for equities under NASDAQ Rule 7047.
The Proposal
    The Exchange has been offering the BONO SM and ITTO 
options market data feeds free of charge. The Exchange now proposes to 
institute Rule 7054 setting forth fees for recipients of BONO 
SM and ITTO data, with a free trial offer for certain data 
recipients.
    The definitions of BONO SM and ITTO are established in 
new Rule 7054. Proposed Rule 7054(d) states that BONO SM is 
a data feed that provides the NBBO and last sale information for trades 
executed on NOM. Proposed Rule 7054(e) states that ITTO is a data feed 
that provides quotation information for individual orders on the NOM 
book, last sale information for trades executed on NOM, and Order 
Imbalance Information as set forth in NOM Rules Chapter VI, Section 
8.\4\
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    \4\ The language of subsections (d) and (e) within Rule 7054 is 
identical to the language that describes BONO SM and ITTO 
in NOM option rules at Chapter VI, Section 1(a)(3)(A) and (B).
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    Using elements of the current fee structure for recipients of 
NASDAQ TotalView and NASDAQ Basic,\5\ which are similar on the equities 
side to BONO SM and ITTO, the Exchange proposes to charge 
monthly fees for firms that are distributors of BONO SM and 
ITTO market data. Proposed Rule 7054(b) states that a ``distributor'' 
of NASDAQ options market data is any entity that receives a feed or 
data file of NASDAQ data directly from NASDAQ or indirectly through 
another entity and then distributes the data either internally (within 
that entity) or externally (outside that entity). Proposed subsection 
(b) also states that all distributors would be required to execute a 
NASDAQ distributor agreement. The amount of the monthly fees would 
depend on whether a distributor is an ``Internal Distributor'' or 
``External Distributor.'' \6\
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    \5\ See Rules 7023 and 7047.
    \6\ Thus, a distributor may pay either ``Internal Distributor'' 
or ``External Distributor'' fees.
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    An Internal Distributor is a firm that is permitted by agreement 
with the Exchange to provide BONO SM and ITTO data to 
internal users (i.e., users within their own organization). Under the 
proposal, Internal Distributors of BONO SM and ITTO data 
would be charged a monthly fee of $1,500 per firm.
    An External Distributor is a firm that is permitted by agreement 
with the Exchange to provide BONO SM and ITTO data to both 
internal users and to external users (i.e., users outside of their own 
organization). External Distributors would be charged a monthly fee of 
$2,000 per firm. The fee paid by an

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External Distributor includes the Internal Distributor Fee. The fee 
paid by an Internal Distributor or an External Distributor would allow 
access to both the BONO SM and ITTO data feeds.
    The Exchange also proposes to assess user fees for BONO 
SM and ITTO data on a per-user basis.\7\ These fees would 
vary based on whether they are for Professional users or Non-
Professional users. Proposed Rule 7054 (f) states that the term ``Non-
Professional'' shall have the same meaning as in NASDAQ Rule 
7011(b)(2). Rule 7011(b)(2) defines a ``Non-Professional'' as a natural 
person who is neither: (A) Registered or qualified in any capacity with 
the Commission, the Commodities Futures Trading Commission, any state 
securities agency, any securities exchange or association, or any 
commodities or futures contract market or association; (B) engaged as 
an ``investment adviser'' as that term is defined in Section 201(11) of 
the Investment Advisors Act of 1940 (whether or not registered or 
qualified under that Act); nor (C) employed by a bank or other 
organization exempt from registration under federal or state securities 
laws to perform functions that would require registration or 
qualification if such functions were performed for an organization not 
so exempt.\8\ A Professional user is any user that is not a Non-
Professional.
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    \7\ While the user fees would be paid by firms (Internal 
Distributors and External Distributors), some portion of the fees 
may be passed through to users inside or outside the firms (that is, 
to internal or external users).
    \8\ The Exchange believes that Non-Professional users of market 
data, in contrast to Professional data users and distributors, often 
tend to be individual consumers, smaller retail investors, and 
public customers.
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    For BONO SM data, the proposed per-user fees are $5 per 
Professional user; and $1 per Non-Professional user. For ITTO data, the 
proposed per-user fees are $10 per Professional user; and $1 per Non-
Professional user.
    The Exchange notes that for many years, exchanges have engaged in 
and the Commission has accepted the practice of price differentiation, 
both in the context of market data as well as in the context of 
executions. With respect to market data, NASDAQ and NYSE Euronext 
(``NYSE'') in their capacities as network processors and exchanges have 
differentiated in pricing between Professional and Non-Professional 
market data users, often charging Professionals many times more than 
Non-Professionals for using the same data. For example, NASDAQ 
currently charges Non-Professional users (subscribers) $60 a month for 
NASDAQ Depth Data received via a Managed Depth Solution and 
Professional users $300 a month.\9\ Also, NASDAQ currently charges Non-
Professionals $15 per terminal for its NASDAQ Depth Data via a 
standalone terminal, while Professional investors pay roughly five 
times the Non-Professional rate.\10\ This reflects the value of the 
service to various constituencies (i.e., lower prices are charged to 
consumers with more elastic demand) and allows both types of investors 
to contribute to the high fixed costs of operating an exchange 
platform. The Exchange believes that this differentiation for 
Professional and Non-Professional data usage, as the differentiation 
for Professional and Non-Professional users proposed in this filing, is 
completely consistent with past Commission precedent and economic 
theory.\11\
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    \9\ See Rule 7026.
    \10\ See Rule 7023.
    \11\ In economic terms, charging lower fees to non-professional 
consumers increases overall economic welfare by increasing output--
in this case, providing more data to more investors--and avoids two 
equally undesirable alternatives: (i) requiring the firm to charge 
uniformly high prices that constrict demand, or (ii) insisting on 
uniformly low prices at marginal cost (potentially zero or close to 
zero) that do not allow the firm to cover its fixed costs and 
thereby lead to bankruptcy.
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    The Exchange also proposes to assess a monthly non-display 
enterprise license fee. Proposed Rule 7054(c) states that an 
``enterprise license'' entitles a distributor to provide BONO 
SM or ITTO market data pursuant to this rule to an unlimited 
number of non-display devices \12\ within the firm without any per user 
charge. Under the proposal, distributors of BONO SM and ITTO 
data may, if they choose to subscribe to a non-display enterprise 
license, be charged a monthly enterprise license fee or $2,500.
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    \12\ Non-display devices do not graphically show (display) BONO 
SM or ITTO market data but instead use the data for 
performance of analytic or calculative functions (e.g. algorithms).
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    The non-display enterprise license is in addition to other 
distributor fees. Thus, a firm that has a non-display enterprise 
license could pay an Internal Distributor fee and distribute data to 
limitless number of non-user display devices (devices within the firm) 
pursuant to the license without incurring further fees for each 
internal user. However, the enterprise license does not allow external 
distribution without incurring an External Distributor fee and external 
per user fees, if applicable under the circumstances.
    Finally, the Exchange proposes a 30-Day Free Trial Offer in 
subsection (g) of Rule 7054.\13\ In particular, the 30-day waiver of 
the user fees for NASDAQ options market data pursuant to the rule 
extends to all new individual (non-firm) users (subscribers) and 
potential new individual users. This fee waiver period will be applied 
on a rolling basis, determined by the date on which a new individual 
(non-distributor or firm) user or potential individual user is first 
entitled by a distributor to receive access to NASDAQ options market 
data. Subsection (g) provides that a distributor may only provide this 
waiver to a specific individual user one time.
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    \13\ For other Exchange data products that offer a 30-day free 
trial, see Rules 7023, 7044 and 7036. See also Rules 7049 and 7055.
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    The Exchange notes that the categories of BONO SM and 
ITTO market data and fees compare favorably with similar products 
offered by other markets such as International Stock Exchange 
(``ISE''), NYSE, NASDAQ OMX PHLX (``Phlx''), and Chicago Board Options 
Exchange (``CBOE''). For example, ISE offers market data products that 
are similar to BONO SM: a data feed that shows the top of 
the market entitled TOP Quote Feed,\14\ and a data feed that shows the 
top five price levels entitled Depth of Market.\15\ NYSE offers a 
market data product for Arca and Amex that is similar to BONO 
SM and ITTO: a feed that shows top of book, last sale, and 
depth of quote and is entitled NYSE Arca Book for Options.\16\ Phlx 
offers a market data feed entitled TOPO that is similar to BONO 
SM and shows orders and quotes at the top of the market, as 
well as trades; and a TOPO Plus Orders feed that is similar to ITTO and 
shows the data in the TOPO data feed as well as the depth of 
orders.\17\ A subsidiary of CBOE for

[[Page 35500]]

which CBOE charges fees offers a market data feed that is similar to 
BONO SM and shows BBO, last sale, and top of book data.\18\ 
And BATS offers Multicast PITCH, which is their depth of market and 
last sale feed similar to ITTO.\19\
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    \14\ The ISE TOP Quote Feed has a monthly base access fee of 
$5,000 applicable to professionals and non-professionals plus a $10 
variable device fee for professionals and a no device fee for 
internal use professionals; or a flat fixed enterprise fee of $2,500 
for professionals and a $2,000 fee for internal use professionals. 
The Exchange notes that the monthly fees for the ISE TOP Quote Feed 
are higher than those proposed in this filing.
    \15\ The ISE Depth of Market Feed has a monthly base access fee 
of $5,000 applicable to professionals and non-professionals plus a 
$50 variable device fee for professionals and a $5 per device fee 
for external distribution non-professionals; or a flat fixed 
enterprise fee of $7,500 for internal use professionals, $12,500 for 
external use professionals, and $10,000 for non-professionals. The 
Exchange notes that the monthly fees for ISE Depth of Market are 
higher than those proposed in this filing for a more robust product.
    \16\ The fee for NYSE Arca Book for Options is $750 per month.
    \17\ TOPO Plus Orders has a monthly fee of $4,000 for internal 
distributors or $5,000 for external distributors plus a monthly fee 
of $1 per non-professional subscribers (users) and $20 for 
professional subscribers. The Exchange notes that the monthly fees 
for TOPO Plus Orders are higher than those proposed in this filing. 
See Securities Exchange Act Release No. 62194 (May 28, 2010), 75 FR 
31830 (June 4, 2010) (SR-Phlx-2010-48)(order approving proposal 
related to TOPO Plus Orders market data fees).
    \18\ The subsidiary is identified as Market Data Express, LLC 
(``MDX'') by CBOE, which indicates that the feed will also provide 
data regarding contingency orders and complex strategies. The 
monthly fee charged by CBOE for the data is $3,500 plus a $25 per 
user or device fee. See Securities Exchange Act Release No. 63997 
(March 1, 2011), 76 FR 12388 (March 7, 2011) (SR-CBOE-2011-014) 
(notice of filing and immediate effectiveness). In the filing, CBOE 
specifically references as similar products the Phlx TOPO Plus 
Orders feed and the ISE Depth of Market Feed.
    \19\ BATS offers Multicast PITCH without charge ostensibly to 
attract order flow to that exchange.
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    The Exchange believes that the continued availability of BONO\SM\ 
and ITTO data feeds enhances transparency, fosters competition among 
orders and markets, and enables buyers and sellers to obtain better 
prices.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\20\ in general and with 
Sections 6(b)(5) of the Act,\21\ in particular in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, to remove impediments to and perfect the mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \20\ 15 U.S.C. 78f.
    \21\ 15 U.S.C. 78f(b)(5).
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    In adopting Regulation NMS, the Commission granted self-regulatory 
organizations like NASDAQ 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. NASDAQ believes that this proposal is in 
keeping with those principles by promoting increased transparency 
through the dissemination of more useful proprietary data and also by 
clarifying its availability to various market participants.
    Additionally, NASDAQ has made a voluntary decision to make this 
market data available. NASDAQ is not required by the Exchange Act in 
the first instance to make the data available, unlike the best bid and 
offer which must be made available under the Act. NASDAQ has chosen to 
make the noted data available to improve market quality, to attract 
order flow, and to increase transparency; and will continue to make the 
data available until such time as NASDAQ changes its rule.
    NASDAQ believes that its ITTO and BONO,SM which includes 
the NBBO and last sale information for trades executed on NOM in 
BONO,SM are precisely the sort of market data products that 
the Commission envisioned when it adopted Regulation NMS. The 
Commission concluded that Regulation NMS--by lessening regulation of 
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.\22\

    \22\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496 (June 29, 2005).
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    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.
    The recent decision of the United States Court of Appeals for the 
District of Columbia Circuit in NetCoaliton v. SEC, No. 09-1042 (D.C. 
Cir. 2010) upheld the Commission's reliance upon competitive markets to 
set reasonable and equitably allocated fees for market data. ``In fact, 
the legislative history indicates that the Congress intended that the 
market system `evolve through the interplay of competitive forces as 
unnecessary regulatory restrictions are removed' and that the SEC wield 
its regulatory power `in those situations where competition may not be 
sufficient,' such as in the creation of a `consolidated transactional 
reporting system.' NetCoaltion, at 15 (quoting H.R. Rep. No. 94-229, at 
92 (1975), as reprinted in 1975 U.S.C.C.A.N. 321, 323).
    The court agreed with the Commission's conclusion that ``Congress 
intended that `competitive forces should dictate the services and 
practices that constitute the U.S. national market system for trading 
equity securities.' '' \23\
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    \23\ NetCoaliton v. SEC at p. 16.
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    The Court in NetCoalition, although upholding the Commission's 
conclusion that competitive forces may be relied upon to establish the 
fairness of prices, nevertheless concluded that the record in that case 
did not adequately support the Commission's conclusions as to the 
competitive nature of the market for NYSEArca's data product at issue 
in that case. As discussed previously and explained below in NASDAQ's 
Statement on Burden on Competition, however, NASDAQ believes that there 
is substantial evidence of competition in the marketplace for data that 
was not in the record in the NetCoalition case, and that the Commission 
is entitled to rely upon such evidence in concluding that the fees 
established in this filing are the product of competition, and 
therefore in accordance with the relevant statutory standards.\24\
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    \24\ It should also be noted that Section 916 of Dodd-Frank Wall 
Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank 
Act'') has amended paragraph (A) of Section 19(b)(3) of the Act, 15 
U.S.C. 78s(b)(3) to make it clear that all exchange fees, including 
fees for market data, may be filed by exchanges on an immediately 
effective basis. Although this change in the law does not alter the 
Commission's authority to evaluate and ultimately disapprove 
exchange rules if it concludes that they are not consistent with the 
Act, it unambiguously reflects a conclusion that market data fee 
changes do not require prior Commission review before taking effect, 
and that a formal proceeding with regard to a particular fee change 
is required only if the Commission determines that it is necessary 
or appropriate to suspend the fee and institute such a proceeding.
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    Competitive products similar to BONO SM and ITTO are, as 
previously discussed, offered by other exchanges, albeit sometimes at 
higher prices. ISE offers two data products similar to BONO 
SM that are called TOP Quote Feed, Depth of Market and have 
fees higher that those proposed in this filing.\25\ NYSE offers a 
market data product similar to BONO SM and ITTO called NYSE 
Arca Book of Options that has market data for NYSE Arca and NYAE Amex. 
Phlx offers a market data product that is similar to ITTO.\26\ CBOE 
offers a market data product that is similar to BONO.SM \27\ 
BATS offers a market data product similar to ITTO.

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Moreover, the Exchange notes that, as a substitute for exchange data, 
consolidated market data (e.g. last sale, NBBO, current quotes) are 
also available from securities information processors such as OPRA.
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    \25\ For the fees related to ISE TOP Quote Feed and Depth of 
Market, see supra notes 14 and 15.
    \26\ For the fees related to NYSE Arca Book of Options and Phlx 
TOPO Plus Orders, see supra notes 16 and 17.
    \27\ For the fees related to the CBOE market data product, see 
supra note 18.
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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. NASDAQ's ability to 
price its BONO SM and ITTO products is constrained by (1) 
Competition between exchanges and other trading platforms that compete 
with each other in a variety of dimensions; (2) the existence of 
inexpensive real-time consolidated data and free delayed consolidated 
data; and (3) the inherent contestability of the market for proprietary 
last sale data. NASDAQ believes that the Dodd-Frank Act amendments to 
Section 19 materially alter the scope of the Commission's review of 
future market data filings, by creating a presumption that all fees may 
take effect immediately, without prior analysis by the Commission of 
the competitive environment. Even in the absence of this important 
statutory change, however, NASDAQ believes that a record may readily be 
established to demonstrate the competitive nature of the market in 
question.
    The market for market data products is 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. Broker-dealers currently have numerous 
alternative venues for their order flow, including ten self-regulatory 
organization (``SRO'') markets, as well as internalizing broker-dealers 
(``BDs'') and various forms of alternative trading systems (``ATSs'') 
and electronic communication networks (``ECNs''). For example, the 
Exchange has noted that numerous other U.S. options exchanges offer 
market data products that are substantially similar to the ITTO and 
BONO SM products, which the Exchange must consider in its 
pricing discipline in order to compete for listings, trades, and the 
market data itself.
    The large number of SROs, BDs, and ATSs that currently produce 
proprietary data or are currently capable of producing it provides 
further pricing discipline for proprietary data products. Each SRO, 
ATS, and BD is currently permitted to produce proprietary data 
products, and many currently do or have announced plans to do so, 
including ISE, CBOE, NYSE (NYSE Amex and NYSE Arca), Phlx, and BATS. 
Indeed, the Exchange has discussed a host of products that are similar 
to ITTO and BONO,SM including: ISE's TOP Quote Feed and 
Depth of Market feed; NYSE's Arca Book of Options feed; Phlx's TOPO 
Plus Orders feed; BATS' Multicast PITCH feed; and CBOE's recently fee 
liable data feed through MDX.
    Furthermore, any ATS or BD can combine with any other ATS, BD, or 
multiple ATSs or BDs to produce joint proprietary data products. 
Additionally, order routers and 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 ATSs, 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.
    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 not purchase in sufficient 
numbers. Internet portals, such as Yahoo, impose a discipline by 
providing only data that 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 
market proprietary data products successfully.
    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 of entrants 
that swiftly grew into some of the largest electronic trading platforms 
and proprietary data producers: Archipelago, Bloomberg Tradebook, 
Island, RediBook, Attain, TracECN, BATS Trading and Direct Edge. A 
proliferation of ATSs operate profitably with fragmentary shares of 
consolidated market volume.
    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, and Thomson-Reuters.
    The court in NetCoalition concluded that the Commission had failed 
to demonstrate that the market for market data was competitive based on 
the reasoning of the Commission's NetCoalition order because, in the 
court's view, the Commission had not adequately demonstrated that the 
depth-of-book data at issue in the case is used to attract order flow. 
NASDAQ believes, however, that evidence not before the court clearly 
demonstrates that availability of depth data attracts order flow.
    Competition among platforms has driven NASDAQ continually to 
improve its platform data offerings and to cater to customers' data 
needs. For example, NASDAQ has been offering front end applications 
such as its NetView and ITCH equity data products and ITTO and BONO 
SM options data products to help customers utilize data. Yet 
another example of the continuous effort by exchanges to improve 
platform data is Phlx's TOPO Plus Orders and TOPO data products.

[[Page 35502]]

    Moreover, the Exchange believes that the decision whether and on 
which platform to post an order will depend on the attributes of the 
platform where the order can be posted, including the execution fees, 
data quality and price and distribution of its data products. Without 
trade executions, exchange data products cannot exist. Data products 
are valuable to many end users only insofar as they provide information 
that end users expect will assist them or their customers in making 
trading decisions.
    In the recent filing approving the aforementioned Phlx TOPO Plus 
Orders data feed,\28\ the Commission recognized the intense competition 
among exchanges, particularly as related to options market data, 
stating:
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    \28\ See Securities Exchange Act Release No. 62194 (May 28, 
2010), 75 FR 31830 (June 4, 2010) (SR-Phlx-2010-48) (order approving 
proposal related to TOPO Plus Orders market data fees).
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    Phlx currently competes with seven other options exchanges for 
order flow. Attracting order flow is an essential part of Phlx's 
competitive success. If Phlx cannot attract order flow to its market, 
it will not be able to execute transactions. If Phlx cannot execute 
transactions on its market, it will not generate transaction revenue. 
If Phlx cannot attract orders or execute transactions on its market, it 
will not have market data to distribute, for a fee or otherwise, and 
will not earn market data revenue and thus not be competitive with 
other exchanges that have this ability. This compelling need to attract 
order flow imposes significant pressure on Phlx to act reasonably in 
setting its fees for Phlx market data, particularly given that the 
market participants that will pay such fees often will be the same 
market participants from whom Phlx must attract order flow. These 
market participants include broker-dealers that control the handling of 
a large volume of customer and proprietary order flow. Given the 
portability of order flow from one exchange to another, any exchange 
that sought to charge unreasonably high data fees would risk alienating 
many of the same customers on whose orders it depends for competitive 
survival.
    The primary competition and anti-trust regulator in the U.S., the 
Antitrust Division of the U.S. Department of Justice (the ``Antitrust 
Division''), has recognized the intensely competitive nature of 
exchange market data. When analyzing competition among exchanges, 
Assistant Attorney General Christine Varney recently stated:
    If the acquisition [of NYSE by NASDAQ and ICE] proceeded, it would 
have eliminated substantial competition in the following ways * * * 
NASDAQ and NYSE also compete head to head to offer real-time equity 
data products. These data products include the best bid and offer of 
every exchange and information on each equity trade, including the last 
sale. Post-merger, the [new] firm would have the ability to raise the 
cost of real-time proprietary equity data and the firm would be less 
likely to develop new, innovative, real-time data products.\29\
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    \29\ See Remarks as Prepared for Delivery by Assistant Attorney 
General Christine Varney Regarding NASDAQ OMX Group Inc. and 
Intercontinental Exchange Inc. Abandoning Their Bid for NYSE 
Euronext (May 16, 2011).
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    In establishing the price for the BONO SM and ITTO 
products, NASDAQ considered the competitiveness of the market for 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 fees and an equitable allocation of fees 
among all users. The existence of alternatives to ITTO and 
BONO,SM including noted competitive products by other 
exchanges and real-time consolidated last sale and NBBO data, free 
delayed consolidated data, and even proprietary data from other 
sources, ensures that NASDAQ cannot set unreasonable fees, or fees that 
are unreasonably discriminatory, without losing business to these 
alternatives.\30\ NASDAQ believes that this demonstrates the 
consistency of these fees with applicable statutory standards.
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    \30\ The Exchange notes also that competitiveness in the market 
data field (as in other areas such as, for example, securities 
offerings and pricing) encourages--and often requires--exchanges to 
be innovative and forward-thinking in terms of market data product 
offerings.
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    Accordingly, 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 purpose of the Act.

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

    Written comments were neither solicited nor received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\31\ At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission shall institute proceedings to determine whether the 
proposed rule should be approved or disapproved.
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    \31\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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-2011-075 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-2011-075. 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, 100 F 
Street, NE., Washington, DC 20549, on official business days between 
the hours of 10 a.m. and 3 p.m. Copies of such filing will also 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

[[Page 35503]]

identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File No. SR-NASDAQ-2011-075 and should be submitted on 
or before July 8, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\32\
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    \32\ 17 CFR 200.30-3(a)(12).
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Cathy H. Ahn,
Deputy Secretary.
[FR Doc. 2011-15015 Filed 6-16-11; 8:45 am]
BILLING CODE 8011-01-P


