
[Federal Register Volume 77, Number 69 (Tuesday, April 10, 2012)]
[Notices]
[Pages 21609-21615]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8580]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66740; File No. SR-NASDAQ-2012-042]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Re-Organize NASDAQ's Rules Governing the Fees Applicable to NASDAQ's 
Depth-of-Book Market Data

April 5, 2012.
    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 March 28, 2012, The NASDAQ Stock Market LLC (``NASDAQ'') 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 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 the 
Substance of the Proposed Rule Change

    NASDAQ proposes to: (1) Re-organize NASDAQ's rules governing the 
fees applicable to NASDAQ's Depth-of-Book market data; and (2) 
establish an Enterprise License for Non-Professional Usage of certain 
NASDAQ Depth-of-Book market data.
    The text of the proposed rule change is available at http://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

[[Page 21610]]

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
    NASDAQ is proposing two changes to the fees governing distribution 
of NASDAQ market data: (1) Re-organize NASDAQ's rules governing the 
fees applicable to NASDAQ's Depth-of-Book market data; and (2) 
establish an Enterprise License for Non-Professional Usage of certain 
NASDAQ Depth-of-Book market data.
Re-Organizing NASDAQ Rules 7017 and 7023
    NASDAQ proposes to create a single rule containing all fees 
applicable to NASDAQ Depth-of-Book market data. To accomplish this, 
NASDAQ will combine NASDAQ Rule 7017 which governs the NASDAQ Quotation 
Data Service or NQDS and NASDAQ Rule 7023 which governs NASDAQ 
TotalView and NASDAQ OpenView. In doing so, NASDAQ will collect and 
improve all existing defined terms and add several new defined terms 
where needed to enhance the clarity of NASDAQ's rules. None of these 
proposed modifications will change the substance of NASDAQ's rules or 
the manner in which NASDAQ applies the existing fees for NASDAQ Depth-
of-Book data.
    New Rule 7023 begins by defining the relevant terminology in 
subsection (a). New Rule 7023(a)(1) defines in one place the three 
Depth-of-Book feeds that NASDAQ offers: NASDAQ Level 2 (formerly known 
as the NASDAQ Quotation Data Service or NQDS) currently defined in Rule 
7017(a); NASDAQ TotalView, currently defined in Rule 7023(a), and 
NASDAQ OpenView, currently defined at Rule 7023(c).
    NASDAQ is proposing to rename NQDS as NASDAQ Level 2, and to 
clarify the definition of NASDAQ Level 2 without substantively 
modifying its content or cost. NQDS (now Level 2) currently consists of 
three components: individual market maker quotations from NASDAQ, 
NASDAQ Level 1, and the Last Sale Information Service (``Last Sale''). 
The NASDAQ Level 1 and Last Sale Services are consolidated data feeds 
disseminated by the network processor for NASDAQ-listed stocks. The 
current monthly fee for NASDAQ Level 1 is $20 per Professional 
Subscriber and $1 per Non-Professional Subscriber for NASDAQ Level 1 
and Last Sale. However, because NASDAQ Level 1 and Last Sale are 
consolidated feeds, the fees for those services are remitted to the 
network processor rather than to the Exchange.
    The current fee for NASDAQ Level 2, listed in Rule 7017(a) and (b), 
is $50 monthly for Professional Subscribers and $10 monthly for Non-
Professional Subscribers. Of that $50 for Professional Subscribers, $20 
is attributable to NASDAQ Level 1; and of that $10 for Non-Professional 
Subscribers, $1 is attributable to NASDAQ Level 1. Thus, the current 
monthly fee attributable to individual market maker quotations from 
NASDAQ is $30 for Professional Subscribers and $9 for Non-Professional 
Subscribers.
    Going forward, new NASDAQ Rule 7023(a)(1)(A) will properly define 
NASDAQ Level 2 to include only individual market maker quotations from 
NASDAQ (thereby excluding the consolidated data feeds), and new Rule 
7023(b)(1) will properly list the monthly fee of $30 for Professional 
Subscribers and $9 for Non-Professional Subscribers (thereby excluding 
the fees for the consolidated data feeds). As a result, there will be 
no impact to current or future Subscribers either in the price or 
content of NASDAQ Level 2.
    New NASDAQ Rule 7023(a)(2) contains new definitions of Display and 
Non-Display Usage of Depth-of-Book data based on the distinction 
already reflected throughout current NASDAQ Rule 7023, most clearly at 
subsection (a)(1)(D). NASDAQ has assessed fees for Display and Non-
Display Usage since 2006, although it was not until 2010 that NASDAQ 
assessed different fees based on the two different usage methods.\3\
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    \3\ See NASDAQ Rule 7023(a)(1)((D). See also Securities Exchange 
Act Release No. 34-61700 (Mar. 12, 2010), 75 FR 13172 (Mar. 18, 
2010).
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    New NASDAQ Rule 7023(a)(3) defines and distinguishes between 
Professional and Non-Professional Subscribers, carrying forward the 
same definition set forth in current NASDAQ Rule 7017(c).
    New NASDAQ Rule 7023(a)(4) defines Distributor and distinguishes 
between Internal and External Distribution.
    New NASDAQ Rule 7023(a)(5) defines and distinguishes between Direct 
Access and Indirect Access based on the existing definition and 
distinction set forth at NASDAQ Rule 7019(d). This will not change the 
application of NASDAQ rules or fees.
    New NASDAQ Rule 7023(a)(6) defines Controlled Device with minor, 
stylistic changes to the definition set forth at existing NASDAQ Rule 
7023(b). The stylistic changes are intended only to improve the clarity 
and not to change the application or impact of the defined term.
    New NASDAQ Rule 7023(b) collects and reorganizes the Subscriber 
fees for NASDAQ Level 2, NASDAQ TotalView, and NASDAQ OpenView. 
Subsection (b)(1)(A) and (b)(1)(B) set forth the monthly Non-
Professional and Professional Subscriber fees currently set forth in 
NASDAQ Rule 7017(a) and (b). The fee for Professional usage of NASDAQ 
Level 2 will appear lower by $20 (down from $50 to $30) per month 
because (as stated above) NASDAQ is removing the $20 monthly fee for 
NASDAQ Level 1 that previously had been combined in the fee for NASDAQ 
Level 2. The fee for Non-Professional usage of Level 2 will also appear 
lower by $1 (from $10 to $9) because NASDAQ is removing the $1 fee for 
NASDAQ Level 1 which also had been combined with the fee for NASDAQ 
Level 2. New NASDAQ Rule 7023(b)(1)(C) states clearly that the fees for 
NASDAQ Level 1 and NASDAQ Level 2 are completely separate, as they have 
been and should be. The feeds themselves also have been and will remain 
separately available for the same monthly Subscriber fees.
    The Subscriber fees for NASDAQ TotalView and NASDAQ OpenView are 
now set forth at NASDAQ Rule 7023(b)(2) and (b)(3) in the same form as 
currently set forth in NASDAQ Rule 7023(a) and (c).
    New NASDAQ Rule 7023(c) sets forth the fee caps generally referred 
to as Enterprise Licenses. Subsections (c)(1), (c)(2), and (c)(4) 
reflect the enterprise licenses currently set forth in NASDAQ Rule 
7023(a)(1)(C) and (D). Current Rule 7023(a)(1)(E) is being modified and 
moved to new NASDAQ Rule 7023(c)(3) as described in more detail below 
in the second section of this proposed rule change.
    New NASDAQ Rule 7023(d) and (e) are repeated almost verbatim from 
current Rule 7023(a)(2) and (d). NASDAQ is proposing to make minor, 
stylistic changes to those provisions, which will have no impact on the 
application of the rule.
    With the exception of those provisions identified above and 
described in detail below, the elimination of NASDAQ Rule 7017 and the 
proposed changes to NASDAQ Rule 7023 are technical and administrative 
changes that will not impact the fees assessed to any Subscriber.

[[Page 21611]]

Depth-of-Book Enterprise License for Non-Professional Usage
    New NASDAQ Rule 7023(c)(3) will offer an optional Enterprise 
License for unlimited Non-Professional Usage of NASDAQ Level 2, NASDAQ 
TotalView, or NASDAQ OpenView for certain NASDAQ members. Specifically, 
Distributors that are also broker-dealers registered under the Act can 
choose to pay a fee of $325,000 per month that covers all Non-
Professional Usage fees to Subscribers with whom the firm has a 
brokerage relationship.\4\ This Depth-of-Book Enterprise License Fee 
includes Non-Professional Usage fees, but does not include Distributor 
fees. Non-broker-dealer vendors and application service providers are 
not eligible for the enterprise license; such firms typically pass 
through the cost of market data Subscriber fees to their customers.\5\
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    \4\ NASDAQ previously offered the same optional Enterprise 
License on a pilot basis. See Securities Exchange Act Release No. 
63892 (Feb. 11, 2011); 76 FR 9391 (Feb. 17, 2011) (SR-NASDAQ-2011-
021); Securities Exchange Act Release No. 63084 (Oct. 13, 2010); 75 
FR 64379 (Oct. 19, 2010) (SR-NASDAQ-2010-125). See also Securities 
Exchange Act Release No. 62908 (Sept. 14, 2010); 75 FR 57321 (Sept. 
20, 2010) (SR-NASDAQ-2010-111). The proposed Depth Enterprise 
License will be a permanent rule rather than a pilot.
    \5\ NASDAQ relies on Distributor self-reporting of usage rather 
than on individual contact with each end-user Subscriber. NASDAQ 
permits Distributors to designate an entire Subscriber population as 
Non-Professional provided that the number of Professional 
Subscribers within that Subscriber population does not exceed ten 
percent (10%) of the total population.
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    NASDAQ continues to seek broader distribution of Depth-of-Book data 
and to reduce the cost of providing Depth-of-Book data to larger 
numbers of investors. In the past, NASDAQ has accomplished this goal in 
part by offering similar enterprise licenses for Professional and Non-
Professional Usage of TotalView which contains the full Depth-of-Book 
data for the NASDAQ Market Center Execution System. NASDAQ believes 
that the adoption of enterprise licenses has led to greater 
distribution of market data, particularly among Non-Professional 
Subscribers.
    Based on input from market participants, NASDAQ believes that this 
increase in distribution is attributable in part to the relief it 
provides distributors from the NASDAQ requirement that distributors 
count and report each Non-Professional Subscriber of NASDAQ Depth-of-
Book data. In addition to increased administrative flexibility, 
enterprise licenses also encourage broader distribution by firms that 
are currently over the fee cap as well as those that are approaching 
the cap and wish to take advantage of the benefits of the program. 
Further, NASDAQ believes that capping fees in this manner creates 
goodwill with broker-dealers and increases transparency for retail 
investors.
    The Depth-of-Book Enterprise License Fee covers usage fees for data 
received directly from NASDAQ as well as data received from third-party 
vendors (e.g., Bloomberg, Thomson-Reuters, etc.). Upon joining the 
program, firms may inform third-party market data vendors they utilize 
(through a NASDAQ-provided form) that, going forward, depth data usage 
by the broker-dealer may be reported to NASDAQ on a non-billable basis. 
This structure attempts to address a long-standing concern that broker-
dealers are over-billed for market data consumed by one person through 
multiple market-data display devices. At the same time, the proposed 
billing structure will continue to provide NASDAQ with accurate 
reporting information for purposes of usage monitoring and auditing.
    The proposed Depth-of-Book Enterprise License Fee is completely 
optional and does not replace existing enterprise license fee 
alternatives set forth in Rule 7023. Additionally, the proposal does 
not impact individual usage fees for any product or raise the costs of 
any Subscriber of any NASDAQ data product. To the contrary, it provides 
broker-dealers with an additional approach to providing more NASDAQ 
data at a fixed cost.
b. [sic] Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\6\ in general, and with Section 
6(b)(4) of the Act,\7\ in particular, in that it provides an equitable 
allocation of reasonable fees among Subscribers 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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    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(4).
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    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.\8\
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    \8\ 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. Level 2, TotalView and 
OpenView are precisely the sort of market data product that the 
Commission envisioned when it adopted Regulation NMS.
    On July 21, 2010, President Barack Obama signed into law H.R. 4173, 
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 
(``Dodd-Frank Act''), which amended Section 19 of the Act. Among other 
things, Section 916 of the Dodd-Frank Act amended paragraph (A) of 
Section 19(b)(3) of the Act by inserting the phrase ``on any person, 
whether or not the person is a member of the self-regulatory 
organization'' after ``due, fee or other charge imposed by the self-
regulatory organization.'' As a result, all SRO rule proposals 
establishing or changing dues, fees, or other charges are immediately 
effective upon filing regardless of whether such dues, fees, or other 
charges are imposed on members of the SRO, non-members, or both. 
Section 916 further amended paragraph (C) of Section 19(b)(3) of the 
Act to read, in pertinent part, ``At any time within the 60-day period 
beginning on the date of filing of such a proposed rule change in 
accordance with the provisions of paragraph (1) [of Section 19(b)], the 
Commission summarily may temporarily suspend the change in the rules of 
the self-regulatory organization made thereby, 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 this title. If the Commission takes such action, the 
Commission shall institute proceedings under paragraph (2)(B) [of 
Section 19(b)] to determine whether the proposed rule should be 
approved or disapproved.''
    The decision of the United States Court of Appeals for the District 
of Columbia Circuit in NetCoalition v.

[[Page 21612]]

SEC, No. 09-1042 (DC Cir. 2010), although reviewing a Commission 
decision made prior to the effective date of the Dodd-Frank Act, upheld 
the Commission's reliance upon competitive markets to set reasonable 
and equitably allocated fees for market data. ``In fact, the 
legislative history indicates that the Congress intended that the 
market system `evolve through the interplay of competitive forces as 
unnecessary regulatory restrictions are removed' and that the SEC wield 
its regulatory power `in those situations where competition may not be 
sufficient,' such as in the creation of a `consolidated transactional 
reporting system.' '' NetCoalition, 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's conclusions about Congressional intent are therefore reinforced 
by the Dodd-Frank Act amendments, which create a presumption that 
exchange fees, including market data fees, may take effect immediately, 
without prior Commission approval, and that the Commission should take 
action to suspend a fee change and institute a proceeding to determine 
whether the fee change should be approved or disapproved only where the 
Commission has concerns that the change may not be consistent with the 
Act.
    For the reasons stated above, NASDAQ believes that the proposed 
fees are fair and equitable, and not unreasonably discriminatory. As 
described above, the proposed fees are based on pricing conventions and 
distinctions that exist in NASDAQ's current fee schedule, and the fee 
schedules of other exchanges. These distinctions (top-of-book versus 
Depth-of-Book, Professional versus non-Professional Subscribers, Direct 
versus Indirect Access, Internal versus External Distribution) are each 
based on principles of fairness and equity that have helped for many 
years to maintain fair, equitable, and not unreasonably discriminatory 
fees, and that apply with equal or greater force to the current 
proposal.
    As described in greater detail below, if NASDAQ has calculated 
improperly and the market deems the proposed fees to be unfair, 
inequitable, or unreasonably discriminatory, firms can diminish or 
discontinue the use of their data because the proposed fee is entirely 
optional to all parties. Firms are not required to purchase Depth-of-
Book data or to utilize any specific pricing alternative if they do 
choose to purchase Depth-of-Book data. NASDAQ is not required to make 
Depth-of-Book data available or to offer specific pricing alternatives 
for potential purchases. NASDAQ can discontinue offering a pricing 
alternative (as it has in the past) and firms can discontinue their use 
at any time and for any reason (as they often do), including due to 
their assessment of the reasonableness of fees charged. NASDAQ 
continues to create new pricing policies aimed at increasing fairness 
and equitable allocation of fees among Subscribers, and NASDAQ believes 
this is another useful step in that direction.
    NASDAQ believes that the Depth-of-Book Enterprise License promotes 
increased transparency by offering a new pricing option resulting in 
lower fees for heavy users of Depth-of-Book data. This fee limitation 
will, in turn, enable firms to make additional information available to 
the firms' clients, thereby increasing transparency of the market. 
Additionally, the proposal provides for simplified market data 
administration by eliminating the current requirement that firms 
identify and track the number of individual Subscribers of Depth-of-
Book data. NASDAQ continues to create new pricing policies aimed at 
increasing transparency in the market and believes this is useful step 
in that direction.

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. Notwithstanding its 
determination that the Commission may rely upon competition to 
establish fair and equitably allocated fees for market data, the 
NetCoalition court found that the Commission had not, in that case, 
compiled a record that adequately supported its conclusion that the 
market for the data at issue in the case was competitive. NASDAQ 
believes that a record may readily be established to demonstrate the 
competitive nature of the market in question.
    There is intense competition between trading platforms that provide 
transaction execution and routing services and proprietary data 
products. Transaction execution and proprietary data products are 
complementary in that market data is both an input and a byproduct of 
the execution service. In fact, market data and trade execution are a 
paradigmatic example of joint products with joint costs. 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 the prospect of a taking order seeing and reacting to 
a posted order on a particular platform, the posting of the order would 
accomplish little. Without trade executions, exchange data products 
cannot exist. Data products are valuable to many end Subscribers only 
insofar as they provide information that end Subscribers expect will 
assist them or their customers in making trading decisions.
    The costs of producing market data include not only the costs of 
the data distribution infrastructure, but also the costs of designing, 
maintaining, and operating the exchange's transaction execution 
platform and the cost of regulating the exchange to ensure its fair 
operation and maintain investor confidence. The total return that a 
trading platform earns reflects the revenues it receives from both 
products and the joint costs it incurs. Moreover, an exchange's 
customers view the costs of transaction executions and of data as a 
unified cost of doing business with the exchange. A broker-dealer will 
direct orders to a particular exchange only if the expected revenues 
from executing trades on the exchange exceed net transaction execution 
costs and the cost of data that the broker-dealer chooses to buy to 
support its trading decisions (or those of its customers). The choice 
of data products is, in turn, a product of the value of the products in 
making profitable trading decisions. If the cost of the product exceeds 
its expected value, the broker-dealer will choose not to buy it. 
Moreover, as a broker-dealer chooses to direct fewer orders to a 
particular exchange, the value of the product to that broker-dealer 
decreases, for two reasons. First, the product will contain less 
information, because executions of the broker-dealer's orders will not 
be reflected in it. Second, and perhaps more important, the product 
will be less valuable to that broker-dealer because it does not provide 
information about the venue to which it is directing its orders. Data 
from the competing venue to which the broker-dealer is directing orders 
will become correspondingly more valuable.
    Thus, a super-competitive increase in the fees charged for either 
transactions or data has the potential to impair revenues from both 
products. ``No one disputes that competition for order flow is 
`fierce'.'' NetCoalition at 24. However, the existence of fierce 
competition for order flow implies a high degree of price sensitivity 
on the part of broker-dealers with order flow, since they may readily 
reduce costs by directing orders toward the lowest-cost trading venues. 
A

[[Page 21613]]

broker-dealer that shifted its order flow from one platform to another 
in response to order execution price differentials would both reduce 
the value of that platform's market data and reduce its own need to 
consume data from the disfavored platform. Similarly, if a platform 
increases its market data fees, the change will affect the overall cost 
of doing business with the platform, and affected broker-dealers will 
assess whether they can lower their trading costs by directing orders 
elsewhere and thereby lessening the need for the more expensive data.
    Analyzing the cost of market data distribution in isolation from 
the cost of all of the inputs supporting the creation of market data 
will inevitably underestimate the cost of the data. Thus, because it is 
impossible to create data without a fast, technologically robust, and 
well-regulated execution system, system costs and regulatory costs 
affect the price of market data. It would be equally misleading, 
however, to attribute all of the exchange's costs to the market data 
portion of an exchange's joint product. Rather, all of the exchange's 
costs are incurred for the unified purposes of attracting order flow, 
executing and/or routing orders, and generating and selling data about 
market activity. The total return that an exchange earns reflects the 
revenues it receives from the joint products and the total costs of the 
joint products.
    Competition among trading platforms can be expected to constrain 
the aggregate return each platform earns from the sale of its joint 
products, but different platforms may choose from a range of possible, 
and equally reasonable, pricing strategies as the means of recovering 
total costs. For example, some platform may choose to pay rebates to 
attract orders, charge relatively low prices for market information (or 
provide information free of charge) and charge relatively high prices 
for accessing posted liquidity. Other platforms may choose a strategy 
of paying lower rebates (or no rebates) to attract orders, setting 
relatively high prices for market information, and setting relatively 
low prices for accessing posted liquidity. In this environment, there 
is no economic basis for regulating maximum prices for one of the joint 
products in an industry in which suppliers face competitive constraints 
with regard to the joint offering. This would be akin to strictly 
regulating the price that an automobile manufacturer can charge for car 
sound systems despite the existence of a highly competitive market for 
cars and the availability of after-market alternatives to the 
manufacturer-supplied system.
    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 SRO markets, as well as internalizing BDs and 
various forms of alternative trading systems (``ATSs''), including dark 
pools and electronic communication networks (``ECNs''). Each SRO market 
competes to produce transaction reports via trade executions, and two 
FINRA-regulated Trade Reporting Facilities (``TRFs'') compete to 
attract internalized transaction reports. 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, 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, TRF, ATS, and BD is currently permitted to produce proprietary 
data products, and many currently do or have announced plans to do so, 
including NASDAQ, NYSE, NYSE Amex, NYSEArca, and BATS.
    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 Depth-of-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 Subscribers. Vendors impose price restraints based upon 
their business models. For example, vendors such as Bloomberg and 
Thomson Reuters that assess a surcharge on data they sell may refuse to 
offer proprietary products that end Subscribers will not purchase in 
sufficient numbers. Internet portals, such as Google, 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 dark pools and other 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

[[Page 21614]]

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 
data attracts order flow. For example, as of July 2010, 92 of the top 
100 broker-dealers by shares executed on NASDAQ consumed NQDS and 80 of 
the top 100 broker-dealers consumed TotalView. During that month, the 
NQDS-Subscribers were responsible for 94.44% of the orders entered into 
NASDAQ and TotalView Subscribers were responsible for 92.98%.
    Competition among platforms has driven NASDAQ continually to 
improve its platform data offerings and to cater to customers' data 
needs. For example, NASDAQ has developed and maintained multiple 
delivery mechanisms (IP, multi-cast, and compression) that enable 
customers to receive data in the form and manner they prefer and at the 
lowest cost to them. NASDAQ offers front end applications such as its 
``Bookviewer'' to help customers utilize data. NASDAQ has created new 
products like TotalView Aggregate to complement TotalView ITCH and/
NQDS, because offering data in multiple formatting allows NASDAQ to 
better fit customer needs. NASDAQ offers data via multiple extranet 
providers, thereby helping to reduce network and total cost for its 
data products. NASDAQ has developed an online administrative system to 
provide customers transparency into their data feed requests and 
streamline data usage reporting. NASDAQ has also expanded its 
Enterprise License options that reduce the administrative burden and 
costs to firms that purchase market data.
    Despite these enhancements and a dramatic increase in message 
traffic, NASDAQ's fees for market data have remained flat. In fact, as 
a percent of total Subscriber costs, NASDAQ data fees have fallen 
relative to other data usage costs--including bandwidth, programming, 
and infrastructure--that have risen. The same holds true for execution 
services; despite numerous enhancements to NASDAQ's trading platform, 
absolute and relative trading costs have declined. Platform competition 
has intensified as new entrants have emerged, constraining prices for 
both executions and for data.
    The vigor of competition for Depth-of-Book information is 
significant and the Exchange believes that this proposal itself clearly 
evidences such competition. NASDAQ is offering a new pricing model in 
order to keep pace with changes in the industry and evolving customer 
needs. It is entirely optional and is geared towards attracting new 
customers, as well as retaining existing customers.
    The Exchange has witnessed competitors creating new products and 
innovative pricing in this space over the course of the past year. 
NASDAQ continues to see firms challenge its pricing on the basis of the 
Exchange's explicit fees being higher than the zero-priced fees from 
other competitors such as BATS. In all cases, firms make decisions on 
how much and what types of data to consume on the basis of the total 
cost of interacting with NASDAQ or other exchanges. Of course, the 
explicit data fees are but one factor in a total platform analysis. 
Some competitors have lower transactions fees and higher data fees, and 
others are vice versa. The market for this Depth-of-Book information is 
highly competitive and continually evolves as products develop and 
change.
    Additional evidence cited by NYSE Arca in SR-NYSE Arca-2010-097 \9\ 
[sic] which was not before the NetCoalition court also demonstrates 
that availability of Depth-of-Book data attracts order flow and that 
competition for order flow can constrain the price of market data:
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    \9\ See Securities Exchange Act Release No. 63291 (Nov. 9, 2010) 
75 FR 70311 (Nov. 17, 2010) (SR-NYSEArca-2010-97).

    1. Terrence Hendershott & Charles M. Jones, Island Goes Dark: 
Transparence, Fragmentation, and Regulation, 18 Review of Financial 
Studies 743 (2005);
    2. Charts and Tables referenced in Exhibit 3B to that filing;
    3. PHB Hagler Bailly, Inc., ``Issues Surrounding Cost-Based 
Regulation of Market Data Prices;'' and
    4. PHB Hagler Bailly, Inc., ``The Economic Perspective on 
Regulation of Market Data.''

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.\10\ 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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    \10\ 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 email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2012-042 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-2012-042. This 
file number should be included on the subject line if email is used.
    To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet 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 also will be 
available for inspection and copying at the principal offices 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-

[[Page 21615]]

NASDAQ-2012-042, and should be submitted on or before May 1, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-8580 Filed 4-9-12; 8:45 am]
BILLING CODE 8011-01-P


