
[Federal Register Volume 79, Number 4 (Tuesday, January 7, 2014)]
[Notices]
[Pages 875-880]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-31608]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71217; File No. SR-NASDAQ-2013-162]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Extend Fee Pilot Program for NASDAQ Last Sale

December 31, 2013.
    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 December 23, 2013, The NASDAQ Stock Market LLC (``NASDAQ'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the Exchange. 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 is proposing to extend for three months the fee pilot 
pursuant to which NASDAQ distributes the NASDAQ Last Sale (``NLS'') 
market data products. NLS allows data distributors to have access to 
real-time market data for a capped fee, enabling those distributors to 
provide free access to the data to millions of individual investors via 
the internet and television. Specifically, NASDAQ offers the ``NASDAQ 
Last Sale for NASDAQ'' and ``NASDAQ Last Sale for NYSE/NYSE MKT'' data 
feeds containing last sale activity in U.S. equities within the NASDAQ 
Market Center and reported to the FINRA/NASDAQ Trade Reporting Facility 
(``FINRA/NASDAQ TRF''), which is jointly operated by NASDAQ and the 
Financial Industry Regulatory Authority (``FINRA''). The purpose of

[[Page 876]]

this proposal is to extend the existing pilot program for three months, 
from January 1, 2014 through March 31, 2014.\3\
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    \3\ Prior to the end of this pilot period, NASDAQ expects to 
submit a proposed rule change to remove the pilot status of NLS and 
make the product permanent.
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    This pilot program supports the aspiration of Regulation NMS to 
increase the availability of proprietary data by allowing market forces 
to determine the amount of proprietary market data information that is 
made available to the public and at what price. During the pilot 
period, the program has vastly increased the availability of NASDAQ 
proprietary market data to individual investors. Based upon data from 
NLS distributors, NASDAQ believes that since its launch in July 2008, 
the NLS data has been viewed by millions of investors on Web sites 
operated by Google, Interactive Data, and Dow Jones, among others.
    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in brackets.
* * * * *

7039. NASDAQ Last Sale Data Feeds

    (a) For a three month pilot period commencing on [October 1, 2013] 
January 1, 2014, NASDAQ shall offer two proprietary data feeds 
containing real-time last sale information for trades executed on 
NASDAQ or reported to the NASDAQ/FINRA Trade Reporting Facility.
    (1)-(2) No change.
    (b)-(c) 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 self-regulatory organization 
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 those 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 parts of such statements.

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

1. Purpose
    Prior to the launch of NLS, public investors that wished to view 
market data to monitor their portfolios generally had two choices: (1) 
Pay for real-time market data or (2) use free data that is 15 to 20 
minutes delayed. To increase consumer choice, NASDAQ proposed a pilot 
to offer access to real-time market data to data distributors for a 
capped fee, enabling those distributors to disseminate the data at no 
cost to millions of internet users and television viewers. NASDAQ now 
proposes a three-month extension of that pilot program, subject to the 
same fee structure as is applicable today.
    NLS consists of two separate ``Level 1'' products containing last 
sale activity within the NASDAQ market and reported to the jointly-
operated FINRA/NASDAQ TRF. First, the ``NASDAQ Last Sale for NASDAQ'' 
data product is a real-time data feed that provides real-time last sale 
information including execution price, volume, and time for executions 
occurring within the NASDAQ system as well as those reported to the 
FINRA/NASDAQ TRF. Second, the ``NASDAQ Last Sale for NYSE/NYSE MKT'' 
data product provides real-time last sale information including 
execution price, volume, and time for NYSE- and NYSE MKT-securities 
executions occurring within the NASDAQ system as well as those reported 
to the FINRA/NASDAQ TRF. By contrast, the securities information 
processors (``SIPs'') that provide ``core'' data consolidate last sale 
information from all exchanges and trade reporting facilities 
(``TRFs''). Thus, NLS replicates a subset of the information provided 
by the SIPs.
    NASDAQ established two different pricing models, one for clients 
that are able to maintain username/password entitlement systems and/or 
quote counting mechanisms to account for usage, and a second for those 
that are not. Firms with the ability to maintain username/password 
entitlement systems and/or quote counting mechanisms are eligible for a 
specified fee schedule for the NASDAQ Last Sale for NASDAQ Product and 
a separate fee schedule for the NASDAQ Last Sale for NYSE/NYSE MKT 
Product. Firms that are unable to maintain username/password 
entitlement systems and/or quote counting mechanisms also have multiple 
options for purchasing the NASDAQ Last Sale data. These firms choose 
between a ``Unique Visitor'' model for internet delivery or a 
``Household'' model for television delivery. Unique Visitor and 
Household populations must be reported monthly and must be validated by 
a third-party vendor or ratings agency approved by NASDAQ at NASDAQ's 
sole discretion. In addition, to reflect the growing confluence between 
these media outlets, NASDAQ offered a reduction in fees when a single 
distributor distributes NASDAQ Last Sale Data Products via multiple 
distribution mechanisms.
    NASDAQ also established a cap on the monthly fee, currently set at 
$50,000 per month, for all NASDAQ Last Sale products. The fee cap 
enables NASDAQ to compete effectively against other exchanges that also 
offer last sale data for purchase or at no charge.
    As with the distribution of other NASDAQ proprietary products, all 
distributors of the NASDAQ Last Sale for NASDAQ and/or NASDAQ Last Sale 
for NYSE/NYSE MKT products pay a single $1,500/month NASDAQ Last Sale 
Distributor Fee in addition to any applicable usage fees. The $1,500 
monthly fee applies to all distributors and does not vary based on 
whether the distributor distributes the data internally or externally 
or distributes the data via both the internet and television.
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\ in particular, in that it provides an equitable 
allocation of reasonable fees among users and recipients of the data. 
In adopting Regulation NMS, the Commission granted self-regulatory 
organizations (``SROs'') and broker-dealers (``BDs'') 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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    NASDAQ believes that its NASDAQ Last Sale market data products are 
precisely the sort of market data product 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

[[Page 877]]

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 BDs at 
all, it follows that the price at which such data is sold should be set 
by the market as well.
    The decision of the United States Court of Appeals for the District 
of Columbia Circuit in NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 
2010) (``NetCoalition I''), 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 I, at 535 (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.' '' \7\
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    \7\ NetCoalition I, at 535.
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    The court in NetCoalition I, while 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 NYSE Arca's data product at issue 
in that case. As 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 I 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.\8\ Moreover, NASDAQ further 
notes that the product at issue in this filing--a NASDAQ last sale data 
product that replicates a subset of the information available through 
``core'' data products whose fees have been reviewed and approved by 
the SEC--is quite different from the NYSE Arca depth-of-book data 
product at issue in NetCoalition I. Accordingly, any findings of the 
court with respect to that product may not be relevant to the product 
at issue in this filing.
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    \8\ It should also be noted that Section 916 of the 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. See also NetCoalition v. SEC, 715 F.3d 342 (D.C. 
Cir. 2013) (``NetCoalition II'') (finding no jurisdiction to review 
Commission's non-suspension of immediately effective fee changes).
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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 Last Sale Data 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 market-specific data and free delayed 
consolidated data; and (3) the inherent contestability of the market 
for proprietary last sale data.
    The market for proprietary last sale 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.
    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 trade executions, exchange data products cannot 
exist. Moreover, 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.
    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, the operation of the 
exchange is characterized by high fixed costs and low marginal costs. 
This cost structure is common in content and content distribution 
industries such as software, where developing new software typically 
requires a large initial investment (and continuing large investments 
to upgrade the software), but once the software is developed, the 
incremental cost of providing that software to an additional user is 
typically small, or even zero (e.g., if the software can be downloaded 
over the internet after being purchased).\9\ In NASDAQ's case, it is 
costly to build and maintain a trading platform, but the incremental 
cost of trading each additional share on an existing platform, or 
distributing an additional instance of data, is very low. Market 
information and executions are each produced jointly (in the sense that 
the activities of trading and placing orders are the source of the 
information that is distributed) and are each subject to significant 
scale economies. In such cases, marginal cost pricing is not feasible 
because if all sales were priced at the margin, NASDAQ would be unable 
to defray its platform costs of providing the joint products.
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    \9\ See William J. Baumol and Daniel G. Swanson, ``The New 
Economy and Ubiquitous Competitive Price Discrimination: Identifying 
Defensible Criteria of Market Power,'' Antitrust Law Journal, Vol. 
70, No. 3 (2003).
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    An exchange's BD customers view the costs of transaction executions 
and of data as a unified cost of doing business with the exchange. A BD 
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 BD 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

[[Page 878]]

of the product exceeds its expected value, the BD will choose not to 
buy it. Moreover, as a BD chooses to direct fewer orders to a 
particular exchange, the value of the product to that BD decreases, for 
two reasons. First, the product will contain less information, because 
executions of the BD's trading activity will not be reflected in it. 
Second, and perhaps more important, the product will be less valuable 
to that BD because it does not provide information about the venue to 
which it is directing its orders. Data from the competing venue to 
which the BD is directing orders will become correspondingly more 
valuable.
    Similarly, in the case of products such as NLS that are distributed 
through market data vendors, the vendors provide 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 Google, impose a discipline by 
providing only data that will enable them to attract ``eyeballs'' that 
contribute to their advertising revenue. Retail BDs, 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. Moreover, NASDAQ believes that products 
such as NLS can enhance order flow to NASDAQ by providing more 
widespread distribution of information about transactions in real time, 
thereby encouraging wider participation in the market by investors with 
access to the internet or television. Conversely, the value of such 
products to distributors and investors decreases if order flow falls, 
because the products contain less content.
    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. NASDAQ pays rebates to attract orders, charges relatively 
low prices for market information and charges relatively high prices 
for accessing posted liquidity. Other platforms may choose a strategy 
of paying lower liquidity rebates to attract orders, setting relatively 
low prices for accessing posted liquidity, and setting relatively high 
prices for market information. Still others may provide most data free 
of charge and rely exclusively on transaction fees to recover their 
costs. Finally, some platforms may incentivize use by providing 
opportunities for equity ownership, which may allow them to charge 
lower direct fees for executions and data.
    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. Such regulation is unnecessary because an ``excessive'' price 
for one of the joint products will ultimately have to be reflected in 
lower prices for other products sold by the firm, or otherwise the firm 
will experience a loss in the volume of its sales that will be adverse 
to its overall profitability. In other words, an increase in the price 
of data will ultimately have to be accompanied by a decrease in the 
cost of executions, or the volume of both data and executions will 
fall.
    The level of competition and contestability in the market is 
evident in the numerous alternative venues that compete for order flow, 
including thirteen 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 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, 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 MKT, NYSE Arca, BATS, and Direct Edge.
    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 BDs' 
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 a core data product, 
an SRO proprietary product, and/or a non-SRO proprietary product, the 
data available in proprietary products is exponentially greater than 
the actual number of orders and transaction reports that exist in the 
marketplace. Indeed, in the case of NLS, the data provided through that 
product appears both in (i) real-time core data products offered by the 
SIPs for a fee, and (ii) free SIP data products with a 15-minute time 
delay, and finds a close substitute in last-sale products of competing 
venues.
    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

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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 BDs have 
previously published their proprietary data individually, Regulation 
NMS encourages market data vendors and BDs 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.
    Moreover, consolidated data provides two additional measures of 
pricing discipline for proprietary data products that are a subset of 
the consolidated data stream. First, the consolidated data is widely 
available in real-time at $1 per month for non-professional users. 
Second, consolidated data is also available at no cost with a 15- or 
20- minute delay. Because consolidated data contains marketwide 
information, it effectively places a cap on the fees assessed for 
proprietary data (such as last sale data) that is simply a subset of 
the consolidated data. The mere availability of low-cost or free 
consolidated data provides a powerful form of pricing discipline for 
proprietary data products that contain data elements that are a subset 
of the consolidated data, by highlighting the optional nature of 
proprietary products.
    The competitive nature of the market for products such as NLS is 
borne out by the performance of the market. In May 2008, the internet 
portal Yahoo! began offering its Web site viewers real-time last sale 
data (as well as best quote data) provided by BATS. In response, in 
June 2008, NASDAQ launched NLS, which was initially subject to an 
``enterprise cap'' of $100,000 for customers receiving only one of the 
NLS products, and $150,000 for customers receiving both products. The 
majority of NASDAQ's sales were at the capped level. In early 2009, 
BATS expanded its offering of free data to include depth-of-book data. 
Also in early 2009, NYSE Arca announced the launch of a competitive 
last sale product with an enterprise price of $30,000 per month. In 
response, NASDAQ combined the enterprise cap for the NLS products and 
reduced the cap to $50,000 (i.e., a reduction of $100,000 per month). 
Although each of these products offers only a specific subset of data 
available from the SIPs, NASDAQ believes that the products are viewed 
as substitutes for each other and for core last-sale data, rather than 
as products that must be obtained in tandem. For example, while Yahoo! 
and Google now both disseminate NASDAQ's product, several other major 
content providers, including MSN and Morningstar, use the BATS product.
    In this environment, 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 I at 539. The existence of 
fierce competition for order flow implies a high degree of price 
sensitivity on the part of BDs with order flow, since they may readily 
reduce costs by directing orders toward the lowest-cost trading venues. 
A BD 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. If a platform increases its market 
data fees, the change will affect the overall cost of doing business 
with the platform, and affected BDs will assess whether they can lower 
their trading costs by directing orders elsewhere and thereby lessening 
the need for the more expensive data. Similarly, increases in the cost 
of NLS would impair the willingness of distributors to take a product 
for which there are numerous alternatives, impacting NLS data revenues, 
the value of NLS as a tool for attracting order flow, and ultimately, 
the volume of orders routed to NASDAQ and the value of its other data 
products.
    In establishing the price for the NASDAQ Last Sale Products, NASDAQ 
considered the competitiveness of the market for last sale 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 fair, reasonable, and not unreasonably 
discriminatory fees and an equitable allocation of fees among all 
users. The existence of numerous alternatives to NLS, including real-
time consolidated data, free delayed consolidated data, and proprietary 
data from other sources ensures that NASDAQ cannot set unreasonable 
fees, or fees that are unreasonably discriminatory, without losing 
business to these alternatives. Accordingly, NASDAQ believes that the 
acceptance of the NLS product in the marketplace demonstrates the 
consistency of these fees with applicable statutory standards.

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

    Three comment letters were filed regarding the proposed rule change 
as originally published for comment. NASDAQ responded to these comments 
in a letter dated December 13, 2007. Both the comment letters and 
NASDAQ's response are available on the SEC Web site at http://www.sec.gov/comments/sr-nasdaq-2006-060/nasdaq2006060.shtml. In 
addition, in response to prior filings to extend the NLS pilot,\10\ the 
Securities Industry and Financial Markets Association (``SIFMA'') and/
or NetCoalition \11\ filed comment letters contending that the SEC 
should suspend and institute disapproval proceedings with respect to 
the filing. SIFMA and NetCoalition had also filed petitions seeking 
review by the United States Court of Appeals for the District of 
Columbia Circuit with respect to the NLS pricing pilots in effect from 
July 1, 2011 through September 30, 2011, from October 1, 2011 through 
December 31, 2011, from July 1, 2012 through September 30, 2012, and 
from January 1, 2013 through March 31, 2013. These appeals were stayed 
pending resolution of the NetCoalition II case. On April 30, 2013, the 
court issued a decision dismissing NetCoalition II, concluding that it 
lacked jurisdiction to entertain the case. Subsequently, the court 
issued orders dismissing each of the pending petitions seeking review 
of prior extensions of the NLS pricing pilot. On May 30, 2013, SIFMA 
filed with the Commission an ``Application for an Order Setting Aside 
Rule Changes of Certain Self-Regulatory Organizations Limiting Access 
to their Services'' that purports to challenge prior filings under 
Section 19(d) and (f) of the Act.\12\ Pursuant to a Commission 
procedural order, interested parties have recently completed submission 
of briefs to the Commission regarding

[[Page 880]]

appropriate procedures and other threshold questions.
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    \10\ Securities Exchange Act Release Nos. 69245 (March 27, 
2013), 78 FR 19772 (April 2, 2013) (SR-NASDAQ-2013-053); 68568 
(January 3, 2013), 78 FR 1910 (January 9, 2013) (SR-NASDAQ-2012-
145); 67376 (July 9, 2012), 77 FR 41467 (July 13, 2012) (SR-NASDAQ-
2012-078); 65488 (October 5, 2011), 76 FR 63334 (October 21, 2011) 
(SR-NASDAQ-2011-132); 64856 (July 12, 2011), 76 FR 41845 (July 15, 
2011) (SR-NASDAQ-2011-092); 64188 (April 5, 2011), 76 FR 20054 
(April 11, 2011) (SR-NASDAQ-2011-044).
    \11\ NetCoalition has since terminated its operations.
    \12\ Admin. Proc. File No. 3-15351. See also Admin Proc. File 
No. 13-15350 (similar proceeding with respect to NYSEArca data 
product). As with prior SIFMA challenges, the pendency of SIFMA's 
new action should in no way affect the continuation of the pilot for 
NASDAQ Last Sale.
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    It appears to NASDAQ that SIFMA's contentions in this new 
proceeding are similar to the contentions in its numerous prior comment 
letters, which have repeatedly argued that market data fees are 
improper unless established through public utility-style rate-making 
proceedings that are nowhere contemplated by the Act. In making its 
arguments, SIFMA has sought to rely upon NetCoalition I, while 
repeatedly mischaracterizing the import of that case. Specifically, the 
court made findings about the extent of the Commission's record in 
support of determinations about a depth-of-book product offered by NYSE 
Arca. In making this limited finding, the court nevertheless squarely 
rejected contentions that cost-based review of market data fees was 
required by the Act:

    The petitioners believe that the SEC's market-based approach is 
prohibited under the Exchange Act because the Congress intended 
``fair and reasonable'' to be determined using a cost-based 
approach. The SEC counters that, because it has statutorily-granted 
flexibility in evaluating market data fees, its market-based 
approach is fully consistent with the Exchange Act. We agree with 
the SEC.\13\
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    \13\ NetCoalition I, 615 F.3d at 534.

    While the court noted that cost data could sometimes be relevant in 
determining the reasonableness of fees, it acknowledged that submission 
of cost data may be inappropriate where there are ``difficulties in 
calculating the direct costs . . . of market data,'' id. at 539. That 
is the case here, due to the fact that the fixed costs of market data 
production are inseparable from the fixed costs of providing a trading 
platform, and the marginal costs of market data production are 
minimal.\14\ Because the costs of providing execution services and 
market data are not unique to either of the provided services, there is 
no meaningful way to allocate these costs among the two ``joint 
products''--and any attempt to do so would result in inherently 
arbitrary cost allocations.\15\
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    \14\ Because the fees charged for products must cover these 
fixed costs, however, pricing at marginal cost is impossible.
    \15\ The court also explicitly acknowledged that the ``joint 
product'' theory set forth by NASDAQ's economic experts in 
NetCoalition I (and also described in this filing) could explain the 
competitive dynamic of the market and explain why consideration of 
cost data would be unavailing. Indeed, the Commission relied on that 
theory before the DC Circuit, but the court declined to reach the 
question because the Commission raised it for the first time on 
appeal. Id. at 541 n.16. For the purpose of providing a complete 
explanation of the theory, NASDAQ is further submitting as Exhibit 3 
to this filing a study that was submitted to the Commission in SR-
NASDAQ-2011-010. See Statement of Janusz Ordover and Gustavo 
Bamberger at 2-17 (December 29, 2010).
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    SIFMA further contended that prior filings lacked evidence 
supporting a conclusion that the market for NLS is competitive, 
asserting that arguments about competition for order flow and 
substitutability were rejected in NetCoalition I. While the court did 
determine that the record before it was not sufficient to allow it to 
endorse those theories on the facts of that case, the court did not 
itself make any conclusive findings about the actual presence or 
absence of competition or the accuracy of these theories: Rather, it 
simply made a finding about the state of the SEC's record. Moreover, 
analysis about competition in the market for depth-of-book data is only 
tangentially relevant to the market for last sale data. As discussed 
above and in prior filings, perfect and partial substitutes for NLS 
exist in the form of real-time core market data, free delayed core 
market data, and the last sale products of competing venues; additional 
competitive entry is possible; and evidence of competition is readily 
apparent in the pricing behavior of the venues offering last sale 
products and the consumption patterns of their customers. Thus, 
although NASDAQ believes that the competitive nature of the market for 
all market data, including depth-of-book data, will ultimately be 
established, SIFMA's submissions have not only mischaracterized the 
NetCoalition I decision, but have also failed to address the 
characteristics of the product at issue and the evidence already 
presented.

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.\16\ 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.
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    \16\ 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-2013-162 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-2013-162. 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 
10:00 a.m. and 3:00 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-2013-162 and should 
be submitted on or before January 28, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-31608 Filed 1-6-14; 8:45 am]
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DATE][NOTICES]


