
[Federal Register Volume 79, Number 148 (Friday, August 1, 2014)]
[Notices]
[Pages 44956-44958]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-18119]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72684; File No. SR-NASDAQ-2014-072]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Disclose Publicly the Sources of Data Used for Exchange Functions

July 28, 2014.
    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 July 15, 2014, 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 and II 
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 proposes a rule change to disclose publicly the sources of 
data, whether from the network processors or from direct data feeds, 
that NASDAQ utilizes when performing (1) order handling and execution; 
(2) order routing; and (3) related compliance processes.

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 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
    In her June 5, 2014 market structure speech, the Chair requested 
that all national securities exchanges review and disclose their 
policies and procedures governing the market data used when performing 
important exchange functions.\3\ In a letter dated June 20, 2014, the 
Director of the Division of Trading and Markets codified this request:
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    \3\ See Mary Jo White, Chair, Securities and Exchange 
Commission, Speech at the Sandler O'Neill & Partners L.P. Global 
Exchange and Brokerage Conference (June 5, 2014).

    We believe there is a need for clarity regarding whether (1) the 
SIP data feeds, (2) proprietary data feeds, or (3) a combination 
thereof, are used by the exchanges for purposes of (1) order 
handling and execution (e.g., with pegged or midpoint orders), (2) 
order routing, and (3) regulatory compliance, as applicable. . . . 
Accordingly, we ask that proposed rule changes be filed that 
disclose the particular market data feeds that are used for each of 
these purposes. Consistent with your recent discussions with 
Commission staff, we ask that each SRO file these proposed rule 
changes with the Commission by July 15, 2014.\4\
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    \4\ See Letter from Steven Luparello, Director, SEC Division of 
Trading and Markets, to Robert Greifeld, Chief Executive Officer, 
NASDAQ OMX Group, Inc., dated June 20, 2014.

    NASDAQ fully supports the Commission's efforts to provide more 
clarity in this area. In fact, in 2011, NASDAQ disclosed its general 
practices governing the use of market data in the handling, execution, 
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and routing of orders on NASDAQ:

    The Exchange is also changing its policies and procedures under 
Regulation NMS governing the data feeds used by its execution system 
and routing engine. Current policies state that those systems use 
data provided by the network processors. In the future, those 
systems will use data provided either by the network processors or 
by proprietary feeds offered by certain exchanges directly to 
vendors. The determination of which data feed to utilize will be the 
same as the determination made with respect to the [MatchView] Feed. 
In other words, the Exchange execution system, routing engine and 
Feed will each utilize the same data for a given exchange. . . .\5\
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    \5\ See SR-NASDAQ-2011-118 (Aug. 18, 2011); 76 FR 53007 (Aug. 
25, 2011).

    Although, as described above, NASDAQ publicly disclosed its general 
practice of consuming data from a combination of network processor and 
proprietary data feeds, NASDAQ did not disclose the specific feeds 
NASDAQ utilizes for each individual exchange, and it did not describe 
its data usage practice with respect to related compliance checks.
    Through this proposed rule change, NASDAQ is publicly clarifying on 
a market-by-market basis the specific network processor and proprietary 
data feeds that NASDAQ utilizes for the handling, routing, and 
execution of orders, and for performing the regulatory compliance 
checks related to each of those functions. These complex practices are 
governed by a few, simple principles that are designed to ensure that 
NASDAQ has the most accurate view of the trading interest available 
across multiple markets, and to maximize the synchronization of the 
many exchange functions that depend upon the calculation of an accurate 
NBBO and top-of-book for each market. These principles are:
    1. NASDAQ uses a proprietary data feed from each exchange that 
provides a reliable proprietary data feed. Where no reliable 
proprietary data feed is available, NASDAQ uses the network processor 
feed;
    2. Where NASDAQ uses a proprietary data feed for an exchange quote, 
it also maintains access to the network processor feed as a back-up in 
the event a specific proprietary feed become unavailable or unusable 
for any reason;
    3. NASDAQ uses the same proprietary data feed when performing order 
handling, routing, and execution functions, and also when the execution 
and routing system performs internal compliance checks related to those 
functions; and
    4. NASDAQ acquires and processes all proprietary and network 
processor feeds via the same technological

[[Page 44957]]

configuration (i.e., telecommunication circuitry, switches, and feed 
handlers) to the greatest extent possible.
    5. NASDAQ calculates the National Best Bid and Offer (``NBBO'') and 
top-of-book for each exchange at a single point within the NASDAQ 
system, and then distributes that data simultaneously to numerous 
applications performing order handling,\6\ routing, execution, and 
internal compliance functions throughout the NASDAQ system.
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    \6\ With respect to order handling, the NBBO and top-of-book 
calculation feeds applications governing the proper processing 
midpoint orders, pegged orders, price-to-comply orders, and retail 
orders.
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    As of the date of this filing, NASDAQ utilizes the following data 
feeds for the handling, execution and routing of orders, as well as for 
performing related compliance checks:

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              Market center                        Primary source                     Secondary source
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A--NYSE MKT (AMEX)......................  CQS/UQDF........................  n/a.
B--NASDAQ OMX BX........................  BX ITCH 4.1.....................  CQS/UQDF.
D--FINRA ADF............................  CQS/UQDF........................  n/a.
J--DirectEdge A.........................  EdgeBook........................  CQS/UQDF.
K--DirectEdge X.........................  EdgeBook........................  CQS/UQDF.
M--CSX..................................  CQS/UQDF........................  n/a.
N--NYSE.................................  NYSE OpenBook Ultra.............  CQS/UQDF.
P--NYSE Arca............................  ArcaBook Binary uncompacted.....  CQS/UQDF.
T/Q--NASDAQ.............................  ITCH 4.1........................  CQS/UQDF.
W--CBOE.................................  CQS/UQDF........................  n/a.
X--NASDAQ OMX PSX.......................  PSX ITCH 4.1....................  CQS/UQDF.
Y--BATS Y-Exchange......................  BATS PITCH......................  CQS/UQDF.
Z--BATS Exchange........................  BATS PITCH......................  CQS/UQDF.
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    NASDAQ uses these feeds to calculate the NBBO via an application 
called the ``NMSFeed.'' The NMSFeed consumes the NASDAQ Protected Quote 
Service (``NPQS''), which provides an internal view of that exchange's 
own market data as NASDAQ ITCH, plus the proprietary and network 
processor market data feeds listed above. The NMSFeed calculates a 
Regulation NMS-Compliant ``Best Bid or Offer'' (``Compliant BBO''), and 
then delivers that information throughout the NASDAQ System, including 
to the ``OUCH'' order entry ports,\7\ the routing system, and various 
compliance applications described below.
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    \7\ OUCH is a protocol that allows NASDAQ participants to enter, 
replace and cancel orders and receive executions. In addition to 
OUCH, NASDAQ offers the FLITE protocol as an option for 
participants. In this document, references to OUCH also include 
FLITE because they are interchangeable for these purposes.
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    Upon receipt of an update to a protected quote for a specific 
venue, the NMSFeed updates its quote for that venue, recalculates the 
consolidated BBO based upon the update, and recalculates the Compliant 
BBO after applying NASDAQ's own BBO. Any quote that crosses NASDAQ's 
BBO is ignored. NASDAQ odd lot orders at the same price are aggregated 
and considered in the NBBO calculation if the sum is greater than or 
equal to a round lot. Otherwise, they are not considered in the NBBO 
calculation. Out of the remaining quotes, the most aggressive remaining 
bid and offer (excluding NASDAQ \8\ and any destination which has been 
excluded from the NBBO in compliance with the self-help procedures 
under Regulation NMS) is selected and reported as the best quote. If 
away markets are crossing the market after applying NASDAQ's BBO, 
orders will be accepted as originally priced and have the potential to 
execute. Any order sent to NASDAQ that is not an Intermarket Sweep 
Order (``ISO'') will have the Compliant BBO check enforced by the 
system.\9\
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    \8\ Deletion of NASDAQ's quote at this stage of the process is 
necessary because otherwise the system would prevent valid 
executions on NASDAQ in the erroneous belief that such executions 
would be ``trade throughs'' in violation of Regulation NMS.
    \9\ In general, any order that is sent to NASDAQ with an ISO 
flag is not re-priced and will be processed at its original price. 
There are a limited number of circumstances in which an order marked 
as an ISO will be determined not to be executable at its original 
price and will be re-priced. These include re-pricing under the Plan 
to Address Extraordinary Market Volatility, re-pricing to comply 
with Regulation SHO, and the re-pricing of an order with a post-only 
condition if NASDAQ has an order at that price at the time the order 
is accepted.
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    The NASDAQ OMX Routing and Special Handling System (``RASH'') 
utilizes the Compliant BBO to determine if and when an order with 
special processing directives is marketable either against one or more 
orders in either the Core Matching System or a remote trading venue. 
RASH also receives market data feeds from certain venues not displaying 
protected quotes in the national market system for use in ``QDRK'' and 
``QCST'' routing strategies set forth in NASDAQ Rule 
4758(a)(1)(A)(xiii) [sic] and (xiv) [sic], respectively. RASH maintains 
a number of routing processes, or Routers, unique to each venue that 
the System accesses. These Routers maintain a limited set of details 
for orders that are configured as routable by the user, while also 
monitoring the current best bid and best offer prices on each exchange.
    The NASDAQ system includes internal compliance applications related 
to locked and crossed markets, trade throughs, limit-up/limit-down, and 
Regulation SHO compliance. Each of these applications utilizes the 
Compliant BBO to ensure compliance with applicable regulations.
    NASDAQ operates a separate real-time surveillance system that is 
external to the execution systems and that monitors the execution 
system's compliance with applicable rules and regulations. The real-
time surveillance system utilizes a ``mirrored'' version of the 
internal NMSFeed in various realtime surveillance patterns, including 
(1) Lock/Cross, which detects lock/cross events across all markets, 
regardless of whether or not NASDAQ is a participant in the event; (2) 
Trade Through, which detects potential trade through events for all 
three NASDAQ equity markets; and (3) RegSho, which detects potential 
RegSho violations, alerting when a trade executes at or below the NBB 
at the time of order entry while the stock is in a RegSho restricted 
state.
    In addition to the operational transparency provided above, NASDAQ 
is also proposing to add Rule 4759, which will provide for the public 
display of the proprietary and network processor feeds that NASDAQ 
utilizes in the order handling, routing, and

[[Page 44958]]

execution processes described above, as well as in the compliance 
functions described above. NASDAQ will display this information on 
www.nasdaqtrader.com, which is heavily used by NASDAQ members and their 
customers.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\10\ in general and with 
Sections 6(b)(5) of the Act,\11\ 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. The Exchange believes that 
this proposal is in keeping with those principles by enhancing 
transparency through the dissemination of the most accurate quotations 
data and by clarifying its contents.
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    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission. The 
Commission deems this requirement to have been met.
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    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 will institute proceedings to 
determine whether the proposed rule change should be approved or 
disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2014-072 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2014-072. 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 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-2014-072 and should 
be submitted on or before August 22, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-18119 Filed 7-31-14; 8:45 am]
BILLING CODE 8011-01-P


