
[Federal Register Volume 79, Number 241 (Tuesday, December 16, 2014)]
[Notices]
[Pages 74784-74790]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-29362]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73807; File No. SR-NASDAQ-2014-117]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify an Optional Subscriber Fee and Tiered Distribution Fee for 
``Enhanced'' Data Displays (the ``Enhanced Display Solution Fee'')

December 10, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on November 25, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or 
the ``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I 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

    The Exchange proposes to modify an optional Subscriber fee and 
tiered Distribution fee for ``Enhanced'' data displays (the ``Enhanced 
Display Solution Fee'').
    The text of the proposed rule change is below; proposed new 
language is italicized; proposed deletions are in brackets.
* * * * *

7026. Distribution Models

    (a) Display Solutions
    (1) Enhanced Display[s] Solution (``EDS'') (optional delivery 
method)
    (A) The charges to be paid by Distributors for offering EDS 
S[s]ubscribers of NASDAQ Depth [data] Information [controlled display 
products along] with access to an API or similar solution shall be:

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                                                             Number of downstream EDS subscribers
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Monthly Enhanced Display Solution Fee per    [1-299 users = $2,000/month.
 Distributor for the right to offer an       300-399 users = $3,000/month].
 [display products containing] API or        1-399 [400-499] users = $4,000/month.
 similar solution*.                          [500-599 users = $5,000/month.
                                             600-699 users = $6,000/month.
                                             700-799 users = $7,000/month.
                                             800-899 users = $8,000/month.
                                             900-999 users = $9,000/month].
                                             400-999 users = $7,500/month.
                                             1,000 users or more = $15[0],000/month.
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* [Customers] Distributors that are subscribing to certain enterprise depth capped fees as described in NASDAQ
  Rule 7023(a)(1)(c) are exempt from this fee.

    (B) The monthly fee per Professional [or Non-Professional] EDS 
S[s]ubscriber for utilizing NASDAQ Level 2, NASDAQ TotalView or NASDAQ 
OpenView data on a [controlled display] product with access to an API 
or similar solution [through that display] is $74 per month for 
TotalView and Level 2 and $6 per month for OpenView. [the applicable 
NASDAQ TotalView or NASDAQ OpenView rates.]
    The monthly fee per Non-Professional EDS Subscriber for utilizing 
NASDAQ Level 2, NASDAQ TotalView or NASDAQ OpenView data on a product 
with access to an API or similar solution is the applicable NASDAQ 
Level 2, NASDAQ TotalView or NASDAQ OpenView rates.
    [The monthly fee per Professional or Non-Professional subscriber 
for utilizing the Level 2 data for NASDAQ-listed securities on a 
controlled display product with access to an API or similar solution 
through that display is the applicable NASDAQ TotalView rates.]
    [The monthly fee per Professional or Non-Professional subscriber 
for utilizing NASDAQ Level 2 data for NYSE, AMEX or regional listed 
securities on a controlled display product with access to an API or 
similar solution through that display is the applicable NASDAQ OpenView 
rates.]
    (C) EDS Enterprise License: EDS Distributors may elect to purchase 
an Enterprise License for $30,000 per month. Such Enterprise License 
shall entitle the EDS Distributor to distribute to an unlimited number 
of Professional EDS Subscribers for a monthly fee of $70 for TotalView 
and/or Level 2 and $6 for OpenView, notwithstanding the fees set forth 
in subsection (B) above.
    (2) The term ``[n]Non-[p]Professional'' shall have the same meaning 
as set forth in NASDAQ Rule 7011(b).
    (3) The term ``Distributor'' shall have the same meaning as set 
forth in NASDAQ Rule 7019(c).
    (b)-(c) No change.
* * * * *

[[Page 74785]]

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of 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
    NASDAQ is proposing to amend NASDAQ Rule 7026 (Distribution Models) 
to modify the optional Enhanced Display Solution (``EDS'') Fee 
governing the distribution of NASDAQ TotalView, NASDAQ OpenView and 
NASDAQ Level 2 Information (collectively, ``NASDAQ Depth 
Information''). The modified optional EDS Fee will offer increased 
flexibility and simplified market data administration for members and 
to Distributors with external subscribers that use the NASDAQ Depth 
Information internally.
    Existing EDS Fee. Currently, the optional EDS Fee provides a 
pricing option for Distributors who provide a ``controlled device'' 
product \3\ along with an Application Programming Interface (``API'') 
or similar solution to Subscribers. Non-display use is not permitted 
under the Enhanced Display Solution fee structure. To ensure proper 
application of the EDS Fee, NASDAQ requires Distributors to monitor for 
any non-display or excessive use suggesting that the EDS Subscriber is 
not in compliance. The Distributor is liable for any unauthorized use 
by the EDS Subscribers under the EDS Fee. The optional fee is available 
only to NASDAQ members and external Distributors offering NASDAQ Depth 
Information and who apply and are approved for an Enhanced Display 
Solution.
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    \3\ The term ``controlled device'' is defined as follows in Rule 
7023(a)(6): A Controlled Device is any device that a Distributor of 
NASDAQ Depth-of-Book data permits to: (1) Access the Depth-of-Book 
information or (2) communicate with the Distributor so as to cause 
the Distributor to access the Depth-of-Book data. Where a Controlled 
Device is part of an electronic network between computers used for 
investment, trading or order routing activities, the Distributor 
must demonstrate that the particular Controlled Device should not 
have to pay for an entitlement. For example, in some Display systems 
the Distributor gives the Subscribers the choice to view the data or 
not; a Subscriber that chooses not to view it would not be charged. 
Similarly, in a Non-Display system, users of Controlled Devices may 
have a choice of basic or advanced computerized trading or order 
routing services, where only the advanced version uses the 
information. Customers of the basic service would not be charged.
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    The EDS option also has administrative requirements for data usage. 
As administered today, the Distributor must agree to reformat, 
redisplay and/or alter the NASDAQ Depth Information prior to 
retransmission, but not to affect the integrity of the NASDAQ Depth 
Information and not to render it inaccurate, unfair, uninformative, 
fictitious, misleading or discriminatory. An Enhanced Display Solution 
is any controlled display product containing NASDAQ Depth Information 
where the Distributor controls a display of NASDAQ Depth Information, 
but also allows the EDS Subscriber to access an API or similar solution 
from that display product. The EDS Subscriber may use the NASDAQ Depth 
Information for the EDS Subscriber's own purposes and may not 
redistribute the information outside of their organization. The EDS 
Subscriber may not redistribute the data internally to other users in 
the same organization.
    Proposed Modification. The new Enhanced Display Solution will offer 
even greater flexibility. Where previously, EDS required the 
Distributor to both ``control'' the display and the entitlement to the 
display, effective January 1, 2015, Distributors will have the option 
to disseminate NASDAQ Depth Information to EDS Subscribers without the 
requirement of controlling the display. This does not replace the 
existing EDS program, but rather provides additional flexibility by 
offering two options under the EDS program. In response to industry 
demand and ongoing changes in the technical distribution of market 
data, NASDAQ will now permit Distributors to offer APIs that power 
third party software display applications where the Distributor 
controls the entitlement but not the display of data. Previously, 
downstream firms receiving this type of NASDAQ Depth Information would 
have been classified as a data feed recipient and pay a much higher 
internal distributor fee. These downstream data feed recipients are now 
able to reduce their cost and the cost to the industry by paying a 
modest fee increase for each EDS Subscriber, while also removing 
reporting and administration requirements by allowing the Distributor 
to manage this on behalf of the EDS Subscriber firm. The EDS program 
will continue to cover the same NASDAQ Depth Information, namely NASDAQ 
TotalView, NASDAQ OpenView, and NASDAQ Level 2.
    The EDS Subscriber, or end user, to an Enhanced Display Solution 
may use the NASDAQ Depth Information for its own purposes but may not 
redistribute the NASDAQ Depth Information outside of their organization 
or even internally to other subscribers in the same organization. Any 
EDS Subscriber distributing the NASDAQ Depth Information further 
downstream from NASDAQ--such as posting the NASDAQ Depth Information on 
a shared drive or delivering the NASDAQ Depth Information into another 
system--would forfeit eligibility for the EDS Fee.\4\ Additionally, EDS 
Distributors must offer an integrated data solution with secured data 
transmissions, a robust entitlement system and monitor EDS Subscribers 
for any non-display or excessive usage to ensure compliance. EDS 
Distributors must also offer NASDAQ Depth Information in Distributor's 
own messaging formats (rather than its raw NASDAQ message formats) by 
reformatting, redisplaying and/or altering the NASDAQ Depth Information 
prior to retransmission, but not to affect the integrity of the NASDAQ 
Depth Information and not to render it inaccurate, unfair, 
uninformative, fictitious, misleading or discriminatory.
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    \4\ Such use would be considered a Re-transmission and would be 
governed by NASDAQ Rule 7019 governing market data distribution.
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    Non-display use is not included or permitted under the EDS Fee. 
While Distributors are not required to technically control against non-
display usage (due to the difficulty of achieving such control), the 
Distributor is required to restrict non-display usage contractually by 
including such restrictions in any agreements with recipients of the 
Information. The non-display definition in the policy document is not 
changing. Today, data use that powers the display is allowed. For 
example, if an application is updating a portfolio and exposes such 
information on the display, this use is included under EDS. Also, 
calculating VWAPs or other derived information for use on the display/
device is permitted under EDS. Examples of prohibited non-display use 
include but are not limited to, auto-quoting, algorithmic trading, and 
risk management, even if that information is used to power the display.

[[Page 74786]]

    Finally, Distributors offering an Enhanced Display Solution have 
several administrative requirements. They must report the number of EDS 
Subscribers under new report titles and separately from controlled non-
EDS products. Distributors must include EDS Subscribers under new 
products codes in the Detailed Usage Reporting. Distributors also 
assume the liability for any unauthorized use of NASDAQ Depth 
Information by EDS Subscribers. While there are more administrative 
requirements for this program for the Distributor, the industry 
administration burden is lessened, as downstream data feed recipient 
firms no longer need to go through the process of having data feeds 
approved or tracking and reporting usage.
    Effective January 1, 2015, NASDAQ will offer new pricing for the 
optional EDS program. If the Distributor offers multiple Enhanced 
Display Solutions, it would only be fee liable for one EDS Distribution 
fee. The simplified fees to be paid by Distributors offering EDS are as 
follows:

----------------------------------------------------------------------------------------------------------------
     Old fee for number of downstream
                subscribers                             New fee for number of downstream  subscribers
----------------------------------------------------------------------------------------------------------------
1-299 Subscribers = $2,000/month..........  1-399 Subscribers= $4,000/month.
300-399 Subscribers = $3,000/month........
400-499 Subscribers = $4,000/month........  400-999 Subscribers = $7,500/month.
500-599 Subscribers = $5,000/month........
600-699 Subscribers = $6,000/month........
700-799 Subscribers = $7,000/month........
800-899 Subscribers = $8,000/month........
900-999 Subscribers = $9,000/month........
1,000 or more Subscribers = $10,000/month.  1,000 or more Subscribers = $15,000/month.
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    With one exception, distributors opting for an Enhanced Display 
Solution are, in addition, liable for the applicable Professional or 
Non-Professional Subscriber fees for the underlying NASDAQ Depth 
Information products. Distributors opting for an Enhanced Display 
Solution that provides access to NASDAQ TotalView, NASDAQ Level 2 or 
OpenView will be charged a monthly fee of $74 per Professional EDS 
Subscriber of TotalView or Level 2 and $6 per Professional EDS 
Subscriber of OpenView. The fees otherwise applicable to such 
Subscribers would be $70 and $6 for TotalView and OpenView.\5\
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    \5\ Effective January 1, 2015, the fees for non-EDS Level 2 
subscribers will be increasing from $45 to $50 per month. See SR-
NASDAQ-2014-111, filed November 17, 2014.
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    NASDAQ is also creating a new Enterprise License option for EDS 
Distributors. Specifically, as set forth in new Rule 7026(a)(1)(C), an 
EDS Distributor may elect to purchase an Enterprise License for $30,000 
per month. This Enterprise Licensee will permit the EDS Distributor to 
distribute to an unlimited number of Professional EDS Subscribers for 
$70 per month each for TotalView and Level 2 and $6 per month each for 
OpenView. The EDS Enterprise License does not modify the fees assessed 
for distribution to Non-Professional Subscribers. Distributors that 
subscribe to existing NASDAQ enterprise licenses set forth in Rule 
7023(c)(1-3) are not impacted by the new EDS Enterprise License and 
they remain exempt from the EDS Distributor fee as they are today.
    This new pricing and administrative option respond to industry 
demand, as well as to changes in the technology to distribute market 
data. By providing this new fee option, Distributors will have more 
administrative flexibility in their receipt and distribution of NASDAQ 
Depth Information.
2. 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 users and recipients of NASDAQ 
Depth Information.
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    \6\ 15 U.S.C. 78f.
    \7\ 15 U.S.C. 78f(b)(4).
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    NASDAQ believes that this proposal represents an equitable 
allocation of reasonable dues and fees, consistent with the 
requirements of the Act. The EDS Fee, which has been available as an 
option for two years, has reduced costs for Distributors and Subscriber 
firms that voluntarily opt for this service. The fee is tiered by 
number of subscribers, which has been found to be consistent with the 
Act in multiple contexts due to the economic efficiencies attributable 
to providing the same data elements to an increasing population of 
subscribers. NASDAQ's proposal to reduce the number of price tiers is 
also consistent with the Act in that it merely simplifies the existing 
tiers and only modestly adjusts the fees--some higher, some lower--of 
Distributors that opt for the program and that fall within the old and 
new tiers.
    NASDAQ's proposal to increase by $4 the monthly fee for EDS 
Subscribers with access to NASDAQ TotalView and Level 2 is also 
consistent with the Act in that it reflects an equitable allocation of 
reasonable fees. The Commission has long recognized the equitable 
nature of assessing different fees for Professional and Non-
Professional users of the same data. NASDAQ also believes it is 
equitable to assess a higher fee per EDS Professional TotalView 
Subscriber than to an ordinary Professional TotalView Subscriber due to 
the enhanced flexibility and lower overall costs that the EDS program 
offers Distributors, as well as to the voluntary nature of the EDS 
program itself.
    Finally, NASDAQ believes that the new EDS Enterprise License is 
fair and equitable and not unreasonably discriminatory. Enterprise 
Licenses have long been accepted as an economically efficient form of 
volume discount for the heaviest users of market data (see Rule 7023 
enterprise licenses). NASDAQ notes that the EDS Enterprise License 
Fee--and the entire EDS program--is entirely optional in that NASDAQ is 
not required to offer it and Distributors are not required to pay it. 
Accordingly, Distributors and users can discontinue use at any time and 
for any reason, including due to an assessment of the reasonableness of 
fees charged. NASDAQ continues to create new pricing policies aimed at 
increasing transparency in the market and believes this is another step 
in that direction.
    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

[[Page 74787]]

data available to consumers, and also spur innovation and competition 
for the provision of market data.
    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.
    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 
Exchange 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.''
    NASDAQ believes that these amendments to Section 19 of the Act 
reflect Congress's intent to allow the Commission to rely upon the 
forces of competition to ensure that fees for market data are 
reasonable and equitably allocated. Although Section 19(b) had formerly 
authorized immediate effectiveness for a ``due, fee or other charge 
imposed by the self-regulatory organization,'' the Commission adopted a 
policy and subsequently a rule stipulating that fees for data and other 
products available to persons that are not members of the self-
regulatory organization must be approved by the Commission after first 
being published for comment. At the time, the Commission supported the 
adoption of the policy and the rule by pointing out that unlike 
members, whose representation in self-regulatory organization 
governance was mandated by the Act, non-members should be given the 
opportunity to comment on fees before being required to pay them, and 
that the Commission should specifically approve all such fees. NASDAQ 
believes that the amendment to Section 19 reflects Congress's 
conclusion that the evolution of self-regulatory organization 
governance and competitive market structure have rendered the 
Commission's prior policy on non-member fees obsolete. Specifically, 
many exchanges have evolved from member-owned not-for-profit 
corporations into for-profit investor-owned corporations (or 
subsidiaries of investor-owned corporations). Accordingly, exchanges no 
longer have narrow incentives to manage their affairs for the exclusive 
benefit of their members, but rather have incentives to maximize the 
appeal of their products to all customers, whether members or non-
members, so as to broaden distribution and grow revenues. Moreover, we 
believe that the change also reflects an endorsement of the 
Commission's determinations that reliance on competitive markets is an 
appropriate means to ensure equitable and reasonable prices. Simply 
put, the change reflects a presumption that all fee changes should be 
permitted to take effect immediately, since the level of all fees are 
constrained by competitive forces.
    The recent decision of the United States Court of Appeals for the 
District of Columbia Circuit in NetCoaliton v. SEC, No. 09-1042 (D.C. 
Cir. 2010), 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.' 
NetCoaltion, at 15 (quoting H.R. Rep. No. 94-229, at 92 (1975), as 
reprinted in 1975 U.S.C.C.A.N. 321, 323). The court'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.

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 
NetCoaltion 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. For the 
reasons discussed above, NASDAQ believes that the Dodd-Frank Act 
amendments to Section 19 materially alter the scope of the Commission's 
review of future market data filings, by creating a presumption that 
all fees may take effect immediately, without prior analysis by the 
Commission of the competitive environment. Even in the absence of this 
important statutory change, however, NASDAQ believes that a record may 
readily be established to demonstrate the competitive nature of the 
market in question.
    There is intense competition between trading platforms that provide 
transaction execution and routing services and proprietary data 
products.

[[Page 74788]]

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 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, 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 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 self-regulatory organization (``SRO'') 
markets, as well as internalizing broker-dealers (``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

[[Page 74789]]

of proprietary data products, as BATS and Arca did before registering 
as exchanges by publishing proprietary book data on the Internet. 
Second, because a single order or transaction report can appear in an 
SRO proprietary product, a non-SRO proprietary product, or both, the 
data available in proprietary products is exponentially greater than 
the actual number of orders and transaction reports that exist in the 
marketplace.
    Market data vendors provide another form of price discipline for 
proprietary data products because they control the primary means of 
access to end users. Vendors impose price restraints based upon their 
business models. For example, vendors such as Bloomberg and Thomson 
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 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 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 Level 2/NQDS and 80 of the top 100 broker-
dealers consumed TotalView. During that month, the Level 2/NQDS-users 
were responsible for 94.44% of the orders entered into NASDAQ and 
TotalView users 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 
Level 2/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 customer 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 information is significant and 
the Exchange believes that this proposal 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 information is highly 
competitive and continually evolves as products develop and change.

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

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act \9\ and paragraph (f)(2) of Rule 19b-4 
thereunder.\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.
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    \9\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \10\ 17 CFR 240.19b-4(f)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing,

[[Page 74790]]

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-2014-117 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-2014-117. 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 NASDAQ. 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-2014-117 and should 
be submitted on or before January 6, 2015.

    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. 2014-29362 Filed 12-15-14; 8:45 am]
BILLING CODE 8011-01-P


