
[Federal Register Volume 79, Number 242 (Wednesday, December 17, 2014)]
[Notices]
[Pages 75220-75223]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-29497]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73820; File No. SR-NASDAQ-2014-111]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify a Level 2 Professional Subscriber Fee

December 11, 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 November 28, 2014, The NASDAQ Stock Market LLC (``NASDAQ'') filed 
with the Securities and Exchange Commission (``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by NASDAQ. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    NASDAQ proposes to modify the NASDAQ Level 2 Professional 
Subscriber (``Subscriber'') fee. While the changes proposed herein are 
effective upon filing, the Exchange has designated that the amendments 
be operative on January 1, 2015.
* * * * *

7023. NASDAQ Depth-of-Book Data

    (a) No change.
    (b) Subscriber Fees.
    (1) NASDAQ Level 2.
    (A) Non-Professional Subscribers pay a monthly fee of $9 each;
    (B) Professional Subscribers pay a monthly fee of $[4]50 each for 
Display Usage based upon Direct or Indirect Access, or for Non-Display 
Usage based upon Indirect Access only;
    (C)-(E) No Change.
    (2)-(4) No change.
    (c)-(e) 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, NASDAQ included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NASDAQ has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    The purpose of the proposed rule change is to increase the NASDAQ 
Level 2 Professional Subscriber fee (``Level 2 fee''). Specifically, 
the Exchange proposes to increase the Level 2 fee by $5 from $45 to $50 
for display usage based upon direct or indirect access, or for non-
display usage based upon indirect access only. This proposed rule 
change will not affect the pricing of the NASDAQ OpenView Non-
Professional and Professional Subscriber fees.
    The NASDAQ Level 2 product is completely optional. NASDAQ has 
enhanced this product through capacity upgrades and regulatory data 
sets over the last approximately 30 years and the release of a new 
(more efficient) binary version this year. The network capacity for 
NASDAQ Level 2 has increased from a 56 Kb feed in 1983 to the current 
33 Mb feed. Additionally, since NASDAQ Level 2 is also used for market 
making functions, NASDAQ has invested over the years to add regulatory 
data sets, such as Market Maker Mode, Trading Action status, Limit Up--
Limit Down, Market Wide Circuit Breaker (MWCB) messaging, Short Sale 
Threshold Indicator, as well as other regulatory information.
    In 2014 NASDAQ expanded the reference data available for each 
security. Level 2 had also been improved with the release this year to 
give more transparency on Issue Classification and associated Issue 
Sub-Type, as well as the IPO flag and the flags to help further 
identify exchange traded products. Additionally, NASDAQ is taking steps 
to increase resiliency with the upcoming additional back-up feed (also 
referred to as the ``B'' feed) in the Carteret co-location facility. 
This helps to reduce cost for customers by receiving both the ``A'' 
feed and ``B'' feed from the same co-location facility while retaining 
an additional ``B'' feed out of the mid-Atlantic co-location facility 
to reduce proximity risk.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\3\ in general, and with 
Section 6(b)(4) and 6(b)(5) of the Act,\4\ in particular, in that it 
provides an equitable allocation of reasonable fees among Subscribers 
and recipients of NASDAQ data and is not designed to permit unfair 
discrimination between them. NASDAQ's proposal to increase the Level 2 
fee by $5 from $45 to $50 for display usage based upon direct or 
indirect access, or for non-display usage based upon indirect access 
only, is also consistent with the Act in that it reflects an equitable 
allocation of reasonable fees. The Commission has long recognized the 
fair and equitable and not unreasonably discriminatory 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 Professional User than to an ordinary Non-Professional User due 
to the enhanced flexibility, lower overall costs and value that it 
offers Distributors.
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    \3\ 15 U.S.C. 78f.
    \4\ 15 U.S.C. 78f(b)(4) and (5).
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    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.
    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.\5\
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    \5\ 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

[[Page 75221]]

that the price at which such data is sold should be set by the market 
as well. Level 2 is precisely the sort of market data products that the 
Commission envisioned when it adopted Regulation NMS.
    The decision of the United States Court of Appeals for the District 
of Columbia Circuit in NetCoaliton 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.' 
NetCoaltion 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).
    NASDAQ believes that the allocation of the proposed fee is fair and 
equitable in accordance with Section 6(b)(4) of the Act, and not 
unreasonably discriminatory in accordance with Section 6(b)(5) of the 
Act. As described above, the proposed fee is based on pricing 
conventions and distinctions that exist in NASDAQ's current fee 
schedule. These distinctions are each based on principles of fairness 
and equity that have helped for many years to maintain fair, equitable, 
and not unreasonably discriminatory fees, and that apply with equal or 
greater force to the current proposal.
    As described in greater detail below, if NASDAQ has calculated 
improperly and the market deems the proposed fees to be unfair, 
inequitable, or unreasonably discriminatory, firms can discontinue the 
use of their data because the proposed product is entirely optional to 
all parties. Firms are not required to purchase data and NASDAQ is not 
required to make data available or to offer specific pricing 
alternatives for potential purchases. NASDAQ can discontinue offering a 
pricing alternative (as it has in the past) and firms can discontinue 
their use at any time and for any reason (as they often do), including 
due to their assessment of the reasonableness of fees charged. NASDAQ 
continues to establish and revise pricing policies aimed at increasing 
fairness and equitable allocation of fees among Subscribers.
    NASDAQ believes that periodically it must adjust the Subscriber 
fees to reflect market forces. NASDAQ believes it is an appropriate 
time to adjust this fee to more accurately reflect the investments made 
to enhance this product through capacity upgrades and regulatory data 
sets added. This also reflects that the market for this information is 
highly competitive and continually evolves as products develop and 
change.

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. 
Notwithstanding its determination that the Commission may rely upon 
competition to establish fair and equitably allocated fees for market 
data, the NetCoalition court found that the Commission had not, in that 
case, compiled a record that adequately supported its conclusion that 
the market for the data at issue in the case was competitive. NASDAQ 
believes that a record may readily be established to demonstrate the 
competitive nature of the market in question.
    There is intense competition between trading platforms that provide 
transaction execution and routing services and proprietary data 
products. Transaction execution and proprietary data products are 
complementary in that market data is both an input and a byproduct of 
the execution service. In fact, market data and trade execution are a 
paradigmatic example of joint products with joint costs. Data products 
are valuable to many end Subscribers only insofar as they provide 
information that end Subscribers expect will assist them or their 
customers in making trading decisions.
    The costs of producing market data include not only the costs of 
the data distribution infrastructure, but also the costs of designing, 
maintaining, and operating the exchange's transaction execution 
platform and the cost of regulating the exchange to ensure its fair 
operation and maintain investor confidence. The total return that a 
trading platform earns reflects the revenues it receives from both 
products and the joint costs it incurs. Moreover, an exchange's 
customers view the costs of transaction executions and of data as a 
unified cost of doing business with the exchange. A broker-dealer will 
direct orders to a particular exchange only if the expected revenues 
from executing trades on the exchange exceed net transaction execution 
costs and the cost of data that the broker-dealer chooses to buy to 
support its trading decisions (or those of its customers). The choice 
of data products is, in turn, a product of the value of the products in 
making profitable trading decisions. If the cost of the product exceeds 
its expected value, the broker-dealer will choose not to buy it. 
Moreover, as a broker-dealer chooses to direct fewer orders to a 
particular exchange, the value of the product to that broker-dealer 
decreases, for two reasons. First, the product will contain less 
information, because executions of the broker-dealer's orders will not 
be reflected in it. Second, and perhaps more important, the product 
will be less valuable to that broker-dealer because it does not provide 
information about the venue to which it is directing its orders. Data 
from the competing venue to which the broker-dealer is directing orders 
will become correspondingly more valuable.
    Thus, an 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.

[[Page 75222]]

    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 platforms 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 thirteen 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, New York Stock Exchange LLC (``NYSE''), NYSE MKT LLC, 
NYSE Arca LLC, and BATS Exchange, Inc. (``BATS'').
    Any ATS or BD can combine with any other ATS, BD, or multiple ATSs 
or BDs to produce joint proprietary data products. Additionally, order 
routers and market data vendors can facilitate single or multiple 
broker-dealers' production of proprietary data products. The potential 
sources of proprietary products are virtually limitless.
    The fact that proprietary data from ATSs, BDs, and vendors can by-
pass SROs is significant in two respects. First, non-SROs can compete 
directly with SROs for the production and sale of proprietary data 
products, as BATS and Arca did before registering as exchanges by 
publishing data on the Internet. Second, because a single order or 
transaction report can appear in an SRO proprietary product, a non-SRO 
proprietary product, or both, the data available in proprietary 
products is exponentially greater than the actual number of orders and 
transaction reports that exist in the marketplace.
    Market data vendors provide another form of price discipline for 
proprietary data products because they control the primary means of 
access to end Subscribers. Vendors impose price restraints based upon 
their business models. For example, vendors such as Bloomberg and 
Thomson Reuters that assess a surcharge on data they sell may refuse to 
offer proprietary products that end Subscribers will not purchase in 
sufficient numbers. Internet portals, such as Google, impose a 
discipline by providing only data that will enable them to attract 
``eyeballs'' that contribute to their advertising revenue. Retail 
broker-dealers, such as Schwab and Fidelity, offer their customers 
proprietary data only if it promotes trading and generates sufficient 
commission revenue. Although the business models may differ, these 
vendors' pricing discipline is the same: They can simply refuse to 
purchase any proprietary data product that fails to provide sufficient 
value. NASDAQ and other producers of proprietary data products must 
understand and respond to these varying business models and pricing 
disciplines in order to market proprietary data products successfully.
    In addition to the competition and price discipline described 
above, the market for proprietary data products is also highly 
contestable because market entry is rapid, inexpensive, and profitable. 
The history of electronic trading is replete with examples of entrants 
that swiftly grew into some of the largest electronic trading platforms 
and proprietary data producers: Archipelago, Bloomberg Tradebook, 
Island, RediBook, Attain, TracECN and BATS Trading. 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 vigor of competition for information is significant. NASDAQ has 
made a determination to adjust the fees associated with this product in 
order to reflect more accurately the value of its products and the 
investments made to enhance them, as well as to keep pace with changes 
in the industry and evolving customer needs. This product 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 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

    Written comments were neither solicited nor received.

[[Page 75223]]

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.\6\ At any time within 60 days of the filing 
of the proposed rule change, the Commission summarily may temporarily 
suspend such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act. If the Commission takes such action, the Commission shall 
institute proceedings to determine whether the proposed rule should be 
approved or disapproved.
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    \6\ 15 U.S.C. 78s(b)(3)(a)[sic](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, as amended, 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-2014-111 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2014-111. 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 such filing also will be 
available for inspection and copying at the principal offices of the 
Exchange. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly.
    All submissions should refer to File Number SR-NASDAQ-2014-111, and 
should be submitted on or before January 7, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-29497 Filed 12-16-14; 8:45 am]
BILLING CODE 8011-01-P


