
[Federal Register Volume 80, Number 72 (Wednesday, April 15, 2015)]
[Notices]
[Pages 20282-20285]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2015-08545]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74690; File No. SR-NASDAQ-2015-033]


Self-Regulatory Organizations; The NASDAQ Stock Market, LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Update Public Disclosure of Exchange Usage of Market Data

April 9, 2015.
    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 April 2, 2015, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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 update the public disclosure of the 
sources of data that NASDAQ utilizes when performing (1) order handling 
and execution; (2) order routing; and (3) related compliance processes.
    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are bracketed.
* * * * *
4759. Data Feeds Utilized
    [NASDAQ shall publicly disclose the proprietary and network 
processor feeds utilized by the System for the handling, routing, and 
execution of orders, as well as for the regulatory compliance processes 
related to those functions. This information shall be displayed on 
www.nasdaqtrader.com, and it shall be updated promptly each time NASDAQ 
determines to add, subtract, or otherwise modify a data source.]
    The NASDAQ System utilizes the below proprietary and network 
processor feeds utilized by the System for the handling, routing, and 
execution of orders, as well as for the regulatory compliance processes 
related to those functions. The Secondary Source of data is utilized 
only in emergency market conditions and only until those emergency 
conditions are resolved.

 
----------------------------------------------------------------------------------------------------------------
             Market center                     Primary source                      Secondary source
----------------------------------------------------------------------------------------------------------------
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             CQS/UQDF
                                          uncompacted.
T/Q--NASDAQ............................  ITCH 4.1..................  CQS/UQDF
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
----------------------------------------------------------------------------------------------------------------


[[Page 20283]]

* * * * *
    (b) Not applicable.
    (c) Not applicable.

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 these 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 aspects 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. 
24, 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 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, routing, execution, and 
internal compliance functions throughout the NASDAQ System.
    6. NASDAQ aggregates odd-lot orders, including those in its own and 
affiliated markets, when calculating the NBBO based upon a direct feed 
from an away exchange. NASDAQ processes odd-lot orders from each 
exchange direct feed in the same manner that that exchange aggregates 
odd-lots when reporting its own quotations to the SIP.
    7. NASDAQ utilizes the NBBO and top-of-book calculations described 
above for the handling of orders that use those reference points, 
including all variations of midpoint orders, pegged orders, and price-
to-comply orders described in NASDAQ Rule 4751(f), as well as Retail 
Price Improving Orders described in NASDAQ Rule 4780(a).
    8. When calculating the NBBO, the NASDAQ System does not utilize 
feedback from other venues when calculating the NBBO. The NASDAQ System 
assumes that a protected quotation to which it has routed an order has 
been executed and can be removed from the NBBO; it does not await or 
respond to execution reports from such routing activity.
    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:

 
----------------------------------------------------------------------------------------------------------------
             Market center                     Primary source                      Secondary source
----------------------------------------------------------------------------------------------------------------
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

[[Page 20284]]

 
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             CQS/UQDF
                                          uncompacted.
T/Q--NASDAQ............................  ITCH 4.1..................  CQS/UQDF
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
----------------------------------------------------------------------------------------------------------------

    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,\6\ the routing System, and various 
compliance applications described below.
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    \6\ 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 \7\ 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.\8\
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    \7\ 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.
    \8\ 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) and (xiv), 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 NBBO at the 
time of order entry while the stock is in a RegSho restricted state.
 2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\9\ in general and with Sections 
6(b)(5) of the Act,\10\ 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.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
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    The Exchange believes that its proposal to describe the Exchange's 
use of data feeds removes impediments to and perfects the mechanism of 
a free and open market and protects investors and the public interest 
because it provides additional specificity and transparency. The 
Exchange's proposal will enable investors to better assess the quality 
of the Exchange's execution and routing services. The proposal does not 
change the operation of the Exchange or its use of data feeds; rather 
it describes how, and for what purposes, the Exchange uses the quotes 
disseminated from data feeds to calculate the NBBO for a security for 
purposes of Regulation NMS, Regulation SHO and various order types that 
update based on changes to the applicable NBBO. The Exchange believes 
the additional transparency into the operation of the Exchange as 
described in the proposal will remove impediments to and perfect the

[[Page 20285]]

mechanism of a free and open market and a national market system, and, 
in general, protect investors and the public interest.

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. To 
the contrary, the Exchange believes the proposal would enhance 
competition because describing the Exchange's use of data feeds 
enhances transparency and enables investors to better assess the 
quality of the Exchange's execution and routing services.

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

    Because the 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, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \11\ and Rule 19b-4(f)(6) 
thereunder.\12\
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the 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.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \13\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \14\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has asked the Commission to waive the 30-day operative delay so that 
the proposal may become operative immediately upon filing, noting that 
waiver of the operative delay would permit the Exchange to immediately 
enhance transparency. The Commission believes the waiver of the 
operative delay is consistent with the protection of investors and the 
public interest. Therefore, the Commission hereby waives the operative 
delay and designates the proposal operative upon filing.\15\
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    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ 17 CFR 240.19b-4(f)(6)(iii).
    \15\ For purposes only of waiving the 30-day operative delay, 
the Commission has also considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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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 shall institute proceedings to 
determine whether the proposed rule 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-2015-033 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-2015-033. 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-2015-033 and should 
be submitted on or before May 6, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-08545 Filed 4-14-15; 8:45 am]
 BILLING CODE 8011-01-P


