
[Federal Register Volume 80, Number 249 (Tuesday, December 29, 2015)]
[Notices]
[Pages 81387-81390]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-32652]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76738; File No. SR-NASDAQ-2015-152]


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

December 22, 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 December 15, 2015, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'' or ``SEC'') 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 4, 2016.
    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are bracketed.

NASDAQ Market Rules
Equity Rules
* * * * *
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 $6[5]0 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)-(f) 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 $10 from $50 to 
$60 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 optional. NASDAQ has enhanced this 
product through capacity upgrades and regulatory data sets over the 
life of the product. The network capacity for NASDAQ Level 2 has also 
increased from a 56 Kb feed 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 and Short Sale Threshold Indicator.
    Moreover, NASDAQ also increased the infrastructure resiliency with 
the migration of the entire Exchange's Disaster Recovery facility to 
Chicago, Illinois, which further reduces proximity risk. The costs 
associated with this migration are being apportioned among data 
products across multiple asset classes and, as a result, some of this 
cost is being allocated to NASDAQ Level 2.
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 $10 from $50 to $60 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 that the price at which such data is 
sold should be set by the market as well. The Exchange considers Level 
2 to be the sort of market data product 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 \6\ (``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

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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.' \7\ The court agreed with the 
Commission's conclusion that ``Congress intended that `competitive 
forces should dictate the services and practices that constitute the 
U.S. national market system for trading equity securities.' '' \8\
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    \6\ See NetCoaliton v. SEC 615 F.3d 525 (D.C. Cir. 2010).
    \7\ NetCoalition I, at 535 (quoting H.R. Rep. No. 94-229, at 92 
(1975), as reprinted in 1975 U.S.C.C.A.N. 321, 323).
    \8\ Id.
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    The Court in NetCoalition I, while upholding the Commission's 
conclusion that competitive forces may be relied upon to establish the 
fairness of prices, nevertheless concluded that the record in that case 
did not adequately support the Commission's conclusions as to the 
competitive nature of the market for NYSE Arca, Inc.'s (``NYSE Arca'') 
data product at issue in that case. As explained below in NASDAQ's 
Statement on Burden on Competition, however, NASDAQ believes that there 
is substantial evidence of competition in the marketplace for data that 
was not in the record in the NetCoalition I case, and that the 
Commission is entitled to rely upon such evidence in concluding fees 
are the product of competition, and therefore in accordance with the 
relevant statutory standards.\9\ Accordingly, any findings of the court 
with respect to that product may not be relevant to the product at 
issue in this filing.
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    \9\ It should also be noted that Section 916 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank 
Act'') has amended paragraph (A) of Section 19(b)(3) of the Act, 15 
U.S.C. 78s(b)(3), to make it clear that all exchange fees, including 
fees for market data, may be filed by exchanges on an immediately 
effective basis. See also NetCoalition v. SEC, 715 F.3d 342 (D.C. 
Cir. 2013) finding no jurisdiction to review Commission's non-
suspension of immediately effective fee changes).
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    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 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 I 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'.'' \10\ 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

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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.
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    \10\ NetCoalition I, at 539.
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    Analyzing the cost of market data distribution in isolation from 
the cost of all of the inputs supporting the creation of market data 
will inevitably underestimate the cost of the data. Thus, because it is 
impossible to create data without a fast, technologically robust, and 
well-regulated execution system, system costs and regulatory costs 
affect the price of market data. It would be equally misleading, 
however, to attribute all of the exchange's costs to the market data 
portion of an exchange's joint product. Rather, all of the exchange's 
costs are incurred for the unified purposes of attracting order flow, 
executing and/or routing orders, and generating and selling data about 
market activity. The total return that an exchange earns reflects the 
revenues it receives from the joint products and the total costs of the 
joint products.
    Competition among trading platforms can be expected to constrain 
the aggregate return each platform earns from the sale of its joint 
products, but different platforms may choose from a range of possible, 
and equally reasonable, pricing strategies as the means of recovering 
total costs. NASDAQ pays rebates to attract orders, charges relatively 
low prices for market information and charges relatively high prices 
for accessing posted liquidity. Other platforms may choose a strategy 
of paying lower liquidity rebates to attract orders, setting relatively 
low prices for accessing posted liquidity, and setting relatively high 
prices for market information. Still others may provide most data free 
of charge and rely exclusively on transaction fees to recover their 
costs. Finally, some platforms may incentivize use by providing 
opportunities for equity ownership, which may allow them to charge 
lower direct fees for executions and data.
    In this environment, there is no economic basis for regulating 
maximum prices for one of the joint products in an industry in which 
suppliers face competitive constraints with regard to the joint 
offering. Such regulation is unnecessary because an ``excessive'' price 
for one of the joint products will ultimately have to be reflected in 
lower prices for other products sold by the firm, or otherwise the firm 
will experience a loss in the volume of its sales that will be adverse 
to its overall profitability. In other words, an increase in the price 
of data will ultimately have to be accompanied by a decrease in the 
cost of executions, or the volume of both data and executions will 
fall.
    The level of competition and contestability \11\ in the market is 
evident in the numerous alternative venues that compete for order flow, 
including eleven 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. It is common for BDs to further and 
exploit this competition by sending their order flow and transaction 
reports to multiple markets, rather than providing them all to a single 
market. Competitive markets for order flow, executions, and transaction 
reports provide pricing discipline for the inputs of proprietary data 
products.
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    \11\ Contestability in this rule filing means that the market 
leader for a particular product can be easily challenged.
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    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 so or have announced plans to do 
so, including NASDAQ, New York Stock Exchange LLC, NYSE MKT LLC, NYSE 
Arca, and BATS Exchange (``BATS'')/Direct Edge.
    Any ATS or BD can combine with any other ATS, BD, or multiple ATSs 
or BDs to produce joint proprietary data products. Additionally, order 
routers and market data vendors can facilitate single or multiple BDs' 
production of proprietary data products. The potential sources of 
proprietary products are virtually limitless. Notably, the potential 
sources of data include the BDs that submit trade reports to TRFs and 
that have the ability to consolidate and distribute their data without 
the involvement of FINRA or an exchange-operated TRF.
    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 NYSE Arca did before registering as exchanges by 
publishing proprietary book data on the internet. Second, because a 
single order or transaction report can appear in a core data product, 
an SRO proprietary product, and/or a non-SRO proprietary product, the 
data available in proprietary products is exponentially greater than 
the actual number of orders and transaction reports that exist in the 
marketplace.
    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, based on 
Nasdaq's experience, 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 BATS/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 competition of that market. While BDs have previously 
published their proprietary data individually, Regulation NMS 
encourages market data vendors and BDs to produce proprietary products 
cooperatively in a manner never before possible. Multiple market data 
vendors already have the capability to aggregate data and disseminate 
it on a profitable scale, including Bloomberg and Thomson Reuters. In 
Europe, Cinnober aggregates and disseminates data from over 40 brokers 
and multilateral trading facilities.\12\
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    \12\ See http://www.cinnober.com/boat-trade-reporting.
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    In the case of TRFs, the rapid entry of several exchanges into this 
space in 2006-2007 following the development and Commission approval of 
the TRF structure demonstrates the contestability of this aspect of the 
market.\13\ Given the demand for trade reporting services that is 
itself a by-product of the fierce competition for transaction 
executions--characterized notably by a proliferation of ATSs and BDs 
offering internalization--any unjustified price increase in the fees 
associated with trade reporting or TRF data would shift trade report 
volumes from one of the existing TRFs to the other \14\ and create 
incentives for other

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TRF operators to enter the space. Alternatively, because BDs reporting 
to TRFs are themselves free to consolidate the market data that they 
report, the market for over-the-counter data itself, separate and apart 
from the markets for execution and trade reporting services--is very 
competitive.
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    \13\ The low cost exit of two TRFs from the market is also 
evidence of a contestable market because new entrants are reluctant 
to enter a market where exit may involve substantial shut-down 
costs.
    \14\ It should be noted that the FINRA/NYSE TRF during November 
2016 [sic] received reports for 10.6% of non-exchange share volume 
in Regulation NMS stocks that represented 3.8% of overall volume.
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    Moreover, consolidated data provides two additional measures of 
pricing discipline for proprietary data products that are a subset of 
the consolidated data stream. First, the consolidated data is widely 
available in real-time at $1 per month for non-professional users. 
Second, consolidated data is also available at no cost with a 15- or 
20-minute delay. Because consolidated data contains marketwide 
information, it effectively places a cap on the fees assessed for 
proprietary data (such as last sale data) that is simply a subset of 
the consolidated data. The mere availability of low-cost or free 
consolidated data provides a powerful form of pricing discipline for 
proprietary data products that contain data elements that are a subset 
of the consolidated data, by highlighting the optional nature of 
proprietary products.
    In this environment, an unjustified price increase in the fees 
charged for either transactions or data has the potential to impair 
revenues from both products. ``No one disputes that competition for 
order flow is `fierce'.'' NetCoalition I at 539. The existence of 
fierce competition for order flow implies a high degree of price 
sensitivity on the part of BDs with order flow, since they may readily 
reduce costs by directing orders toward the lowest-cost trading venues. 
A BD that shifted its order flow from one platform to another in 
response to order execution price differentials would both reduce the 
value of that platform's market data and reduce its own need to consume 
data from the disfavored platform. If a platform increases its market 
data fees, the change will affect the overall cost of doing business 
with the platform, and affected BDs will assess whether they can lower 
their trading costs by directing orders elsewhere and thereby lessening 
the need for the more expensive data.

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

    Written comments were neither solicited nor received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\15\ 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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    \15\ 15 U.S.C. 78s(b)(3)(a)(ii). [sic]
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IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2015-152 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-2015-152. 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 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-2015-152, and should 
be submitted on or before January 19, 2016.
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    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\16\
Brent J. Fields,
Secretary.
[FR Doc. 2015-32652 Filed 12-28-15; 8:45 am]
 BILLING CODE 8011-01-P


