
[Federal Register Volume 81, Number 86 (Wednesday, May 4, 2016)]
[Notices]
[Pages 26846-26849]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-10370]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77736; File No. SR-NASDAQ-2016-058]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Nasdaq Rule 7023

April 28, 2016.
    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 18, 2016, The NASDAQ Stock Market LLC (``Nasdaq'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') a proposed rule change as described in 
Items I, II and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is proposing to amend Nasdaq Rule 7023 (NASDAQ Depth-of-Book 
Data) to remove free top-of-file (``Top-of-File'') data from Nasdaq 
OpenView.
    The text of the proposed rule change is available at 
nasdaq.cchwallstreet.com, at Nasdaq's principal office, and at the 
Commission's Public Reference Room.

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

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of those statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant parts of such 
statements.

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

1. Purpose
    The Exchange proposes to amend Nasdaq Rule 7023 (NASDAQ Depth-of-
Book Data). Currently, Nasdaq does not charge a fee for use of Nasdaq 
OpenView Top-of-File data that is created using Nasdaq OpenView. Top-
of-File data consists of Nasdaq's aggregate best bid and offer 
quotation for each security listed on an exchange other than Nasdaq. 
Vendors can create Top-of-File data from Nasdaq OpenView and offer it 
to both professionals and non-professionals either for display or non-
display.
    The Exchange proposes to keep Top-of-File data as part of Nasdaq 
OpenView, but to no longer provide for free the use of this data (e.g., 
a subscriber of Nasdaq OpenView may no longer create a Top-of-File data 
product and provide it for free to other market participants). All 
market participants that opt to receive Nasdaq OpenView and create a 
Top-of-File data product from it will be liable for the Nasdaq OpenView 
fee rate applicable to Non-Professional Subscribers \3\ or Professional 
Subscribers,\4\ as appropriate. The monthly fee is

[[Page 26847]]

currently $1 for Non-Professional Subscribers \5\ while the monthly fee 
for Professional Subscribers is currently $6 each for any display 
usage, or for non-display usage based upon indirect access.\6\ Market 
participants cannot be charged for both Top-of-File data and OpenView.
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    \3\ See Nasdaq Rule 7023(a)(3)(A). This rule defines a Non-
Professional Subscriber as a natural person who is not: (1) 
Registered or qualified in any capacity with the Commission, the 
Commodity Futures Trading Commission, any state securities agency, 
any securities exchange or association, or any commodities or 
futures contract market or association; (2) engaged as an 
``investment adviser'' as that term is defined in Section 201(11) of 
the Investment Advisers Act of 1940 (whether or not registered or 
qualified under that Act); or (3) employed by a bank or other 
organization exempt from registration under federal or state 
securities laws to perform functions that would require registration 
or qualification if such functions were performed for an 
organization not so exempt.
    \4\ See Nasdaq Rule 7023(a)(3)(B). This rule defines a 
Professional Subscriber as any subscriber other than a ``Non-
Professional Subscriber,'' as that term is defined in Nasdaq Rule 
7023(a)(3)(A).
    \5\ See Nasdaq Rule 7023(b)(3)(A).
    \6\ See Nasdaq Rule 7023(b)(3)(B).
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    Since no firms currently are utilizing Nasdaq OpenView Top-of-File 
data, there will be no immediate impact on any subscribers due to the 
proposed rule change. However, the proposed rule change makes clear 
going forward that any subscribers creating this data will not be able 
to use it for free.
    To effectuate this proposed rule change, the Exchange will 
eliminate Nasdaq Rule 7023(b)(3)(C) and renumber Nasdaq Rule 
7023(b)(3)(D) as Nasdaq Rule 7023(b)(3)(C).
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\7\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act,\8\ in particular, in that it provides 
for the equitable allocation of reasonable dues, fees and other charges 
among members and issuers and other persons using its facilities which 
the Exchange operates or controls, and is not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.
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    \7\ 15 U.S.C. 78f(b).
    \8\ 15 U.S.C. 78f(b)(4) and (5).
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    The Commission and the courts have repeatedly expressed their 
preference for competition over regulatory intervention in determining 
prices, products, and services in the securities markets. In Regulation 
NMS, while adopting a series of steps to improve the current market 
model, the Commission highlighted the importance of market forces in 
determining prices and SRO revenues and, also, recognized that current 
regulation of the market system ``has been remarkably successful in 
promoting market competition in its broader forms that are most 
important to investors and listed companies.'' \9\
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    \9\ Securities Exchange Act Release No. 34-51808 (June 9, 2005) 
(``Regulation NMS Adopting Release'').
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    Likewise, in NetCoalition v. Securities and Exchange Commission 
\10\ (``NetCoalition'') the D.C. Circuit upheld the Commission's use of 
a market-based approach in evaluating the fairness of market data fees 
against a challenge claiming that Congress mandated a cost-based 
approach.\11\ As the court emphasized, the Commission ``intended in 
Regulation NMS that `market forces, rather than regulatory 
requirements' play a role in determining the market data . . . to be 
made available to investors and at what cost.'' \12\
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    \10\ NetCoalition v. SEC 615 F.3d 525 (D.C. Cir. 2010).
    \11\ Id. at 534-535.
    \12\ Id. at 537.
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    Further, ``[n]o one disputes that competition for order flow is 
`fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . .'' \13\
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    \13\ Id. at 539 (quoting ArcaBook Order, 73 FR at 74782-74783).
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    Vendors can create Top-of-File data from Nasdaq OpenView and offer 
it to both professionals and non-professionals either for display or 
non-display. The Exchange believes that the proposed rule change to 
charge all market participants that opt to receive Nasdaq OpenView and 
create a Top-of-File data product the Nasdaq OpenView fee rate 
applicable to Non-Professional Subscribers or Professional Subscribers, 
as appropriate, is reasonable because the Exchange is entitled to 
receive a fee from each subscriber that receives such data to help 
offset costs associated with providing Nasdaq OpenView data to 
subscribers. Also, the proposed rule change is reasonable because a 
market participant must use Nasdaq OpenView data in order to create a 
Top-of-File data product and since Nasdaq OpenView is fee liable, the 
same should be true of the resulting Top-of-File data product.
    The Exchange also believes that the proposed rule change is an 
equitable allocation of fees and is not unfairly discriminatory because 
market participants cannot be charged for both Top-of-File data and 
OpenView and the proposed rule change applies uniformly to all market 
participants since it treats all similarly situated market participants 
the same.
    The renumbering of Nasdaq Rule 7023(b)(3)(D) as Nasdaq Rule 
7023(b)(3)(C) is reasonable because it is a technical and clarifying 
change that is intended to maintain the coherency and consistency 
within the Nasdaq rule book.

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 (``BD'') 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 BD 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 BD will choose 
not to buy it. Moreover, as a BD chooses to direct fewer orders to a 
particular exchange, the value of the product to that BD decreases, for 
two

[[Page 26848]]

reasons. First, the product will contain less information, because 
executions of the BD's orders will not be reflected in it. Second, and 
perhaps more important, the product will be less valuable to that BD 
because it does not provide information about the venue to which it is 
directing its orders. Data from the competing venue to which the BD 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'.'' \14\ However, 
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. Similarly, 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.
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    \14\ Id.
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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 in the market is 
evident in the numerous alternative venues that compete for order flow, 
including eleven SRO markets, as well as internalizing 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 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.
    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 MKT, NYSE Arca, and 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 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 contestability 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

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over 40 brokers and multilateral trading facilities.\15\
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    \15\ 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.\16\ 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 supra-competitive 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 \17\ and create 
incentives for other 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 fully contestable.
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    \16\ 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.
    \17\ It should be noted that the FINRA/NYSE TRF has, in recent 
weeks, received reports for almost 10% of all over-the-counter 
volume in NMS stocks.
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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 instance, the proposed rule change to charge all market 
participants that create a Top-of-File product using Nasdaq OpenView 
data the fee rate applicable to Non-Professional Subscribers or 
Professional Subscribers, as appropriate, by eliminating current rule 
text in Nasdaq Rule 7023(b)(3)(C), does not impose a burden on 
competition because no firms currently are utilizing this data so there 
will be no immediate impact on any subscribers.
    In sum, if the rule change proposed herein is unattractive to 
market participants, it is likely that the Exchange will lose market 
share as a result. Accordingly, the Exchange does not believe that the 
proposed change will impair the ability of members or competing order 
execution venues to maintain their competitive standing in the 
financial markets.

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 change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\18\ 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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    \18\ 15 U.S.C. 78s(b)(3)(A)(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 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-2016-058 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-2016-058. 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-2016-058, and should 
be submitted on or before May 25, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-10370 Filed 5-3-16; 8:45 am]
 BILLING CODE 8011-01-P


