
[Federal Register Volume 81, Number 196 (Tuesday, October 11, 2016)]
[Notices]
[Pages 70207-70210]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-24420]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79035; File No. SR-NASDAQ-2016-124]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Nasdaq Rule 7046

October 4, 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 September 23, 2016, 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, 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 proposed [sic] Nasdaq Rule 7046 
(Nasdaq Trading Insights) by adding the corresponding fee for the 
optional Nasdaq Trading Insights product.
    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 7046 (Nasdaq Trading

[[Page 70208]]

Insights) by adding the corresponding fees for the optional Nasdaq 
Trading Insights product.\3\ As discussed in the NTI Filing, the Nasdaq 
Trading Insights product is a single optional market data service 
comprised of four market data components: (a) Missed Opportunity--
Liquidity; (b) Missed Opportunity--Latency; (c) Peer Benchmarking; and 
(d) Liquidity Dynamics Analysis.
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    \3\ This filing is referenced in the recently approved Nasdaq 
Trading Insights filing (the ``NTI Filing'') that proposed Nasdaq 
Rule 7046 (Nasdaq Trading Insights) to the Exchange rule book. See 
Securities Exchange Act Release No. 78886 (Sept. 20, 2016) (SR-
NASDAQ-2016-101) (order granting approval).
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    Upon request by a potential subscribing firm, Nasdaq will provide 
the Nasdaq Trading Insights product for a 14-day period at no charge. 
This waiver may be provided only once per firm. A firm will be charged 
the monthly fee rate listed in Nasdaq Rule 7046(b)(2) if it does not 
cancel by the conclusion of the trial offer and the fee will not be 
pro-rated.
    The monthly fee rates set forth in Nasdaq Rule 7046(b), as well as 
in the chart below, will apply to a firm that subscribes to the Nasdaq 
Trading Insights product. The monthly fee will be based on the number 
of ports the firm is subscribing to within the Nasdaq Trading Insights 
product and in no case will the Nasdaq Trading Insights fees be pro-
rated. The fees for the Nasdaq Trading Insights product will be in 
accordance with the following table.

------------------------------------------------------------------------
                                                 Number of     Monthly
                     Tiers                         ports       charges
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Tier 1........................................          1-5       $1,500
Tier 2........................................         6-15        2,000
Tier 3........................................        16-25        2,500
Tier 4........................................          26+        3,500
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2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\4\ in general, and with 
Sections 6(b)(4) and (5) of the Act,\5\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees, and 
other charges among its members, issuers and other persons using its 
facilities, and does not unfairly discriminate between customers, 
issuers, brokers or dealers.
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    \4\ 15 U.S.C. 78f.
    \5\ 15 U.S.C. 78f(b)(4) and (5).
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    In adopting Regulation NMS,\6\ the Commission granted SROs and 
broker-dealers (``BDs'') increased authority and flexibility to offer 
new and unique market data to the public. It was believed that this 
authority would expand the amount of data available to consumers, and 
also spur innovation and competition for the provision of market data. 
Nasdaq believes that its Nasdaq Trading Insights market data product is 
precisely the sort of market data product that the Commission 
envisioned when it adopted Regulation NMS. 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:
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    \6\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (``Regulation NMS Adopting 
Release'').

    [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.\7\
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    \7\ Id.

    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 BDs at 
all, it follows that the price at which such data is sold should be set 
by the market as well.
    Moreover, fee liable data products such as the Nasdaq Trading 
Insights product are a means by which exchanges compete to attract 
order flow, and this proposal simply adds the relevant fee structure 
into an Exchange rule. To the extent that exchanges are successful in 
such competition, they earn trading revenues and also enhance the value 
of their data products by increasing the amount of data they are able 
to provide. Conversely, to the extent that exchanges are unsuccessful, 
the inputs needed to add value to data products are diminished. 
Accordingly, the need to compete for order flow places substantial 
pressure upon exchanges to keep their fees for both executions and data 
reasonable.
    The fee structure for the Nasdaq Trading Insights product, 
including the 14-day trial offer, also reflects an equitable allocation 
and will not be unfairly discriminatory because it is a voluntary 
product designed to ensure that the amount of the charge is tailored to 
the specific port usage patterns of the subscriber. Thus, for example, 
a subscriber's monthly charge for receiving access to the Nasdaq 
Trading Insights product for five ports is $1,500, while a subscriber's 
monthly charge for receiving access to the Nasdaq Trading Insights 
product for 26 ports is $3,500. The range of fee options further 
ensures that subscribers are not charged a fee that is inequitably 
disproportionate to the use that they make of the product. 
Additionally, the 14-day trial offer provides a potential subscriber an 
opportunity to try the product before signing on to receive it for a 
fee.
    The proposal would not permit unfair discrimination because the 
Nasdaq Trading Insights product will be available to all interested 
market participants opting to subscribe, regardless of whether they 
take advantage of the 14-day trial offer, and will help to protect a 
free and open market by continuing to provide additional non-core data 
(offered on an optional basis for a fee) to the marketplace and by 
providing investors with greater choices.\8\
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    \8\ See Sec. Indus. Fin. Mkts. Ass'n (SIFMA), Initial Decision 
Release No. 1015, 2016 SEC LEXIS 2278 (ALJ June 1, 2016) (finding 
the existence of vigorous competition with respect to non-core 
market data). See also the decision of the United States Court of 
Appeals for the District of Columbia Circuit in NetCoalition v. SEC, 
615 F.3d 525 (D.C. Cir. 2010) (``NetCoalition I'') (upholding the 
Commission's reliance upon competitive markets to set reasonable and 
equitably allocated fees for market data).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The proposed fee structure is 
designed to ensure a fair and reasonable use of Exchange resources by 
allowing the Exchange to recoup costs while continuing to offer its 
data products at competitive rates to firms.
    The market for data products is extremely competitive and firms may 
freely choose alternative venues and data vendors based on the 
aggregate fees assessed, the data offered, and the value provided. The 
Nasdaq Trading Insights product is part of the existing market for 
proprietary market data products that is currently 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.

[[Page 70209]]

    Transaction execution and proprietary data products are 
complementary in that market data is both an input and a byproduct of 
the execution service. In fact, market data and trade execution are a 
paradigmatic example of joint products with joint costs. The decision 
whether and on which platform to post an order will depend on the 
attributes of the platform where the order can be posted, including the 
execution fees, data quality and price, and distribution of its data 
products. Without trade executions, exchange data products cannot 
exist. Moreover, data products are valuable to many end users only 
insofar as they provide information that end users expect will assist 
them or their customers in making trading decisions.
    The costs of producing market data include not only the costs of 
the data distribution infrastructure, but also the costs of designing, 
maintaining, and operating the exchange's transaction execution 
platform and the cost of regulating the exchange to ensure its fair 
operation and maintain investor confidence. The total return that a 
trading platform earns reflects the revenues it receives from both 
products and the joint costs it incurs. Moreover, the operation of the 
exchange is characterized by high fixed costs and low marginal costs. 
This cost structure is common in content and content distribution 
industries such as software, where developing new software typically 
requires a large initial investment (and continuing large investments 
to upgrade the software), but once the software is developed, the 
incremental cost of providing that software to an additional user is 
typically small, or even zero (e.g., if the software can be downloaded 
over the internet after being purchased).\9\ In Nasdaq's case, it is 
costly to build and maintain a trading platform, but the incremental 
cost of trading each additional share on an existing platform, or 
distributing an additional instance of data, is very low. Market 
information and executions are each produced jointly (in the sense that 
the activities of trading and placing orders are the source of the 
information that is distributed) and are each subject to significant 
scale economies. In such cases, marginal cost pricing is not feasible 
because if all sales were priced at the margin, Nasdaq would be unable 
to defray its platform costs of providing the joint products.
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    \9\ See William J. Baumol and Daniel G. Swanson, ``The New 
Economy and Ubiquitous Competitive Price Discrimination: Identifying 
Defensible Criteria of Market Power,'' Antitrust Law Journal, Vol. 
70, No. 3 (2003).
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    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 and credits 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.\10\
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    \10\ Moreover, 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.
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    The proposed charges for the Nasdaq Trading Insights product are 
designed to ensure a fair and reasonable use of Exchange resources by 
allowing the Exchange to recoup costs and ease administrative burden 
while continuing to offer its data products at competitive rates to 
firms.

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.\11\
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    \11\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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.

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-2016-124 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-2016-124. 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

[[Page 70210]]

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-2016-124, and should be submitted on or before 
November 1, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\12\
Robert W. Errett,
Deputy Secretary.
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    \12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2016-24420 Filed 10-7-16; 8:45 am]
 BILLING CODE 8011-01-P


