
[Federal Register Volume 81, Number 217 (Wednesday, November 9, 2016)]
[Notices]
[Pages 78890-78893]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-27022]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79228; File No. SR-NASDAQ-2016-144]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Institute a New Fee for the Distribution of Data

November 3, 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 October 20, 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

    The Exchange proposes to amend Rule 7047 of the Exchange's 
transaction fees to institute a new fee for the distribution of data 
derived from Nasdaq Basic on third-party Web sites or other electronic 
platforms, as described further below.
    The changes are being filed for immediate effectiveness and will 
become operative on October 20, 2016.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, 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, 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
    The purpose of the proposed rule change is to introduce a new 
pricing model to keep pace with an evolving practice. Distributors have 
increasingly used Nasdaq Basic to make ``Derived Data'' available on a 
Web site or other electronic platform that is branded by a third party, 
or co-branded by a Distributor and a third party, and available to 
external subscribers.
    ``Derived Data'' is pricing data or other information that is 
created in whole or in part from Nasdaq information, but which cannot 
be reverse engineered to recreate Nasdaq information or be used to 
create other data that is recognizable as a reasonable substitute for 
Nasdaq information. The type of Derived Data subject to the proposed 
fee is taken from Nasdaq Basic, a proprietary data product that 
provides best bid and offer and last sale information for all U.S. 
exchange-listed stocks using data from the Nasdaq Market Center and the 
FINRA/Nasdaq Trade Reporting Facility.
    The Derived Data subject to the proposed fee is made available to 
subscribers on a ``Hosted Display Solution'': A product, solution or 
capability provided by a Distributor in which the Distributor makes the 
Derived Data available on a platform that reflects either a brand of a 
third party, or is co-branded with a third party and a Distributor, and 
available for use by external subscribers of the third party or the 
Distributor. The Distributor maintains control of the application's 
data, entitlements and display.
    The Hosted Display Solution may take a number of forms. For 
example, the Distributor may host a ``Widget,'' such as an iframe or 
applet, in which the Hosted Display Solution is a part or a subset of a 
Web site or platform. The Hosted Display Solution may also take the 
form of a ``White Label,'' in which the Distributor hosts or maintains 
the Web site or platform on behalf of a third-party entity. Although 
the specific forms may vary, Hosted Display Solutions allow 
Distributors to make Derived Data available on a platform that is 
branded with a third-party brand, or co-branded with a third party and 
a Distributor, for the use of external subscribers.
    Derived Data on a Hosted Display Solution may be used for a number 
of different purposes, to be determined by the Distributor. Possible 
uses include the display of information or data, or the creation of 
derivative instruments, such as swaps,\3\ swaptions,\4\ binary 
options,\5\ or contracts for difference.\6\ The specific use of the 
data will be determined by the Distributor, as the proposed fee will 
not depend on the purpose for placing the Derived Data on a Hosted 
Display Solution.
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    \3\ A swap is a derivative contract in which two parties agree 
to exchange financial instruments.
    \4\ A swaption, or swap option, is an option to enter into a 
swap at a specified time.
    \5\ A binary option is a type of contract in which the return 
depends on the outcome of a true/false proposition. If the 
proposition is true, the option purchaser would be entitled to 
predetermined compensation; otherwise, the purchaser would receive 
no compensation.
    \6\ A contract for difference is an agreement to exchange the 
difference between the current value of an asset and its future 
value. If the price increases, the seller pays the buyer the amount 
of the increase. If the price decreases, the buyer pays the seller 
the amount of the decrease.
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    The Exchange proposes a flat fee of $400 per month per Hosted 
Display Solution for each Distributor that makes Derived Data available 
on a Hosted Display Solution. The monthly fee will apply whenever such 
a Hosted Display Solution is employed at any time during the month. 
This fee will be in addition to the distributor fee owed for the 
distribution of Nasdaq Basic under Rule 7047(c)(1), as well as any fee 
that may be owed under Rule 7047(c)(2). Any Distributor that 
distributes Nasdaq data that is not Derived Data--i.e., Nasdaq Basic 
for Nasdaq, Nasdaq Basic for NYSE, or Nasdaq Basic for NYSE Market--on 
a Hosted Display Solution would be liable for any applicable per-
subscriber or per-query fees set forth in

[[Page 78891]]

Rules 7047(b)(1)-(3), as well as the distribution fee under 7047(c)(1).
    The fee is entirely optional, in that it applies only to 
Distributors that opt to use Derived Data from Nasdaq Basic to create a 
Hosted Display Solution, as described herein. It does not impact or 
raise the cost of any other Nasdaq product, nor does it increase the 
cost of Nasdaq Basic, except in instances where Derived Data is made 
available on a Hosted Display Solution.
    Because ``Derived Data'' will be a defined term under the proposal, 
the Exchange also proposes replacing the phrase ``data derived'' in 
Rule 7047(c)(2) with the term ``Derived Data.''
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 facility, 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. 51808 (June 9, 2005), 70 
FR 37496, 37499 (June 29, 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\ See NetCoalition at 534-535; see also Sec. Indus. Fin. 
Mkts. Ass'n (SIFMA), Initial Decision Release No. 1015, 2016 SEC 
LEXIS 2278 (ALJ June 1, 2016) (applying a market-based approach to 
the Regulation NMS analysis).
    \12\ NetCoalition 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 Securities Exchange Act Release No. 
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008) 
(SR-NYSEArca-2006-21)).
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    The Exchange believes that the introduction of a fee for the use of 
Derived Data on Hosted Display Solutions is reasonable because: (i) All 
proprietary data fees are constrained by the Exchange's need to compete 
for order flow; (ii) proprietary data fees are subject to market 
competition from substitute products; and (iii) the proposed fee will 
be constrained by downstream competition among Distributors and third-
party firms. The Exchange does not currently have a specific fee for 
making Derived Data available on Hosted Display Solutions for external 
subscribers; the proposed fee will be $400 per month for any use of a 
Hosted Display Solution to display Derived Data at any time during that 
month. A Distributor who makes Derived Data available on a Hosted 
Display Solution would not be subject to the per-Subscriber or per-
query user fees set forth in Rules 7047(b)(1)-(3) because Derived Data, 
by definition, cannot be reverse engineered to recreate the data that 
is fee-liable under those rules. This is in contrast to any firm that 
distributes Nasdaq data that is not Derived Data on a Hosted Display 
Solution, which would be subject to such user fees. The Exchange 
believes that this fee is an equitable allocation and is not unfairly 
discriminatory because the Exchange will apply the same fee to all 
similarly situated distributors.

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. In terms of inter-market 
competition, the Exchange notes that it operates in a highly 
competitive market in which market participants can readily favor 
competing venues if they deem fee levels at a particular venue to be 
excessive, or rebate opportunities available at other venues to be more 
favorable. In such an environment, the Exchange must continually adjust 
its fees to remain competitive with other exchanges and with 
alternative trading systems that have been exempted from compliance 
with the statutory standards applicable to exchanges. Because 
competitors are free to modify their own fees in response, and because 
market participants may readily adjust their order routing practices, 
the Exchange believes that the degree to which fee changes in this 
market may impose any burden on competition is extremely limited.
    The proposed fee in this case applies to data derived from Nasdaq 
Basic, which is subject to competition from the NYSE, BATS, and other 
exchanges that offer similar products. In sum, if the changes proposed 
herein are 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 changes will impair the ability of 
members or competing order execution venues to maintain their 
competitive standing in the financial markets.
    Market forces constrain the proposed fee in three specific 
respects. First, all fees related to Nasdaq Basic are constrained by 
competition among exchanges and other entities in attracting order 
flow. Firms make decisions regarding Nasdaq Basic and other proprietary 
data based on the total cost of interacting with the Exchange, and 
order flow would be harmed by the supracompetitive pricing of any 
proprietary data product. Second, the price of Nasdaq Basic is 
constrained by the existence of multiple substitutes that are offered, 
or may be offered, by entities that offer proprietary or non-
proprietary data. Third, the proposed fee will be constrained by 
competition among Distributors and third parties for subscribers.
Competition for Order Flow
    Fees related to Nasdaq Basic are constrained by competition among 
exchanges and other entities seeking to attract order flow. Order flow 
is the ``life blood'' of the exchanges. Broker-dealers currently have 
numerous alternative venues for their order flow, including thirteen 
self-regulatory organization (``SRO'') markets, as well as 
internalizing broker-dealers (``BDs'') and various forms of alternative 
trading

[[Page 78892]]

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. The existence of fierce competition for order flow implies a 
high degree of price sensitivity on the part of BDs, which may readily 
reduce costs by directing orders toward the lowest-cost trading venues.
    The level of competition and contestability in the market for order 
flow is demonstrated by the numerous 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. For a variety of 
reasons, competition from new entrants, especially for order execution, 
has increased dramatically over the last decade.
    Each SRO, TRF, ATS, and BD that competes for order flow is 
permitted to produce proprietary data products. Many currently do or 
have announced plans to do so, including NYSE, NYSE Amex, NYSE Arca, 
and BATS. This is because Regulation NMS deregulated the market for 
proprietary data. While BDs had 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. Order routers and market data vendors can facilitate 
production of proprietary data products for single or multiple BDs. The 
potential sources of proprietary products are virtually limitless.
    The markets for order flow and proprietary data are inextricably 
linked: A trading platform cannot generate market information unless it 
receives trade orders. As a result, the competition for order flow 
constrains the prices that platforms can charge for proprietary data 
products. Firms make decisions on how much and what types of data to 
consume based on the total cost of interacting with Nasdaq and other 
exchanges. Data fees are but one factor in a total platform analysis. 
If the cost of the product exceeds its expected value, the broker-
dealer will choose not to buy it. A supracompetitive increase in the 
fees charged for either transactions or proprietary data has the 
potential to impair revenues from both products. In this manner, the 
competition for order flow will constrain prices for proprietary data 
products, including charges relating to Nasdaq Basic.
Substitute Products
    The price of data derived from Nasdaq Basic is constrained by the 
existence of multiple substitutes offered by numerous entities, 
including both proprietary data offered by other SROs or other 
entities, and non-proprietary data disseminated by Nasdaq in its 
capacity as a Securities Information Processor (``SIP'') for the 
national market system plan governing securities listed on Nasdaq as a 
national securities exchange (``Nasdaq UTP Plan'').
    The information provided through Nasdaq Basic is a subset of the 
best bid and offer and last sale data provided by the SIP. The ``core'' 
data disseminated by the SIP consists of best-price quotations and last 
sale information from all markets in U.S.-listed equities; Nasdaq Basic 
provides best bid and offer and last sale information for all U.S. 
exchange-listed stocks based on trade reports from the Nasdaq Market 
Center and the FINRA/Nasdaq Trade Reporting Facility. Many customers 
that purchase SIP data do not also purchase Nasdaq Basic because they 
are substitutes; moreover, in cases where customers buy both products, 
they may shift the extent to which they purchase one or the other based 
on price changes. The SIP constrains the price of Nasdaq Basic because 
no purchaser would pay an excessive price for Nasdaq Basic when 
substitute data is also available from the SIP.
    Proprietary data sold by other exchanges also constrain the price 
of Nasdaq Basic. NYSE and BATS, like Nasdaq, sell proprietary non-core 
data that include best bid and offer and last sale data. Customers do 
not typically purchase proprietary best bid and offer and last sale 
data from multiple exchanges. Other proprietary data products constrain 
the price of Nasdaq Basic because no customer would pay an excessive 
price for Nasdaq Basic when substitute data is available from other 
proprietary sources. The effectiveness of competition in constraining 
prices for Nasdaq Basic is demonstrated by the fact that the fee to 
distribute data derived from Nasdaq Basic to non-professional 
subscribers has remained unchanged since July 29, 2011.\14\
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    \14\ See Securities Exchange Act Release No. 64994 (July 29, 
2011), 76 FR 47621 (August 5, 2011) (SR-NASDAQ-2011-091).
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Competitive Market Structure
    The fee for making Derived Data available on a Hosted Display 
Solution is also constrained by competition among Distributors and 
third-party firms placing their brand names on Hosted Display 
Solutions. Distributors must compete for customers. Firms placing their 
brand on Hosted Display Solutions must compete for subscribers. If the 
price of Hosted Display Solutions were to exceed competitive levels, 
thereby placing Distributors and third party firms at a competitive 
disadvantage relative to firms that did not purchase Nasdaq products, 
Distributors and the third party firms would take their business 
elsewhere. There are no legal, regulatory, or other requirements 
restricting their ability to do so.
    In summary, market forces constrain the proposed fee through 
competition for order flow, competition from substitute data products, 
and in the competition among Distributors and third party for 
subscribers. For these reasons, the Exchange has provided a substantial 
basis demonstrating that the fee is equitable, fair, reasonable, and 
not unreasonably discriminatory, and therefore consistent with and in 
furtherance of the purposes of the Exchange Act.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\15\
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    \15\ 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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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

[[Page 78893]]

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-2016-144 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-2016-144. 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-2016-144 and should 
be submitted on or before November 30, 2016.

    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. 2016-27022 Filed 11-8-16; 8:45 am]
 BILLING CODE 8011-01-P


