
[Federal Register Volume 81, Number 244 (Tuesday, December 20, 2016)]
[Notices]
[Pages 92935-92937]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-30561]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79556; File No. SR-NASDAQ-2016-167]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify Distributor Fees for ITTO and BONO Data Feeds

December 14, 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 December 2, 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 Chapter XV of the Options Rules for 
the Nasdaq Stock Market, entitled ``Options Pricing,'' at Section 4, 
which governs Nasdaq Options Market (``NOM'') data distributor fees. 
Specifically, the Exchange proposes to separate the distributor fees 
for the ITCH \3\ to Trade Options (``ITTO'') and Best of Nasdaq Options 
(``BONO'') data feeds, which are now charged as a single fee, into two 
separate fees, and conforming language to clarify that there will be no 
change to the Monthly Non-Display Enterprise License for ITTO and BONO. 
The proposal is described further below.
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    \3\ ITCH is a direct data feed interface for NOM.
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    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 separate the 
distributor fees for the ITTO and BONO data feeds, which are now 
charged together as a single fee, into two separate fees.
    ITTO and BONO are proprietary data feeds designed to facilitate 
trading in options markets. ITTO provides in-depth quote and order 
information, last sale information, and Net Order Imbalance (``NOI'') 
data for NOM. BONO provides top-of-market data for NOM, including best 
bid and offer and last sale information. The information provided in 
BONO can be derived from ITTO. Customers typically purchase either ITTO 
or BONO, but not both.
    Nasdaq currently charges a monthly distributor fee of $1,500 for 
the internal distribution of either ITTO or BONO or both, and a monthly 
external distributor fee of $2,000 for the external distribution of 
either or both feeds. Nasdaq also offers an enterprise license for BONO 
and ITTO for a monthly fee of $10,000.
Proposed Changes
    The Exchange proposes to separate the internal and external 
distributor fees for ITTO and BONO. After the proposed changes take 
effect, a firm that distributes either ITTO or BONO, but not both, will 
be charged the current fee. A firm that elects to distribute both ITTO 
and BONO, however, will be charged a fee for the distribution of ITTO 
and a separate fee for the distribution of BONO. The proposal will not 
affect the other fees associated with ITTO and BONO: the monthly 
external and internal per user fees and the monthly enterprise license 
fee will remain the same.
    The proposed fee change is reasonable and necessary because of the 
increase in the value of ITTO and BONO to customers resulting from the 
growth in NOM listings and recent infrastructure upgrades. NOM listings 
have increased from 663 in June of 2011 to over 2,800 today--over a 300 
percent increase--while NOM's market share has jumped more than 250 
percent between July of 2011 and November of 2016, according to data 
from the Options Clearing Corporation. In addition, in August of 2016, 
NOM commenced a market-wide technology refresh for several options 
systems, including ITTO and BONO, to provide a more efficient and 
robust infrastructure for options trading. The increase in the value of 
ITTO and BONO to customers generated by the growth in NOM and 
infrastructure investments, together with Nasdaq's reasonable objective 
to recoup costs associated with the growth of NOM and infrastructure 
investments, justify the proposed price increase.
    The impact of the proposed change on firms that use BONO and ITTO 
will be minimal. Because BONO data is a subset of ITTO, most firms buy 
either ITTO or BONO, but not both. To the extent that firms use both 
BONO and ITTO, the higher fee is reasonable in light of the higher 
demands placed on Nasdaq's infrastructure by those firms.
    The proposed changes do not affect the enterprise license fee for 
BONO and ITTO. The Nasdaq Options Rules, Chapter XV, Section 4(a), 
currently present the Monthly Enterprise License (Non-Display) Fee of 
$10,000 in the same chart that sets forth the distributor fees for ITTO 
and BONO. To avoid implying that the enterprise license fee for ITTO 
and BONO will be separated as well, the Exchange proposes taking the 
enterprise license fee out of that chart, and placing it in a separate 
paragraph under Section 4(a).
    The new paragraph will not change current fees: the $10,000 per 
month enterprise license fee will permit the distribution of BONO and 
ITTO as provided in Section 4(c), and the fee will be in addition to 
the monthly distributor fees set forth in Section 4(a). This is 
consistent with the current rule and practice.
    The ITTO and BONO internal and external distributor fees are 
entirely optional in that they apply only to firms that opt to 
distribute ITTO and BONO. The proposed changes do not impact or raise 
the cost of any other Nasdaq product.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b)

[[Page 92936]]

of the Act,\4\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act,\5\ 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 any facility, and is 
not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
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    \4\ 15 U.S.C. 78f(b).
    \5\ 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.'' \6\
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    \6\ 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 \7\ 
(``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.\8\ 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.'' \9\
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    \7\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \8\ See NetCoalition, at 534--535.
    \9\ 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' . . . .'' \10\ Although the court and 
the SEC were discussing the cash equities markets, the Exchange 
believes that these views apply with equal force to the options 
markets.
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    \10\ 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 proposed separation of distributor 
fees for the ITTO and BONO data feeds 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 change in fees is reasonable and 
necessary to reflect the growing value of these products to customers 
and to offset the cost of systems upgrades and greater data demands 
resulting from growing NOM listings.
    The Exchange believes that the proposed changes are reasonable and 
will benefit the investing public by supporting the distribution of 
these products and encouraging investment in infrastructure. Moreover, 
the fees for ITTO and BONO, like all proprietary data fees, are 
constrained by the Exchange's need to compete for order flow, and are 
subject to competition from other products and among distributors of 
ITTO and BONO data for customers.
    The Exchange believes that the proposed change in fees 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. The proposed changes establish 
separate monthly internal and external distributor fees for BONO and 
ITTO, which are justified by the increasing value of the product and 
the greater data demands created by growing NOM listings and a 
technology refresh for the options market. 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.
    Specifically, market forces constrain fees for ITTO and BONO in 
three respects. First, all fees related to ITTO and BONO are 
constrained by competition among exchanges and other entities 
attracting order flow. Firms make decisions regarding 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, prices for ITTO and BONO are constrained by the 
existence of substitutes that are offered, or may be offered, by other 
entities. Third, competition among options market data distributors 
will further constrain the cost of ITTO and BONO.
Competition for Order Flow
    Fees related to ITTO and BONO are constrained by competition among 
exchanges and other entities seeking to attract order flow. Order flow 
is the ``life blood'' of the exchanges. For a variety of reasons, 
competition from new entrants, especially for order execution, has 
increased dramatically over the last decade, as demonstrated by the 
proliferation of new options exchanges such as ISE Mercury, BATS EDGX, 
ISE Gemini and MIAX Options within the last four years. Each options 
exchange is permitted to produce proprietary data products.
    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.
Substitute Products
    The price of depth-of-book data 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 the Options Price Reporting Authority, 
LLC (``OPRA''). OPRA is a securities information processor that 
disseminates last sale reports and quotations, as well as the number of 
options contracts traded, open interest and end-of-day summaries. As 
noted above, ITTO provides in-depth quote and order information, last 
sale information, and NOI data, while BONO provides best bid and offer 
and last sale information.

[[Page 92937]]

Many customers that obtain information from OPRA do not also purchase 
ITTO and BONO, but in cases where customers buy both products, they may 
shift the extent to which they purchase one or the other based on price 
changes. OPRA constrains the price of ITTO and BONO because no 
purchaser would pay an excessive price for these products when similar 
data is also available from OPRA. It is not necessary that products be 
identical in order to be reasonable substitutes for each other.
    Proprietary data sold by other exchanges also constrain the price 
of ITTO and BONO. NYSE, BATS and CBOE, like Nasdaq, sell proprietary 
data for options markets. Other proprietary data products constrain the 
price of ITTO and BONO because no customer would pay an excessive price 
for these products when substitute data is available from other 
proprietary sources.
Competition Among Distributors
    Distributors provide another form of price discipline for 
proprietary data products because they control the primary means of 
access to users. Distributors are in competition for users, and can 
simply refuse to purchase any proprietary data product that fails to 
provide sufficient value for the price. Nasdaq and other producers of 
proprietary data products must understand and respond to the needs of 
distributors to market such products successfully.
    In summary, market forces constrain the price of depth-of-book data 
such as ITTO and BONO through competition for order flow, competition 
from similar products, and in the competition among distributors for 
customers. 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.\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: (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 
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-2016-167 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-2016-167. 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-2016-167, and should 
be submitted on or before January 10, 2017.

    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. 2016-30561 Filed 12-19-16; 8:45 am]
 BILLING CODE 8011-01-P


