
[Federal Register Volume 81, Number 248 (Tuesday, December 27, 2016)]
[Notices]
[Pages 95213-95216]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31109]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79617; File No. SR-NASDAQ-2016-168]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend the Exchange Data Fees at Rule 7052

December 20, 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 12, 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 the Exchange's data fees at Rule 
7052 to replace the current $500 per month fee for both internal and 
external distribution of short sale data with two separate fees: (1) A 
$750 monthly fee for the distribution of short sale data to internal 
users, and (2) a $1,250 monthly fee for the distribution of short sale 
data to external users, as described further below.

[[Page 95214]]

    While these amendments are effective upon filing, the Exchange has 
designated the proposed amendments to be operative on January 1, 2017.
    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 replace the current 
$500 per month fee for both internal and external distribution of short 
sale data with two separate fees: (1) A $750 monthly fee for the 
distribution of short sale data to internal users, and (2) a $1,250 
monthly fee for the distribution of short sale data to external users.
Daily and Monthly Short Sale Files
    Nasdaq distributes two types of short sale data: (1) Daily Short 
Sale Volume files, and (2) Monthly Short Sale Transaction files.
    The Daily Short Sale Volume files reflect the aggregate number of 
shares executed on the Nasdaq market during regular trading hours on a 
daily basis. At the security level, these files show the volume for 
executed short sales and the total trading volume for the Nasdaq 
market. The files include data for Nasdaq, NYSE and regional exchange-
listed securities.
    The Monthly Short Sale Transaction files provide a trade-by-trade 
record of all short sales executed on the Nasdaq execution system and 
reported to a consolidated tape in Nasdaq, NYSE and regional exchange-
listed securities. The records include the transaction time, price and 
number of shares for every short sale transaction. The files are 
provided on a monthly basis, separated into daily files. Historical 
files are available from August 2005.
    The current fee for internal and external distribution of the Daily 
Short Sale Volume and Monthly Short Sale Transaction files is $500 per 
month.
Proposed Changes
    The Exchange proposes to replace the current $500 per month fee for 
both internal and external distribution of short sale data with two 
separate fees: (1) a $750 monthly fee for the distribution of short 
sale data to internal users, and (2) a $1,250 monthly fee for the 
distribution of short sale data to external users.
    The purpose of the proposed rule change is to create a pricing 
system that better reflects the value of the product to our customers. 
External Distributors, unlike Internal Distributors, are typically 
compensated for the distribution of short sale data through 
subscription fees or other mechanisms. Some External Distributors 
incorporate short sale data into their own proprietary products, which 
they sell to downstream users. These distributors may not charge 
separately for the Nasdaq short sale data, but nevertheless gain value 
from the data by incorporating it into their product. The price 
increase for External Distributors reflects the additional value these 
distributors gain from the product.
    In addition, the value of the short sale data has increased over 
time for all distributors that have purchased short sale data over a 
long period of time. Short sale data is frequently used to develop 
trading models, conduct analyses and assess long-term risks. As time 
passes, long-term distributors are able to accrue a larger database, 
rendering the data more valuable. The proposed price increases reflect 
the growing value of the data over time.
    Purchases of the Daily Short Sale Volume and Monthly Short Sale 
Transaction files are entirely optional. These reports are not 
necessary to execute trades, but rather are typically used to develop 
trading models, conduct analyses and assess long-term risks. This type 
of activity is entirely at the discretion of the subscriber.
    The proposed changes do not impact or raise the cost of any other 
Nasdaq product. Short sale reports from the Nasdaq BX and PSX Exchanges 
will continue to be provided free of charge, as they have been since 
2010.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\3\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act,\4\ 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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    \3\ 15 U.S.C. 78f(b).
    \4\ 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.'' \5\
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    \5\ 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 \6\ 
(``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.\7\ 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.'' \8\
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    \6\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \7\ See NetCoalition, at 534-535.
    \8\ 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'. . . .'' \9\
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    \9\ 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 proposal to replace the current fee 
of $500 per month for the internal and

[[Page 95215]]

external distribution of short sale data with a monthly fee of $750 per 
month for the distribution of short sale data to internal users, and a 
monthly fee of $1,250 for the distribution of short sale data to 
external users, 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, it is reasonable 
for external distributors to bear a higher proportion of the cost 
because they receive greater value from the product, and it is 
reasonable for Nasdaq to increase a fee for a product that has become 
more valuable over time. Moreover, short sale data fees, 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, such as the short sale data products produced by NYSE and 
BATS.
    The Exchange believes that the proposed change 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 fees replace the current fee of $500 per month for the 
internal and external distribution of short sale data with a monthly 
fee of $750 per month for distribution to internal users, and a monthly 
fee of $1,250 for distribution to external users. 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 Daily Short Sale 
Volume files and Monthly Short Sale Transaction files in three 
respects. First, all fees related to short sale data are constrained by 
competition among exchanges and other entities attracting order flow. 
Firms make decisions regarding short sale data 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, prices for short sale data are 
constrained by the sale of short sale data by other exchanges. Third, 
competition among Distributors will constrain the cost of short sale 
data.
Competition for Order Flow
    Fees related to short sale data 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 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. 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, 
BATS, and IEX. 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.
Substitute Products
    The price of short sale data from Nasdaq is constrained by the 
availability of short sale data from other exchanges, such as NYSE and 
BATS. Short sale data is used to support various analytical tools, and 
Distributors would not pay an excessive price for such data when 
similar information is available from other sources.
Competition Among Distributors
    Distributors provide another form of price discipline for 
proprietary data products. 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. If the price of short 
sale data were set above competitive levels, Distributors purchasing 
such data would be at a disadvantage relative to their competitors, and 
would therefore either purchase a substitute or

[[Page 95216]]

forego the product altogether. This competition for customers provides 
another check on the price for short sale data.
    In summary, market forces constrain the price of short sale data 
through competition for order flow, competition from substitute 
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.\10\
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    \10\ 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-2016-168 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-2016-168. 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-2016-168 and should 
be submitted on or before January 17, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-31109 Filed 12-23-16; 8:45 am]
 BILLING CODE 8011-01-P


