
[Federal Register Volume 81, Number 251 (Friday, December 30, 2016)]
[Notices]
[Pages 96527-96530]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-31681]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79690; File No. SR-BX-2016-073]


Self-Regulatory Organizations; NASDAQ BX, Inc.; Notice of Filing 
and Immediate Effectiveness of Proposed Rule Change to Amend the 
Exchange's Transaction Fees at Rule 7019 (Market Data Distributor Fees)

December 23, 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 20, 2016, NASDAQ BX, Inc. (``BX'' 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the Exchange's transaction fees at 
Rule 7019 (Market Data Distributor Fees) to (i) increase the Monthly 
Internal Distributor Fee from $500 to $750 for BX TotalView, and (ii) 
increase the Monthly External Distributor Fee from $1,250 to $1,500 for 
BX TotalView, as described further below.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaqbx.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 increase the Monthly 
Internal Distributor Fee from $500 to $750 for BX TotalView, and to 
increase the Monthly External Distributor Fee from $1,250 to $1,500 for 
BX TotalView.
    TotalView is a proprietary feed that provides subscribers with full 
depth-of-book data on BX for Nasdaq-listed securities and securities 
not listed on Nasdaq. TotalView allows customers to view all displayed 
quotes and orders attributed to specific market participants at every 
price level on BX, access total displayed anonymous interest at every 
price level on BX, and to see the total size of all displayed quotes 
and orders on BX. TotalView also offers trade data for BX executions 
that occur on BX.
    Customers may access TotalView as either a Distributor, or through 
Direct Access. Rule 7019(b) defines a ``distributor'' of Exchange data 
as ``any entity that receives a feed or data file of Exchange data 
directly from the Exchange or indirectly through another entity and 
then distributes it either internally (within that entity) or 
externally (outside that entity).'' \3\ Rule 7019(c) defines ``Direct 
Access'' as ``a telecommunications interface with the Exchange for 
receiving Exchange data, or receiving an Exchange data feed within the 
Exchange co-location facility, or receiving Exchange data via an 
Extranet access provider or other such provider that is fee-liable 
under 7025.'' \4\
---------------------------------------------------------------------------

    \3\ See Rule 7019(b). The Rule also provides that all 
distributors shall execute an Exchange distributor agreement, and 
states that the Exchange itself is a vendor of its data feed(s) and 
has executed an Exchange distributor agreement and pays the 
distributor charge. Id.
    \4\ See Rule 7019(c).
---------------------------------------------------------------------------

    The Exchange proposed the TotalView fees, among others, in 2009, 
following its acquisition by Nasdaq, Inc. and the resumption of its 
cash equities trading business.\5\ The Exchange proposed that 
Distributors of TotalView would pay a $500 monthly fee to distribute 
the data feed internally (i.e., to employees) and a $1,250 monthly fee 
to distribute to external customers.\6\
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 59307 (January 28, 
2009), 74 FR 6069 (February 4, 2009) (Notice of filing of SR-BX-
2009-005). BX proposed, for the first year of BX's operation, to 
make TotalView available free of charge. Id.
    \6\ Id. The Exchange also proposed that Distributors pay a 
$1,000 monthly fee to receive the data directly from the Exchange, 
since the Exchange incurs costs to support the connection to each 
direct Distributor; indirect Distributors (i.e., those receiving 
data from a direct Distributor) would not pay this charge.
---------------------------------------------------------------------------

    In support of these fees, the Exchange noted that the TotalView fee 
structure is similar to the structure for the TotalView data product 
offered by The NASDAQ Stock Market LLC (``Nasdaq''), but that the 
overall level of fees is lower than for Nasdaq TotalView. The lower fee 
levels for BX TotalView reflected the start-up nature of the Exchange's 
new equities trading platform, and was designed help to attract order 
flow to the Exchange, since, at its inception, the Exchange had zero 
market share and therefore set its fees, including data fees, with a 
view to attracting order flow. Finally, the Exchange noted that the 
alternatives that exist for market participants to determine market 
depth--such as other depth of book products that may be associated with 
markets with more liquidity, or order routing strategies designed to 
ascertain market depth--provided incentives for the Exchange to ensure 
that its fees for BX TotalView were set reasonably.\7\
---------------------------------------------------------------------------

    \7\ Id.
---------------------------------------------------------------------------

    With this proposal, BX proposes to increase the Monthly Internal 
Distributor Fee from $500 to $750 for BX TotalView, and increase the 
Monthly External Distributor Fee from

[[Page 96528]]

$1,250 to $1,500 for BX TotalView. BX is only changing the fee for the 
Monthly Internal and External Distributor Fees. The terms of access for 
TotalView, and the definition of ``Direct Access'' and ``Distributor,'' 
remain the same.
    This fee increase is justified because BX has not increased the 
Distributor fees for TotalView since they were initially proposed in 
2009, although the value of BX TotalView has increased since that time. 
Since 2009, BX's market share for quoting and trading of Nasdaq-listed 
securities and securities not listed on Nasdaq has increased, which 
has, in turn, increased the content and therefore the value of the 
TotalView product. In addition, various technical changes have enhanced 
TotalView by improving the performance and the resiliency of the BX 
matching engine, which, in turn, has improved outbound messaging 
through TotalView, especially during peak times of messaging 
traffic.\8\ BX also notes that the proposed new TotalView fees remain 
consistent with fees for comparable products offered by other 
exchanges. This fee increase therefore reflects the increased value of 
the TotalView product and the comparative cost of other similar 
products.
---------------------------------------------------------------------------

    \8\ Specifically, in 2016, BX split its matching engine into 
four matching engines to improve the handling and execution of 
orders by increasing system resiliency and reduce the impact of 
peaks in messaging traffic. In anticipation of this change, BX 
implemented a series of system upgrades in 2015, including upgrading 
the servers for the BX matching engine, upgrading the matching 
engine to the newest and most efficient version, and upgrading the 
necessary tools to effectively monitor the Nasdaq BX marketplace.
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act,\10\ 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.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

    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.'' \11\
---------------------------------------------------------------------------

    \11\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
---------------------------------------------------------------------------

    Likewise, in NetCoalition v. Securities and Exchange Commission 
\12\ (``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.\13\ 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.'' \14\
---------------------------------------------------------------------------

    \12\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \13\ See NetCoalition, at 534-535.
    \14\ Id. at 537.
---------------------------------------------------------------------------

    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'. . . .'' \15\
---------------------------------------------------------------------------

    \15\ 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)).
---------------------------------------------------------------------------

    More specifically, the SEC recognized the importance of competition 
in setting fees for non-core market data products when approving the 
TotalView fees in 2009.\16\ The SEC noted that TotalView related to the 
distribution of non-core, depth of book market data products, and the 
SEC was therefore able to use a market-based approach in analyzing the 
appropriateness of the fees.\17\ Accordingly, the SEC recognized both 
BX's compelling need to attract order flow from market participants; 
and the availability to market participants of alternatives to 
purchasing BX's depth-of-book order data.\18\ The SEC stated that, 
given the competitive landscape of trading in cash equities, BX must 
compete vigorously for order flow to maintain its share of trading 
volume.\19\ This compelling need to attract order flow imposed 
significant pressure on BX to act reasonably in setting its fees for BX 
market data, particularly given that the market participants that must 
pay such fees often will be the same market participants from whom BX 
must attract order flow. The SEC also noted that, in setting the fees 
for its TotalView data, BX must consider the extent to which market 
participants would choose one or more alternatives instead of 
purchasing the Exchange's data.\20\ The Commission stated that the 
availability of those alternatives, as well as the BX's compelling need 
to attract order flow, imposed significant competitive pressure on the 
BX to act equitably, fairly, and reasonably in setting the terms of its 
proposal.\21\
---------------------------------------------------------------------------

    \16\ See Securities Exchange Act Release No. 59615 (March 20, 
2009), 74 FR 14604 (March 31, 2009) (Order approving SR-BX-2009-
005). Core data is the best-priced quotations and comprehensive 
last-sale reports of all markets that the Commission, pursuant to 
Rule 603(b), requires a central processor to consolidate and 
distribute to the public pursuant to joint-SRO plans. In contrast, 
individual exchanges and other market participants distribute non-
core data voluntarily. Id.
    \17\ Id.
    \18\ Id.
    \19\ Id.
    \20\ Id.
    \21\ Id. In approving the TotalView fees, the Commission also 
did not find a substantial countervailing basis to conclude that the 
proposal nevertheless failed to meet an applicable requirement of 
the Act or the rules thereunder.
---------------------------------------------------------------------------

    The same arguments apply with respect to the proposed fee increase 
here. Although BX is a more mature market than in 2009, competition for 
order flow remains fierce, and some of the market participants that 
purchase TotalView are the same market participants from whom BX must 
attract order flow. Additionally, market participants continue to have 
a range of other market data products that they could purchase as 
alternatives to TotalView. As with the initial TotalView fees, the 
significant competitive pressure with respect to order flow and market 
data products therefore requires BX to act equitably, fairly, and 
reasonably in setting the terms of its proposed TotalView fees.
    The Exchange also believes that the increase in the Monthly 
Internal Distributor Fee from $500 to $750 and the increase in the 
Monthly External Distributor Fee from $1,250 to $1,500 is reasonable 
because these fee increases reflect the current value of the TotalView 
product. TotalView provides comprehensive order and trade information 
for Nasdaq-listed securities and securities not listed on Nasdaq, and 
the value of a product that offers such information increases as BX's 
market share increases. As noted above, when TotalView was initially 
proposed, BX was seeking to resume its cash equities trading business, 
which was reflected in the initial TotalView fees. Given that BX's 
market share in those securities

[[Page 96529]]

has increased since 2009, and given the technical enhancements to 
TotalView since that time, the proposed increase reasonably reflects 
the increased value of TotalView to market participants. The proposed 
fees are also fair and reasonable in that they compare favorably to 
fees charged by other exchanges for comparable products.
    The Exchange believes that these fees are an equitable allocation 
and are not unfairly discriminatory because the proposed fees for 
subscribers are uniform for all subscribers within a particular 
category, e.g., external Distributors will all pay the same Monthly 
External Distributor Fee. The proposal maintains the current 
distinction between internal and external Distributors in that external 
Distributors will continue to be charged a higher amount. Although the 
amount of the fee increase is proportionally greater for internal 
Distributors than external Distributors, the Exchange believes that 
this is equitable and not unfairly discriminatory because the fee 
increase better aligns the value of TotalView for purposes of internal 
distribution to the value of TotalView for purposes of external 
distribution. Under the proposal, the Exchange notes that internal 
Distributors will still pay a fee that is 50% less than external 
Distributors.
    The Exchange also believes that it is equitable and not unfairly 
discriminatory to increase the fee for internal and external 
distribution, and not for Direct Access. Rule 7019 provides that a 
distributor may distribute data either internally (within that entity) 
or externally (outside that entity), whereas a Direct Access subscriber 
is not permitted to distribute TotalView data. To the extent that the 
value of TotalView has increased since 2009 as the BX market has grown, 
the fee increase for internal and external distribution reflects this 
increased value and the fact that Distributors, by definition, have 
more ways than Direct Access subscribers to benefit from this increased 
value, e.g., through distribution.

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 fee levels 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. 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.
    Here, the proposed changes to the charges assessed for internal and 
external Distributors of TotalView do not impose a burden on 
competition because TotalView is completely voluntary and subject to 
extensive competition both from other exchanges and from off-exchange 
venues. As is discussed in greater detail below, competition for order 
flow remains fierce, and some of the market participants that purchase 
TotalView are the same market participants from whom BX must attract 
order flow. Firms make decisions regarding TotalView 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. Additionally, market 
participants continue to have a range of other proprietary market data 
products that they could purchase as alternatives to TotalView. Third, 
competition among Distributors for customers will further constrain the 
cost of TotalView. There is therefore significant competitive pressure 
with respect to order flow and market data products that requires BX to 
act equitably, fairly, and reasonably in setting the terms of its 
proposed TotalView fees.
Competition for Order Flow
    Fees related to TotalView 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 BX 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

[[Page 96530]]

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 
competition from other exchanges, such as NYSE and BATS, which sell 
proprietary depth-of-book data. While a small number of highly 
sophisticated traders purchase depth-of-book products from multiple 
exchanges, most customers do not. Because most customers would not pay 
an excessive price for TotalView when substitute data is available from 
other proprietary sources, the Exchange is constrained in its pricing 
decisions.
Competition Among Distributors
    Competition among Distributors provides another form of price 
discipline for proprietary data products. If the price of TotalView 
were set above competitive levels, Distributors purchasing TotalView 
would be at a disadvantage relative to their competitors, and would 
therefore either purchase a substitute or forego the product 
altogether.
    In summary, market forces constrain the price of depth-of-book data 
such as TotalView through competition for order flow, competition from 
substitute products, and in the competition among vendors 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.\22\
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

    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-BX-2016-073 on the subject line.

Paper Comments

     Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-BX-2016-073. 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-BX-2016-073, and should be 
submitted on or before January 20, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
---------------------------------------------------------------------------

    \23\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-31681 Filed 12-29-16; 8:45 am]
 BILLING CODE 8011-01-P


