[Federal Register Volume 83, Number 193 (Thursday, October 4, 2018)]
[Notices]
[Pages 50127-50130]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-21584]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-84317; File No. SR-NASDAQ-2018-075]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Rules 7039, 7047, 7049, 7055, and 7061 To Update the Definition 
of the Term FINRA/Nasdaq Trade Reporting Facility

September 28, 2018.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 19, 2018, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II 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 Rules \3\ 7039, 7047, 7049, 7055, 
and 7061 to update the definition of the term ``FINRA/Nasdaq Trade 
Reporting Facility (`TRF')'' for Nasdaq Basic, Nasdaq Last Sale 
(``NLS''), Nasdaq InterACT, the Short Sale Monitor and the Limit 
Locator to reflect approval of a second FINRA/Nasdaq TRF in Chicago, as 
described in further detail below.
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    \3\ References to rules are to Nasdaq rules, unless otherwise 
noted.
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    The text of the proposed rule change is available on the Exchange's 
website 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

[[Page 50128]]

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 Exchange proposes to update the definition of the term ``FINRA/
Nasdaq Trade Reporting Facility (`TRF')'' for Nasdaq Basic, NLS, Nasdaq 
InterACT, the Short Sale Monitor and the Limit Locator to reflect 
approval of a second FINRA/Nasdaq TRF in Chicago.
    The Commission has approved a proposed rule change by FINRA to 
establish a second FINRA/Nasdaq TRF in Chicago as consistent with the 
requirements of the Act and the rules and regulations thereunder 
applicable to a national securities association.\4\ Consistent with the 
findings of the Commission, the Exchange proposes to define the term 
``FINRA/Nasdaq Trade Reporting Facility'' in Rules 7039 (NLS and NLS 
Plus Data Feeds), 7047 (Nasdaq Basic), 7049 (Nasdaq InterACT), 7055 
(Short Sale Monitor) and 7061 (Limit Locator) as the ``FINRA/Nasdaq 
Trade Reporting Facility (`TRF') Carteret and the FINRA/Nasdaq TRF 
Chicago.'' The Exchange anticipates that the FINRA/Nasdaq TRF Chicago 
will begin to accept trade reports for Reg NMS securities on September 
24, 2018, and the Exchange will begin to distribute such data in the 
NLS and NLS Plus Data Feeds, Nasdaq Basic, Nasdaq InterACT, the Short 
Sale Monitor, and the Limit Locator on that same date. The Exchange 
expects to retire existing versions of these products, which do not 
include reports from the FINRA/Nasdaq TRF Chicago, on December 31, 
2018.\5\
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    \4\ See Securities Exchange Act Release No. 83559 (June 29, 
2018), 83 FR 31589 (July 6, 2018) (SR-FINRA-2018-013) (approving the 
FINRA/Nasdaq TRF Chicago); see also Securities Exchange Act Release 
No. 83082 (April 20, 2018), 83 FR 18379 (April 26, 2018) (SR-FINRA-
2018-013) (proposing the FINRA/Nasdaq TRF Chicago).
    \5\ The new data feeds for NLS, NLS Plus, Nasdaq Basic, the 
Short Sale Monitor, and the Limit Locator will include coding that 
identifies the market system that generated the trade report 
message, which will enable the recipient to distinguish between 
information from the FINRA/Nasdaq TRF Chicago and the FINRA/Nasdaq 
TRF Carteret. To utilize that coding, Distributors will be required 
to make certain technical modifications to their software. Nasdaq is 
working with Distributors to ensure that all such modifications will 
be complete before the FINRA/Nasdaq TRF Chicago commences 
operations, but, as a courtesy to any Distributor that has not made 
such modifications before such operations commence, Nasdaq will 
continue to make legacy feeds available until December 31, 2018.
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    This is a conforming change to the FINRA filing that will not 
change any fee or charge by the Exchange.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\6\ in general, and furthers the objectives of Section 
6(b)(5) of the Act,\7\ in particular, in that it fosters cooperation 
and coordination with persons engaged in regulating and processing 
information with respect to securities, facilitates transactions in 
securities, protects investors and the public interest, and does not 
unfairly discriminate between customers, issuers, brokers or dealers. 
As described above, the Exchange proposes to update the definition of 
the FINRA/Nasdaq TRF for Nasdaq Basic, NLS, Nasdaq InterACT, the Short 
Sale Monitor and the Limit Locator to reflect approval of a second 
FINRA/Nasdaq TRF in Chicago. Updating the definition of ``FINRA/Nasdaq 
TRF'' to mean ``the FINRA/Nasdaq TRF Carteret and the FINRA/Nasdaq TRF 
Chicago'' fosters cooperation with persons engaged in regulating and 
processing securities information, facilitates transactions in 
securities and protects investors and the public interest by conforming 
the Exchange's rule book to FINRA's, and by reflecting the findings of 
the Commission that creation of the Chicago facility is consistent with 
the requirements of the Act and the rules and regulations thereunder 
applicable to a national securities association. The proposal does not 
unfairly discriminate between customers, issuers, brokers or dealers 
because all customers, issuers, brokers and dealers will receive the 
benefit of a Nasdaq rule book that conforms to FINRA's rule book and 
decisions by the Commission.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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    In adopting Regulation NMS, the Commission granted self-regulatory 
organizations (``SROs'') and broker-dealers increased authority and 
flexibility to offer new and unique market data to the public. It was 
believed that this authority would expand the amount of data available 
to consumers, and also spur innovation and competition for the 
provision of market data. The Commission concluded that Regulation 
NMS--by deregulating the market in proprietary data--would itself 
further the Act's goals of facilitating efficiency and competition:

    [E]fficiency is promoted when broker-dealers who do not need the 
data beyond the prices, sizes, market center identifications of the 
NBBO and consolidated last sale information are not required to 
receive (and pay for) such data. The Commission also believes that 
efficiency is promoted when broker-dealers may choose to receive 
(and pay for) additional market data based on their own internal 
analysis of the need for such data.\8\
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    \8\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (``Regulation NMS Adopting 
Release'').

    The Commission was speaking to the question of whether broker-
dealers should be subject to a regulatory requirement to purchase data, 
such as depth-of-book data, that is in excess of the data provided 
through the consolidated tape feeds, and the Commission concluded that 
the choice should be left to them. Accordingly, Regulation NMS removed 
unnecessary regulatory restrictions on the ability of exchanges to sell 
their own data, thereby advancing the goals of the Act and the 
principles reflected in its legislative history. If the free market 
should determine whether proprietary data is sold to broker-dealers at 
all, it follows that the price at which such data is sold should be set 
by the market as well.
    The market data products affected by this proposal are all 
voluntary products for which market participants can readily find 
substitutes. Accordingly, Nasdaq is constrained from pricing these 
products in a manner that would be inequitable or unfairly 
discriminatory. Moreover, the fees for these products, like all 
proprietary data fees, are constrained by the Exchange's need to 
compete for order flow.

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 change--which will 
simply define FINRA/Nasdaq TRF as it is used in the context of several 
market data products to reflect approval of a second FINRA/Nasdaq TRF 
in Chicago--does not impose a burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act, but rather 
provides both current and potential customers more precise description 
of the information contained in certain Exchange products without 
changing any fee or charge by the Exchange.
    The market for data products is extremely competitive and firms may 
freely choose alternative venues and data vendors based on the 
aggregate fees assessed, the data offered, and the value provided. 
Numerous exchanges compete with each other for listings, trades, and 
market data itself, providing virtually limitless opportunities for 
entrepreneurs

[[Page 50129]]

who wish to produce and distribute their own market data. This 
proprietary data is produced by each individual exchange, as well as 
other entities, in a vigorously competitive market.
    Transaction execution and proprietary data products are 
complementary in that market data is both an input and a byproduct of 
the execution service. In fact, market data and trade execution are a 
paradigmatic example of joint products with joint costs. The decision 
whether and on which platform to post an order will depend on the 
attributes of the platform where the order can be posted, including the 
execution fees, data quality and price, and distribution of its data 
products. Without trade executions, exchange data products cannot 
exist. Moreover, data products are valuable to many end users only 
insofar as they provide information that end users expect will assist 
them or their customers in making trading decisions.
    The costs of producing market data include not only the costs of 
the data distribution infrastructure, but also the costs of designing, 
maintaining, and operating the exchange's transaction execution 
platform, the cost of implementing cybersecurity to protect the data 
from external threats and the cost of regulating the exchange to ensure 
its fair operation and maintain investor confidence. The total return 
that a trading platform earns reflects the revenues it receives from 
both products and the joint costs it incurs.
    Moreover, the operation of the Exchange is characterized by high 
fixed costs and low marginal costs. This cost structure is common in 
content and content distribution industries such as software, where 
developing new software typically requires a large initial investment 
(and continuing large investments to upgrade the software), but once 
the software is developed, the incremental cost of providing that 
software to an additional user is typically small, or even zero (e.g., 
if the software can be downloaded over the internet after being 
purchased).\9\
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    \9\ See William J. Baumol and Daniel G. Swanson, ``The New 
Economy and Ubiquitous Competitive Price Discrimination: Identifying 
Defensible Criteria of Market Power,'' Antitrust Law Journal, Vol. 
70, No. 3 (2003).
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    In Nasdaq's case, it is costly to build and maintain a trading 
platform, but the incremental cost of trading each additional share on 
an existing platform, or distributing an additional instance of data, 
is very low. Market information and executions are each produced 
jointly (in the sense that the activities of trading and placing orders 
are the source of the information that is distributed) and each are 
subject to significant scale economies. In such cases, marginal cost 
pricing is not feasible because if all sales were priced at the margin, 
Nasdaq would be unable to defray its platform costs of providing the 
joint products. Similarly, data products cannot make use of TRF trade 
reports without the raw material of the trade reports themselves, and 
therefore necessitate the costs of operating, regulating,\10\ and 
maintaining a trade reporting system, costs that must be covered 
through the fees charged for use of the facility and sales of 
associated data.
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    \10\ It should be noted that the costs of operating the FINRA/
Nasdaq TRF borne by Nasdaq include regulatory charges paid by Nasdaq 
to FINRA.
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    An exchange's broker-dealer customers view the costs of transaction 
executions and of data as a unified cost of doing business with the 
exchange. A broker-dealer will disfavor a particular exchange if the 
expected revenues from executing trades on the exchange do not exceed 
net transaction execution costs and the cost of data that the broker-
dealer chooses to buy to support its trading decisions (or those of its 
customers). The choice of data products is, in turn, a product of the 
value of the products in making profitable trading decisions. If the 
cost of the product exceeds its expected value, the broker-dealer will 
choose not to buy it. Moreover, as a broker-dealer chooses to direct 
fewer orders to a particular exchange, the value of the product to that 
broker-dealer decreases, for two reasons. First, the product will 
contain less information, because executions of the broker-dealer's 
trading activity will not be reflected in it. Second, and perhaps more 
important, the product will be less valuable to that broker-dealer 
because it does not provide information about the venue to which it is 
directing its orders. Data from the competing venue to which the 
broker-dealer is directing more orders will become correspondingly more 
valuable.
    Similarly, vendors provide price discipline for proprietary data 
products because they control the primary means of access to end users. 
Vendors impose price restraints based upon their business models. For 
example, vendors that assess a surcharge on data they sell may refuse 
to offer proprietary products that end users will not purchase in 
sufficient numbers. Internet portals impose a discipline by providing 
only data that will enable them to attract ``eyeballs'' that contribute 
to their advertising revenue. Retail broker-dealers offer their retail 
customers proprietary data only if it promotes trading and generates 
sufficient commission revenue. Although the business models may differ, 
these vendors' pricing discipline is the same: They can simply refuse 
to purchase any proprietary data product that fails to provide 
sufficient value. Exchanges, TRFs, and other producers of proprietary 
data products must understand and respond to these varying business 
models and pricing disciplines in order to market proprietary data 
products successfully. Moreover, Nasdaq believes that market data 
products can enhance order flow to Nasdaq by providing more widespread 
distribution of information about transactions in real time, thereby 
encouraging wider participation in the market by investors with access 
to the internet or television. Conversely, the value of such products 
to Distributors and investors decreases if order flow falls, because 
the products contain less content.
    Competition among trading platforms can be expected to constrain 
the aggregate return each platform earns from the sale of its joint 
products, but different platforms may choose from a range of possible, 
and equally reasonable, pricing strategies as the means of recovering 
total costs. Nasdaq pays rebates to attract orders, charges relatively 
low prices for market information and charges relatively high prices 
for accessing posted liquidity. Other platforms may choose a strategy 
of paying lower liquidity rebates to attract orders, setting relatively 
low prices for accessing posted liquidity, and setting relatively high 
prices for market information. Still others may provide most data free 
of charge and rely exclusively on transaction fees to recover their 
costs. Finally, some platforms may incentivize use by providing 
opportunities for equity ownership, which may allow them to charge 
lower direct fees for executions and data.
    In this environment, there is no economic basis for regulating 
maximum prices for one of the joint products in an industry in which 
suppliers face competitive constraints with regard to the joint 
offering. Such regulation is unnecessary because an ``excessive'' price 
for one of the joint products will ultimately have to be reflected in 
lower prices for other products sold by the firm, or otherwise the firm 
will experience a loss in the volume of its sales that will be adverse 
to its overall profitability. In other words, an increase in the price 
of data will ultimately have to be accompanied by a decrease in the

[[Page 50130]]

cost of executions, or the volume of both data and executions will 
fall.\11\
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    \11\ Cf. Ohio v. American Express, No. 16-1454 (S. Ct. June 25, 
2018), https://www.supremecourt.gov/opinions/17pdf/16-1454_5h26.pdf 
(recognizing the need to analyze both sides of a two-sided platform 
market in order to determine its competitiveness).
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    Moreover, the level of competition and contestability in the market 
is evident in the numerous alternative venues that compete for order 
flow, including SRO markets, internalizing broker-dealers 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 the 
FINRA-regulated TRFs compete to attract internalized transaction 
reports. It is common for broker-dealers to further exploit this 
competition by sending their order flow and transaction reports to 
multiple markets, rather than providing them all to a single market. 
Competitive markets for order flow, executions, and transaction reports 
provide pricing discipline for the inputs of proprietary data products. 
The large number of SROs, TRFs, broker-dealers, and ATSs that currently 
produce proprietary data or are currently capable of producing it 
provides further pricing discipline for proprietary data products. Each 
SRO, TRF, ATS, and broker-dealer is currently permitted to produce 
proprietary data products, and many currently do or have announced 
plans to do so, including Nasdaq, NYSE, NYSE American, NYSE Arca, IEX, 
and BATS/Direct Edge.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). As required under Rule 19b-
4(f)(6)(iii), the Exchange provided the Commission with written 
notice of its intent to file the proposed rule change, along with a 
brief description and the text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change, or such shorter time as designated by the Commission.
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    A proposed rule change filed pursuant to Rule 19b-4(f)(6) under the 
Act \14\ normally does not become operative for 30 days after the date 
of its filing. However, Rule 19b-4(f)(6)(iii) \15\ permits the 
Commission to designate a shorter time if such action is consistent 
with the protection of investors and the public interest. The Exchange 
has requested that the Commission waive the 30-day operative delay so 
that the proposed rule change may become operative upon filing. Waiver 
of the operative delay would allow the Exchange to reflect in its rules 
that there are now two Nasdaq TRFs to which trades can be reported and 
would provide customers with more precise information about the data 
contained within certain Exchange products. For these reasons, the 
Commission believes that waiver of the 30-day operative delay is 
consistent with the protection of investors and the public interest. 
Accordingly, the Commission hereby waives the operative delay and 
designates the proposed rule change operative upon filing.\16\
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    \14\ 17 CFR 240.19b-4(f)(6).
    \15\ 17 CFR 240.19b-4(f)(6)(iii).
    \16\ For purposes only of waiving the 30-day operative delay, 
the Commission also has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule change 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 [email protected]. Please include 
File Number SR-NASDAQ-2018-075 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-NASDAQ-2018-075. 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 website (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 website 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2018-075, and should be submitted 
on or before October 25, 2018.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2018-21584 Filed 10-3-18; 8:45 am]
 BILLING CODE 8011-01-P


