80 FR 47968 - Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Regarding NASDAQ Last Sale Plus

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 80, Issue 153 (August 10, 2015)

Page Range		47968-47974
FR Document		2015-19537

Federal Register, Volume 80 Issue 153 (Monday, August 10, 2015)

[Federal Register Volume 80, Number 153 (Monday, August 10, 2015)]
[Notices]
[Pages 47968-47974]
From the Federal Register Online [www.thefederalregister.org]
[FR Doc No: 2015-19537]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-75600; File No. SR-NASDAQ-2015-088]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change
Regarding NASDAQ Last Sale Plus

August 4, 2015.
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 July 24, 2015, The NASDAQ Stock Market LLC (``NASDAQ'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III, below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange proposes to amend Rule 7039 (NASDAQ Last Sale and
NASDAQ Last Sale Plus Data Feeds) with language indicating the fees for
NASDAQ Last Sale Plus (``NLS Plus''), a comprehensive data feed offered
by NASDAQ OMX Information LLC.\3\
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\3\ NASDAQ OMX Information LLC is a subsidiary of The NASDAQ OMX
Group, Inc. (``NASDAQ OMX'').
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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 this proposal is to amend Rule 7039 with language
indicating the fees for NLS Plus. NLS Plus allows data distributors to
access the three last sale products offered by each of NASDAQ OMX's
three U.S. equity markets.\4\ Thus, in offering NLS Plus, NASDAQ OMX
Information LLC is acting as a redistributor of last sale products
already offered by NASDAQ,

[[Page 47969]]

BX, and PSX and volume information provided by the securities
information processors for Tape A, B, and C.\5\ This proposal is being
filed by the Exchange to indicate the fees for the NLS Plus data feed
offering and in light of the recent approval order regarding NLS
Plus.\6\
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\4\ The NASDAQ OMX U.S. equity markets include The NASDAQ Stock
Market (``NASDAQ''), NASDAQ OMX BX (``BX''), and NASDAQ OMX PSX
(``PSX'') (together known as the ``NASDAQ OMX equity markets''). PSX
and BX will shortly file companion proposals regarding data feeds
similar to NLS Plus. NASDAQ's last sale product, NASDAQ Last Sale,
includes last sale information from the FINRA/NASDAQ Trade Reporting
Facility (``FINRA/NASDAQ TRF''), which is jointly operated by NASDAQ
and the Financial Industry Regulatory Authority (``FINRA''). See
Securities Exchange Act Release No. 71350 (January 17, 2014), 79 FR
4218 (January 24, 2014) (SR-FINRA-2014-002). For proposed rule
changes submitted with respect to NASDAQ Last Sale, BX Last Sale,
and PSX Last Sale, see, e.g., Securities Exchange Act Release Nos.
57965 (June 16, 2008), 73 FR 35178, (June 20, 2008) (SR-NASDAQ-2006-
060) (order approving NASDAQ Last Sale data feeds pilot); 61112
(December 4, 2009), 74 FR 65569, (December 10, 2009) (SR-BX-2009-
077) (notice of filing and immediate effectiveness regarding BX Last
Sale data feeds); and 62876 (September 9, 2010), 75 FR 56624,
(September 16, 2010) (SR-Phlx-2010-120) (notice of filing and
immediate effectiveness regarding PSX Last Sale data feeds).
\5\ Tape A and Tape B securities are disseminated pursuant to
the Security Industry Automation Corporation's (``SIAC'')
Consolidated Tape Association Plan/Consolidated Quotation System, or
CTA/CQS (``CTA''). Tape C securities are disseminated pursuant to
the NASDAQ Unlisted Trading Privileges (``UTP'') Plan.
\6\ See Securities Exchange Act Release No. 75257 (June 22,
2015), 80 FR 36862 (June 26, 2015) (SR-NASDAQ-2015-055) (order
approving proposed rule change regarding NASDAQ Last Sale Plus); and
Rule 7039(d). See also Securities Exchange Act Release No. 74972
(May 15, 2015), 80 FR 29370 (May 21, 2015) (SR-NASDAQ-2015-055)
(notice of filing of proposed rule change regarding NASDAQ Last Sale
Plus). These filings are known as ``NLS Plus Approval Order'' and
``NLS Plus notice'', respectively. NLS Plus, which is codified in
Rule 7039(d), has been offered since 2010 via NASDAQ OMX Information
LLC. NLS Plus is described online at http://nasdaqtrader.com/content/technicalsupport/specifications/dataproducts/NLSPlusSpecification.pdf; and the annual administrative and other
fees for NLS Plus are noted at http://nasdaqtrader.com/Trader.aspx?id=DPUSdata#ls.
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NLS Plus allows data distributors to access last sale products
offered by each of NASDAQ OMX's three equity exchanges. NLS Plus
includes all transactions from all of NASDAQ OMX's equity markets, as
well as FINRA/NASDAQ TRF data that is included in the current NLS
product. In addition, NLS Plus features total cross-market volume
information at the issue level, thereby providing redistribution of
consolidated volume information (``consolidated volume'') from the
securities information processors (``SIPs'') for Tape A, B, and C
securities.\7\ Thus, NLS Plus covers all securities listed on NASDAQ
and New York Stock Exchange (``NYSE'') (now under the Intercontinental
Exchange (``ICE'') umbrella), as well as US ``regional'' exchanges such
as NYSE MKT, NYSE Arca, and BATS (also known as BATS/Direct Edge).\8\
As noted in the NLS Plus Approval Order, the Exchange is filing this
separate proposal regarding the NLS Plus fee structure.
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\7\ This reflects real-time trading activity for Tape C
securities and 15-minute delayed information for Tape A and Tape B
securities.
\8\ Registered U.S. exchanges are listed at http://www.sec.gov/divisions/marketreg/mrexchanges.shtml.
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NLS Plus is currently codified in Rule 7039(d) \9\ in a manner
similar to products of other markets.\10\ NLS Plus is offered, as
noted, through NASDAQ OMX Information LLC, which is a subsidiary of The
NASDAQ OMX Group, Inc. that is separate and apart from The NASDAQ Stock
Market LLC. NASDAQ OMX Information LLC combines publicly available data
from the three filed last sale products of the NASDAQ OMX equity
markets and from the network processors for the ease and convenience of
market data users and vendors, and ultimately the investing public. In
that role, the function of NASDAQ OMX Information LLC is analogous to
that of other market data vendors, and it has no competitive advantage
over other market data vendors. NASDAQ OMX Information LLC distributes
no data that is not equally available to all market data vendors. For
example, NASDAQ OMX Information LLC receives data from the exchange
that is available to other market data vendors, with the same
information distributed to NASDAQ OMX Information LLC at the same time
it is distributed to other vendors (that is, NASDAQ OMX Information LLC
has neither a speed nor an information differential). Through this
structure, NASDAQ OMX Information LLC performs precisely the same
functions as Bloomberg, Thomson Reuters, and dozens of other market
data vendors; and the contents of the NLS Plus data stream are similar
in nature to what is distributed by other exchanges.
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\9\ See supra note 6.
\10\ See Securities Exchange Act Release No. 73918 (December 23,
2014), 79 FR 78920 (December 31, 2014) (SR-BATS-2014-055; SR-BYX-
2014-030; SR-EDGA-2014-25; SR-EDGX-2014-25) (order approving market
data product called BATS One Feed being offered by four affiliated
exchanges). See also Securities Exchange Act Release No. 73553
(November 6, 2014), 79 FR 67491 (November 13, 2014) (SR-NYSE-2014-
40) (order granting approval to establish the NYSE Best Quote &
Trades (``BQT'') Data Feed). These exchanges have likewise
instituted fees for their products.
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The Exchange believes that market data distributors may use the NLS
Plus data feed to feed stock tickers, portfolio trackers, trade alert
programs, time and sale graphs, and other display systems. The contents
of NLS Plus are set forth in NASDAQ Rule 7039(d).\11\ Specifically,
subsection (d) states that NASDAQ Last Sale Plus is a comprehensive
data feed produced by NASDAQ OMX Information LLC that provides last
sale data as well as consolidated volume of NASDAQ OMX equity markets
(NASDAQ, BX, and PSX) and the NASDAQ/FINRA Trade Reporting
Facility(``TRF''). NASDAQ Last Sale Plus also reflects cumulative
volume real-time trading activity across all U.S. exchanges for Tape C
securities and 15-minute delayed information for Tape A and Tape B
securities. NLS Plus also contains the following data elements: Trade
Price, Trade Size, Sale Condition Modifiers, Cumulative Consolidated
Market Volume, End of Day Trade Summary, Adjusted Closing Price, IPO
Information, and Bloomberg ID. Additionally, pertinent regulatory
information such as Market Wide Circuit Breaker, Reg SHO Short Sale
Price Test Restricted Indicator, Trading Action, Symbol Directory,
Adjusted Closing Price, and End of Day Trade Summary are included.\12\
NLS Plus may be received by itself or in combination with NASDAQ Basic.
The Exchange now proposes to add into Rule 7039(d) the fees associated
with NLS Plus.
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\11\ The contents of NLS Plus in large part mimic those of NLS,
which is set forth in NASDAQ Rule 7039(a)-(c). Similar to NLS, NLS
Plus offers data for all U.S. equities via two separate data
channels: The first data channel reflects NASDAQ, BX, and PSX trades
with real-time consolidated volume for NASDAQ-listed securities; and
the second data channel reflects NASDAQ, BX, and PSX trades with
delayed consolidated volume for NYSE, NYSE MKT, NYSE Arca and BATS-
listed securities.
\12\ The overwhelming majority of these data elements and
messages are exactly the same as, and in fact are sourced from, NLS,
BX Last Sale, and PSX Last Sale. Only two data elements
(consolidated volume and Bloomberg ID) are sourced from other
publicly accessible or obtainable resources. The Reg SHO Short Sale
Price Test Restricted Indicator message is disseminated intra-day
when a security has a price drop of 10% or more from the adjusted
prior day's NASDAQ Official Closing Price. Trading Action indicates
the current trading status of a security to the trading community,
and indicates when a security is halted, paused, released for
quotation, and released for trading. Symbol Directory is
disseminated at the start of each trading day for all active NASDAQ
and non-NASDAQ-listed security symbols. Adjusted Closing Price is
disseminated at the start of each trading day for all active symbols
in the NASDAQ system. End of Day Trade Summary is disseminated at
the close of each trading day, as a summary for all active NASDAQ-
and non-NASDAQ-listed securities. IPO Information reflects IPO
general administrative messages from the UTP and CTA Level 1 feeds
for Initial Public Offerings for all NASDAQ- and non-NASDAQ-listed
securities. For additional information, see NLS Plus Approval Order.
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The Fees
Firms that receive an NLS Plus feed today are liable for annual
administration fees for applicable NASDAQ equity exchanges: $1,000 for
NASDAQ, $1,000 for BX, and $1,000 for PSX.\13\ In addition, firms that
receive NLS Plus are liable for NLS or NASDAQ Basic fees.\14\ Finally,
firms will pay a

[[Page 47970]]

data consolidation fee of $350 per month.
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\13\ For current fees, see http://nasdaqtrader.com/Trader.aspx?id=DPUSdata#ls. Annual administrative fees are in BX
Rule 7035, NASDAQ Rule 7035, and NASDAQ OMX PSX Fees Chapter VIII.
\14\ User fees for NLS and NASDAQ Basic are in NASDAQ Rules 7039
and 7047. User fees for BX Last Sale are in BX Rule 7039 (currently
there is no fee liability), and for PSX Last Sale are in NASDAQ OMX
PSX Fees Chapter VIII (currently there is no fee liability). As
currently described in NASDAQ Rule 7047, NASDAQ Basic provides two
sets of data elements: (1) the best bid and offer on the NASDAQ
Stock Market for each U.S. equity security; and (2) the last sale
information currently provided by NLS.
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Accordingly, proposed Rule 7039 states the following at sections
(d)(1) through (d)(3):
(1) Firms that receive NLS Plus shall pay the annual administration
fees for NLS, BX Last Sale, and PSX Last Sale, and a data consolidation
fee of $350 per month.
(2) Firms that receive NLS Plus are in addition liable for NLS or
NASDAQ Basic fees, as applicable.
(3) In the event that NASDAQ OMX BX and/or NASDAQ OMX PHLX adopt
user fees for BX Last Sale and/or PSX Last Sale, firms that receive NLS
Plus would also be liable for such fees.\15\
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\15\ BX Last Sale and PSX Last Sale currently are not fee
liable, as noted in BX Rule 7039 and NASDAQ OMX PSX Fees Chapter
VIII, respectively.
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The Exchange notes that the proposed fee structure is designed to
ensure that vendors could compete with the Exchange by creating a
product similar to NLS Plus.\16\ The proposed fee structure reflects
the current annual administrative cost as well as the incremental cost
of the aggregation and consolidation function (generally known as the
``consolidation function'') for NLS Plus, and would not be lower than
the cost to a vendor creating a competing product, including the cost
of receiving the underlying data feeds. The proposed fee structure for
NLS Plus would enable a vendor to receive the underlying data feeds and
offer a similar product on a competitive basis and with no greater cost
than the Exchange.\17\
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\16\ For discussion in addition to this proposal, see NLS Plus
Approval Order.
\17\ See also footnote 24 in the NLS Plus notice, wherein the
Exchange indicated that it expects that the fee structure for NLS
Plus will reflect an amount that is no less than the cost to a
market data vendor to obtain all the underlying feeds, plus an
amount to be determined that would reflect the value of the
aggregation and consolidation function.
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The proposed fee structure is reasonable and proper. First, the
proposed administration fee is essentially a codification of the
current administration fee vis a vis NASDAQ, BX and PSX. Second, NLS
Plus recipients would also be liable for fees if the Exchange adopts
user fees for BX Last Sale and/or PSX Last Sale. To that end, the
Exchange notes that it will file separate proposals to adopt NLS Plus
in the BX Last Sale and PSX Last Sale provisions,\18\ as well as
separate fee proposals that would each, like this filing, be expected
to have an administrative fee component and a consolidation component.
Third, firms receive NLS Plus by itself or in conjunction with NASDAQ
Basic.\19\ Accordingly, firms would either be liable for NLS fees or
NASDAQ Basic fees. Fourth, the Exchange proposes that NLS Plus includes
a specific monthly $350 data consolidation fee. This fee is designed to
recoup the monthly consolidation costs emanating from the aggregation
and consolidation of the data and data streams that make up the NLS
Plus data feed. Such consolidated costs include, for example, the costs
of combining the feeds, adding the Bloomberg ID, and combining the
consolidated sale info. The Exchange believes that this consolidation
fee, while in addition to the current NLS Plus fees in place, would not
be material to firms.
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\18\ BX Rule 7039 and NASDAQ OMX PSX Fees Chapter VIII.
\19\ As provided in Rule 7047, NASDAQ Basic provides the
information contained in NLS, together with NASDAQ's best bid and
best offer.
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The Exchange believes that the proposed NLS Plus fee is a simple
codification of the existing NLS PLS [sic] fee into Rule 7039, as
discussed, with the addition of a monthly data consolidation fee, and
as such meets the requirements of the Act.
2. Statutory Basis
NASDAQ believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\20\ in general, and with
Sections 6(b)(4) and (5) of the Act,\21\ in particular, in that it
provides for the equitable allocation of reasonable dues, fees, and
other charges among its members, issuers and other persons using its
facilities, and does not unfairly discriminate between customers,
issuers, brokers or dealers. The Exchange is codifying the fees
regarding the NLS Plus data offering and the consolidation fee, as
discussed, into sections (d)(1) through (d)(3) of Rule 7039.
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\20\ 15 U.S.C. 78f.
\21\ 15 U.S.C. 78f(b)(4) and (5).
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NASDAQ believes that the proposed fees offered to firms that elect
to receive NLS Plus are reasonable, equitable and not unfairly
discriminatory. These fees are reasonable because they are, as
discussed, simply a codification of the existing fee structure, with an
addition of the above-discussed consolidation fee, into existing Rule
7039. The proposed fee structure would apply equally to all firms that
choose to avail themselves of the NLS Plus data feed, and no firm is
required to use NLS Plus. Moreover, the Exchange believes that the
consolidation fee, while in addition to the current NLS Plus fee, would
not be material to firms. The consolidation fee would, however, enable
the Exchange to recoup the monthly consolidation cost emanating from
the aggregation and consolidation of the data and data streams that
make up the NLS Plus data feed. Such consolidated costs include, for
example, the monthly the costs of combining the feeds, adding the
Bloomberg ID, and creating the consolidated sale info. The proposed fee
structure would not be unfairly discriminatory because it would apply
equally to all firms that choose to use NLS Plus.
NASDAQ believes that the proposed fees are also consistent with the
investor protection objectives of Section 6(b)(5) of the Act \22\ in
that they are designed to promote just and equitable principles of
trade, to remove impediments to a free and open market and national
market system, and in general to protect investors and the public
interest. Specifically, the proposed fee structure will codify the fees
regarding the NLS Plus data offering into sections (d)(1) through
(d)(3) of Rule 7039, which helps to assure proper enforcement of the
rule and investor protection. NASDAQ believes also that the proposal
facilitates transactions in securities, removes impediments to and
perfects the mechanism of a free and open market and a national market
system, and, in general, protects investors and the public interest by
codifying into a rule the fee liability for an additional means by
which investors may access information about securities transactions,
namely NLS Plus, thereby providing investors with additional options
for accessing information that may help to inform their trading
decisions.
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\22\ 15 U.S.C. 78f(b)(5).
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NASDAQ notes that the Commission has recently approved data
products on several exchanges that are similar to NLS Plus, and
specifically determined that the fee-liable approved data products were
consistent with the Act.\23\ NLS Plus simply provides market
participants with an additional option for receiving market data that
has already been the subject of a proposed rule change and that is
available from myriad market data vendors.
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\23\ See supra note 10 regarding BATS One and NYSE BQT.
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In adopting Regulation NMS, the Commission granted SROs and broker-
dealers (``BDs'') 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. NASDAQ
believes that its NLS Plus market data product is

[[Page 47971]]

precisely the sort of market data product that the Commission
envisioned when it adopted Regulation NMS. The Commission concluded
that Regulation NMS--by deregulating the market in proprietary data--
would itself further the Act's goals of facilitating efficiency and
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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.\24\
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\24\ See Securities Exchange Act Release No. 51808 (June 9,
2005), 70 FR 37496 (June 29, 2005).

By removing unnecessary regulatory restrictions on the ability of
exchanges to sell their own data, Regulation NMS advanced 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 BDs at
all, it follows that the price at which such data is sold should be set
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by the market as well.

The decision of the United States Court of Appeals for the District
of Columbia Circuit in NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir.
2010) (``NetCoalition I''), upheld the Commission's reliance upon
competitive markets to set reasonable and equitably allocated fees for
market data. ``In fact, the legislative history indicates that the
Congress intended that the market system `evolve through the interplay
of competitive forces as unnecessary regulatory restrictions are
removed' and that the SEC wield its regulatory power `in those
situations where competition may not be sufficient,' such as in the
creation of a `consolidated transactional reporting system.' ''
NetCoalition I, at 535 (quoting H.R. Rep. No. 94-229, at 92 (1975), as
reprinted in 1975 U.S.C.C.A.N. 321, 323). The court agreed with the
Commission's conclusion that ``Congress intended that `competitive
forces should dictate the services and practices that constitute the
U.S. national market system for trading equity securities.' '' \25\
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\25\ NetCoalition I, at 535.
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The Court in NetCoalition I, while upholding the Commission's
conclusion that competitive forces may be relied upon to establish the
fairness of prices, nevertheless concluded that the record in that case
did not adequately support the Commission's conclusions as to the
competitive nature of the market for NYSE Arca's data product at issue
in that case. As explained below in NASDAQ's Statement on Burden on
Competition, however, NASDAQ believes that there is substantial
evidence of competition in the marketplace for data that was not in the
record in the NetCoalition I case, and that the Commission is entitled
to rely upon such evidence in concluding fees are the product of
competition, and therefore in accordance with the relevant statutory
standards.\26\ Accordingly, any findings of the court with respect to
that product may not be relevant to the product at issue in this
filing.
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\26\ It should also be noted that Section 916 of the Dodd-Frank
Wall Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank
Act'') has amended paragraph (A) of Section 19(b)(3) of the Act, 15
U.S.C. 78s(b)(3), to make it clear that all exchange fees, including
fees for market data, may be filed by exchanges on an immediately
effective basis. See also NetCoalition v. SEC, 715 F.3d 342 (D.C.
Cir. 2013) (``NetCoalition II'') (finding no jurisdiction to review
Commission's non-suspension of immediately effective fee changes).
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Moreover, fee liable data products such as NLS Plus are a means by
which exchanges compete to attract order flow, and this proposal simply
codifies the relevant fee structure into an Exchange rule. To the
extent that exchanges are successful in such competition, they earn
trading revenues and also enhance the value of their data products by
increasing the amount of data they are able to provide. Conversely, to
the extent that exchanges are unsuccessful, the inputs needed to add
value to data products are diminished. Accordingly, the need to compete
for order flow places substantial pressure upon exchanges to keep their
fees for both executions and data reasonable.

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 fee structure is
designed to ensure a fair and reasonable use of Exchange resources by
allowing the Exchange to recoup costs while continuing to offer its
data products at competitive rates to firms.
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. This
rule proposal does not burden competition, which continues to offer
alternative data products and, like the Exchange, set fees,\27\ but
rather reflects the competition between data feed vendors and will
further enhance such competition. As described, NLS Plus competes
directly with existing similar products and potential products of
market data vendors. NASDAQ OMX Information LLC was constructed
specifically to establish a level playing field with market data
vendors and to preserve fair competition between them. Therefore,
NASDAQ OMX Information LLC receives NLS, BX Last Sale, and PSX Last
Sale from each NASDAQ-operated exchange in the same manner, at the same
speed, and reflecting the same fees as for all market data vendors.
Therefore, NASDAQ Information LLC has no competitive advantage with
respect to these last sale products and NASDAQ commits to maintaining
this level playing field in the future. In other words, NASDAQ will
continue to disseminate separately the underlying last sale products to
avoid creating a latency differential between NASDAQ OMX Information
LLC and other market data vendors, and to avoid creating a pricing
advantage for NASDAQ OMX Information LLC.
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\27\ See, e.g., supra note 10.
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NLS Plus joins the existing market for proprietary last sale data
products that is currently competitive and inherently contestable
because there is fierce competition for the inputs necessary to the
creation of proprietary data and strict pricing discipline for the
proprietary products themselves. Numerous exchanges compete with each
other for listings, trades, and market data itself, providing virtually
limitless opportunities for entrepreneurs 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. Similarly, with respect to the FINRA/NASDAQ TRF
data that is a component of NLS and NLS Plus, allowing exchanges to
operate TRFs has permitted them to earn revenues by providing
technology and data in support of the non-exchange segment of the
market. This revenue opportunity has also resulted in fierce
competition between the two current TRF operators, with both TRFs
charging extremely low trade reporting fees and rebating the majority
of the revenues they receive from core market data to the parties
reporting trades.
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

[[Page 47972]]

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 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).\28\ 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 are each 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,\29\ 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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\28\ 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).
\29\ 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 BD customers view the costs of transaction executions
and of data as a unified cost of doing business with the exchange. A BD
will direct orders to a particular exchange only if the expected
revenues from executing trades on the exchange exceed net transaction
execution costs and the cost of data that the BD 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 BD will choose not to buy it. Moreover, as a BD
chooses to direct fewer orders to a particular exchange, the value of
the product to that BD decreases, for two reasons. First, the product
will contain less information, because executions of the BD's trading
activity will not be reflected in it. Second, and perhaps more
important, the product will be less valuable to that BD because it does
not provide information about the venue to which it is directing its
orders. Data from the competing venue to which the BD is directing
orders will become correspondingly more valuable.
Similarly, in the case of products such as NLS Plus that are
distributed through market data vendors, the 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 such as
Bloomberg and Reuters 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, such as Google, impose a
discipline by providing only data that will enable them to attract
``eyeballs'' that contribute to their advertising revenue. Retail BDs,
such as Schwab and Fidelity, offer their 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 products such as NLS Plus 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
cost of executions, or the volume of both data and executions will
fall.
The level of competition and contestability in the market is
evident in the numerous alternative venues that compete for order flow,
including eleven SRO markets, as well as internalizing 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,

[[Page 47973]]

and two FINRA-regulated TRFs compete to attract internalized
transaction reports. It is common for BDs to further and 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, BDs, 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 BD is currently permitted to produce proprietary
data products, and many currently do or have announced plans to do so,
including NASDAQ, NYSE, NYSE MKT, NYSE Arca, and BATS/Direct Edge.
Any ATS or BD can combine with any other ATS, BD, or multiple ATSs
or BDs to produce joint proprietary data products. Additionally, order
routers and market data vendors can facilitate single or multiple BDs'
production of proprietary data products. The potential sources of
proprietary products are virtually limitless. Notably, the potential
sources of data include the BDs that submit trade reports to TRFs and
that have the ability to consolidate and distribute their data without
the involvement of FINRA or an exchange-operated TRF.
The fact that proprietary data from ATSs, BDs, and vendors can by-
pass SROs is significant in two respects. First, non-SROs can compete
directly with SROs for the production and sale of proprietary data
products, as BATS and NYSE Arca did before registering as exchanges by
publishing proprietary book data on the internet. Second, because a
single order or transaction report can appear in a core data product,
an SRO proprietary product, and/or a non-SRO proprietary product, the
data available in proprietary products is exponentially greater than
the actual number of orders and transaction reports that exist in the
marketplace. Indeed, in the case of NLS Plus, the data provided through
that product appears both in (i) real-time core data products offered
by the SIPs for a fee, (ii) free SIP data products with a 15-minute
time delay, and (iii) individual exchange data products, and finds a
close substitute in last-sale products of competing venues.
In addition to the competition and price discipline described
above, the market for proprietary data products is also highly
contestable because market entry is rapid, inexpensive, and profitable.
The history of electronic trading is replete with 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.
Regulation NMS, by deregulating the market for proprietary data,
has increased the contestability of that market. While BDs have
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. Multiple
market data vendors already have the capability to aggregate data and
disseminate it on a profitable scale, including Bloomberg and Thomson
Reuters. In Europe, Cinnober aggregates and disseminates data from over
40 brokers and multilateral trading facilities.\30\
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\30\ See http://www.cinnober.com/boat-trade-reporting.
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In the case of TRFs, the rapid entry of several exchanges into this
space in 2006-2007 following the development and Commission approval of
the TRF structure demonstrates the contestability of this aspect of the
market.\31\ Given the demand for trade reporting services that is
itself a by-product of the fierce competition for transaction
executions--characterized notably by a proliferation of ATSs and BDs
offering internalization--any supra-competitive increase in the fees
associated with trade reporting or TRF data would shift trade report
volumes from one of the existing TRFs to the other \32\ and create
incentives for other TRF operators to enter the space. Alternatively,
because BDs reporting to TRFs are themselves free to consolidate the
market data that they report, the market for over-the-counter data
itself, separate and apart from the markets for execution and trade
reporting services--is fully contestable.
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\31\ The low cost exit of two TRFs from the market is also
evidence of a contestable market, because new entrants are reluctant
to enter a market where exit may involve substantial shut-down
costs.
\32\ It should be noted that the FINRA/NYSE TRF has, in recent
weeks, received reports for almost 10% of all over-the-counter
volume in NMS stocks.
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Moreover, consolidated data provides two additional measures of
pricing discipline for proprietary data products that are a subset of
the consolidated data stream. First, the consolidated data is widely
available in real-time at $1 per month for non-professional users.
Second, consolidated data is also available at no cost with a 15- or
20-minute delay. Because consolidated data contains marketwide
information, it effectively places a cap on the fees assessed for
proprietary data (such as last sale data) that is simply a subset of
the consolidated data. The mere availability of low-cost or free
consolidated data provides a powerful form of pricing discipline for
proprietary data products that contain data elements that are a subset
of the consolidated data, by highlighting the optional nature of
proprietary products.
In this environment, a super-competitive increase in the fees
charged for either transactions or data has the potential to impair
revenues from both products. ``No one disputes that competition for
order flow is `fierce'.'' NetCoalition I at 539. The existence of
fierce competition for order flow implies a high degree of price
sensitivity on the part of BDs with order flow, since they may readily
reduce costs by directing orders toward the lowest-cost trading venues.
A BD that shifted its order flow from one platform to another in
response to order execution price differentials would both reduce the
value of that platform's market data and reduce its own need to consume
data from the disfavored platform. If a platform increases its market
data fees, the change will affect the overall cost of doing business
with the platform, and affected BDs will assess whether they can lower
their trading costs by directing orders elsewhere and thereby lessening
the need for the more expensive data. Similarly, increases in the cost
of NLS Plus would impair the willingness of distributors to take a
product for which there are numerous alternatives, impacting NLS Plus
data revenues, the value of NLS Plus as a tool for attracting order
flow, and ultimately, the volume of orders routed to NASDAQ and the
value of its other data products.

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.\33\ At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend

[[Page 47974]]

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 should be approved
or disapproved.
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\33\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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-2015-088 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-2015-088. 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 will also 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-2015-088 and
should be submitted on or before August 31, 2015.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\34\
Robert W. Errett,
Deputy Secretary.
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\34\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2015-19537 Filed 8-7-15; 8:45 am]
BILLING CODE 8011-01-P

Document Created: 2015-12-15 12:12:43
Document Modified: 2015-12-15 12:12:43

Category		Regulatory Information
Collection		Federal Register
sudoc Class		AE 2.7: GS 4.107: AE 2.106:
Publisher		Office of the Federal Register, National Archives and Records Administration
Section		Notices
FR Citation		80 FR 47968