81 FR 60768 - Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Notice of Filing of Proposed Rule Change To Adopt the Third Party Connectivity Service Under Rules 7034(b) and 7051

SECURITIES AND EXCHANGE COMMISSION

Federal Register Volume 81, Issue 171 (September 2, 2016)

[Federal Register Volume 81, Number 171 (Friday, September 2, 2016)]
[Notices]
[Pages 60768-60771]
From the Federal Register Online  [www.thefederalregister.org]
[FR Doc No: 2016-21130]



[[Page 60768]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78713; File No. SR-Nasdaq-2016-120]


Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Adopt the Third Party 
Connectivity Service Under Rules 7034(b) and 7051

August 29, 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 August 16, 2016, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
---------------------------------------------------------------------------

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

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

    The Exchange proposes to adopt the Third Party Connectivity Service 
under Rules 7034(b) and 7051.
    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 parts 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 is proposing to adopt the Third Party Connectivity 
Service under Rules 7034(b) and 7051, in light of increased capacity 
requirements, including recent changes to the Consolidated Tape 
Association (``CTA'') and Options Price Reporting Authority (``OPRA'') 
feeds \3\ as well as planned changes to the Unlisted Trading Privileges 
Plan (``UTP'') data feed requirements.\4\
---------------------------------------------------------------------------

    \3\ See https://www.nyse.com/publicdocs/ctaplan/notifications/trader-update/CTA%20SIP%201Q16%20Consolidated%20Data%20Operating%20Metrics%20Report.pdf; see also, http://www.opradata.com/specs/opra_bandwidth_apr2016.pdf.
    \4\ The Exchange is also making minor technical changes to Rules 
7034(b) and 7051 to remove rule text concerning temporary waivers of 
fees that have since expired.
---------------------------------------------------------------------------

Background
    Under both Rules 7034 and 7051, the Exchange assesses fees for 
various means to connect to the Exchange. Under Rule 7034 the Exchange 
provides charges for co-location services, and subparagraph (b) of the 
rule provides the fees assessed for connectivity, which include 
capacity options ranging from 1 Gb copper connectivity to 10 Gb Ultra 
fiber connectivity. Co-location services are a suite of hardware, 
power, telecommunication, and other ancillary products and services 
that allow market participants and vendors to place their trading and 
communications equipment in close physical proximity to the quoting and 
execution facilities of the Exchange and other Nasdaq, Inc. markets.\5\ 
By contrast, under Rule 7051 the Exchange provides fees for 10 Gb, 1 Gb 
and 1 Gb Ultra direct circuit connections, to customers who are not co-
located at the Exchange's data center. Thus, direct connectivity 
subscribers are not located within the Exchange's data center, but 
rather connect to it through third-party direct connection carriers.\6\
---------------------------------------------------------------------------

    \5\ The Exchange provides co-location services and imposes fees 
through its wholly-owned subsidiary Nasdaq Technology Services LLC 
and pursuant to agreements with the owner/operator of its data 
center where both the Exchange's quoting and trading facilities and 
co-located customer equipment are housed. Users of co-location 
services include private extranet providers, data vendors, as well 
as Exchange members and non-members. The Exchange notes that co-
location customers are not provided any separate or superior means 
of direct access to Exchange quoting and trading facilities in 
contrast to non-co-location customers. Nor does the Exchange offer 
any separate or superior means of access to the Exchange quoting and 
trading facilities as among co-location customers themselves within 
in the datacenter. Likewise, the Exchange does not make available to 
co-located customers any market data or data feed product or service 
for data going into, or out of, Exchange systems that is not 
likewise available to all the Exchange members. Finally, all orders 
sent to the Exchange enter the market center through same central 
system quote and order gateway regardless of whether the sender is 
co-located in the Exchange data center or not.
    \6\ See http://www.nasdaqtrader.com/content/ProductsServices/Trading/direct_connect_providers.pdf.
---------------------------------------------------------------------------

    Subscribers to the connectivity options provided under Rules 
7034(b) and 7051 may use the connectivity provided to link them to the 
Exchange for order entry and to receive proprietary data feeds, to 
receive public quote feeds from Securities Information Processors 
(``SIPs''),\7\ and to connect to facilities of FINRA, such as the 
FINRA/Nasdaq TRF.\8\ The Exchange provides various co-location and 
direct connectivity options based on the capacity of the connection. A 
subscriber generally determines the capacity of the connection it needs 
based on the number of data services it wishes to receive and its 
estimated usage for trading and trade reporting purposes; however, the 
Exchange will inform a subscriber that a certain connectivity option 
will not suffice for the use it proposes when the connection is clearly 
insufficient.
---------------------------------------------------------------------------

    \7\ The SIPs link the U.S. markets by processing and 
consolidating all protected bid/ask quotes and trades from every 
registered exchange trading venue and FINRA into a single data feed, 
and they disseminate and calculate critical regulatory information, 
including the National Best Bid and Offer, Limit Up Limit Down price 
bands, short sale restrictions and regulatory halts.
    \8\ See http://www.nasdaqtrader.com/Trader.aspx?id=DPSpecs for a 
list of proprietary feeds. See http://www.nasdaqtrader.com/content/ProductsServices/trading/NasdaqThirdPartyServices.pdf for a list of 
third party services and feeds.
---------------------------------------------------------------------------

    The Exchange has observed a steady increase in the capacity 
requirements of the various data services to which a member may connect 
through the connectivity options under Rules 7034(b) and 7051. The 
increased capacity requirements are reducing the number of data feeds 
that may be provided in any single connectivity option. In addition to 
increased capacity requirements of proprietary data feeds, the CTA and 
OPRA SIPs recently increased their capacity requirements. Moreover, the 
UTP SIP Operating Committee approved a migration plan for the UTP SIP 
to the Nasdaq, Inc.'s INET technology for the UTP data services. The 
new enhanced technology will significantly increase the data 
transmitted, handling a minimum peak rate of two million messages per 
second, per data feed. The initial capacity recommendation per 
multicast group is 1.7 Gb.\9\ In light of the increased data provided 
by the enhanced SIPs, current connectivity will not be adequate to 
support all SIP data through a connection less than 10 Gb. Customers 
currently using 1 Gb circuits to connect to the UTP feeds will need to 
upgrade to 10 Gb circuits due to the increase in bandwidth requirements 
for the new

[[Page 60769]]

feeds. Migration of the UTP SIP to the Exchange's INET technology is 
scheduled to occur on October 10, 2016, and current subscribers 
receiving SIP data through a 1 Gb connection under Rules 7034(b) or 
7051 would be compelled to upgrade to a 10 Gb connection to continue 
receiving UTP SIP data.
---------------------------------------------------------------------------

    \9\ See http://www.nasdaqtrader.com/TraderNews.aspx?id=utp2016-13.
---------------------------------------------------------------------------

Proposed New Connectivity
    To address the issue caused by the increased capacity requirements 
of data feeds, the Exchange is proposing to segregate connectivity to 
the Exchange and its proprietary data feeds from connectivity to third 
party services and data feeds, including SIP data feeds. The Exchange 
is proposing to offer the new Third Party Connectivity Service to both 
non-co-location and co-location customers alike, which will enable 
customers to receive third party market data feeds, including SIP data, 
and other non-exchange services.\10\ The Exchange will offer this to 
customers in both 10 Gb Ultra and 1 Gb Ultra hand-offs.\11\ To receive 
the SIP feeds, customers must subscribe to the 10 Gb Ultra connectivity 
options under Rules 7034(b) and 7051(b). The proposed 1 Gb Ultra Third 
Party Connectivity Service options under Rules 7034(b) and 7051(b) will 
support data feeds from other exchanges and markets only.\12\ The 
Exchange notes that it is not offering 10 Gb connectivity under the 
proposed Third Party Connectivity Service because the current 10 Gb 
option uses older technology switches, which the Exchange would have to 
procure to [sic] in order to include in the proposed new service and 
which would not provide an adequate performance margin for future 
enhancements to the data feeds. Customers seeking connectivity to the 
Exchange and its proprietary data feeds may continue to do so through 
the existing connectivity options under Rules 7034(b) and Rule 
7051(a).\13\
---------------------------------------------------------------------------

    \10\ Third Party Services includes not only SIP data feeds, but 
also data feeds from other exchanges and markets. For example, Third 
Party Connectivity will support connectivity to the FINRA/Nasdaq 
Trade Reporting Facility, BATS Depth Feeds, and NYSE Feeds. See 
http://www.nasdaqtrader.com/content/ProductsServices/trading/NasdaqThirdPartyServices.pdf for a list of third party services and 
feeds. A customer must separately subscribe to the third party 
services to which it connects with a Third Party Connectivity 
subscription.
    \11\ A hand-off includes either a 1 Gb Ultra or 10 Gb Ultra 
switch port and a cross connect.
    \12\ For example, a customer may use the 1 Gb Ultra Third Party 
Connectivity Service for connecting to facilities of FINRA, such as 
the FINRA/Nasdaq Trade Reporting Facility for trade reporting 
purposes. FINRA publishes bandwidth reports for its services and 
facilities. See, e.g., http://www.finra.org/file/equity-data-feed-bandwidth-report.
    \13\ The Exchange is placing the current connectivity options of 
Rule 7051 under a new paragraph (a). The proposed Direct 
Connectivity to Third Party Services will fall under a new paragraph 
(b) of Rule 7051.
---------------------------------------------------------------------------

    The Exchange notes that, as is the case with current connectivity 
options, customers that do not wish to subscribe to the Third Party 
Connectivity Service may alternatively connect through an extranet 
provider or a market data redistributor.
    Last, the Exchange is proposing to offer services currently 
available to Direct Connectivity subscribers under Rule 7051 to 
subscribers to Third Party Services. Specifically, the Exchange 
currently offers Optional Cable Router and Per U of Cabinet Space 
services for its direct connectivity options under Rule 7051. The 
Exchange provides customers who are not co-located in the Exchange's 
data center, but require shared cabinet space and power for optional 
routers, switches, or modems to support their direct circuit 
connections. The Exchange assesses an install fee of $925 per router, 
switch or modem, and monthly fees of $150 for space based on a unit 
height of approximately 1.75 inches, commonly called a ``U'' space, and 
a maximum power of 125 Watts per U space. The Exchange is proposing to 
also offer these services to customers of the Third Party Connectivity 
Service because they may have the same connectivity needs as customers 
of the existing Direct Connectivity service.
Proposed New Fees
    The Exchange is proposing to assess fees for Third Party 
Connectivity Service under Rules 7034(b) and 7051(b). Under Rules 
7034(b) and 7051(b), the Exchange is proposing to assess an 
installation fee of $1,500 for installation of either a 10 Gb Ultra or 
1 Gb Ultra Third Party Services co-location or direct connectivity 
subscription, as applicable. The Exchange is proposing to assess an 
ongoing monthly fee of $5,000 for a 10 Gb Ultra connection and $2,000 
for a 1 Gb Ultra connection, under each of the rules. The Exchange is 
proposing to waive all of these fees through October 31, 2016.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with section 
6(b) of the Act,\14\ in general, and furthers the objectives of 
sections 6(b)(4) and 6(b)(5) of the Act,\15\ 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 or system which the Exchange operates or controls, and is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest; and are [sic] 
not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

    The Exchange believes 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 ensuring that market participants 
are provided with adequate capacity to receive data feeds, and to 
access trading and trade reporting venues in times of high demand. As 
noted above, the ever-increasing demand for capacity has strained 
current connectivity options. As an example, the UTP SIP data feeds 
will require significantly greater capacity than current UTP SIP data 
feeds. The Exchange is segregating the various services and data feeds 
that may be connected to between existing and proposed connectivity 
options based on whether the service or data feed is provided by the 
Exchange or by a third party. The Exchange notes that there is no 
difference in the connectivity provided under the current analogous 
connectivity options and the proposed connectivity. Thus, a subscriber 
to an Exchange service or data feed over a 10 Gb Ultra co-location 
connectivity option under Rule 7051(a), for example, will have the same 
connectivity that a subscriber to a third party data feed over a 10 Gb 
Ultra co-location connectivity option under Rule 7051(b) [sic]. The 
Exchange determined to segregate the services and data feeds as 
proposed because it is the most efficient means to allocate the 
services and it will assist subscribers with risk management, since 
Exchange connectivity will be separated from third party services and 
data feeds.
    The Exchange believes that [sic] proposed fees are reasonable 
because they are comparable to the fees currently assessed for 
analogous connectivity under Rules 7034(b) and 7051. In terms of the 
installation fees,

[[Page 60770]]

the proposed fees are identical to the installation fees assessed for 
analogous connectivity under Rules 7034(b) and 7051. The proposed 
monthly fees are less than the monthly fees assessed for analogous 
connectivity under Rules 7034(b) and 7051. Specifically, a subscriber 
to a 1 Gb Ultra Third Party Connectivity Service option under the 
proposed rules will pay $500 less than a subscriber to the analogous 1 
Gb Ultra connectivity options under Rules 7034(b) and 7051. The 
Exchange believes that the installation fees are reasonable because 
they cover the costs the Exchange incurs in installing the hardware 
necessary to connect the subscriber, and they are identical to the fees 
assessed for installation of the same equipment for the analogous co-
location and direct connectivity options under current Rules 7034(b) 
and 7051. The Exchange believes that the proposed monthly fees are 
reasonable because they are set at a level high enough for the Exchange 
to cover the ongoing expenses it incurs in offering the connectivity 
options and to make a profit, while also reducing the economic burden 
placed on subscribers that will be compelled to subscribe to new Third 
Party Connectivity Service offerings under Rules 7034(b) and 7051(b). 
In this regard, the Exchange notes that, to the extent a market 
participant subscribes to an Exchange connectivity option under Rules 
7034(b) and 7051 for connectivity to the market for trading and/or 
proprietary data feeds, it will invariably need to subscribe to one of 
the existing co-location or direct connectivity options under those 
rules. Because the capacity requirements are increasing, subscribers 
will be compelled to subscribe to new connectivity to meet the 
increased capacity requirements. The Exchange is proposing to assess a 
lower monthly fee for third party connectivity because many current 
subscribers will be compelled to subscribe to a new connectivity option 
under the proposed new rules. The Exchange believes that the proposed 
installation fee waiver is reasonable because it will reduce the burden 
on customers that will be compelled to subscribe to new connectivity 
due to the increased demands of the data feeds.
    The Exchange believes that the proposed new fees are an equitable 
allocation and are not unfairly discriminatory because the Exchange 
will apply the same fees to all subscribers to the same connectivity 
option. The Exchange notes that, although the ongoing monthly fees are 
less than the comparable connectivity offered to subscribers to the 
Exchange services and data feeds, these fees are not unfairly 
discriminatory because the lower fees are designed to account for the 
fact that most members will be required to acquire a new connectivity 
subscription due to the change. In this regard, the Exchange has 
assessed the impact of the new fees and found that the majority of 
current subscribers will need to subscribe to a Third Party 
Connectivity Service subscription; however, the Exchange notes that in 
the absence of the new service, the same current subscribers would be 
compelled to subscribe to a new connectivity option under the current 
rules, with certain subscribers that do not currently have a 10 Gb 
Ultra connection and that receive a SIP feed through a 1 Gb 
subscription being compelled to subscribe to a 10 Gb Ultra co-location 
subscription under Rule 7034(b) at $15,000 per month or a 10 Gb direct 
connectivity option under Rule 7051 at $7,500 per month. Both of these 
options would represent a significant premium over the proposed Third 
Party Connectivity Service 10 Gb Ultra offerings under Rules 7034(b) 
and 7051(b) at $5,000 per month each. Existing clients that currently 
have multiple connections to the Exchange subscribed to under Rules 
7034(b) and 7051 may realize a fee decrease by segregating its [sic] 
data feeds under the proposal. For example, a client that has four 10 
Gb connections under Rule 7051 is currently assessed a total monthly 
fee of $30,000. If that client subscribes to two 10 Gb Ultra Third 
Party Services Direct Connections under new Rule 7051(b) in lieu of two 
existing 10 Gb connections, the client would be assessed a total 
monthly fee of $25,000.\16\ The Exchange notes that a client currently 
subscribing to a single 10 Gb option under Rules 7034(b) or 7051(a) 
will have to additionally subscribe to a new 10 Gb Ultra Third Party 
Service option under the proposed rules at a cost of $5,000 per month 
in addition to its existing 10 Gb connectivity, if the client wanted to 
continue receiving connectivity to Nasdaq and its proprietary data 
feeds. This client will pay $5,000 in additional monthly fees, but will 
be receiving an additional/separate 10G connection, which enables for 
additional capacity growth and separation of data feeds flow and access 
to Third Party services. This additional connection would have cost 
$7,500 to $15,000 more per month, if not for the proposed change. Last, 
the Exchange believes that waiving the installation fees of the new 
service through October 31, 2016 is an equitable allocation and is not 
unfairly discriminatory because the Exchange will apply the waiver to 
all subscribers to the new service, and the waiver is limited to a 
reasonable time for customers to act to addresses [sic] the issues 
caused by the increased capacity requirements of the SIP feeds.
---------------------------------------------------------------------------

    \16\ The client would not be assessed a fee of $1,500 per 
installation if it subscribes before October 31, 2016.
---------------------------------------------------------------------------

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. Moreover, market participants have many other options to 
choose from to connect to the Exchange, other than the proposed 
connectivity of this filing. In such an environment, the Exchange must 
act cautiously when increasing or implementing a new fee because market 
participants may easily unsubscribe to the Exchange's connectivity 
options and instead contract with a third-party connectivity provider. 
As discussed above, the capacity requirements of the data feeds and 
services to [sic] which the current connectivity options under Rules 
7034(b) and 7051 provide have grown significantly, leaving the Exchange 
with the option of decreasing the number of services and data feeds 
that may be linked with any given connectivity option, which would in 
turn require subscribers to have more connectivity subscriptions to 
maintain the status quo in terms of data feeds and services, or, 
alternatively, dividing the services itself in a manner it deems best 
and offering a lower monthly price based on that division. Here, the 
Exchange has selected the latter, and determined that the most 
efficient and logical divide is to distinguish between Exchange data 
feeds and services and those of third parties. For these reasons, the 
Exchange does not believe that any of the proposed changes will impair 
the ability of members or competing order execution venues to maintain 
their competitive standing in the financial markets. Because there are 
numerous competitive alternatives to Exchange's connectivity options, 
it is likely that the Exchange will lose market share as a result of 
the changes if they are unattractive to market participants.

[[Page 60771]]

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will: 
(a) By order approve or disapprove such proposed rule change; or (b) 
institute proceedings to determine whether the proposed rule change 
should be 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-2016-120 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-2016-120. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing will also be available 
for inspection and copying at the principal offices of the Exchange. 
All comments received will be posted without change; the Commission 
does not edit personal identifying information from submissions. You 
should submit only information that you wish to make available 
publicly. All submissions should refer to File Number SR-Nasdaq-2016-
120, and should be submitted on or before September 23, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

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

Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-21130 Filed 9-1-16; 8:45 am]
BILLING CODE 8011-01-P