[Federal Register Volume 81, Number 73 (Friday, April 15, 2016)]
[Notices]
[Pages 22344-22347]
[FR Doc No: 2016-08643]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-77578; File No. SR-NASDAQ-2016-048]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Amend Nasdaq Rule 7039

April 11, 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 March 31, 2016, The NASDAQ Stock Market LLC (``Nasdaq'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') a proposed rule change as described in
Items I, II and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------

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

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

    Nasdaq is proposing changes to amend Nasdaq Rule 7039 (NASDAQ Last
Sale and NASDAQ Last Sale Plus Data Feeds).
    The text of the proposed rule change is available at
nasdaq.cchwallstreet.com, at Nasdaq's principal office, 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, Nasdaq 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 those 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 proposes to amend Nasdaq Rule 7039 (NASDAQ Last Sale
and NASDAQ Last Sale Plus Data Feeds). Nasdaq offers two proprietary
data feeds containing real-time last sale information for trades
executed on Nasdaq or reported to the Nasdaq/FINRA Trade Reporting
Facility. These include the ``NASDAQ Last Sale for NASDAQ,'' \3\ which
contains all transaction reports for Nasdaq-listed stocks and ``NASDAQ
Last Sale for NYSE/NYSE MKT,'' \4\ which contains all such transaction
reports for NYSE- and NYSE MKT-listed stocks (collectively, the
``Nasdaq Last Sale Data Feeds'').
---------------------------------------------------------------------------

    \3\ See Nasdaq Rule 7039(a)(1).
    \4\ See Nasdaq Rule 7039(a)(2).
---------------------------------------------------------------------------

    Specifically, Nasdaq proposes to amend Nasdaq Rule 7039(b) to
reduce the monthly fee from $50,000 to $41,500 for each distributor of
Nasdaq Last Sale Data Feeds. The new lower fee is designed to
incentivize distributors to subscribe to the Nasdaq Last Sale Data
Feeds. This fee is exclusive of the $1,500 monthly fee that all
distributors of a Nasdaq Last Sale Data Feed must also pay and that is
set forth under Nasdaq Rule 7039(c).
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section
6(b) of the Act,\5\ in general, and furthers the objectives of Sections
6(b)(4) and 6(b)(5) of the Act,\6\ 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 its facilities which
the Exchange operates or controls, and is not designed to permit unfair
discrimination between customers, issuers, brokers, or dealers.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78f(b).
    \6\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

    The Commission and the courts have repeatedly expressed their
preference for competition over regulatory intervention in determining
prices, products, and services in the securities markets. In Regulation
NMS, while adopting a series of steps to improve the current market
model, the Commission highlighted the importance of market forces in
determining prices and SRO revenues and, also, recognized that current
regulation of the market system ``has been remarkably successful in
promoting market competition in its broader forms that are most
important to investors and listed companies.'' \7\
---------------------------------------------------------------------------

    \7\ Securities Exchange Act Release No. 34-51808 (June 9, 2005)
(``Regulation NMS Adopting Release'').
---------------------------------------------------------------------------

    Likewise, in NetCoalition v. Securities and Exchange Commission \8\
(``NetCoalition'') the D.C. Circuit upheld the Commission's use of a
market-based

approach in evaluating the fairness of market data fees against a
challenge claiming that Congress mandated a cost-based approach.\9\ As
the court emphasized, the Commission ``intended in Regulation NMS that
`market forces, rather than regulatory requirements' play a role in
determining the market data . . . to be made available to investors and
at what cost.'' \10\
---------------------------------------------------------------------------

    \8\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \9\ Id. at 534-535.
    \10\ Id. at 537.
---------------------------------------------------------------------------

    Further, ``[n]o one disputes that competition for order flow is
`fierce.' . . . As the SEC explained, '[i]n the U.S. national market
system, buyers and sellers of securities, and the broker-dealers that
act as their order-routing agents, have a wide range of choices of
where to route orders for execution'; [and] `no exchange can afford to
take its market share percentages for granted' because `no exchange
possesses a monopoly, regulatory or otherwise, in the execution of
order flow from broker dealers'. . . .'' \11\
---------------------------------------------------------------------------

    \11\ Id. at 539 (quoting ArcaBook Order, 73 FR at 74782-74783).
---------------------------------------------------------------------------

    The Exchange believes that amending Nasdaq Rule 7039(b) to reduce
the monthly maximum fee from $50,000 to $41,500 for each distributor of
Nasdaq Last Sale Data Feeds (exclusive of the $1,500 monthly fee
applicable to all distributors of a Nasdaq Last Sale Data Feed under
Nasdaq Rule 7039(c)) is reasonable because Nasdaq believes it will
incentivize more distributors to subscribe to the Nasdaq Last Sale Data
Feeds.
    The Exchange also believes that the proposed rule fee change is an
equitable allocation and is not unfairly discriminatory because the
Exchange will apply the new lower fee uniformly across all distributors
of Nasdaq Last Sale Data Feeds

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
Notwithstanding its determination that the Commission may rely upon
competition to establish fair and equitably allocated fees for market
data, the NetCoalition court found that the Commission had not, in that
case, compiled a record that adequately supported its conclusion that
the market for the data at issue in the case was competitive. Nasdaq
believes that a record may readily be established to demonstrate the
competitive nature of the market in question.
    There is intense competition between trading platforms that provide
transaction execution and routing services and proprietary data
products. 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. Data products
are valuable to many end Subscribers only insofar as they provide
information that end Subscribers 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, an exchange's customers view the costs of transaction
executions and of data as a unified cost of doing business with the
exchange. A broker-dealer (``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 orders 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.
    Thus, an 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'.'' \12\ However,
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. Similarly, 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.
---------------------------------------------------------------------------

    \12\ Id.
---------------------------------------------------------------------------

    Analyzing the cost of market data distribution in isolation from
the cost of all of the inputs supporting the creation of market data
will inevitably underestimate the cost of the data. Thus, because it is
impossible to create data without a fast, technologically robust, and
well-regulated execution system, system costs and regulatory costs
affect the price of market data. It would be equally misleading,
however, to attribute all of the exchange's costs to the market data
portion of an exchange's joint product. Rather, all of the exchange's
costs are incurred for the unified purposes of attracting order flow,
executing and/or routing orders, and generating and selling data about
market activity. The total return that an exchange earns reflects the
revenues it receives from the joint products and the total costs of the
joint products.
    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, 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.
    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.\13\
---------------------------------------------------------------------------

    \13\ See http://www.cinnober.com/boat-trade-reporting.
---------------------------------------------------------------------------

    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.\14\ 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 \15\ 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.
---------------------------------------------------------------------------

    \14\ 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.
    \15\ 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.
---------------------------------------------------------------------------

    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 instance, the Exchange believes that amending Nasdaq Rule
7039(b) to reduce the monthly maximum fee from $50,000 to $41,500 for
each distributor of Nasdaq Last Sale Data Feeds (exclusive of the
$1,500 monthly fee that all distributors of a Nasdaq Last Sale Data
Feed must also pay and that is set forth under Nasdaq Rule 7039(c))
does not impose a burden on competition and may increase competition
through making this a more affordable option for distributors.
Accordingly, the Exchange does not believe that the proposed change
will impair the ability of members or competing order execution venues
to maintain their competitive standing in the financial markets.

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

    Written comments were neither solicited nor received.

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

    The foregoing change has become effective pursuant to Section
19(b)(3)(A)(ii) of the Act.\16\ 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.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

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_ADDRESS>Please include
File Number SR-NASDAQ-2016-048 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2016-048. 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 also will be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-NASDAQ-2016-048, and should
be submitted on or before May 6, 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. 2016-08643 Filed 4-14-16; 8:45 am]
BILLING CODE 8011-01-P