[Federal Register Volume 76, Number 18 (Thursday, January 27, 2011)]
[Notices]
[Pages 4970-4978]
[FR Doc No: 2011-1711]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63745; File No. SR-NASDAQ-2011-010]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Link Market Data Fees and Transaction Execution Fees

January 20, 2011.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on January 10, 2011, The NASDAQ Stock Market LLC (``NASDAQ'' or
the ``Exchange'') filed with the Securities and Exchange Commission
(the ``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

    NASDAQ proposes to reduce market data fees and transaction
execution fees for retail investors. NASDAQ, like the Commission, ``is
particularly focused on the interests of long-term investors.'' \3\
Retail investors' orders are often executed away from well-regulated
public exchanges that offer pre-trade transparency. The Commission has
noted that absent extraordinary conditions such as those occurring on
May 6, 2010, retail orders are generally executed by internalizers away
from exchanges and without pre-trade transparency, exposure or order
interaction.\4\ In NASDAQ's view, the likelihood that retail investors'
orders are executed away from exchanges is impacted by disparities in
regulation between lit markets such as those operated by exchanges \5\
on one hand and broker systems or dark markets operated as Alternative
Trading Systems on the other. One such disparity provides dark markets
great flexibility to price differentiate between subscribers, while
denying exchanges the same flexibility to differentiate between
members. Furthermore, although exchanges and dark markets compete for
the same order flow and for the same transactions, exchanges must file
proposed fee schedules and changes, while other markets have no such
burden. The result is that proposed rule changes that impact NASDAQ's
ability to compete for order flow, transactions, and market data, such
as the current proposal, are subject to significant scrutiny and
potential delay while similar conduct by other markets is subject to no
public filing requirement, no regulatory delay, and for dark markets is
opaque to investors and competitors alike.
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    \3\ See Exchange Act Release 61358, Concept Release on Equity
Market Structure (Jan. 14, 2010), at p. 33.
    \4\ See Findings Regarding The Market Events Of May 6, 2010,
Report Of The Staffs Of The CFTC And SEC To The Joint Advisory
Committee On Emerging Regulatory Issues, September 30, 2010, at p.
56. It is often contended that dark markets serve the interests of
large investors whose order sizes give rise to the potential for
adverse market movements. Such potential does not exist in the case
of smaller retail orders.
    \5\ Alternative Trading Systems that meet the five percent
display threshold under Regulation ATS also qualify as lit markets
with higher regulatory requirements. NASDAQ is not aware that any
ATS is operating under these conditions today.
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    This filing is an attempt by NASDAQ to compete to attract retail
investors' orders and to improve the experience of retail investors on
NASDAQ's public market. NASDAQ is reducing fees for members that serve
retail investors. Specifically, NASDAQ is reducing the costs of
executing trades and of providing ``depth of book'' data products for
NASDAQ member firms that service ``non-professional'' users with which
the firm has a brokerage relationship. The more NASDAQ data a firm
provides to retail investors, and the more that firm trades on NASDAQ,
the lower its fees will be. This is an optional pricing proposal
designed to benefit non-professional investors by providing an
incentive for them to trade in the well-regulated, publicly-displayed
market that NASDAQ operates.
    NASDAQ will implement the proposed change on January 3, 2011. The
text of the proposed rule change is available at http://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. The
text of these statements may be examined at the places specified in
Item III below, and is set forth in Sections A, B, and C below. NASDAQ
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 the
Statutory Basis for, the Proposed Rule Change

1. Purpose
    This filing reduces prices for NASDAQ market data and for trading
on NASDAQ. The proposed price reduction is targeted at retaining the
business of members that represent retail investors and that
redistribute market data to them in a non-professional capacity. NASDAQ
believes that this proposal thereby promotes NASDAQ's and the
Commission's goal of better serving long-term, retail investors and
restoring confidence in public capital markets. The participation of
these investors in NASDAQ's market benefits NASDAQ, its listed
companies, its market quality, and the quality of its data products.
The proposal is also a competitive response to other trading venues
that have used

price discounts to entice firms to shift order flow and data
consumption, and that may continue to do so in the future. In short,
NASDAQ is attempting to compete on price for the business of customers
that are highly valued to NASDAQ and important to the health of U.S.
capital markets.
Description of the Pricing Proposal
    NASDAQ is proposing a discount for its depth-of-book data products
and an enhanced liquidity provider rebate based upon the extent to
which a NASDAQ member both consumes NASDAQ market data and also
contributes to the quality of NASDAQ data through liquidity provision.
This program focuses on non-professional use of ``NASDAQ Depth Data
Product Fees'' which are the non-professional fees for NQDS (Rule
7017), and TotalView and OpenView (Rule 7023), including fees for usage
(Rule 7026) and enterprise license fees. It also focuses on average
daily liquidity provision to the NASDAQ Market Center as that activity
is measured today in NASDAQ Rule 7018. This pricing is completely
optional; no member is required to participate or excluded from
participating.
    The market data discount provided through the proposal is for fees
incurred by NASDAQ members in providing NASDAQ depth-of-book data to
non-professional users. A member incurs non-professional fees when it
offers depth-of-book data to natural persons that are not acting in a
capacity that subjects them to financial industry regulation (e.g.,
retail customers).\6\ NASDAQ seeks to encourage wide distribution of
market data to non-professional users, because it believes that this
will encourage more order flow from investors whose trading volumes are
elastic and therefore influenced by factors such as the availability of
data. NASDAQ also expects that some of the benefit of the fee
reductions offered through the proposal will be passed on to brokerage
customers. For this reason, NASDAQ already provides a discounted rate
for non-professional data, whether it is sold directly to a non-
professional user or distributed to the user through a broker. NASDAQ
believes that non-professional users that are able to make use of depth
data also have a degree of knowledge about market structure that would
cause them to favor limit orders, rather than market orders, when
buying and selling. Thus, through the proposal, NASDAQ hopes to
encourage a ``virtuous circle'' in which firms route more liquidity-
providing orders to NASDAQ and consume and distribute more data in
order to receive the discount, with increased data distribution in turn
encouraging still more liquidity provision. NASDAQ also hopes to
encourage additional firms to provide depth-of-book to their customers.
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    \6\ NASDAQ Rule 7017(c) defines a non-professional as a natural
person who is neither:
    (1) Registered or qualified in any capacity with the Commission,
the Commodities Futures Trading Commission, any State securities
agency, any securities exchange or association, or any commodities
or futures contract market or association;
    (2) Engaged as an ``investment adviser'' as that term is defined
in Section 201(11) of the Investment Advisors Act of 1940 (whether
or not registered or qualified under that Act); nor
    (3) Employed by a bank or other organization exempt from
registration under Federal or State securities laws to perform
functions that would require registration or qualification if such
functions were performed for an organization not so exempt.
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    The program has three tiers, each with two requirements, one based
on liquidity provision and the other based on data consumption. A
member will qualify as a ``Tier 1 Firm'' for purposes of the discount
during a particular month if it (i) has an average daily volume of 12
million or more shares of liquidity provided through the NASDAQ Market
Center in all securities during the month; and (ii) incurs NASDAQ Depth
Data Product Fees (as defined above) during the month of $150,000 or
more (prior to applying the discount provided by this proposal). A
member will qualify as a ``Tier 2 Firm'' for purposes of the discount
during a particular month if it (i) has an average daily volume of 35
million or more shares of liquidity provided through the NASDAQ Market
Center in all securities during the month; and (ii) incurs NASDAQ Depth
Data Product Fees during the month of $300,000 or more (prior to
applying the discount provided by this proposal). A member will qualify
as a ``Tier 3 Firm'' for purposes of the discount during a particular
month if it (i) has an average daily volume of 65 million or more
shares of liquidity provided through the NASDAQ Market Center in all
securities during the month; and (ii) incurs NASDAQ Depth Data Product
Fees during the month of $500,000 or more (prior to applying the
discount provided by this proposal).
    Firms that qualify as Tier 1, Tier 2, or Tier 3 Firms will receive
discounted market NASDAQ Depth Data Product Fees and, in the case of
Tier 1 Firms, increased liquidity provider credits. With respect to
market data fees, Tier 1 Firms will receive a 15% discount on non-
professional fees for NASDAQ Depth Data Products charged to them. Tier
2 Firms will receive a 35% discount on non-professional fees for NASDAQ
Depth Data Products charged to them. Tier 3 Firms will receive a 50%
discount on non-professional fees charged to them.\7\ The discounted
NASDAQ Depth Data Product Fees are tailored to benefit firms that
provide a high quantity of data to non-professional retail investors
and that also contribute significantly to the quality of NASDAQ data.
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    \7\ Since the eligibility of a member for the discount is
determined on a month-by-month basis, data fees that are paid on an
annual basis, such as the annual administrative fee for market data
distributors under Rule 7019(a), are not covered by the definition
of NASDAQ Depth Data Product Fees, and are therefore not counted in
determining a firm's status as a Tier 1, Tier 2 or Tier 3 Firm.
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    With respect to liquidity provider credits, Tier 1 Firms will
qualify for a credit of $0.0028 per share of displayed liquidity
provided and a $0.0015 per share of non-displayed liquidity. These
rates are higher than the $0.0020 and $0.0010 per share of displayed
and non-displayed liquidity provider credit available to firms that
provide the same 12 million shares of liquidity per day without also
consuming NASDAQ Depth Data Products sufficient to qualify for Tier 1
as defined here.\8\ These credits are not incrementally higher than the
credit currently available to firms providing 35 and 65 million shares
of liquidity daily. In other words, the benefit available to Tier 2 and
Tier 3 Firms under this program is limited to the discount for NASDAQ
Depth Data Products described above.
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    \8\ Tier 2 and Tier 3 Firms will receive the current liquidity
provider credit of $0.00295 per share of displayed liquidity and
$0.00015 per share of non-displayed liquidity. There is no
enhancement to these liquidity provider credits at this time.
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    The proposal is designed to recognize the benefits to NASDAQ, its
listed companies, its market quality, and the quality of its
proprietary data products that are provided by member firms that both
post retail liquidity on NASDAQ and redistribute data to their
customers. The proposal is also a direct competitive response to other
trading venues that have used price discounts to entice firms to shift
order flow and data consumption, and that may continue to do so in the
future. Firms that are eligible for the discount are key contributors
to market quality, by providing liquidity to support rapid execution of
incoming orders with minimal price impact. These firms are able to
shift their business immediately to competing exchanges, which requires
NASDAQ to offer competitive responses to keep the business of these
valued customers. NASDAQ currently recognizes the value of liquidity
provision by offering liquidity provider credits that rise with the
volume of

liquidity provided. For companies listed on NASDAQ, liquidity provision
dampens volatility by allowing higher volumes to trade at a consistent
price.
Single Platform, Joint Products
    NASDAQ is offering a joint discount on market information and
executions because, as described in greater detail in the attached
Statement of Ordover and Bamberger (Exhibit 3), The NASDAQ Market
Center is a single trading platform that unavoidably produces joint
products: execution services and market data. Every execution of a
trade automatically produces market information about that trade
including the price and quantity traded. Every execution requires
posted and taking orders, which in turn produce market data in the form
of quotations, including top-of-book and depth-of-book quotations.
Market information and executions are inextricably linked; each is both
an input and a byproduct of the other and neither can exist without the
other.
    The operation of The NASDAQ Market Center and the production of
joint products (executions and market information) require NASDAQ to
incur joint costs. NASDAQ's costs to produce market information and
executions are inseparable in that most of them are not uniquely
incurred on behalf of either of the services provided by the exchange.
To operate its trading platform, NASDAQ must incur high fixed costs
before accepting a single order, executing a single trade, or producing
a single element of market information. Each year, NASDAQ spends
millions of dollars on market infrastructure such as servers,
processors, line handlers, software, and personnel; data intake,
processing and dissemination equipment and networking hardware and
software; and regulatory and surveillance systems of both a manual and
automated nature. NASDAQ incurs these high costs to operate the
platform and to produce both executions and market information. In
other words, without these costs, neither product is produced, but with
them, both products are unavoidably produced.\9\
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    \9\ This point was recognized over a century ago by the British
economist Alfred Marshall, who noted the inextricability of
producing wool and mutton and the inextricable nature of the costs
associated with such production.
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    NASDAQ recaptures the cost of operating its platform through the
sale of both executions and market information. The total return that
NASDAQ or any trading platform earns reflects the revenues it receives
from the sale of these joint products and other services, net of the
joint and other costs (i.e., those limited costs that can be directly
attributed to one of the relevant products) it incurs. Different
platforms choose different pricing strategies and ways 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.\10\ These strategies can
vary over time in response to changing market and regulatory
factors.\11\
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    \10\ See, e.g., Securities Exchange Act Release No. 62358 (June
22, 2010), 75 FR 37861 (June 30, 2010) (SR-NSX-2010-06). It has also
been reported that NYSE Amex has offered equity incentives to active
members. While Nasdaq is aware of no Amex rule filing with the
Commission, Amex consistently refers publicly to the ``semi-
mutualization.'' program. See, e.g., NYSE Euronext Brings Partners
Into Options Market (Dow Jones Newswires, September 9, 2009);
Comments of Duncan Neiderauer at NYSE Euronext Q3 2009 Earnings Call
(October 30, 2009).
    \11\ Similarly, Marshall's sheep farmer would be expected to
cover his costs of production through the sale of both wool and
mutton, and it would be unreasonable for sweater-wearers to demand
free sweaters subsidized by consumers of mutton. Moreover, in
contrast to sheep farming, consumption of each of NASDAQ's main
products enables further production and consumption of the other--
more executions translate into more data, and more data usage
encourages more executions. Accordingly, as discussed below, there
is no basis in the Act for requiring these inextricably linked
products to be priced in isolation from one another. Such a result
makes no more economic sense than requiring the price of a live
sheep to be divorced from the price of wool and mutton.
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    The Commission has acknowledged many times that trading platforms
compete fiercely for executions. Platforms also compete for the sale of
market data. For example, in June 2008, NASDAQ launched two proprietary
``Last Sale'' products. In each case, the terms included subscription
rates and an ``enterprise cap'' rate designed for Web portals. The
enterprise cap rates for the two products were $100,000 per month and
$50,000 per month for the two products (i.e., a total of $150,000 per
month for customers who purchased both products). The majority of
NASDAQ's sales were at the cap level. In early 2009, we understand that
BATS offered an alternative product (BATS PITCH data) as a zero-cost
alternative to the NASDAQ Last Sale products.\12\ Also in early 2009,
NYSE Arca announced the launch of a competitive product with an
enterprise price of $30,000 per month. In response, NASDAQ combined its
two Last Sale products into one in April 2009, and reduced the
enterprise cap to $50,000 per month (i.e., a reduction of $100,000 per
month).
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    \12\ Subsequently, BATS has begun to charge for certain of its
data products, signaling a shift in strategy to recover a greater
percentage of its costs through data, rather than using data solely
as a means to draw (fee-liable) orders to its market.
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    Given the joint nature of these products and the competitive
markets in which they are offered, a bundled discount that is linked to
total spending across the joint products is economically sensible for a
single platform producing joint products. Bundling recognizes the value
of liquidity provision and data distribution in creating the conditions
that further encourage the creation of the trading platform's products.
It also recognizes the fact that customers are differentiated on
multiple dimensions in terms of their willingness to pay for data and
for accessing liquidity. Platform pricing of market data and executions
enables NASDAQ to design a plan that will appeal to a broader group of
potential customers--in this case those serving retail investors--and
stimulate overall sales of both data and trading. NASDAQ expects that
bundling will be more appealing to its customers than offering
discounts based only on the volume of one kind of activity or another,
as it has done in the past. By conditioning the discount on two
activities, NASDAQ can achieve improved participation from both retail
brokers that distribute data and their order-providing customers, as
compared to a disaggregated pricing approach.\13\
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    \13\ Bundled pricing is also evident--indeed, it arguably finds
its most complete expression--in exchange programs to offer equity
ownership to favored members. Equity allows its owner to participate
in the upside of all aspects of an exchange's operations, including
executions, data, and listings. Thus, equity shares offered in
exchange for liquidity provision offset the costs of all exchange
products that the favored member consumes, effectively translating
into an across-the-board discount and encouraging further
consumption that enhances the value of the equity. Moreover,
participation in such programs is conditioned upon being a member
that directs order flow to the exchange in question, thereby
excluding non-members, such as non-broker data distributors, as well
as members that choose to direct order flow elsewhere. Moreover, an
equity distribution program cannot be open-ended without diluting
its value to the first recipients. Accordingly, once the equity
distribution program is closed, incumbent owners benefit on an
ongoing basis and new members are frozen out.
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    Given the fierce competition between platforms, as evidenced by
rapid shifts in order flow and price cutting behavior

in markets for data, the competitive concerns potentially implicated by
bundling are not present here. Competitive concerns from a practice of
bundling discounts across a range of products may potentially arise
when such bundling is used to foreclose entry (expansion) of rival
firms that may not be able to offer an array of products as broad as
that offered by an incumbent. In the instant case it is not likely that
the combined offer will induce rival exchanges to exit (or become less
competitively potent due to a reduction in volume), since many of
NASDAQ's competitors command a comparably strong measure of market
share in the relevant markets. Accordingly, their product offerings can
readily compete with NASDAQ's in terms of execution functionality,
depth of data, and price (included, if they deem it appropriate,
bundled prices). It is also not likely that the combined offer will
have the effect of creating significant barriers to entry or expansion
for new exchanges. Current conditions of market fragmentation
underscore the absence of barriers to entry in the market to attract
and execute order flow. Because executions necessarily create data,
barriers to entry in that market are correspondingly low.\14\
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    \14\ A further discussion of competitive conditions in the
market for exchange data is provided in NASDAQ's ``Statement on
Burden on Competition'' below.
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Price Differentiation Is Consistent With the Exchange Act
    For many years, exchanges have engaged in and the Commission has
accepted the practice of price differentiation, both in the context of
market data as well as in the context of executions. With respect to
market data, NASDAQ and NYSE in their capacities as network processors
and exchanges have differentiated in pricing between professional and
non-professional market data users often charging professionals many
times more than non-professionals for using the same data. For example,
consolidated data for NASDAQ stocks costs non-professional investors
just one dollar per month, whereas professional investors pay twenty
dollars per month for the same data. Also, NASDAQ currently charges $15
per terminal for its TotalView product to non-professionals, while
professional investors pay roughly five times the non-professional
rate. This reflects the value of the service to various constituencies
(i.e., lower prices are charged to consumers with more elastic demand)
and allows both types of investors to contribute to the high fixed
costs of operating an exchange platform.\15\ Thus, one of the two bases
for differentiation employed here--reduced prices for non-professional
data usage--is completely consistent with economic theory and past
Commission precedent.
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    \15\ As discussed in Exhibit 3, charging lower fees to non-
professional consumers increases overall economic welfare by
increasing output--in this case, providing more data to more
investors--and avoids two equally undesirable alternatives: (i)
Requiring the firm to charge uniformly high prices that constrict
demand, or (ii) insisting on uniformly low prices at marginal cost
(in this case, zero or close to zero) that do not allow the firm to
cover its fixed costs and thereby lead to bankruptcy.
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    Similarly, the Commission has long accepted price differentiation
between and among members of trading platforms that provide and take
liquidity to execute trades. For example, exchanges have offered and
continue to offer differential pricing based on absolute volume,
incremental volume, order type, ticker symbol, routing strategy, stock
price, equity ownership,\16\ and other characteristics. Other
platforms, including electronic communications networks and other forms
of alternative trading systems (``ATSs''), including dark pools,
differentiate on these dimensions and, NASDAQ understands, other
dimensions that exchanges are prohibited from using.\17\ The
differentiation that NASDAQ's proposes here--higher rebates for larger
liquidity providers--is entirely consistent with past precedent and
with the Act as interpreted and applied by the Commission.
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    \16\ An equity ownership program in which a member receives
equity in exchange for its initial order flow commitment gives rise
to differential pricing in which two classes of participants that
thereafter engage in the same behavior are treated differently on an
ongoing basis: The equity owner is rewarded for participation
through the increased value of its stock, and the non-owner is not.
    \17\ For example, we understand that ATSs routinely negotiate
individualized pricing packages with their subscribers, and deny
access to disfavored users.
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    Thus, the Commission has accepted in individual form the precise
elements of the price differentiation that NASDAQ is proposing here in
joint form. As explained above and in Exhibit 3, this is especially
appropriate where the products subject to the joint pricing--market
data and executions--are themselves joint products of a single
platform: Joint pricing will allow exchanges to structure fees that
recognize the contribution of particular classes of members to the
creation of the products and thereby broaden output and reduce fees.
    The Commission should also recognize that trading platform
operations are 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).\18\ 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 information that is distributed) and are each subject to
significant scale economies.\19\
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    \18\ 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.
    \19\ This is not the case with Marshall's sheep farming. Sheep
are likely produced with constant or increasing marginal cost, and
the pricing complication is confined to the most efficient recovery
of the marginal cost of a sheep.
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    That NASDAQ's platform produces market information and executions
jointly and in scale does not mean that either of the joint products
should be, or even can be, offered at no charge or at marginal cost.
Marginal cost pricing is not feasible when there are increasing returns
to scale because if all sales were priced at marginal cost, NASDAQ
would be unable to defray its platform costs of providing the joint
products. Moreover, to offer market data at no cost would require
NASDAQ to raise the cost of providing execution services because it
would require execution services to cover 100 percent of the recovery
of the joint and common costs of both execution services and market
data. While this may be a viable choice for some platforms, individual
platform operators can and do reasonably choose other pricing models to
allocate the recovery of cost between the joint products. At the same
time, as discussed below and in Exhibit 3, competition between
platforms clearly constrains the ability of platform operators to price
execution services and market data products.
    The Commission has previously stated, in dicta, that ``the Exchange
Act precludes exchanges from adopting terms for data distribution that
unfairly discriminate by favoring participants in

an exchange's market or penalizing participants in other markets.''
\20\ The Commission provided no analysis in support of this statement.
NASDAQ believes that consideration of the joint nature of the products
in question and the Commission's precedents will allow a more developed
analysis of conduct that constitutes unfair discrimination under the
Act. As noted above, the Commission has allowed exchanges to price
discriminate in a wide range of respects, including, for example,
volume-based execution discounts that directly favor participants in
the exchange's market, discounts on uses of particular order types or
strategies that favor participants with certain trading models, and
selective equity ownership that provides effective discounts on all of
the exchange's products, including data, and that discriminates in
favor of active participants in the exchange's market during a set
offering period. Moreover, in light of the joint nature of an
exchange's transaction and data products, uniform fees--requiring
exchanges to charge the same fees to data consumers that help to
produce data as it charges to those who do not--could be said to
discriminate against participants by requiring them to pay fees that
are not allocated based on the value of their participation in the
market. Thus, if it is fair to discount execution fees to liquidity
providers because they add value to the market place, it should also be
considered fair to discount data fees to liquidity providers because
they add value to data.
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    \20\ Securities Exchange Act Release No. 59039 (December 2,
2008), 73 FR 74770 (December 9, 2008) (SR-NYSEArca-2006-21), vacated
by NetCoalition v. SEC, No. 09-1042 (DC Cir. 2010).
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    In addition, it is difficult to discern a reasonable policy goal
behind a strict prohibition on data discounts that consider transaction
activity. As noted above and in Exhibit 3, differences in pricing may
increase economic welfare by allowing greater distribution than would
otherwise be the case, and also, in this case, enhance the value of
NASDAQ's joint product to the extent that greater consumption of data
encourages further investor activity, which in turn results in the
production of more data. Moreover, differentiating pricing based on
reasonable distinctions among consumers cannot be considered unfair
under the Act, since the Commission has approved numerous instances of
such distinctions. If the Commission were to adopt such a prohibition,
therefore, it would seem to be driven by a concern that exchanges might
use bundled data pricing in an anticompetitive manner.\21\
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    \21\ Another possibility is that the Commission might somehow
conclude that transactions and data must be priced in isolation of
one another, despite their wool/mutton nature, merely to ensure that
data consumers who do not use transaction services pay the same fees
as those who do. There is nothing in the Act that speaks directly to
maintaining a dichotomy between products in establishing their
prices, and the Act clearly allows differential pricing within a
product category. Nor would it be reasonable for the Commission to
conclude that fairness mandates that consumers with different cost
and benefit profiles nevertheless pay the same fees. Thus, before
the Commission concludes that a particular price differential is
``unfair,'' it should first conclude that the differential lacks a
reasonable basis in fact. NASDAQ respectfully maintains that the
Commission may not reach such a conclusion in this instance.
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    This concern would be reasonable only if the exchange actually
enjoyed substantial market power in the data segment of the market and
could use it to attempt to reduce competition in the transactions
segment. Thus, if all market participants needed data from a particular
exchange to operate, and the exchange conditioned low data fees on
market participants directing order flow to the exchange, the exchange
might attempt to use its control over data to monopolize trading as
well. These conditions are not present here, nor is it likely that they
could ever arise in these markets. First, an exchange that attempted to
restrict the provision of data to disfavored recipients would be
restricting access to one of the key mechanisms by which the exchange
attracts orders to its matching engine. Moreover, as discussed in
detail throughout this filing, the market participants with the most
demand for an exchange's data are the ones that actually trade on that
exchange, but no one is required to trade on any particular exchange or
to consume its data. Indeed, no single exchange controls proprietary
data that is indispensible to any particular market participant.
Therefore, an effort to use pricing to ``penalize'' market participants
for sending orders to other venues would likely succeed only in driving
more orders to those venues and cutting demand for data as well.
Finally, because the marginal cost of selling data to one more customer
is zero or close to zero, exchanges have every interest in selling as
much data as possible, in order to ensure that they cover their high
fixed costs. As a result, exchanges readily sell data to market
participants and also to non-market participants that direct no order
flow to the exchange at all. Penalizing ``disloyal'' consumers of data
would do nothing more than diminish the exchange's revenue
opportunities.
    Under traditional antitrust analysis, pricing systems under which
the prices for two products are ``bundled'' have generally been found
to be beneficial to consumers, rather than anticompetitive. A court
will not uphold a challenge to bundled pricing unless it is clear that
a party has market power in one product and is using the bundled
pricing to extend its market power to another product. ``Buyers often
find package sales attractive; a seller's decision to offer such
packages can merely be an attempt to compete effectively--conduct that
is entirely consistent with the Sherman Act.'' Jefferson Parish Hosp.
Dist. No. 2 v. Hyde, 466 U.S. 2, 12 (1984). As noted in the recent
report of a bipartisan commission on antitrust law,\22\ ``[l]arge and
small firms, incumbents, and new entrants use bundled discounts and
rebates in a wide variety of industries and market circumstances.
Because they involve lower prices, bundled discounts and bundled
rebates typically benefit consumers.'' The report noted that bundled
discounts can be used appropriately to reduce the seller's costs, to
improve the quality of products, to advertise the benefits of related
products, and to increase demand for a product. If, as is the case
here, the markets for both bundled products are competitive, bundled
pricing will not give rise to any competitive concerns.
---------------------------------------------------------------------------

    \22\ Report and Recommendations of the Antitrust Modernization
Commission (April 2007) (available at http://govinfo.library.unt.edu/amc/report_recommendation/amc_final_report.pdf).
---------------------------------------------------------------------------

    Nevertheless, since the Act clearly bars discrimination that is
unfair, it would be reasonable for the Commission to disapprove fees or
other conditions to access that appear to have anticompetitive aims,
such as rules that selectively prohibit some parties from having access
to data. The Commission should not, however, block efforts by exchanges
to reduce their prices merely because they do not cut prices ``across
the board.'' As the Supreme Court has recognized, ``cutting prices in
order to increase business often is the very essence of competition.''
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 594
(1986). ``Mistaken inferences in cases'' involving alleged harm from
low prices ``are especially costly, because they chill the very conduct
the antitrust laws are designed to protect.'' Matsushita, 475 U.S. at
594. In this case, disapproval of NASDAQ's proposed fee reductions
would leave the fees for NASDAQ depth products untouched: consumers
that would have paid lower fees under the proposal will

continue to pay higher fees, and other consumers will pay exactly what
they do now, and exactly what they would have paid if the proposal had
gone into effect. It is difficult to see how the interests of any
parties, or of the marketplace as a whole, would be served by that
outcome.
Conclusion
    This filing reduces prices for NASDAQ market data and for trading
on NASDAQ. It is designed to promote NASDAQ's and the Commission's goal
of better serving retail investors whose participation in NASDAQ's
market benefits NASDAQ, its listed companies, its market quality, and
the quality of its data products. It is also a competitive response to
other trading venues. In short, NASDAQ is cutting prices for customers
that are highly valued to NASDAQ and are important to the health of
U.S. capital market.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act.\23\ In particular, NASDAQ
believes that the proposal is consistent with Section 6(b)(4) of the
Act,\24\ in that it provides an equitable allocation of reasonable fees
among users and recipients of the data, Section 6(b)(5) of the Act,\25\
in that it is not designed to permit unfair discrimination between
customers, issuers, brokers, or dealers, Section 6(b)(8) of the
Act,\26\ in that it does not impose any burden on competition not
necessary or appropriate in the furtherance of the purposes of the Act,
and Rule 603(a) of Regulation NMS,\27\ in that it provides for
distribution of information with respect to quotations for or
transactions in an NMS stock on terms that are fair and reasonable and
are not unreasonably discriminatory. In adopting Regulation NMS, the
Commission granted self-regulatory organizations and broker-dealers
\28\ 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.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78f.
    \24\ 15 U.S.C. 78f(b)(4).
    \25\ 15 U.S.C. 78f(b)(5),
    \26\ 15 U.S.C. 78f(b)(8).
    \27\ 17 CFR 202.603(a).
    \28\ It should be stressed that Rule 603, 17 CFR 202.603(a),
both allows broker-dealers to distribute their own data, singly or
on an aggregated basis, and generally subjects them to the same
regulatory standards as exchanges. Thus, any broker or dealer that
distributes information must do so on terms that are not
unreasonably discriminatory, and any broker or dealer that
distributes information for which it is the exclusive source must do
so on terms that are fair and reasonable. As a result, to the extent
that the Commission establishes procedures or legal standards
applicable to exchange data, it must apply the same procedures and
standards to broker-dealer data.
---------------------------------------------------------------------------

    NASDAQ Depth Data Products are precisely the sort of market data
product that the Commission envisioned when it adopted Regulation NMS.
The Commission concluded that Regulation NMS--by lessening regulation
of the market in proprietary data--would itself further the Act's goals
of facilitating efficiency and competition:

    [E]fficiency is promoted when broker-dealers who do not need the
data beyond the prices, sizes, market center identifications of the
NBBO and consolidated last sale information are not required to
receive (and pay for) such data. The Commission also believes that
efficiency is promoted when broker-dealers may choose to receive
(and pay for) additional market data based on their own internal
analysis of the need for such data.\29\

    \29\ 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
broker-dealers at all, it follows that the price at which such data is
sold should be set by the market as well.
    The recent decision of the United States Court of Appeals for the
District of Columbia Circuit in NetCoaliton [sic] v. SEC, No. 09-1042
(DC Cir. 2010) 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.' NetCoaltion [sic], at 15 (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.' '' \30\
---------------------------------------------------------------------------

    \30\ NetCoaliton [sic] v. SEC, No. 09-1042 (DC Cir. 2010) at p.
16, [sic].
---------------------------------------------------------------------------

    The Court in NetCoalition, while upholding the Commission
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 NYSEArca's data product at issue
in that case. For the reasons discussed in this filing and in Exhibit
3, however, NASDAQ believes that there is substantial evidence of
competition in the marketplace for data that was not in the record in
the NetCoalition case, and that the Commission is entitled to rely upon
such evidence in concluding that the fees established in this filing
are the product of competition, and therefore in accordance with the
relevant statutory standards.\31\ In addition, as discussed in the
``Purpose'' section of the filing above, NASDAQ believes that it is not
inequitable or unfairly discriminatory to establish discounts for
market data fees that take account of a market participant's
transaction volumes.
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    \31\ It should also be noted that Section 916 of 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. Although this change in the law does not alter the
Commission's authority to evaluate and ultimately disapprove
exchange rules if it concludes that they are not consistent with the
Act, it unambiguously reflects a conclusion that market data fee
changes do not require prior Commission review before taking effect,
and that a formal proceeding with regard to a particular fee change
is required only if the Commission determines that it is necessary
or appropriate to suspend the fee and institute such a proceeding.
---------------------------------------------------------------------------

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

    NASDAQ does not believe that the proposed rule change will result
in any burden on competition. To the contrary, NASDAQ's proposed price
reduction in response to competitive pricing offers is the essence of
competition. As the Supreme Court has recognized, ``cutting prices in
order to increase business often is the very essence of competition.''
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 594
(1986). NASDAQ is acting pro-competitively by offering more attractive
pricing, designed to attract order flow and business away from
competing platforms:

    When a firm * * * lowers prices but maintains them above
predatory levels, the business lost by rivals cannot be viewed as an
``anticompetitive'' consequence of the claimed violation. A firm
complaining about the harm it suffers from nonpredatory price
competition ``is really claiming that it [is] unable to raise
prices.'' This is not antitrust injury; indeed, ``cutting prices in
order to increase business often is the very essence of
competition.'' The antitrust laws were

enacted for ``the protection of competition, not competitors.''

Atlantic Richfield Co. v. USA Petroleum Co., 495 U.S. 328, 337-38
(1990) (emphasis in original; citations omitted).

Platform Competition Is Intense

    As the Commission recently recognized,\32\ the market for
transaction execution and routing services is highly competitive, and
the market for proprietary data products is complementary to it, since
the ultimate goal of such products is to attract further order flow to
an exchange. Order flow is immediately transportable to other venues in
response to differences in cost or value and in doing so directly
impact the quality and quantity of data at any given platform.
---------------------------------------------------------------------------

    \32\ Id.
---------------------------------------------------------------------------

    With regard to the market for executions, broker-dealers currently
have numerous alternative venues for their order flow, including
multiple competing self-regulatory organization (``SRO'') markets, as
well as broker-dealers (``BDs'') and aggregators such as the Direct
Edge and LavaFlow electronic communications networks (``ECNs''). Each
SRO market competes to produce transaction reports via trade
executions, and FINRA-regulated Trade Reporting Facilities (``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.
    Public markets such as NASDAQ also compete for order flow and
executions with dark pools and other ATSs that provide similar services
under a lighter regulatory burden.\33\ One such disparity that directly
affects competition for order flow, executions, and market data is the
greater flexibility of dark trading systems and certain ATSs to
differentiate between their subscribers. Another is the requirement
imposed on exchanges and not upon ATSs to file proposed pricing
schedules and changes, thereby subjecting exchanges prices to greater
regulatory scrutiny, intervention and delay. NASDAQ has questioned and
continues to question whether such disparities remain justified
(assuming they once were justified) in light of current competition
between exchanges and ATs and including increasingly high levels of
executions occurring in ATSs.
---------------------------------------------------------------------------

    \33\ See Letter dated April 30, 2010, from Joan Conley, Senior
vice President and Corporate Secretary, The NASDAQ Stock Market LLC,
to Elizabeth Murphy, Secretary, Securities and Exchange Commission
(commenting on regulatory disparities and arbitrage in response to
Concept Release on Market Structure).
---------------------------------------------------------------------------

    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, and ECNs that currently
produce proprietary data or are currently capable of producing it
provides further pricing discipline for proprietary data products. Each
SRO, TRF, ECN and BD is currently permitted to produce proprietary data
products, and many currently do or have announced plans to do so,
including NASDAQ, NYSE, NYSEArca, BATS, and Direct Edge.
    Any ECN or BD can combine with any other ECN, broker-dealer, or
multiple ECNs or BDs to produce jointly proprietary data products.
Additionally, non-BDs such as order routers like LAVA, as well as
market data vendors can facilitate single or multiple broker-dealers'
production of proprietary data products. The potential sources of
proprietary products are virtually limitless.
    The fact that depth data from ECNs, BDs, and vendors can by-pass
SROs is significant in two respects. First, non-SROs can compete
directly with SROs for the production and distribution of proprietary
data products, as Archipelago, BATS, and DirectEdge did prior to
registering as SROs. Second, because a single order or transaction
report can appear in an SRO proprietary product, a non-SRO proprietary
product, or both, the data available in proprietary products is
exponentially greater than the actual number of orders and transaction
reports that exist in the marketplace writ large.
    Market data vendors provide another form of price discipline for
proprietary data products because they control the primary means of
access to end users. Although their business models may differ, vendors
exercise pricing discipline because they can simply refuse to purchase
any proprietary data product that fails to provide sufficient value.
NASDAQ and other producers of proprietary data products must understand
and respond to these varying business models and pricing disciplines in
order to successfully market proprietary data products.
    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 Direct Edge.
Several ECNs have existed profitably for many years with a minimal
share of trading, including Bloomberg Tradebook and LavaFlow.
    Competition among platforms has driven NASDAQ continually to
improve its platform data offerings and to cater to customers' data
needs. For example, NASDAQ has developed and maintained multiple
delivery mechanisms (IP, multi-cast, and compression) that enable
customers to receive data in the form and manner they prefer and at the
lowest cost to them. NASDAQ offers front end applications such as its
``Bookviewer'' to help customers utilize data. NASDAQ has created
TotalView Aggregate to complement TotalView ITCH and Level 2, because
offering data in multiple formatting allows NASDAQ to better fit
customer needs. NASDAQ offers data via multiple extranet providers,
thereby helping to reduce network and total cost for its data products.
NASDAQ has developed an online administrative system to provide
customers transparency into their data feed requests and streamline
data usage reporting. NASDAQ has also expanded its Enterprise License
options that reduce the administrative burden and costs to firms that
purchase market data.
    Despite these enhancements and a dramatic increase in message
traffic, NASDAQ's fees for depth-of-book data have remained flat. In
fact, as a percent of total customer costs, NASDAQ data fees have
fallen relative to other data usage costs--including bandwidth,
programming, and infrastructure--that have risen. The same holds true
for execution services; despite numerous enhancements to NASDAQ's
trading platform, absolute and relative trading costs have declined.
Platform competition has intensified as new entrants have emerged,
constraining prices for both executions and for data.
    The proposed rule change is a direct response to this competition,
and it is motivated by the conclusion that Tier 1, Tier 2 and Tier 3
Firms provide benefits to NASDAQ and its customers across business
lines and therefore merit pricing incentives to join or remain in these
tiers. It recognizes the concern that the order flow and data product
use that such firms currently bring to NASDAQ may migrate elsewhere if
their contributions are not appropriately recognized. At the same time,
if other customers determine that their fees are too high in comparison
to those paid by firms qualifying for the discount, they will take
their business to other venues.

Thus, the proposal must strike a balance between growing and retaining
the business of actual and potential Tier 1 and Tier 2 Firms and the
business of firms that lack the volume of business to become eligible.
In light of the highly competitive nature of these markets, NASDAQ's
revenues and market share are likely to be diminished by the proposal
if it strikes this balance in the wrong way.\34\
---------------------------------------------------------------------------

    \34\ The Commission has recognized that an exchange's failure to
strike this balance correctly will only harm the exchange. ``[M]any
market participants would be unlikely to purchase the exchange's
data products if it sets fees that are inequitable, unfair,
unreasonable, or unreasonably discriminatory[hellip]. For example,
an exchange's attempt to impose unreasonably or unfairly
discriminatory fees on a certain category of customers would likely
be counter-productive for the exchange because, in a competitive
environment, such customers generally would be able to respond by
using alternatives to the exchanges data.'' Id.
---------------------------------------------------------------------------

The NetCoalition Decision
    The court in NetCoalition concluded that the Commission had failed
to demonstrate that the market for market data was competitive based on
the reasoning of the Commission's NetCoalition order because, in the
court's view, the Commission had not adequately demonstrated that
competition for order flow adequately constrains the pricing of depth-
of-book data.\35\ However, the Netcoalition [sic] court did cite
favorably an economic study by Ordover and Bamberger which concluded
that ``[a]lthough an exchange may price its trade execution fees higher
and its market data fees lower (or vice versa), because of ``platform''
competition the exchange nonetheless receives the same return from the
two ``joint products'' in the aggregate.''\36\
---------------------------------------------------------------------------

    \35\ The NetCoalition court did not consider or address the
statutory amendments encompassed by the Dodd-Frank Act in any way.
    \36\ See NetCoalition at fn. 30.
---------------------------------------------------------------------------

    Accordingly, NASDAQ is submitting along with this filing additional
comments from Ordover and Bamberger expanding upon the impact of
platform competition on the pricing of joint products, and in
particular on the application of that theory to NASDAQ's current
proposal. Among the conclusions that Ordover and Bamberger reach are:
    NASDAQ is subject to significant competitive forces in setting the
prices and other terms of execution services and proprietary data
products.
    Competition among trading platforms can be expected to constrain
the aggregate return each platform earns from the sale of the array of
its products, including the joint products at issue here. In
particular, cross-platform competition, and the adverse effects from
overpricing proprietary information on the volume of trading on the
platform, constrain the pricing of proprietary information.
    Competitive forces constrain the prices that platforms can charge
for non-core market information. A trading platform cannot generate
market information unless it receives trade orders. For this reason, a
platform can be expected to use its market data product as a tool for
attracting liquidity and trading to its exchange.
    While, by definition, information that is proprietary to an
exchange cannot be obtained elsewhere, this does not enable the owner
of such information to exercise monopoly power over that information
vis-[agrave]-vis firms with the need for such information. Even though
market information from one platform may not be a perfect substitute
for market information from one or more other platforms, the existence
of alternative sources of information can be expected to constrain the
prices platforms charge for market data.
    Besides the fact that similar information can be obtained
elsewhere, the feasibility of supra-competitive pricing is constrained
by the traders' ability to shift their trades elsewhere, which lowers
the activity on the exchange and so in the long run reduces the quality
of the information generated by the exchange.
    NASDAQ's Platform pricing can be described as a type of
``differential pricing'' and ``bundling.'' Differential pricing in
markets with high fixed costs and low incremental costs is common,
efficient, and not anticompetitive. ``Bundling'' also is common and
generally procompetitive.
    NASDAQ's joint products are produced under the conditions of high
fixed costs, which are also joint and common to a range of products,
and low (or zero) marginal or incremental cost of serving an additional
customer. In industries with these cost characteristics, charging all
customers the same price is not economically efficient.
    Additional evidence cited by NYSE Arca in SR-NYSE Arca-2010-097
which was not before the NetCoalition court also demonstrates that
availability of depth data attracts order flow and that competition for
order flow can constrain the price of market data:
    1. Terrence Hendershott & Charles M. Jones, Island Goes Dark:
Transparence, Fragmentation, and Regulation, 18 Review of Financial
Studies 743 (2005);
    2. Charts and Tables referenced in Exhibit 3B to that filing;
    3. PHB Hagler Bailly, Inc., ``Issues Surrounding Cost-Based
Regulation of Market Data Prices;'' and
    4. PHB Hagler Bailly, Inc., ``The Economic Perspective on
Regulation of Market Data.''
    NASDAQ also submits that in and of itself, NASDAQ's decision
voluntarily to cap fees on existing products is evidence of market
forces at work. The instant proposal does just that, creating an
expanded enterprise license on two product classes. Retail investors
will be the primary beneficiaries.

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.\37\ At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission shall institute proceedings to determine whether the
proposed rule should be approved or disapproved.
---------------------------------------------------------------------------

    \37\ 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 e-mail to<EMAIL_ADDRESS>Please include
File Number SR-NASDAQ-2011-010 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2011-010. This
file number should be included on the subject line if e-mail 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,\38\ 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, on official business days between the hours of 10 a.m.
and 3 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-NASDAQ-2011-010 and should
be submitted on or before February 17, 2011.
---------------------------------------------------------------------------

    \38\ The text of the proposed rule change is available on the
Commission's Web site at http://www.sec.gov/rules/sro.shtml.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\39\
---------------------------------------------------------------------------

    \39\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-1711 Filed 1-26-11; 8:45 am]
BILLING CODE 8011-01-P


HEXAZINONE TOLERANCE REASSESSMENT ELIGIBILITY DECISION REPORT OF THE HAZARD IDENTIFICATION ASSESSMENT (HIARC) REVIEW OF 4/ 25/ 02 DuPONT COMMENTS 2 HAZARD IDENTIFICATION 1.1 Acute Dietary Reference Dose Females 13 50 pp. 3 5 For setting the acute reference dose (ARfD) for females of childbearing age, the Agency has selected a rat developmental study with NOAELs of 100 and 400 mg/ kg for maternal and fetal effects, respectively. The Agency assigned an additional 10x database uncertainty factor (UFdb) because a rabbit developmental study was unacceptable due to uncertainties in the LOEL. A UFdb factor of 10x rather than 3x was used because, based on extrapolation to the rabbit pilot NOEL of 50 mg/ kg in the previous study, it was concluded the difference between rabbits and rats may be greater than 3x. The resulting ARfD was 0.4 mg/ kg (400 mg/ kg / 1000).

Immediately after the HIARC report issued, the Registrant submitted a new rabbit developmental study (DuPont 7405, MRID 45677801) to the Agency. The new rabbit developmental study was conducted using current guidelines and confirmed the results of the previous rabbit developmental study. The maternal and fetal rabbit NOEL was 50 mg/ kg/ day. The maternal and fetal LOEL was 125 mg/ kg/ day based on weight effects, which were only slight in the fetus. A higher dose, 175 mg/ kg/ day produced severe maternal toxicity.

Once the new rabbit study is reviewed, if it is selected as the basis of the ARfD, the registrant believes the extra 10x UFdb should be removed. If selected, this would result in an ARfD of 0.5 mg/ kg (50 mg/ kg / 100). This is essential the same (slight improvement) as the current ARfD, and thus there will be essentially no change in the acute dietary risk assessment.

2.3 Chronic Reference Dose Last line page 6 – typographical error. "The LOAEL is… based on…[ findings listed] and clinical observations of thinnest in one male." Should read "thin appearance in one male."

1.4 Occupational/ Residential Exposure It is not clear to the Registrant why the occupational and residential exposure Sections 2.4.1 through 2.6 were included in a food Tolerance Reassessment. There are no residential uses of hexazinone, that could contribute to the aggregate exposure. It is the Registrant's understanding that occupational exposure assessment is beyond the scope of Tolerance Reassessment. Occupational exposure was addressed under the 1994 Reregistration Eligibility Document. It was noted that a number of the major uses of hexazinone were outside the scope of the Worker Protection Standard (WPS). While agricultural uses and use on sod farms was within WPS; use on pastures, rangeland, plants grown for other than commercial purposes, ornamental plants in parks and golf course, and no agricultural uses such as vegetation along rights of way were outside of the scope of WPS. No worker exposure assessment was conducted.

Therefore the Registrant considers the selection of Occupational/ Residential endpoints (e. g., dermal and inhalation exposure scenarios) to not be relevant to Tolerance Reassessment. Nonetheless, we offer the following comments to the endpoint selection, should these endpoints be considered relevant in the future.

2.4.2 Dermal Absorption The review states that "No dermal absorption study is available." It would be clearer to say that "No dermal penetration study is available. For an estimate of dermal penetration, the NOAEL from the 21 day rabbit dermal toxicity study…." Also, for clarification, add the MRID of the rabbit 21 day study (MRID 41309005).

The Agency extrapolated a dermal absorption factor by comparing the NOAEL in a 21 day dermal study in rabbits to the LOAEL from a rabbit developmental range finding study. A 25% dermal absorption factor was derived.

Rabbit Pilot Developmental LOAEL (oral) = 250 mg/ kg = 25% Rabbit 21 Day Dermal NOAEL 1000 mg/ kg However, the new rabbit developmental study (DuPont 7405, MRID 45677801) indicates there is a greater difference between oral and dermal toxicity than indicated by the above calculation. Further, since no LOAEL was actually established on the Rabbit 21 Day Dermal study, use of a dermal NOAEL in comparison to an oral LOAEL, overestimates the potential dermal penetration. Based on the new rabbit developmental study, dermal absorption is no greater than 12.5%

Rabbit Developmental LOAEL (oral) = 125 mg/ kg =< 12.5% Rabbit 21 Day Dermal NOAEL > 1000 mg/ kg 2.4.3 Short Term (1 Day – 1 Month) Dermal Exposure and 2.4.4 Intermediate Term (1 6 Months) and Long Term (> 6 Months) Dermal Exposures Under 2.4.3, the Agency states the Dose and Endpoint for Risk Assessment for short term dermal Exposure is Not Applicable and that No Hazard and No Quantification are required (based on no effects in the 21 day dermal study in rabbits). However, in the next section (2.4.4) the Agency proceeds to select longer term dermal endpoints based on the chronic dog study NOEL (5 mg/ kg/ day) and a 25% dermal absorption factor (i. e. equivalent to 20 mg/ kg/ day). For intermediate term scenarios, we believe selection of a subchronic endpoint would be more appropriate than selection of the chronic dog study with a 25% absorption factor. It is also consistent wit the Agency guidance document, Toxicology Endpoint Selection Process (February, 1997). Based on the labeled uses for hexazinone, we do not believe a long term dermal exposure scenario is relevant. It is difficult to identify a scenario where there would be daily, lifetime uninterupted dermal exposure to hexazinone.

· The registrant believes that the route specific rabbit dermal study is the most appropriate study to estimate subchronic human dermal exposure. The Agency has concluded that the repeated dose rabbit study (MRID 41309005) meets guidelines and is acceptable. It measured the proper endpoints to identify hexazinone toxicity (including body weights, clinical chemistry, liver histology). Considering lifespan differences, it is of appropriate duration for short term and intermediate endpoint selection.

· However, if the Agency deems that the duration of the subchronic rabbit dermal study is insufficient, acceptable subchronic oral studies of longer duration (90 days) are available. The NOAELs from the rat and dog 90 day studies were 84 and 29 mg/ kg, respectively. Again the dog is the most sensitive species, but the subchronic NOAEL is more appropriate.

· As noted in the discussion above, the 25% absorption factor derived by comparing a LOAEL on a rabbit pilot developmental study to the NOAEL on the rabbit subchronic dermal study overestimated the Dermal Absorption Factor which, in reality, is likely to be less than 12.5%. Using the dog subchronic NOAEL (29 mg/ kg/ day) and applying a more appropriate dermal absorption factor <12.5% would result in an estimated dermal endpoint of > 232 mg/ kg/ day. This is much more comparable to the actual dermal NOAEL determined from the 21 day rabbit study.

Also typographical error in 2.4.4 "thinnest in one males" should read "thin appearance in one male"

2.4.6 Intermediate (1 6 Months) and Long Term (> 6 Months) Inhalation Exposure Typographical error "thinnest in one males" should read "thin appearance in one male"

4 MUTAGENICITY For clarification, we recommend inserting the following wording into the last sentence of the mutagenicity overview (additions are in bold). "Because unambiguous positive results were achieved, it was concluded that the study provided adequate evidence that INA 3674 112 (hexazinone technical) is clastogenic in vitro in an acceptable study. However, negative results were obtained in two studies which assessed chromosome damage in vivo."

General Comment: for consistency with the rest of the document, INA 3674 112 should be changed to hexazinone or hexazinone technical.

Guideline 870.5300: Gene Mutation Assay in Mammalian Cells Conclusion should be bolded as with others studies. "There was, however, no indication that INA 3674 112 induced mutagenic effect in either the presence or the absence of S9 activation."

Guideline 870.5395: Mouse Bone Marrow Micronucleus Assay Change the last sentence from "It satisfy the requirements…." to "It satisfies the requirements…."

Guideline 870.5375: Structural Chromosome Aberration Assay; In vitro Cytogenetic Assay Mid paragraph "In the presence of S 9 mix, no statistically significant increases in chromosome aberrations were seen in Trial 1; however, very low positive control values indicated a problem with the S9 mix." Delete the latter part of the sentence; it is incorrect. Positive control values in both trials produced strong positive results (Trial 1 28 32% abnormal cells, Trial 2 36 40% abnormal cells).

Guideline 870.5385: Structural Chromosome Aberration Assay; In vivo Cytogenetic Assay Fourth sentence of second paragraph, "Few or no analyzable cell were available…" should be "Few or no analyzable cells were available…"

After, "Unacceptable…. The study does not satisfy the requirement for FIFRA Test Guidelines." add, "However, this Guideline is fulfilled by an acceptable mouse micronucleus study."

5 FQPA CONSIDERATIONS 4.3 Developmental Toxicity 5.3.2. Developmental Toxicity in the Rabbit Last paragraph should be upgraded to indicate a Rabbit Developmental Toxicity (45677801) has just been submitted but not yet been reviewed.

5.7 Determination of the Need for Developmental Neurotoxicity Study 4.6.1 Evidence that suggest requiring a Developmental Neurotoxicity Study Atrazine should not be considered as evidence suggesting requirement of a developmental neurotoxicity. Although atrazine and hexazinone contain a triazine ring, there are significant structural differences that contribute substantial differences in the biological response to these molecules by laboratory animals. EPA reached a similar conclusion in the Toxicology Disciplinary Chapter for the Tolerance Reassessment and Evaluation Decision Document, Section 1.0 – Hazard Characterization (May 16, 2002). The critical structural differences include substitutions of a cyclohexyl and a methyl group on the ring nitrogens and the presence of two ring oxo groups in hexazinone. As a result, hexazinone is less aromatic in character than the chloro s triazines. Collectively, these structural differences are considered to contribute differences in toxicological properties. Hexazinone has been classified as a triazine dione by EPA, which further indicates this Agency acknowledges its differences from the chloro striazine herbicide class.

Hexazinone has been extensively tested for safety to mammals. A key difference between hexazinone and atrazine and other members of the chloro s triazine class is that chronic exposures to the latter produce a characteristic mammary tumor response in Sprague Dawley rats. The mode of action for this chloro s triazine induced tumor response has been associated with altered endocrine activity unique to this rat strain. In contrast hexazinone does not induce rat mammary tumors, which indicates the absence of the endocrine modulation responsible for this effect. Additional evidence supporting the absence of endocrine effects with hexazinone includes the absence of endocrine organ effects and effects on reproduction and development. The differences in chemical structures are considered to be critical to the observed differences in toxicological response between hexazinone and the chloro s triazines.

7. Data Gaps "HIARC has requested a 28 day inhalation study because of the concern for inhalation exposure based on the use pattern"

· It is unclear as to which use pattern is being considered. There are no residential uses of hexazinone. Most of the use patterns are outside the scope of WPS. Since no use patterns of concern are identified, it is impossible to determine duration of exposure. · On the same page that it requests a 28 day inhalation study, the Agency notes that it already has an unreviewed 21 day inhalation study (MRID # 00063972, HLR 447 76). In that study, groups of ten male rats were exposed 6 hours/ day, 5 day/ week for 3 weeks to 0 (control) or 2.5 mg/ L of 90% wettable powder formulation of hexazinone. Using the guidance in (Whalan EPA, 1997) this represents an exposure of greater than 600 mg/ kg/ day (2.25 mg hexazinone a. i./ L x 11.38 L/ hr respiration x 6 hr/ day exposure/ 0.25 kg body weight ). Histopathology examination indicated that lung changes were similar between control and hexazinone exposed rats. Intermittent weight losses were noted throughout the test period but all rats showed a normal rate of weight gain during the recovery period . The Registrant acknowledges that this is an old study which was conducted prior to issuance of current guidelines. However, it clearly indicates that repeated exposure to hexazinone dust poses negligible inhalation risk. It also suggests that no further inhalation testing is required since no lung toxicity was identified and since the exposure producing minimal to moderate toxicity was two orders of magnitude higher than the chronic NOAEL that has just been selected by the Agency to set an inhalation endpoint. Therefore the oral endpoint selected is overly protective. In the interest of conservation of animals we strongly urge that available information be considered before the Agency request another study and the repeated dose inhalation be removed as a data gap.

For the rabbit developmental toxicity data gap we recommend changing the statement "is expected to be submitted" to "was not submitted in enough time for review prior to issuance of this document"