20666 Federal Register / Vol. 77, No. 66 / Thursday, April 5, 2012 / Notices 

23 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3NASDAQ previously stated that it would file a 

proposed rule change to make the NLS pilot fees 

permanent. NASDAQ has also informed 

Commission staff that it is consulting with FINRA 

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–NYSEArca–2012–24. 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 Section, 100 F Street NE., 

Washington, DC 20549, on official 

business days between 10 a.m. and 3 

p.m. Copies of the filing will also be 

available for inspection and copying at 

the NYSE’s principal office and on its 

Internet Web site at www.nyse.com. 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–NYSEArca–2012–24 and 

should be submitted on or before April 

26, 2012. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.23

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–8149 Filed 4–4–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66706; File No. SR– 

NASDAQ–2012–045] 

Self-Regulatory Organizations; The 

NASDAQ Stock Market LLC; Notice of 

Filing and Immediate Effectiveness of 

Proposed Rule Change To Extend the 

Fee Pilot Program for NASDAQ Last 

Sale 

March 30, 2012. 

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 28, 

2012, The NASDAQ Stock Market LLC 

(‘‘NASDAQ’’ or the ‘‘Exchange’’) filed 

with the Securities and Exchange 

Commission (‘‘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. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

NASDAQ is proposing to extend for 

three months the fee pilot pursuant to 

which NASDAQ distributes the 

NASDAQ Last Sale (‘‘NLS’’) market data 

products. NLS allows data distributors 

to have access to real-time market data 

for a capped fee, enabling those 

distributors to provide free access to the 

data to millions of individual investors 

via the internet and television. 

Specifically, NASDAQ offers the 

‘‘NASDAQ Last Sale for NASDAQ’’ and 

‘‘NASDAQ Last Sale for NYSE/Amex’’ 

data feeds containing last sale activity in 

US equities within the NASDAQ Market 

Center and reported to the FINRA/ 

NASDAQ Trade Reporting Facility 

(‘‘FINRA/NASDAQ TRF’’), which is 

jointly operated by NASDAQ and the 

Financial Industry Regulatory Authority 

(‘‘FINRA’’). The purpose of this 

proposal is to extend the existing pilot 

program for three months, from April 1, 

2012 to June 30, 2012. 

This pilot program supports the 

aspiration of Regulation NMS to 

increase the availability of proprietary 

data by allowing market forces to 

determine the amount of proprietary 

market data information that is made 

available to the public and at what 

price. During the pilot period, the 

program has vastly increased the 

availability of NASDAQ proprietary 

market data to individual investors. 

Based upon data from NLS distributors, 

NASDAQ believes that since its launch 

in July 2008, the NLS data has been 

viewed by over 50,000,000 investors on 

Web sites operated by Google, 

Interactive Data, and Dow Jones, among 

others. 

The text of the proposed rule change 

is below. Proposed new language is 

italicized; proposed deletions are in 

brackets. 

* * * * * 

7039. NASDAQ Last Sale Data Feeds 

(a) For a three month pilot period 

commencing on [January] April 1, 2012, 

NASDAQ shall offer two proprietary 

data feeds containing real-time last sale 

information for trades executed on 

NASDAQ or reported to the NASDAQ/ 

FINRA Trade Reporting Facility. 

(1)–(2) No change. 

(b)–(c) No change. 

* * * * * 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

self-regulatory organization 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 III 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 the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Prior to the launch of NLS, public 

investors that wished to view market 

data to monitor their portfolios 

generally had two choices: (1) pay for 

real-time market data or (2) use free data 

that is 15 to 20 minutes delayed. To 

increase consumer choice, NASDAQ 

proposed a pilot to offer access to realtime market data to data distributors for 

a capped fee, enabling those distributors 

to disseminate the data at no cost to 

millions of internet users and television 

viewers. NASDAQ now proposes a 

three-month extension of that pilot 

program, subject to the same fee 

structure as is applicable today.3


Tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 66 / Thursday, April 5, 2012 / Notices 20667 

to develop a proposed rule change by FINRA to 

allow inclusion of FINRA/NASDAQ TRF data in 

NLS on a permanent basis. Based on the progress 

of these discussions, NASDAQ expects that it and 

FINRA will both submit filings to make NLS 

permanent during 2012. 

4 15 U.S.C. 78f. 

5 15 U.S.C. 78f(b)(4). 

6Securities Exchange Act Release No. 51808 

(June 9, 2005), 70 FR 37496 (June 29, 2005). 

7NetCoalition, at 535. 

8 It should also be noted that Section 916 of the 

Dodd-Frank Wall Street Reform and Consumer 

Protection Act of 2010 (‘‘Dodd-Frank Act’’) has 

amended paragraph (A) of Section 19(b)(3) of the 

Act, 15 U.S.C. 78s(b)(3) to make it clear that all 

exchange fees, including fees for market data, may 

be filed by exchanges on an immediately effective 

basis. 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 proceeding 

with regard to a particular fee change is required 

only if the Commission determines that it is 

Continued 

NLS consists of two separate ‘‘Level 

1’’ products containing last sale activity 

within the NASDAQ market and 

reported to the jointly-operated FINRA/ 

NASDAQ TRF. First, the ‘‘NASDAQ 

Last Sale for NASDAQ’’ data product is 

a real-time data feed that provides realtime last sale information including 

execution price, volume, and time for 

executions occurring within the 

NASDAQ system as well as those 

reported to the FINRA/NASDAQ TRF. 

Second, the ‘‘NASDAQ Last Sale for 

NYSE/Amex’’ data product provides 

real-time last sale information including 

execution price, volume, and time for 

NYSE- and NYSE Amex-securities 

executions occurring within the 

NASDAQ system as well as those 

reported to the FINRA/NASDAQ TRF. 

By contrast, the securities information 

processors (‘‘SIPs’’) that provide ‘‘core’’ 

data consolidate last sale information 

from all exchanges and trade reporting 

facilities (‘‘TRFs’’). Thus, NLS replicates 

a subset of the information provided by 

the SIPs. 

NASDAQ established two different 

pricing models, one for clients that are 

able to maintain username/password 

entitlement systems and/or quote 

counting mechanisms to account for 

usage, and a second for those that are 

not. Firms with the ability to maintain 

username/password entitlement systems 

and/or quote counting mechanisms are 

eligible for a specified fee schedule for 

the NASDAQ Last Sale for NASDAQ 

Product and a separate fee schedule for 

the NASDAQ Last Sale for NYSE/Amex 

Product. Firms that are unable to 

maintain username/password 

entitlement systems and/or quote 

counting mechanisms also have 

multiple options for purchasing the 

NASDAQ Last Sale data. These firms 

choose between a ‘‘Unique Visitor’’ 

model for internet delivery or a 

‘‘Household’’ model for television 

delivery. Unique Visitor and Household 

populations must be reported monthly 

and must be validated by a third-party 

vendor or ratings agency approved by 

NASDAQ at NASDAQ’s sole discretion. 

In addition, to reflect the growing 

confluence between these media outlets, 

NASDAQ offered a reduction in fees 

when a single distributor distributes 

NASDAQ Last Sale Data Products via 

multiple distribution mechanisms. 

Second, NASDAQ established a cap 

on the monthly fee, currently set at 

$50,000 per month for all NASDAQ Last 

Sale products. The fee cap enables 

NASDAQ to compete effectively against 

other exchanges that also offer last sale 

data for purchase or at no charge. 

As with the distribution of other 

NASDAQ proprietary products, all 

distributors of the NASDAQ Last Sale 

for NASDAQ and/or NASDAQ Last Sale 

for NYSE/Amex products pay a single 

$1,500/month NASDAQ Last Sale 

Distributor Fee in addition to any 

applicable usage fees. The $1,500 

monthly fee applies to all distributors 

and does not vary based on whether the 

distributor distributes the data 

internally or externally or distributes 

the data via both the internet and 

television. 

2. Statutory Basis 

NASDAQ believes that the proposed 

rule change is consistent with the 

provisions of Section 6 of the Act,4 in 

general, and with Section 6(b)(4) of the 

Act,5 in particular, in that it provides an 

equitable allocation of reasonable fees 

among users and recipients of the data. 

In adopting Regulation NMS, the 

Commission granted self-regulatory 

organizations (‘‘SROs’’) and brokerdealers (‘‘BDs’’) increased authority and 

flexibility to offer new and unique 

market data to the public. It was 

believed that this authority would 

expand the amount of data available to 

consumers, and also spur innovation 

and competition for the provision of 

market data. 

NASDAQ believes that its NASDAQ 

Last Sale market 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 brokerdealers 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.6

By removing unnecessary regulatory 

restrictions on the ability of exchanges 

to sell their own data, Regulation NMS 

advanced the goals of the Act and the 

principles reflected in its legislative 

history. If the free market should 

determine whether proprietary data is 

sold to BDs at all, it follows that the 

price at which such data is sold should 

be set by the market as well. 

The recent decision of the United 

States Court of Appeals for the District 

of Columbia Circuit in NetCoalition v. 

SEC, 615 F.3d 525 (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.’ NetCoalition, at 535 (quoting 

H.R. Rep. No. 94–229, at 92 (1975), as 

reprinted in 1975 U.S.C.C.A.N. 321, 

323). The court agreed with the 

Commission’s conclusion that 

‘‘Congress intended that ‘competitive 

forces should dictate the services and 

practices that constitute the U.S. 

national market system for trading 

equity securities.’ ’’ 7

The Court in NetCoalition, while 

upholding the Commission’s conclusion 

that competitive forces may be relied 

upon to establish the fairness of prices, 

nevertheless concluded that the record 

in that case did not adequately support 

the Commission’s conclusions as to the 

competitive nature of the market for 

NYSEArca’s data product at issue in 

that case. As explained below in 

NASDAQ’s Statement on Burden on 

Competition, however, NASDAQ 

believes that there is substantial 

evidence of competition in the 

marketplace for data that was not in the 

record in the NetCoalition 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.8 Moreover, NASDAQ further 


Tkelley on DSK3SPTVN1PROD with NOTICES
20668 Federal Register / Vol. 77, No. 66 / Thursday, April 5, 2012 / Notices 

necessary or appropriate to suspend the fee and 

institute such a proceeding. 

9See 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). 

notes that the product at issue in this 

filing—a NASDAQ last sale data 

product that replicates a subset of the 

information available through ‘‘core’’ 

data products whose fees have been 

reviewed and approved by the SEC—is 

quite different from the NYSEArca 

depth-of-book data product at issue in 

NetCoalition. Accordingly, any findings 

of the court with respect to that product 

may not be relevant to the product at 

issue in this filing. 

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 that is not 

necessary or appropriate in furtherance 

of the purposes of the Act, as amended. 

NASDAQ’s ability to price its Last Sale 

Data Products is constrained by (1) 

Competition between exchanges and 

other trading platforms that compete 

with each other in a variety of 

dimensions; (2) the existence of 

inexpensive real-time consolidated data 

and market-specific data and free 

delayed consolidated data; and (3) the 

inherent contestability of the market for 

proprietary last sale data. 

The market for proprietary last sale 

data products is currently competitive 

and inherently contestable because 

there is fierce competition for the inputs 

necessary to the creation of proprietary 

data and strict pricing discipline for the 

proprietary products themselves. 

Numerous exchanges compete with 

each other for listings, trades, and 

market data itself, providing virtually 

limitless opportunities for entrepreneurs 

who wish to produce and distribute 

their own market data. This proprietary 

data is produced by each individual 

exchange, as well as other entities, in a 

vigorously competitive market. 

Transaction execution and proprietary 

data products are complementary in that 

market data is both an input and a 

byproduct of the execution service. In 

fact, market data and trade execution are 

a paradigmatic example of joint 

products with joint costs. The decision 

whether and on which platform to post 

an order will depend on the attributes 

of the platform where the order can be 

posted, including the execution fees, 

data quality and price and distribution 

of its data products. Without trade 

executions, exchange data products 

cannot exist. Moreover, data products 

are valuable to many end users only 

insofar as they provide information that 

end users expect will assist them or 

their customers in making trading 

decisions. 

The costs of producing market data 

include not only the costs of the data 

distribution infrastructure, but also the 

costs of designing, maintaining, and 

operating the exchange’s transaction 

execution platform and the cost of 

regulating the exchange to ensure its fair 

operation and maintain investor 

confidence. The total return that a 

trading platform earns reflects the 

revenues it receives from both products 

and the joint costs it incurs. Moreover, 

the operation of the exchange is 

characterized by high fixed costs and 

low marginal costs. This cost structure 

is common in content and content 

distribution industries such as software, 

where developing new software 

typically requires a large initial 

investment (and continuing large 

investments to upgrade the software), 

but once the software is developed, the 

incremental cost of providing that 

software to an additional user is 

typically small, or even zero (e.g., if the 

software can be downloaded over the 

internet after being purchased).9 In 

NASDAQ’s case, it is costly to build and 

maintain a trading platform, but the 

incremental cost of trading each 

additional share on an existing platform, 

or distributing an additional instance of 

data, is very low. Market information 

and executions are each produced 

jointly (in the sense that the activities of 

trading and placing orders are the 

source of the information that is 

distributed) and are each subject to 

significant scale economies. In such 

cases, marginal cost pricing is not 

feasible because if all sales were priced 

at the margin, NASDAQ would be 

unable to defray its platform costs of 

providing the joint products. 

An exchange’s BD customers view the 

costs of transaction executions and of 

data as a unified cost of doing business 

with the exchange. A BD will direct 

orders to a particular exchange only if 

the expected revenues from executing 

trades on the exchange exceed net 

transaction execution costs and the cost 

of data that the BD chooses to buy to 

support its trading decisions (or those of 

its customers). The choice of data 

products is, in turn, a product of the 

value of the products in making 

profitable trading decisions. If the cost 

of the product exceeds its expected 

value, the BD will choose not to buy it. 

Moreover, as a BD chooses to direct 

fewer orders to a particular exchange, 

the value of the product to that BD 

decreases, for two reasons. First, the 

product will contain less information, 

because executions of the BD’s trading 

activity will not be reflected in it. 

Second, and perhaps more important, 

the product will be less valuable to that 

BD because it does not provide 

information about the venue to which it 

is directing its orders. Data from the 

competing venue to which the BD is 

directing orders will become 

correspondingly more valuable. 

Similarly, in the case of products such 

as NLS that are distributed through 

market data vendors, the vendors 

provide price discipline for proprietary 

data products because they control the 

primary means of access to end users. 

Vendors impose price restraints based 

upon their business models. For 

example, vendors such as Bloomberg 

and Reuters that assess a surcharge on 

data they sell may refuse to offer 

proprietary products that end users will 

not purchase in sufficient numbers. 

Internet portals, such as Google, impose 

a discipline by providing only data that 

will enable them to attract ‘‘eyeballs’’ 

that contribute to their advertising 

revenue. Retail BDs, such as Schwab 

and Fidelity, offer their customers 

proprietary data only if it promotes 

trading and generates sufficient 

commission revenue. Although the 

business models may differ, these 

vendors’ pricing discipline is the same: 

they can simply refuse to purchase any 

proprietary data product that fails to 

provide sufficient value. NASDAQ and 

other producers of proprietary data 

products must understand and respond 

to these varying business models and 

pricing disciplines in order to market 

proprietary data products successfully. 

Moreover, NASDAQ believes that 

products such as NLS can enhance 

order flow to NASDAQ by providing 

more widespread distribution of 

information about transactions in real 

time, thereby encouraging wider 

participation in the market by investors 

with access to the internet or television. 

Conversely, the value of such products 

to distributors and investors decreases if 

order flow falls, because the products 

contain less content. 

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 


Tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 66 / Thursday, April 5, 2012 / Notices 20669 

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 

thirteen 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, 

NYSEAmex, NYSEArca, BATS, and 

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. 

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 Arca did before registering as 

exchanges by publishing proprietary 

book data on the Internet. Second, 

because a single order or transaction 

report can appear in a core data product, 

an SRO proprietary product, and/or a 

non-SRO proprietary product, the data 

available in proprietary products is 

exponentially greater than the actual 

number of orders and transaction 

reports that exist in the marketplace. 

Indeed, in the case of NLS, the data 

provided through that product appears 

both in (i) real-time core data products 

offered by the SIPs for a fee, and (ii) free 

SIP data products with a 15-minute time 

delay, and finds a close substitute in 

last-sale products of competing venues. 

In addition to the competition and 

price discipline described above, the 

market for proprietary data products is 

also highly contestable because market 

entry is rapid, inexpensive, and 

profitable. The history of electronic 

trading is replete with examples of 

entrants that swiftly grew into some of 

the largest electronic trading platforms 

and proprietary data producers: 

Archipelago, Bloomberg Tradebook, 

Island, RediBook, Attain, TracECN, 

BATS Trading and Direct Edge. Today, 

BATS and Direct Edge provide data at 

no charge in order to attract order flow, 

and use market data revenue rebates 

from the resulting executions to 

maintain low execution charges for their 

users. 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. 

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. 

The competitive nature of the market 

for products such as NLS is borne out 

by the performance of the market. In 

May 2008, the internet portal Yahoo! 

began offering its Web site viewers realtime last sale data (as well as best quote 

data) provided by BATS Trading. In 

response, in June 2008, NASDAQ 

launched NLS, which was initially 

subject to an ‘‘enterprise cap’’ of 

$100,000 for customers receiving only 

one of the NLS products, and $150,000 

for customers receiving both products. 

The majority of NASDAQ’s sales were at 

the capped level. In early 2009, BATS 

expanded its offering of free data to 

include depth-of-book data. Also in 

early 2009, NYSEArca announced the 

launch of a competitive last sale product 

with an enterprise price of $30,000 per 

month. In response, NASDAQ combined 

the enterprise cap for the NLS products 

and reduced the cap to $50,000 (i.e., a 

reduction of $100,000 per month). 

Although each of these products offers 

only a specific subset of data available 

from the SIPs, NASDAQ believes that 

the products are viewed as substitutes 


Tkelley on DSK3SPTVN1PROD with NOTICES
20670 Federal Register / Vol. 77, No. 66 / Thursday, April 5, 2012 / Notices 

10Securities Exchange Act Release No. 65488 

(October 5, 2011), 76 FR 63334 (October 21, 2011) 

(SR–NASDAQ–2011–132); Securities Exchange Act 

Release No. 64856 (July 12, 2011), 76 FR 41845 

(July 15, 2011) (SR–NASDAQ–2011–092); Securities 

Exchange Act Release No. 64188 (April 5, 2011), 76 

FR 20054 (April 11, 2011) (SR–NASDAQ–2011– 

044). 

11NetCoalition, 615 F3d. at 534. While the court 

noted that cost data could sometimes be relevant in 

determining the reasonableness of fees, it 

acknowledged that submission of cost data may be 

inappropriate where there are ‘‘difficulties in 

calculating the direct costs * * * of market data,’’ 

Id. at 539. That is the case here, due to the fact that 

the fixed costs of market data production are 

inseparable from the fixed costs of providing a 

trading platform, and the marginal costs of market 

data production are minimal or even zero. Because 

the costs of providing execution services and 

market data are not unique to either of the provided 

services, there is no meaningful way to allocate 

these costs among the two ‘‘joint products’’—and 

any attempt to do so would result in inherently 

arbitrary cost allocations. 

The court explicitly acknowledged that the ‘‘joint 

product’’ theory set forth by NASDAQ’s economic 

experts in NetCoalition (and also described in this 

filing) could explain the competitive dynamic of the 

market and explain why consideration of cost data 

would be unavailing. The court found, however, 

that the Commission could not rely on the theory 

because it was not in the Commission’s record. Id. 

at 541 n.16. For the purpose of providing a 

complete explanation of the theory, NASDAQ is 

further submitting as Exhibit 3 to this filing a study 

that was submitted to the Commission in SR– 

NASDAQ–2011–010. See Statement of Janusz 

Ordover and Gustavo Bamberger at 2–17 (December 

29, 2010). 

12 15 U.S.C. 78s(b)(3)(a)(ii) [sic]. 

for each other and for core last-sale data, 

rather than as products that must be 

obtained in tandem. For example, while 

the internet portal Yahoo! continues to 

disseminate only the BATS last sale 

product, Google disseminates only 

NASDAQ’s product. 

In this environment, a supercompetitive increase in the fees charged 

for either transactions or data has the 

potential to impair revenues from both 

products. ‘‘No one disputes that 

competition for order flow is ‘fierce’.’’ 

NetCoalition at 24. The existence of 

fierce competition for order flow 

implies a high degree of price sensitivity 

on the part of BDs with order flow, since 

they may readily reduce costs by 

directing orders toward the lowest-cost 

trading venues. A BD that shifted its 

order flow from one platform to another 

in response to order execution price 

differentials would both reduce the 

value of that platform’s market data and 

reduce its own need to consume data 

from the disfavored platform. If a 

platform increases its market data fees, 

the change will affect the overall cost of 

doing business with the platform, and 

affected BDs will assess whether they 

can lower their trading costs by 

directing orders elsewhere and thereby 

lessening the need for the more 

expensive data. Similarly, increases in 

the cost of NLS would impair the 

willingness of distributors to take a 

product for which there are numerous 

alternatives, impacting NLS data 

revenues, the value of NLS as a tool for 

attracting order flow, and ultimately, the 

volume of orders routed to NASDAQ 

and the value of its other data products. 

In establishing the price for the 

NASDAQ Last Sale Products, NASDAQ 

considered the competitiveness of the 

market for last sale data and all of the 

implications of that competition. 

NASDAQ believes that it has considered 

all relevant factors and has not 

considered irrelevant factors in order to 

establish fair, reasonable, and not 

unreasonably discriminatory fees and an 

equitable allocation of fees among all 

users. The existence of numerous 

alternatives to NLS, including real-time 

consolidated data, free delayed 

consolidated data, and proprietary data 

from other sources ensures that 

NASDAQ cannot set unreasonable fees, 

or fees that are unreasonably 

discriminatory, without losing business 

to these alternatives. Accordingly, 

NASDAQ believes that the acceptance 

of the NLS product in the marketplace 

demonstrates the consistency of these 

fees with applicable statutory standards. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

Three comment letters were filed 

regarding the proposed rule change as 

originally published for comment. 

NASDAQ responded to these comments 

in a letter dated December 13, 2007. 

Both the comment letters and 

NASDAQ’s response are available on 

the SEC Web site at http://www.sec.gov/ 

comments/sr-nasdaq-2006-060/

nasdaq2006060.shtml. In addition, in 

response to prior filings to extend the 

NLS pilot,10 the Securities Industry and 

Financial Markets Association 

(‘‘SIFMA’’) and NetCoalition filed 

comment letters contending that the 

SEC should suspend and institute 

disapproval proceedings with respect to 

the filing. Last year, SIFMA and 

NetCoalition filed a petition seeking 

review by the United States Court of 

Appeals for the District of Columbia 

Circuit with respect to the NLS pricing 

pilots in effect from July 1, 2011 through 

September 30, 2011 and from October 1, 

2011 through December 31, 2011. These 

appeals have been stayed pending 

resolution of the consolidated case 

NetCoalition v. SEC, Nos. 10–1421, 10– 

1422, 11–1001, and 11–1065 

(‘‘NetCoalition II’’). 

The letters submitted by SIFMA and 

NetCoalition incorrectly assert that the 

original NetCoalition case stands for the 

proposition that the Commission must 

review cost data to substantiate a 

determination that competitive forces 

constrain the price of market data. In 

fact, the court held the opposite: 

The petitioners believe that the SEC’s 

market-based approach is prohibited 

under the Exchange Act because the 

Congress intended ‘‘fair and reasonable’’ 

to be determined using a cost-based 

approach. The SEC counters that, 

because it has statutorily-granted 

flexibility in evaluating market data 

fees, its market-based approach is fully 

consistent with the Exchange Act. We 

agree with the SEC.11

SIFMA and NetCoalition further 

contend the prior filing lacked evidence 

supporting a conclusion that the market 

for NLS is competitive, asserting that 

arguments about competition for order 

flow and substitutability were rejected 

in NetCoalition. While the court did 

determine that the record before it was 

not sufficient to allow it to endorse 

those theories on the facts of that case, 

the court did not itself make any 

conclusive findings about the actual 

presence or absence of competition or 

the accuracy of these theories: rather, it 

simply made a finding about the state of 

the SEC’s record. Moreover, analysis 

about competition in the market for 

depth-of-book data is only tangentially 

relevant to the market for last sale data. 

As discussed above and in the prior 

filing, perfect and partial substitutes for 

NLS exist in the form of real-time core 

market data, free delayed core market 

data, and the last sale products of 

competing venues, additional 

competitive entry is possible, and 

evidence of competition is readily 

apparent in the pricing behavior of the 

venues offering last sale products and 

the consumption patterns of their 

customers. Thus, although NASDAQ 

believes that the competitive nature of 

the market for all market data, including 

depth-of-book data, will ultimately be 

established, SIFMA and NetCoalition’s 

letters not only mischaracterize the 

NetCoalition decision, they also fail to 

address the characteristics of the 

product at issue and the evidence 

already presented. 

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.12 At any time 

within 60 days of the filing of the 


Tkelley on DSK3SPTVN1PROD with NOTICES
Federal Register / Vol. 77, No. 66 / Thursday, April 5, 2012 / Notices 20671 

13 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 17 CFR 240.19b–4(f)(6). 

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. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change is consistent with the Act. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/sro.shtml); or 

• Send an email to rule-comments@

sec.gov. Please include File Number SR– 

NASDAQ–2012–045 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–2012–045. 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 

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–2012–045 and should be 

submitted on or before April 26, 2012. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.13

Kevin M. O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–8205 Filed 4–4–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66698; File No. SR–BX– 

2012–022] 

Self-Regulatory Organizations; 

NASDAQ OMX BX, Inc.; Notice of Filing 

and Immediate Effectiveness of 

Proposed Rule Change Related to NonDisplay of Primary Pegged Orders With 

an Offset Amount 

March 30, 2012. 

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 23, 

2012, NASDAQ OMX BX, Inc. (‘‘BX’’ or 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

prepared by the Exchange. The 

Exchange has designated the proposed 

rule change as constituting a rule 

change under Rule 19b–4(f)(6) under the 

Act,3 which renders the proposal 

effective upon filing with the 

Commission. The Commission is 

publishing this notice to solicit 

comments on the proposed rule change 

from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend 

Exchange Rule 4751(f)(4) to provide that 

Primary Pegged Orders with an offset 

amount will never be displayed. The 

text of the proposed rule change is 

available at 

nasdaqomxbx.cchwallstreet.com, at the 

Exchange’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, the 

Exchange included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of 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 

BX proposes to amend Rule 4751(f)(4) 

to provide that Primary Pegged Orders 

with an offset amount will be nondisplayed, a change that will improve 

system and inter-market price stability. 

Pegged Orders are orders that, once 

entered, adjust in price automatically, in 

response to changes in the inside bids 

or offers of the BX Equities Market or 

the national market system, depending 

upon the type of pegged order. A 

Primary Pegged Order specifies that its 

price will equal the inside quote on the 

same side of the market; a Market 

Pegged Order will equal the inside 

quote on the opposite side of the 

market. A Midpoint Peg Order will 

equal the midpoint of the national best 

bid and offer (‘‘NBBO’’), excluding the 

effect that the Midpoint Peg Order itself 

has on the inside bid or inside offer. As 

the bids and offers change, so move the 

pegged orders. A Pegged Order may 

have a limit price beyond which the 

order shall not be executed. Primary 

Pegged Orders and Market Pegged 

Orders may establish their pricing 

relative to the appropriate bids or offers 

by selecting one or more offset amounts 

that will adjust the price of the order by 

the offset amount selected. 

Under the Exchange’s current rule, 

Midpoint Pegged Orders are not 

displayed, while Primary and Market 

Pegged Orders may be displayed or not 

displayed, at the option of the person 

placing the order. The display of 

Primary Pegged Orders with an offset 

amount can potentially result in 

excessive messaging when multiple 

venues display pegged non-marketable 

orders. In these scenarios, it is possible 

for the Primary Pegged Orders on each 

venue to react to and change in relation 

to each other, resulting in excessive 

messaging and ‘‘quote flickering.’’ A 


Tkelley on DSK3SPTVN1PROD with NOTICES