Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Notices 21125 

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

2 17 CFR 240.19b–4. 

3Compare NASDAQ Rule 7011 (top-of-book 

consolidated data) and NASDAQ Rule 7047 (top-ofbook NASDAQ-only data). 

4See NASDAQ Rule 7023. 

5See NASDAQ Rules 7044 (Market Pathfinders), 

7048 (Custom Data Feeds), and 7057 (NASDAQ 

MatchView). 

6See NASDAQ Rule 7023(a)(3)(A). 

7See NASDAQ Rule 7023(a)(4). 

For the Commission by the Division of 

Trading and Markets, pursuant to delegated 

authority.8

Kevin O’Neill, 

Deputy Secretary. 

[FR Doc. 2012–8463 Filed 4–6–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66724; File No. SR– 

NASDAQ–2012–044] 

Self-Regulatory Organizations; The 

NASDAQ Stock Market LLC; Notice of 

Filing and Immediate Effectiveness of 

Proposed Rule Change To Modify the 

Fees Applicable to Non-Display Usage 

of Certain NASDAQ Depth-of-Book 

Market Data 

April 3, 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 26, 

2012, The NASDAQ Stock Market LLC 

(‘‘NASDAQ’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’) the proposed rule 

change as described in Items I and II 

below, which Items have been prepared 

by NASDAQ. 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 filing this proposed 

change to modify the fees applicable to 

Non-Display Usage of certain NASDAQ 

Depth-of-Book market data. The text of 

the proposed rule change is available at 

nasdaq.cchwallstreet.com, at 

NASDAQ’s principal office, and at the 

Commission’s Public Reference Room. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

NASDAQ included statements 

concerning the purpose of and basis for 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV 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 

Growth in Use of Non-Displayed Data. 

The implementation of Regulation NMS 

in 2006 and 2007 triggered a dramatic 

change in the composition, speed, and 

consumption of market data products in 

U.S. equities trading. Regulation NMS 

spurred the development and 

proliferation of proprietary data 

products by liberalizing SEC Rule 603, 

allowing self-regulatory organizations to 

offer on a proprietary basis data that 

previously was confined to national 

market system plans, and permit 

investors to use this proprietary data in 

circumstances where consolidated data 

previously was required. Regulation 

NMS also drove market participants to 

increase trading speed and, by 

necessity, the speed of market data feeds 

by requiring in Rule 611 that all market 

participants compete to access a limited 

set of protected quotations. As a result, 

some market participants and exchanges 

have used Depth-of-Book data to 

identify liquidity in fragmented 

markets. 

Technological advancements and 

their use by increasingly sophisticated 

market participants have intensified the 

changes brought about by Regulation 

NMS. For example, the prevalence and 

importance of co-location has grown 

rapidly as market participants seek to 

access protected quotes faster than their 

competitors. Also, markets and market 

participants continually seek expanded 

bandwidth options to communicate an 

ever-increasing number of trading 

messages without significant latencies 

and improvement of determinism. 

Connectivity offerings have multiplied 

as new networks and technologies come 

on line. 

As technology, automation, speed, 

and other aspects of trading have 

evolved, so too has market data 

consumption. No longer is trading and 

investing dominated by individuals 

responding to market data displayed on 

trading screens by manually entering 

quotes and trades into the markets. 

Instead, the vast majority of trading is 

done by firms leveraging powerful 

servers running sophisticated 

algorithms and consuming massive 

quantities of data without displaying 

that data to individual traders. While 

certain groups of investors, including 

retail investors, continue to view 

traditional market data displays, their 

orders are generally processed, 

delivered, and executed by firm servers 

using non-displayed data. Non-Display 

Usage is used not only for automated 

order generation and program trading, 

but also to provide reference prices for 

algorithmic trading and order routing; 

and for various back office processes, 

including surveillance, order 

verification, and risk management 

functions. 

NASDAQ Market Data Pricing. 

NASDAQ’s pricing model for market 

data products must keep pace with 

changes in data consumption patterns in 

order to allocate fees and charges fairly 

among Subscribers. NASDAQ’s pricing 

has evolved over time in response to 

previous changes in market data 

consumption, and it now includes 

numerous factors for setting fees. 

Generally, NASDAQ allocates market 

data fees among Subscribers based on 

the data elements consumed, including 

top-of-book,3 Depth-of-Book,4 and other, 

more sophisticated data products.5

NASDAQ also distinguishes between 

different sets of securities, NASDAQlisted securities versus securities listed 

on other markets for which NASDAQ’s 

data plays a different, often more 

limited, role. Moreover, NASDAQ has 

long followed industry practice by 

distinguishing between real-time and 

delayed data, allocating higher fees to 

real-time usage and lower or no fees to 

delayed data usage. Also, since 1999 

NASDAQ has distinguished between 

Professional and Non-Professional 

Subscribers, offering lower fees to NonProfessional Subscribers in order to 

encourage use by average investors and 

also recognizing that Professional 

Subscribers make heavier use of the 

same data feeds.6 These four 

distinctions have existed in tandem for 

many years. 

Since the mid-2000s, in response to 

changes driven by Regulation NMS, 

NASDAQ has added new considerations 

to its pricing. Thus, in 2005, NASDAQ 

amended its Distributor fee schedule to 

distinguish between distributions [sic] 

that is Internal (redistribution within an 

entity that receives NASDAQ market 

data) versus External (redistribution 

outside that entity) to the Distributor.7

Also, in 2005 NASDAQ began 

differentiating between Direct Access 

and Indirect Access, charging more for 

firms that access data directly from 

NASDAQ based on the enhanced speed 

and simplicity for Subscribers and the 


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21126 Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Notices 

8See NASDAQ Rule 7023(a)(5) 

9See NASDAQ Rule 7023(c). 

10See NASDAQ Rule 7023(a)(1)((D). See also 

Securities Exchange Act Release No. 34–61700 

(Mar. 12, 2010), 75 F.R. 13172 (Mar. 18, 2010). See 

also NASDAQ Options Rules, Chapter XV, Section 

4(a). 

11The TotalView and OpenView fee cap does not 

currently include Distributor fees. See NASDAQ 

Rule 7023(c)(4). 

12 January 2012 represents the most recent fullmonth of data available. As such, it best represents 

current trading and data usage patterns and the best 

prediction of the actual application of the proposed 

fees. 

13NASDAQ’s findings are set forth in Exhibit 3B, 

pages 111 through 114 of this proposed rule change. 

This excludes one exchange that removes over 

100,000 average shares of liquidity daily. 

increased burden on NASDAQ of 

administering individual Distributor 

relationships.8 Later, in 2007, NASDAQ 

began offering enterprise licenses that 

allocate fees by volume of usage, 

differentiating among heavy consumers 

and lighter consumers by capping fees.9

In March 2010, NASDAQ introduced 

an enterprise license for Non-Display 

Usage of market data.10 Currently, 

NASDAQ offers two options for 

measuring Non-Display Usage of Depthof-Book equities data. First, a firm can 

count and report each server or other 

Subscriber or device that uses data, 

whether displayed or non-displayed, 

and pay the Professional fee for each 

Subscriber. Second, NASDAQ offers an 

optional $30,000 per month NonDisplay TotalView and OpenView fee 

cap for Internal Distribution.11 For firms 

reporting over 400 Subscribers, the 

optional fee cap offers a cost savings per 

Subscriber, as well as relief from the 

administrative costs of identifying, 

tracking, and reporting each covered 

Subscriber. NASDAQ is proposing to 

remove this enterprise license for NonDisplay Usage, as described in detail 

below. 

Current Proposal. NASDAQ is 

amending NASDAQ Rule 7023 to create 

a new Subscriber fee and tiered pricing 

structure for Direct Access to Depth-ofBook data that Professional Subscribers 

use in a Non-Display manner. This 

further refinement to NASDAQ’s fees for 

Non-Display Usage of Depth-of-Book 

data leverages existing distinctions 

between Professional and NonProfessional Subscribers and between 

Direct and Indirect Access to data. 

Specifically, the proposed fee schedule 

for Direct Access is as follows: 

Subscribers Monthly fee 

1–10 ...................................... $ 300 per 

11–29 .................................... 3,300.00 

30–49 .................................... 9,000.00 

50–99 .................................... 15,000.00 

100–249 ................................ 30,000.00 

250+ ...................................... 75,000.00 

The fee for Professional Subscribers for 

Non-Display Usage that is accessed 

directly from NASDAQ shall apply to 

any Subscriber that accesses any data 

elements included in the TotalView 

entitlement, including the TotalView, 

OpenView, or Level 2 data elements. 

Professional Subscribers that access 

Depth-of-Book data indirectly and then 

use it in a Non-Display fashion will pay 

the same Subscriber fees as Professional 

Subscribers that use comparable Display 

data. 

NASDAQ has determined to apply the 

proposed Non-Display Usage fee to a 

finite group of Subscribers that consume 

high quantities of market data but that 

have, due to NASDAQ’s current pricing 

structure, paid disproportionately low 

fees. The new fee will apply to (1) 

Professional Subscribers; (2) that are 

Internal Distributors; (3) via Direct 

Access; and (4) via Non-Display Usage. 

The historical rationales supporting 

these four existing distinctions apply 

with equal force to the current proposal. 

Empirical Data and Analysis. 

NASDAQ considered numerous factors 

in determining the proper level of nondisplay fees to assess. Based on 

NASDAQ’s knowledge and experience 

with firm trading behavior and data 

usage reporting, NASDAQ hypothesized 

that these trading characteristics 

correlate highly with intense NonDisplay Usage, and that firms not 

exhibiting those characteristics correlate 

highly with higher Display Usage. To 

test this hypothesis, NASDAQ analyzed 

one month’s data regarding order 

intensity, liquidity removal, and time at 

the inside among firms that are colocated and those that are not and 

among firms that connect to NASDAQ 

via a high number of ports versus a 

lower number of ports.12 NASDAQ then 

compared overall market data costs for 

firms with high usage of non-displayed 

data versus firms with high usage of 

displayed market data. 

NASDAQ found that the group of 

firms with high order intensity is 

comprised disproportionately of firms 

with Non-Display Usage. NASDAQ 

analyzed maximum order entry rates for 

370 firms for the month of January 2012. 

As shown on Slide 1, of 370 firms, only 

38 firms had maximum order entry rates 

exceeding 5,000 orders per second. 

NASDAQ believes that 23 of those 38 

firms utilize exclusively non-displayed 

data, thereby paying less for market data 

than the 15 other firms with high order 

intensity rates that utilize displayed 

data. Further analysis revealed that 

firms with high order intensity often 

paid lower market data fees than firms 

with lower, often substantially lower, 

order intensity. 

NASDAQ also found that firms 

removing high levels of liquidity and 

also utilizing high numbers of OUCH 

connectivity ports are 

disproportionately likely to engage in 

exclusively Non-Display Usage. As 

shown on Slide 2, NASDAQ determined 

that of the 272 firms that remove an 

average of over 100,000 shares of 

liquidity per day, the top 18 liquidity 

takers all rely exclusively on NonDisplay data.13 Again, further analysis 

revealed that firms removing high levels 

of liquidity, using high numbers of 

connectivity ports, and relying on nondisplayed data paid disproportionately 

lower market data fees than firms 

removing comparable or greater 

liquidity and using comparable numbers 

of ports but using displayed market 

data. 

Additionally, NASDAQ found that 

firms quoting most often at the inside 

and also removing high levels of 

liquidity are disproportionately likely to 

use exclusively Non-Display data. As 

shown on Slide 3, NASDAQ observed 

351 firms for the month of January 2012, 

measuring time at the inside and 

liquidity taking. High rates of quoting at 

the inside require continual quote 

updates and generates substantial 

message traffic. Likewise, high rates of 

liquidity taking require high levels of 

order submission, also generating high 

message traffic. Again, of the 351 firms 

covered, 27 firms that rely exclusively 

on non-displayed market data were 

over-represented among firms with high 

levels of both studied behaviors. 

Additionally, those 27 firms were 

under-billed relative to firms 

experiencing comparable or lowerintensity behavior and that consumed 

displayed market data. 

NASDAQ found that firms that are colocated within NASDAQ’s Carteret 

facility and that rely exclusively on 

Non-Display Usage account for a 

disproportionate percentage of overall 

message traffic. Based on data for 

January 2012, 23 co-located, nondisplay firms account for 70 percent of 

NASDAQ’s overall message traffic 

whereas 359 other firms that are not colocated and/or that rely on displayed 

data account for 26 percent of 

NASDAQ’s overall message traffic. As 

shown on Slide 4, Subscribers of nondisplayed data, both co-located and not, 

account for 74 percent of NASDAQ’s 

overall message traffic. These firms not 

only consume high quantities of market 

data, they also create significant 


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Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Notices 21127 

14 15 U.S.C. 78f. 

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

16Securities Exchange Act Release No. 51808 

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

quantities of market data that then must 

be processed, disseminated, and 

consumed by numerous industry 

participants. 

Finally, NASDAQ studied the market 

data fees paid by non-display firms 

isolated by the data in Slides 1 through 

4, comparing them with the market fees 

paid by otherwise comparable firms that 

rely on Display Usage. Based on this 

analysis, NASDAQ concluded that firms 

engaged in quoting and trading behavior 

based on Display Usage of market data 

paid on average eight times more in 

total market data fees compared with 

firms that engaged in comparable or 

higher-intensity behavior based on NonDisplay Usage. NASDAQ designed the 

current [sic] to rectify this disparity by 

applying [sic] only to firms that use 

exclusively non-displayed data and by 

using Subscriber tiers that correlate to 

the trading behaviors observed. 

If, after further observation, NASDAQ 

determines that the proposed fees are 

either over-inclusive or under-inclusive 

in reaching the desired equalization, 

NASDAQ will modify the fees 

accordingly via a future proposed rule 

change. 

2. Statutory Basis 

NASDAQ believes that the proposed 

rule change is consistent with the 

provisions of Section 6 of the Act,14 in 

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

Act,15 in particular, in that it provides 

an equitable allocation of reasonable 

fees among Subscribers and recipients 

of NASDAQ data. In adopting 

Regulation NMS, the Commission 

granted self-regulatory organizations 

and broker-dealers 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. 

The Commission concluded that 

Regulation NMS—by deregulating 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.16

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. 

Level 2, TotalView and OpenView are 

precisely the sort of market data product 

that the Commission envisioned when it 

adopted Regulation NMS. 

On July 21, 2010, President Barack 

Obama signed into law H.R. 4173, the 

Dodd-Frank Wall Street Reform and 

Consumer Protection Act of 2010 

(‘‘Dodd-Frank Act’’), which amended 

Section 19 of the Act. Among other 

things, Section 916 of the Dodd-Frank 

Act amended paragraph (A) of Section 

19(b)(3) of the Act by inserting the 

phrase ‘‘on any person, whether or not 

the person is a member of the selfregulatory organization’’ after ‘‘due, fee 

or other charge imposed by the selfregulatory organization.’’ As a result, all 

SRO rule proposals establishing or 

changing dues, fees, or other charges are 

immediately effective upon filing 

regardless of whether such dues, fees, or 

other charges are imposed on members 

of the SRO, non-members, or both. 

Section 916 further amended paragraph 

(C) of Section 19(b)(3) of the Exchange 

Act to read, in pertinent part, ‘‘At any 

time within the 60-day period beginning 

on the date of filing of such a proposed 

rule change in accordance with the 

provisions of paragraph (1) [of Section 

19(b)], the Commission summarily may 

temporarily suspend the change in the 

rules of the self-regulatory organization 

made thereby, 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 this title. If the Commission 

takes such action, the Commission shall 

institute proceedings under paragraph 

(2)(B) [of Section 19(b)] to determine 

whether the proposed rule should be 

approved or disapproved.’’ 

The decision of the United States 

Court of Appeals for the District of 

Columbia Circuit in NetCoalition v. 

SEC, No. 09–1042 (D.C. Cir. 2010), 

although reviewing a Commission 

decision made prior to the effective date 

of the Dodd-Frank Act, 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 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’s conclusions about 

Congressional intent are therefore 

reinforced by the Dodd-Frank Act 

amendments, which create a 

presumption that exchange fees, 

including market data fees, may take 

effect immediately, without prior 

Commission approval, and that the 

Commission should take action to 

suspend a fee change and institute a 

proceeding to determine whether the fee 

change should be approved or 

disapproved only where the 

Commission has concerns that the 

change may not be consistent with the 

Act. 

For the reasons stated above, 

NASDAQ believes that the proposed 

fees are fair and equitable, and not 

unreasonably discriminatory. As 

described above, the proposed fees are 

based on pricing conventions and 

distinctions that exist in NASDAQ’s 

current fee schedule, and the fee 

schedules of other exchanges. These 

distinctions (top-of-book versus Depthof-Book, Professional versus NonProfessional Usage, Direct versus 

Indirect Access, Internal versus External 

Distribution) are each based on 

principles of fairness and equity that 

have helped for many years to maintain 

fair, equitable, and not unreasonably 

discriminatory fees, and that apply with 

equal or greater force to the current 

proposal. Thus, although the proposal 

results in a fee increase of $224 per 

Subscriber (from $76 to $300) or, at the 

top tier, $45,000 per enterprise (from 

$30,000 to $75,000), these increases are 

based on careful analysis of empirical 

data and the application of time-tested 

pricing principles already accepted by 

the Commission for many years. 

As described in greater detail below, 

if NASDAQ has calculated improperly 

and the market deems the proposed fees 

to be unfair, inequitable, or 

unreasonably discriminatory, firms can 

diminish or discontinue the use of their 

data because the proposed fee is entirely 

optional to all parties. Firms are not 

required to purchase Depth-of-Book data 

or to utilize any specific pricing 

alternative if they do choose to purchase 


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21128 Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Notices 

Depth-of-Book data. NASDAQ is not 

required to make Depth-of-Book data 

available or to offer specific pricing 

alternatives for potential purchases. 

NASDAQ can discontinue offering a 

pricing alternative (as it has in the past) 

and firms can discontinue their use at 

any time and for any reason (as they 

often do), including due to their 

assessment of the reasonableness of fees 

charged. NASDAQ continues to create 

new pricing policies aimed at increasing 

fairness and equitable allocation of fees 

among Subscribers, and NASDAQ 

believes this is another useful step in 

that direction. 

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. 

Notwithstanding its determination that 

the Commission may rely upon 

competition to establish fair and 

equitably allocated fees for market data, 

the NetCoalition court found that the 

Commission had not, in that case, 

compiled a record that adequately 

supported its conclusion that the market 

for the data at issue in the case was 

competitive. NASDAQ believes that a 

record may readily be established to 

demonstrate the competitive nature of 

the market in question. 

There is intense competition between 

trading platforms that provide 

transaction execution and routing 

services and proprietary data products. 

Transaction execution and proprietary 

data products are complementary in that 

market data is both an input and a 

byproduct of the execution service. In 

fact, market data and trade execution are 

a paradigmatic example of joint 

products with joint costs. 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 the 

prospect of a taking order seeing and 

reacting to a posted order on a particular 

platform, the posting of the order would 

accomplish little. Without trade 

executions, exchange data products 

cannot exist. Data products are valuable 

to many end Subscribers only insofar as 

they provide information that end 

Subscribers expect will assist them or 

their customers in making trading 

decisions. 

The costs of producing market data 

include not only the costs of the data 

distribution infrastructure, but also the 

costs of designing, maintaining, and 

operating the exchange’s transaction 

execution platform and the cost of 

regulating the exchange to ensure its fair 

operation and maintain investor 

confidence. The total return that a 

trading platform earns reflects the 

revenues it receives from both products 

and the joint costs it incurs. Moreover, 

an exchange’s customers view the costs 

of transaction executions and of data as 

a unified cost of doing business with the 

exchange. A broker-dealer 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 broker-dealer 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 broker-dealer will choose not 

to buy it. Moreover, as a broker-dealer 

chooses to direct fewer orders to a 

particular exchange, the value of the 

product to that broker-dealer decreases, 

for two reasons. First, the product will 

contain less information, because 

executions of the broker-dealer’s orders 

will not be reflected in it. Second, and 

perhaps more important, the product 

will be less valuable to that brokerdealer because it does not provide 

information about the venue to which it 

is directing its orders. Data from the 

competing venue to which the brokerdealer is directing orders will become 

correspondingly more valuable. 

Thus, a super-competitive increase in 

the fees charged for either transactions 

or data has the potential to impair 

revenues from both products. ‘‘No one 

disputes that competition for order flow 

is ‘fierce’.’’ NetCoalition at 24. However, 

the existence of fierce competition for 

order flow implies a high degree of price 

sensitivity on the part of broker-dealers 

with order flow, since they may readily 

reduce costs by directing orders toward 

the lowest-cost trading venues. A 

broker-dealer that shifted its order flow 

from one platform to another in 

response to order execution price 

differentials would both reduce the 

value of that platform’s market data and 

reduce its own need to consume data 

from the disfavored platform. Similarly, 

if a platform increases its market data 

fees, the change will affect the overall 

cost of doing business with the 

platform, and affected broker-dealers 

will assess whether they can lower their 

trading costs by directing orders 

elsewhere and thereby lessening [sic] 

the need for the more expensive data. 

Analyzing the cost of market data 

distribution in isolation from the cost of 

all of the inputs supporting the creation 

of market data will inevitably 

underestimate the cost of the data. Thus, 

because it is impossible to create data 

without a fast, technologically robust, 

and well-regulated execution system, 

system costs and regulatory costs affect 

the price of market data. It would be 

equally misleading, however, to 

attribute all of the exchange’s costs to 

the market data portion of an exchange’s 

joint product. Rather, all of the 

exchange’s costs are incurred for the 

unified purposes of attracting order 

flow, executing and/or routing orders, 

and generating and selling data about 

market activity. The total return that an 

exchange earns reflects the revenues it 

receives from the joint products and the 

total costs of the joint products. 

Competition among trading platforms 

can be expected to constrain the 

aggregate return each platform earns 

from the sale of its joint products, but 

different platforms may choose from a 

range of possible, and equally 

reasonable, pricing strategies as the 

means of recovering total costs. For 

example, some platform may choose to 

pay rebates to attract orders, charge 

relatively low prices for market 

information (or provide information free 

of charge) and charge relatively high 

prices for accessing posted liquidity. 

Other platforms may choose a strategy 

of paying lower rebates (or no rebates) 

to attract orders, setting relatively high 

prices for market information, and 

setting relatively low prices for 

accessing posted liquidity. 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. This would be akin to strictly 

regulating the price that an automobile 

manufacturer can charge for car sound 

systems despite the existence of a highly 

competitive market for cars and the 

availability of after-market alternatives 

to the manufacturer-supplied system. 

The market for market data products 

is 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. 


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Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Notices 21129 

Broker-dealers currently have 

numerous alternative venues for their 

order flow, including ten self-regulatory 

organization (‘‘SRO’’) markets, as well 

as internalizing broker-dealers (‘‘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 

Trade Reporting Facilities (‘‘TRFs’’) 

compete to attract internalized 

transaction reports. Competitive markets 

for order flow, executions, and 

transaction reports provide pricing 

discipline for the inputs of proprietary 

data products. 

The large number of SROs, TRFs, BDs, 

and ATSs that currently produce 

proprietary data or are currently capable 

of producing it provides further pricing 

discipline for proprietary data products. 

Each SRO, TRF, ATS, and BD is 

currently permitted to produce 

proprietary data products, and many 

currently do or have announced plans to 

do so, including NASDAQ, NYSE, 

NYSE Amex, NYSEArca, and BATS. 

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 broker-dealers’ 

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 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. 

Market data vendors provide another 

form of price discipline for proprietary 

data products because they control the 

primary means of access to end 

Subscribers. Vendors impose price 

restraints based upon their business 

models. For example, vendors such as 

Bloomberg and Thomson Reuters that 

assess a surcharge on data they sell may 

refuse to offer proprietary products that 

end Subscribers 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 broker-dealers, 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. 

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. 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 broker-dealers have 

previously published their proprietary 

data individually, Regulation NMS 

encourages market data vendors and 

broker-dealers 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. 

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 the 

Depth-of-Book data at issue in the case 

is used to attract order flow. NASDAQ 

believes, however, that evidence not 

before the court clearly demonstrates 

that availability of data attracts order 

flow. For example, as of July 2010, 92 

of the top 100 broker-dealers by shares 

executed on NASDAQ consumed 

NASDAQ Level 2 and 80 of the top 100 

broker-dealers consumed TotalView. 

During that month, the NASDAQ Level 

2 Subscribers were responsible for 

94.44% of the orders entered into 

NASDAQ and TotalView Subscribers 

were responsible for 92.98%. 

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 new products like 

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 market data have 

remained flat. In fact, as a percent of 

total Subscriber 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 vigor of competition for Depth-ofBook information is significant and the 

Exchange believes that this proposal 

clearly evidences such competition. 

NASDAQ is offering a new pricing 

model in order to keep pace with 

changes in the industry and evolving 

customer needs. It is entirely optional 

and is geared towards attracting new 

customers, as well as retaining existing 

customers. 

The Exchange has witnessed 

competitors creating new products and 

innovative pricing in this space over the 

course of the past year. NASDAQ 

continues to see firms challenge its 

pricing on the basis of the Exchange’s 

explicit fees being higher than the zeropriced fees from other competitors such 

as BATS. In all cases, firms make 

decisions on how much and what types 


pmangrum on DSK3VPTVN1PROD with NOTICES
21130 Federal Register / Vol. 77, No. 68 / Monday, April 9, 2012 / Notices 

17See Securities Exchange Act Release No. 63291 

(Nov. 9, 2010). 

18 15 U.S.C. 78s(b)(3)(A)(ii). 

19 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

of data to consume on the basis of the 

total cost of interacting with NASDAQ 

or other exchanges. Of course, the 

explicit data fees are but one factor in 

a total platform analysis. Some 

competitors have lower transactions fees 

and higher data fees, and others are vice 

versa. The market for this Depth-of-Book 

information is highly competitive and 

continually evolves as products develop 

and change. 

Additional evidence cited by NYSE 

Arca in SR–NYSE Arca–2010–097 17

which was not before the NetCoalition 

court also demonstrates that availability 

of Depth-of-Book 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.’’ 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

Written comments were neither 

solicited nor received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Pursuant to Section 19(b)(3)(A)(ii) of 

the Act,18 NASDAQ has designated this 

proposal as establishing or changing a 

due, fee, or other charge imposed by the 

self-regulatory organization on any 

person, whether or not the person is a 

member of the self-regulatory 

organization, which renders the 

proposed rule change effective upon 

filing. 

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. 

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 rulecomments@sec.gov. Please include File 

Number SR–NASDAQ–2012–044 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–2012–044. 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–2012–044 and should be 

submitted on or before April 30, 2012. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.19

Elizabeth M. Murphy, 

Secretary. 

[FR Doc. 2012–8462 Filed 4–6–12; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–66719; File No. SR– 

NASDAQ–2012–046] 

Self-Regulatory Organizations; The 

NASDAQ Stock Market LLC; Notice of 

Filing and Immediate Effectiveness of 

a Proposed Rule Change Relating to 

Customer Routing Fees 

April 3, 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 ‘‘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 NASDAQ. 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 proposes to modify Chapter 

XV, Options Pricing, Section 2, of the 

Options Rules portion of the NASDAQ 

Rulebook governing pricing for 

NASDAQ members using The NASDAQ 

Options Market (‘‘NOM’’), NASDAQ’s 

facility for executing and routing 

standardized equity and index options. 

The proposed rule change amends 

certain Customer Routing Fees to recoup 

costs incurred by the Exchange in 

routing to away markets. While changes 

proposed herein are effective upon 

filing, the Exchange has designated 

these changes to be operative on April 

2, 2012. 

The text of the proposed rule change 

is available on the Exchange’s Web site 

at http://nasdaq.cchwallstreet.com, at 

the principal office of the Exchange, and 

at the Commission’s Public Reference 

Room. 


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