Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Notices 64379 

7 15 U.S.C. 78s(b)(3)(a)(ii). 

8 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

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. 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 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 a 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. 

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.7 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 e-mail to rulecomments@sec.gov. Please include File 

Number SR–NASDAQ–2010–129 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–2010–129. This 

file number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for Web site viewing and 

printing in the Commission’s Public 

Reference Room, on official business 

days between the hours of 10 a.m. and 

3 p.m. Copies of the filing also will be 

available for inspection and copying at 

the principal office of the Exchange. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–NASDAQ–2010–129 and 

should be submitted on or before 

November 9, 2010. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.8

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–26246 Filed 10–18–10; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–63084; File No. SR– 

NASDAQ–2010–125] 

Self-Regulatory Organizations; The 

NASDAQ Stock Market LLC; Notice of 

Filing and Immediate Effectiveness of 

Proposed Rule Change To Revise an 

Optional Depth Data Enterprise 

License Fee for Broker-Dealer 

Distribution of Depth-of-Book Data 

October 13, 2010. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (the 

‘‘Act’’) 1 and Rule 19b–4 thereunder,2

notice is hereby given that on 

September 30, 2010, The NASDAQ 

Stock Market LLC (‘‘NASDAQ’’ or the 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission (the 

‘‘Commission’’) the proposed rule 

change as described in Items I, II, and 

III below, which Items have been 

prepared by the Exchange. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

NASDAQ proposes to revise an 

optional Depth Data Enterprise License 

Fee for broker-dealer distribution of 

depth-of-book data to non-professional 

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64380 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Notices 

3Changes are marked to the rules of The 

NASDAQ Stock Market LLC found at http:// 

nasdaqomx.cchwallstreet.com. 

4See Securities Exchange Act Release No. 62908 

(Sept. 14, 2010); 75 FR 57321 (Sept. 20, 20101 [sic]) 

(SR–NASDAQ–2010–111). 

5See Securities Exchange Act Release No. 59039 

(Dec. 2, 2008) [sic] at p. 41. 

6 Id. 

users with which the firm has a 

brokerage relationship. 

The text of the proposed rule change 

is below. Proposed new language is in 

italics; proposed deletions are in 

[brackets].3

* * * * * 

7023. NASDAQ TotalView 

(a) TotalView Entitlement 

The TotalView entitlement allows a 

subscriber to see all individual 

NASDAQ Market Center participant 

orders and quotes displayed in the 

system as well as the aggregate size of 

such orders and quotes at each price 

level in the execution functionality of 

the NASDAQ Market Center, including 

the NQDS feed. 

(1) 

(A)–(D) No change. 

(E) For a pilot period ending 

December 31, 2010, [As] as an 

alternative to (a)(1)(A), (B), and (C), a 

broker-dealer distributor may purchase 

an enterprise license at a rate of 

$325,000 [$300,000] for nonprofessional subscribers. The enterprise 

license entitles a distributor to provide 

NQDS (as set forth in Rule 7017), 

TotalView and OpenView to an 

unlimited number of [internal users, 

whether such users receive the data 

directly or through third-party vendors, 

and external] non-professional [user] 

subscribers with whom the firm has a 

brokerage relationship. The enterprise 

license shall not apply to relevant Level 

1 fees. The enterprise license shall not 

apply to Depth Distributor Fees. 

(2) 30-Day Free-Trial Offer. NASDAQ 

shall offer all new individual 

subscribers and potential new 

individual subscribers a 30-day waiver 

of the user fees for TotalView. This 

waiver shall not include the incremental 

fees assessed for the NQDS-only service, 

which are $30 for professional users and 

$9 for non-professional users per month. 

This fee waiver period shall be applied 

on a rolling basis, determined by the 

date on which a new individual 

subscriber or potential individual 

subscriber is first entitled by a 

distributor to receive access to 

TotalView. A distributor may only 

provide this waiver to a specific 

individual subscriber once. 

For the period of the offer, the 

TotalView fee of $40 per professional 

user and $5 per non-professional user 

per month shall be waived. 

(b) No change. 

(c) No change. 

(d) 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, 

NASDAQ included statements 

concerning the purpose of, and basis for, 

the proposed rule change. The text of 

these statements may be examined at 

the places specified in Item III below, 

and is set forth in Sections A, B, and C 

below. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and the 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Current Proposal. Effective September 

1, 2010, NASDAQ began offering a 

voluntary Enterprise License for nonprofessional usage of the National 

Quotation Dissemination Service or 

NQDS (Rule 7017) and TotalView and 

OpenView, (Rule 7023) (collectively, 

‘‘NASDAQ Depth Data’’).4 The Depth 

Data Enterprise License is available only 

to broker-dealers registered under the 

Securities Exchange Act of 1934, and it 

covers all non-professional usage fees to 

customers with whom the firm has a 

brokerage relationship with an 

allowance to distribute data to external 

professional subscribers with which the 

firm has a brokerage relationship. This 

Depth Data Enterprise License Fee 

includes non-professional usage fees, 

but does not include distributor fees. 

NASDAQ is amending the Depth Data 

Enterprise License in four ways: (1) 

Establishing the Enterprise License as a 

pilot program that will automatically 

sunset on December 31, 2010; (2) 

confirming that the program applies to 

non-professional users and eliminating 

confusing reference to internal users; (3) 

changing the fee from $300,000 to 

$325,000 per month to reflect the fact 

that the new Depth Data Enterprise 

License includes all of the data already 

available in the pre-existing nonprofessional enterprise license set forth 

in NASDAQ Rule 7023(a)(1)(C) at a cost 

of $25,000 per month; and (4) 

confirming in rule language that the 

Depth Data Enterprise License Fee does 

not include distributor fees applicable 

to distribution of the underlying depthof-book products. 

Background. NASDAQ disseminates 

market data feeds in two capacities. 

First, NASDAQ disseminates 

consolidated or ‘‘core’’ data in its 

capacity as Securities Information 

Processor (‘‘SIP’’) for the national market 

system plan governing securities listed 

on NASDAQ as a national securities 

exchange (‘‘NASDAQ UTP Plan’’).5

Second, NASDAQ separately 

disseminates proprietary or ‘‘non-core’’ 

data in its capacity as a registered 

national securities exchange. Non-core 

data is any data generated by the 

NASDAQ Market Center Execution 

System that is voluntarily disseminated 

by NASDAQ separate and apart from the 

consolidated data.6 NASDAQ has 

numerous proprietary data products, 

such as NASDAQ TotalView, NASDAQ 

Last Sale, and NASDAQ Basic. 

NASDAQ continues to seek broader 

distribution of non-core data and to 

reduce the cost of providing non-core 

data to larger numbers of investors. In 

the past, NASDAQ has accomplished 

this goal in part by offering similar 

enterprise licenses for professional and 

non-professional usage of TotalView 

which contains the full depth of book 

data for the NASDAQ Market Center 

Execution System. NASDAQ believes 

that the adoption of enterprise licenses 

has led to greater distribution of market 

data, particularly among nonprofessional users. 

Based on input from market 

participants, NASDAQ believes that this 

increase in distribution is attributable in 

part to the relief it provides distributors 

from the NASDAQ requirement that 

distributors count and report each nonprofessional user of NASDAQ 

proprietary data. In addition to 

increased administrative flexibility, 

enterprise licenses also encourage 

broader distribution by firms that are 

currently over the fee cap as well as 

those that are approaching the cap and 

wish to take advantage of the benefits of 

the program. Further, NASDAQ believes 

that capping fees in this manner creates 

goodwill with broker-dealers and 

increases transparency for retail 

investors. 

Accordingly, effective September 1, 

2010, NASDAQ established the Depth 

Data Enterprise License Fee under 

NASDAQ Rule 7023(a)(1)(E), an 

optional non-professional enterprise 

license for distributors of any NASDQ 

depth-of-book data product including 

the National Quotation Dissemination 

Service or NQDS (Rule 7017) and 

TotalView and OpenView, (Rule 7023) 

(collectively, ‘‘NASDAQ Depth Data’’). 

This Depth Data Enterprise License Fee 

includes non-professional usage fees, 

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Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Notices 64381 

7 Distributors who utilize the enterprise license 

would still be liable for the applicable distributor 

fees. 

8NASDAQ relies on distributor self-reporting of 

usage rather than on individual contact with each 

end-user customer. NASDAQ permits distributors 

to designate an entire user population as ‘‘nonprofessional’’ provided that the number of 

professional subscribers within that user population 

does not exceed ten percent (10%) of the total 

population. 

9 15 U.S.C. 78f. 

10 15 U.S.C. 78f(b)(4). 

11Securities Exchange Act Release No. 51808 

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

but does not include distributor fees.7

This program is available only to brokerdealers registered under the Securities 

Exchange Act of 1934, and would cover 

all non professional usage fees to 

customers with whom the firm has a 

brokerage relationship with an 

allowance to distribute data to external 

professional subscribers with which the 

firm has a brokerage relationship. Nonbroker-dealer vendors and application 

service providers would not be eligible 

for the enterprise license; such firms 

typically pass through the cost of market 

data user fees to their customers.8

The Depth Data Enterprise License 

Fee covers usage fees for NASDAQ 

Depth Data received directly from 

NASDAQ as well as data received from 

third-party vendors (e.g., Bloomberg, 

Thomson-Reuters, etc.). Upon joining 

the program, firms may inform thirdparty market data vendors they utilize 

(through a NASDAQ -provided form) 

that, going forward, depth data usage by 

the broker-dealer may be reported to 

NASDAQ on a non-billable basis. Such 

a structure attempts to address a longstanding concern that broker-dealers are 

over-billed for market data consumed by 

one person through multiple marketdata display devices. At the same time, 

the proposed billing structure will 

continue to provide NASDAQ with 

accurate reporting information for 

purposes of usage monitoring and 

auditing. 

Rationale for Current Proposal. 

Effective October 1, 2010, NASDAQ is 

modifying the rule language governing 

the new Depth Data Enterprise License 

in four ways. First, NASDAQ is 

establishing the program as a pilot and 

setting the sunset date at December 31, 

2010. This change signals to market 

participants that the program is 

experimental and that NASDAQ may 

choose not to continue the program at 

its discretion. Second, NASDAQ is 

clarifying that the new Depth Data 

Enterprise License is available for 

distribution to non-professionals with 

whom the distributor has a brokerage 

relationship. The scope of the prior 

language appeared ambiguous to some 

market participants due to the use of the 

term ‘‘internal users’’ in the original rule 

language. 

Third, NASDAQ is changing the price 

of the new program from $300,000 to 

$325,000. This change recognizes that 

NASDAQ now offers distributors 

enterprise distinct non-professional 

enterprise licenses, one for nonprofessional use of TotalView and 

OpenView under Rule 7023(a)(1)(C) and 

the new Depth Data Enterprise License 

Fee under Rule 7023(a)(1)(E) which 

includes non-professional usage of 

TotalView, OpenView and NQDS. 

Effectively, the new Depth Data 

Enterprise License establishes a fee of 

$300,000 per month for NQDS. 

Fourth, NASDAQ is confirming in 

rule language that the Depth Data 

Enterprise License Fee does not include 

distributor fees applicable to 

distribution of the underlying depth-ofbook products. NASDAQ included this 

description in the purpose section of the 

original proposal. NASDAQ has been 

asked and has agreed to include that 

language in Rule 7023(a)(1)(E). 

The proposed Depth Data Enterprise 

License Fee remains completely 

optional and does not replace existing 

enterprise license fee alternatives set 

forth in Rule 7023. Additionally, the 

proposal does not impact individual 

usage fees for any product or in any way 

raise the costs of any user of any 

NASDAQ data product. To the contrary, 

it provides broker-dealers with an 

additional approach to providing more 

NASDAQ data at a lower cost. 

2. Statutory Basis 

NASDAQ believes that the proposed 

rule change is consistent with the 

provisions of Section 6 of the Act,9 in 

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

Act,10 in particular, in that it provides 

an equitable allocation of reasonable 

fees among users and recipients of 

NASDAQ data. In adopting Regulation 

NMS, the Commission granted selfregulatory organizations and brokerdealers 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.11

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. 

NQDS, 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 Barak 

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.’’ 

NASDAQ believes that these 

amendments to Section 19 of the Act 

reflect Congress’s intent to allow the 

Commission to rely upon the forces of 

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64382 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Notices 

competition to ensure that fees for 

market data are reasonable and 

equitably allocated. Although Section 

19(b) had formerly authorized 

immediate effectiveness for a ‘‘due, fee 

or other charge imposed by the selfregulatory organization,’’ the 

Commission adopted a policy and 

subsequently a rule stipulating that fees 

for data and other products available to 

persons that are not members of the selfregulatory organization must be 

approved by the Commission after first 

being published for comment. At the 

time, the Commission supported the 

adoption of the policy and the rule by 

pointing out that unlike members, 

whose representation in self-regulatory 

organization governance was mandated 

by the Act, non-members should be 

given the opportunity to comment on 

fees before being required to pay them, 

and that the Commission should 

specifically approve all such fees. 

NASDAQ believes that the amendment 

to Section 19 reflects Congress’s 

conclusion that the evolution of selfregulatory organization governance and 

competitive market structure have 

rendered the Commission’s prior policy 

on non-member fees obsolete. 

Specifically, many exchanges have 

evolved from member-owned not-forprofit corporations into for-profit 

investor-owned corporations (or 

subsidiaries of investor-owned 

corporations). Accordingly, exchanges 

no longer have narrow incentives to 

manage their affairs for the exclusive 

benefit of their members, but rather 

have incentives to maximize the appeal 

of their products to all customers, 

whether members or non-members, so 

as to broaden distribution and grow 

revenues. Moreover, we believe that the 

change also reflects an endorsement of 

the Commission’s determinations that 

reliance on competitive markets is an 

appropriate means to ensure equitable 

and reasonable prices. Simply put, the 

change reflects a presumption that all 

fee changes should be permitted to take 

effect immediately, since the level of all 

fees are constrained by competitive 

forces. 

The recent decision of the United 

States Court of Appeals for the District 

of Columbia Circuit in NetCoalition v. 

SEC [sic], 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 [sic], at 15 

(quoting H.R. Rep. No. 94–229, at 92 

(1975), as reprinted in 1975 

U.S.C.C.A.N. 321, 323). The court’s 

conclusions about Congressional intent 

are therefore reinforced by the DoddFrank 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. 

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 [sic] 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. For the reasons discussed 

above, NASDAQ believes that the DoddFrank Act amendments to Section 19 

materially alter the scope of the 

Commission’s review of future market 

data filings, by creating a presumption 

that all fees may take effect 

immediately, without prior analysis by 

the Commission of the competitive 

environment. Even in the absence of 

this important statutory change, 

however, 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 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, 

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 

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Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Notices 64383 

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 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. 

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 bypass 

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 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 Yahoo, impose 

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 

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64384 Federal Register / Vol. 75, No. 201 / Tuesday, October 19, 2010 / Notices 

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

13 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

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 depthof-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 depth data attracts order 

flow. For example, NASDAQ submits 

that in and of itself, NASDAQ’s decision 

voluntarily to cap fees on existing 

products, as is the effect of an enterprise 

license, is evidence of market forces at 

work. In fact, the instant proposal 

creates a second enterprise license for 

non-professional usage of depth data to 

complement the existing enterprise 

license set forth at NASDAQ Rule 

7023(a)(1)(C). 

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 depth-of-book data 

have remained flat. In fact, as a percent 

of total customer costs, NASDAQ data 

fees have fallen relative to other data 

usage costs—including bandwidth, 

programming, and infrastructure—that 

have risen. The same holds true for 

execution services; despite numerous 

enhancements to NASDAQ’s trading 

platform, absolute and relative trading 

costs have declined. Platform 

competition has intensified as new 

entrants have emerged, constraining 

prices for both executions and for data. 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants, or Others 

Written comments were neither 

solicited nor received. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

The foregoing 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 

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 e-mail to rulecomments@sec.gov. Please include File 

Number SR–NASDAQ–2010–125 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–2010–125. This 

file number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, 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 website viewing and 

printing in the Commission’s Public 

Reference Room, on official business 

days between the hours of 10 a.m. and 

3 p.m. Copies of the filing also will be 

available for inspection and copying at 

the principal office of the Exchange. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–NASDAQ–2010–125 and 

should be submitted on or before 

November 9, 2010. 

For the Commission, by the Division of 

Trading and Markets, pursuant to delegated 

authority.13

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. 2010–26208 Filed 10–18–10; 8:45 am] 

BILLING CODE 8011–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–63098; File No. SR– 

NASDAQ–2010–074] 

Self-Regulatory Organizations; The 

NASDAQ Stock Market LLC; Order 

Instituting Proceedings To Determine 

Whether To Disapprove Proposed Rule 

Change, as Modified by Amendment 

No. 1, To Adopt Rule 4753(c) as a Six 

Month Pilot in 100 NASDAQ-Listed 

Securities 

October 13, 2010. 

I. Introduction 

On June 18, 2010, The NASDAQ 

Stock Market LLC (‘‘Nasdaq’’ or the 

‘‘Exchange’’) filed with the Securities 

and Exchange Commission 

(‘‘Commission’’), pursuant to Section 

19(b)(1) of the Securities Exchange Act 

of 1934 (‘‘Act’’) 1 and Rule 19b–4 

thereunder,2 a proposed rule change to 

implement, on a six-month pilot basis, 

a volatility-based trading pause in 100 

Nasdaq-listed securities (‘‘Volatility 

Guard’’). On June 25, 2010, Nasdaq filed 

Amendment No. 1 to the proposed rule 

change. The proposed rule change, as 

amended, was published for comment 

in the Federal Register on July 15, 

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