Document ID: SEC-2016-2160-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2016-12-08T05:00Z

[Federal Register Volume 81, Number 236 (Thursday, December 8, 2016)]
[Notices]
[Pages 88716-88720]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29386]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79456; File No. SR-NASDAQ-2016-162]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend the Exchange's Transaction Fees at Rule 7047

December 2, 2016.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that, on November 21, 2016, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``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.
---------------------------------------------------------------------------

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

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

    The Exchange proposes to amend the Exchange's data fees at Rule 
7047 to: (i) Reduce the enterprise license fee for Nasdaq Basic from 
$350,000 to $100,000 per month for broker-dealers distributing Nasdaq 
Basic to Non-Professional and Professional Subscribers with whom the 
broker-dealer has a brokerage relationship; and (ii) eliminate a 
requirement that broker-dealers purchase other products--specifically, 
Nasdaq Last Sale and Nasdaq TotalView/OpenView--to qualify for the 
license. The Exchange also proposes a number of conforming changes: (1) 
To clarify which Subscribers may receive the data; (2) to limit the use 
of the data by Professional Subscribers; and (3) to specify that each 
electronic system used to distribute data under the enterprise license 
must be separately approved. The proposal is described in further 
detail below.
    These amendments are effective upon filing.
    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.

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 these 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 aspects of such 
statements.

[[Page 88717]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to: (i) Reduce the 
enterprise license fee for Nasdaq Basic from $350,000 to $100,000 per 
month for broker-dealers distributing Nasdaq Basic to Professional and 
Non-Professional Subscribers with whom the broker-dealer has a 
brokerage relationship; and (ii) eliminate the requirement that broker-
dealers purchase other products--specifically, Nasdaq Last Sale and 
Nasdaq TotalView/OpenView--to qualify for the license. To clarify how 
to apply the proposed fee reduction, the Exchange is also proposing 
language specifying that Subscribers must be natural persons; limiting 
use of the data by Professional Subscribers to their brokerage 
relationships with the broker-dealer; and requiring that each 
electronic system used to distribute data from the enterprise license 
be separately approved by the Exchange.
Current Nasdaq Basic Enterprise License
    Nasdaq Basic provides best bid and offer and last sale information 
from the Nasdaq Market Center and from the FINRA/Nasdaq Trade Reporting 
Facility (``FINRA/NASDAQ TRF''). Data is taken from three sources, 
which may be purchased individually or in combination: (i) Nasdaq Basic 
for Nasdaq, which contains the best bid and offer on the Nasdaq Market 
Center and last sale trade reports for Nasdaq and the FINRA/Nasdaq TRF 
for Nasdaq-listed stocks; (ii) Nasdaq Basic for NYSE, which contains 
the best bid and offer on the Nasdaq Market Center and last sale trade 
reports for Nasdaq and the FINRA/Nasdaq TRF for NYSE-listed stocks; and 
(iii) Nasdaq Basic for NYSE MKT, which contains the best bid and offer 
on the Nasdaq Market Center and last sale trade reports for Nasdaq and 
the FINRA/Nasdaq TRF for stocks listed on NYSE MKT and other listing 
venues whose quotes and trade reports are disseminated on Tape B.
    Nasdaq Basic may be purchased through per-subscriber monthly 
charges, per-query fees, or, for broker-dealers, monthly enterprise 
licenses. These monthly enterprise licenses are available in two types: 
An internal license for Professional Subscribers, and a license for 
Non-Professional and Professional Subscribers with whom the broker-
dealer has a brokerage relationship.
    The second type of license, for Professional and Non-Professional 
Subscribers in a brokerage relationship with the broker-dealer, is 
currently available for $350,000 per month. To qualify for this 
license, the broker-dealer must also: (i) Distribute Nasdaq Last Sale 
for Nasdaq or Nasdaq Last Sale for NYSE/NYSE MKT via an internet-based 
electronic system approved by Nasdaq pursuant to Rule 7039(b)(2)(B), at 
a level that allows it to qualify for the fee cap provided for in Rule 
7039(b); (ii) distribute Nasdaq TotalView or Nasdaq OpenView data under 
an enterprise license pursuant to Rule 7023(c)(1); and (iii) pay the 
Distributor Fee for Nasdaq Basic under paragraph [sic] (c)(1) or for 
Nasdaq Last Sale under Rule 7039(c). The electronic system used to 
distribute Nasdaq Basic must be approved by Nasdaq, and the broker-
dealer must report the number of Subscribers at least once per calendar 
year.
Proposed Changes
    The Exchange proposes: (i) Reducing the enterprise license fee for 
Nasdaq Basic from $350,000 to $100,000 per month for broker-dealers 
distributing Nasdaq Basic to Non-Professional and Professional 
Subscribers with whom the broker-dealer has a brokerage relationship; 
and (ii) eliminating the two requirements that the purchaser distribute 
Nasdaq Last Sale for Nasdaq or Nasdaq Last Sale for NYSE/NYSE MKT at a 
level that allows it to qualify for the fee cap provided for in Rule 
7039(b), and distribute Nasdaq TotalView or Nasdaq OpenView data under 
an enterprise license pursuant to Rule 7023(c)(1). The proposed changes 
will promote the use of Nasdaq Basic by lowering its cost to investors 
and broadening the scope of its distribution to the investing public.
    The Exchange also proposes three conforming changes to clarify how 
to apply the proposed fee reduction.
    First, although the term ``Professional Subscribers'' is defined 
elsewhere in the rule to include legal entities that are not natural 
persons, the enterprise license set forth under Rule 7047(b)(5) may not 
be used to provide information to any business or other entity that is 
not a natural person. This is a clarification of current practice.
    Second, Professional Subscribers may use the data obtained through 
this license only in the context of the brokerage relationship between 
the Professional Subscriber and the broker-dealer, and may not use such 
data within the scope of any professional engagement or registration 
identified in Rule 7047(d)(3)(A). Specifically, a Professional 
Subscriber may not use that data in his or her capacity as a person who 
is: (i) Registered or qualified in any capacity with the Commission, 
the Commodity Futures Trading Commission, any state securities agency, 
or any securities exchange or association; (ii) engaged as an 
`investment adviser' as that term is defined in Section 201(11) of the 
Investment Advisers Act of 1940 (whether or not registered or qualified 
under that Act); or (iii) employed by a bank or other organization 
exempt from registration under federal or state securities laws to 
perform functions that would require registration or qualification if 
such functions were performed for an organization not so exempt.\3\ 
Professional Subscribers who use Nasdaq Basic in the course of their 
professional duties will be charged for such usage as appropriate, 
based on the service(s) used. This clarifying language does not change 
current practice.
---------------------------------------------------------------------------

    \3\ The phrase ``any commodities or futures contract market or 
association'' has been deleted from this summary of Rule 
7047(d)(3)(A) as unduly repetitive. Only natural persons may be 
Subscribers under this rule. A ``commodities or futures contract 
market or association'' is not a natural person, and therefore is 
not eligible to receive information under this rule.
---------------------------------------------------------------------------

    Third, if more than one electronic system is used to distribute 
information under this license, each such system must be separately 
approved by the Exchange. In addition, the approved electronic systems 
may be used to distribute information to any customer eligible to 
receive such information under this rule. Prior language limiting 
distribution to employees of the broker-dealer is deleted. Language is 
also added to clarify that the broker-dealer must pay for any Nasdaq 
Last Sale data distributed under Rule 7039(c), if the broker-dealer 
elects to distribute such data. None of these proposed modifications 
represent a change from current practice.
    The enterprise license fee is entirely optional, in that it applies 
only to broker-dealers that opt to distribute Nasdaq Basic to 
Professional and Non-Professional Subscribers as described herein.\4\ 
It does not impact or raise the cost of any other Nasdaq product, and 
in fact serves to decrease the cost of Nasdaq Basic in instances where 
a broker-dealer elects to purchase this license.
---------------------------------------------------------------------------

    \4\ Nasdaq notes, moreover, that no broker-dealer may provide, 
in a context in which a trading or order-routing decision can be 
implemented, a display of any information with respect to quotations 
for or transactions in an NMS stock without also providing, in an 
equivalent manner, a consolidated display for such stock. 17 CFR 
242.603(c).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b)

[[Page 88718]]

of the Act,\5\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act,\6\ in particular, in that it provides 
for the equitable allocation of reasonable dues, fees and other charges 
among members and issuers and other persons using any facility, and is 
not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
---------------------------------------------------------------------------

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

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

    \7\ Securities Exchange Act Release No. 51808 (June 9, 2005), 70 
FR 37496, 37499 (June 29, 2005) (``Regulation NMS Adopting 
Release'').
---------------------------------------------------------------------------

    Likewise, in NetCoalition v. Securities and Exchange Commission \8\ 
(``NetCoalition'') the D.C. Circuit upheld the Commission's use of a 
market-based approach in evaluating the fairness of market data fees 
against a challenge claiming that Congress mandated a cost-based 
approach.\9\ As the court emphasized, the Commission ``intended in 
Regulation NMS that `market forces, rather than regulatory 
requirements' play a role in determining the market data . . . to be 
made available to investors and at what cost.'' \10\
---------------------------------------------------------------------------

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

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

    \11\ Id. at 539 (quoting Securities Exchange Act Release No. 
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008) 
(SR-NYSEArca-2006-21)).
---------------------------------------------------------------------------

    The Exchange believes that the proposed fee reduction and the 
elimination of conditions to qualify for the Nasdaq Basic enterprise 
license under Rule 7047(b)(5) is reasonable. The proposed changes will 
benefit the investing public by lowering the cost and increasing the 
availability of information in the marketplace. Moreover, the fees for 
Nasdaq Basic, like all proprietary data fees, are constrained by the 
Exchange's need to compete for order flow, and are subject to 
competition from other products and among broker-dealers for customers.
    The Exchange believes that the proposed fee reduction is an 
equitable allocation and is not unfairly discriminatory because the 
Exchange will apply the same fee to all similarly situated broker-
dealers. Moreover, by allocating the fee reduction to broker-dealers 
that distribute the product widely among customers, the change will 
assist in promoting a wider distribution of information to the 
investing public.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. In terms of inter-market 
competition, the Exchange notes that it operates in a highly 
competitive market in which market participants can readily favor 
competing venues if they deem fee levels at a particular venue to be 
excessive, or rebate opportunities available at other venues to be more 
favorable. In such an environment, the Exchange must continually adjust 
its fees to remain competitive with other exchanges and with 
alternative trading systems that have been exempted from compliance 
with the statutory standards applicable to exchanges. Because 
competitors are free to modify their own fees in response, and because 
market participants may readily adjust their order routing practices, 
the Exchange believes that the degree to which fee changes in this 
market may impose any burden on competition is extremely limited.
    The proposed change will: (i) Reduce the enterprise license fee for 
Nasdaq Basic from $350,000 to $100,000 per month for broker-dealers 
distributing Nasdaq Basic to Non-Professional and Professional 
Subscribers with whom the broker-dealer has a brokerage relationship; 
and (ii) eliminate the requirement that broker-dealers purchase other 
products--specifically, Last Sale for Nasdaq or Last Sale for NYSE/NYSE 
MKT, and TotalView or OpenView--to qualify for the license. This will 
reduce the cost of Nasdaq Basic to investors, resulting in information 
becoming more widely available to the investing public.
    As illustrated by the proposed fee reduction, market forces 
constrain fees for Nasdaq Basic. This occurs in three distinct 
respects. First, all fees related to Nasdaq Basic are constrained by 
competition among exchanges and other entities attracting order flow. 
Firms make decisions regarding Nasdaq Basic and other proprietary data 
based on the total cost of interacting with the Exchange, and order 
flow would be harmed by the supracompetitive pricing of any proprietary 
data product. Second, the price of Nasdaq Basic is constrained by the 
existence of multiple substitutes that are offered, or may be offered, 
by entities that offer proprietary or non-proprietary data. The 
proposed price reduction itself provides evidence of the need to 
maintain low prices in a competitive marketplace. Third, competition 
among broker-dealers for customers will further constrain the cost of a 
Nasdaq Basic enterprise license.
Competition for Order Flow
    Fees related to Nasdaq Basic are constrained by competition among 
exchanges and other entities seeking to attract order flow. Order flow 
is the ``life blood'' of the exchanges. Broker-dealers currently have 
numerous alternative venues for their order flow, including thirteen 
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. The existence of fierce competition for order flow 
implies a high degree of price sensitivity on the part of BDs, which 
may readily reduce costs by directing orders toward the lowest-cost 
trading venues.
    The level of competition and contestability in the market for order 
flow is demonstrated by the numerous examples of entrants that swiftly 
grew into some of the largest electronic trading platforms and 
proprietary data producers: Archipelago, Bloomberg Tradebook, Island, 
RediBook, Attain, TracECN, BATS Trading and BATS/Direct Edge. A 
proliferation of dark pools and other ATSs operate profitably with 
fragmentary shares of consolidated market volume. For a variety of 
reasons, competition from new entrants, especially for order execution, 
has

[[Page 88719]]

increased dramatically over the last decade.
    Each SRO, TRF, ATS, and BD that competes for order flow is 
permitted to produce proprietary data products. Many currently do or 
have announced plans to do so, including NYSE, NYSE Amex, NYSE Arca, 
BATS, and IEX. This is because Regulation NMS deregulated the market 
for proprietary data. While BDs had 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. Order routers and market data vendors can 
facilitate production of proprietary data products for single or 
multiple BDs. The potential sources of proprietary products are 
virtually limitless.
    The markets for order flow and proprietary data are inextricably 
linked: a trading platform cannot generate market information unless it 
receives trade orders. As a result, the competition for order flow 
constrains the prices that platforms can charge for proprietary data 
products. Firms make decisions on how much and what types of data to 
consume based on the total cost of interacting with Nasdaq and other 
exchanges. Data fees are but one factor in a total platform analysis. 
If the cost of the product exceeds its expected value, the broker-
dealer will choose not to buy it. A supracompetitive increase in the 
fees charged for either transactions or proprietary data has the 
potential to impair revenues from both products. In this manner, the 
competition for order flow will constrain prices for proprietary data 
products, including charges relating to Nasdaq Basic.
Substitute Products
    The price of data derived from Nasdaq Basic is constrained by the 
existence of multiple substitutes offered by numerous entities, 
including both proprietary data offered by other SROs or other 
entities, and non-proprietary data disseminated by Securities 
Information Processors (``SIPs'').
    The information provided through Nasdaq Basic is a subset of the 
best bid and offer and last sale data provided by the SIPs. The 
``core'' data disseminated by the SIP consists of best-price quotations 
and last sale information from all markets in U.S.-listed equities; 
Nasdaq Basic provides best bid and offer and last sale information for 
all U.S. exchange-listed stocks based on trade reports from the Nasdaq 
Market Center and the FINRA/Nasdaq Trade Reporting Facility. Many 
customers that purchase SIP data do not also purchase Nasdaq Basic 
because they are closely related products. In cases where customers buy 
both products, they may shift the extent to which they purchase one or 
the other based on price changes. The SIP constrains the price of 
Nasdaq Basic because no purchaser would pay an excessive price for 
Nasdaq Basic when similar data is also available from the SIP.
    Proprietary data sold by other exchanges also constrain the price 
of Nasdaq Basic. NYSE and BATS, like Nasdaq, sell proprietary non-core 
data that include best bid and offer and last sale data. Customers do 
not typically purchase proprietary best bid and offer and last sale 
data from multiple exchanges. Other proprietary data products constrain 
the price of Nasdaq Basic because no customer would pay an excessive 
price for Nasdaq Basic when substitute data is available from other 
proprietary sources.
Competition Among Broker-Dealers for Customers
    The enterprise license at issue is sold for use by the customers of 
a broker-dealer. There is no legal or regulatory requirement that such 
customers have direct access to data feeds containing best bid and 
offer or last sale information through Nasdaq Basic. If the price of 
the enterprise license were to be set above competitive levels, the 
broker-dealer purchasing that license would be at a competitive 
disadvantage relative to broker-dealers purchasing an alternative 
product as well as broker-dealers not purchasing any comparable product 
at all. As such, the broker-dealer at a competitive disadvantage would 
either purchase a substitute or forego the product altogether. The 
competition among broker-dealers for customers thereby provides yet 
another check on the price for Nasdaq Basic.
    In summary, the proposed rule change lowers the cost of Nasdaq 
Basic and broadens its availability to the investing public. Market 
forces constrain the Nasdaq Basic enterprise license through 
competition for order flow, competition from substitute products, and 
in the competition among broker-dealers for customers. For these 
reasons, the Exchange has provided a substantial basis demonstrating 
that the fee is equitable, fair, reasonable, and not unreasonably 
discriminatory, and therefore consistent with and in furtherance of the 
purposes of the Exchange Act.

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

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\12\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

    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: (i) 
Necessary or appropriate in the public interest; (ii) for the 
protection of investors; or (iii) 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-2016-162 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2016-162. 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

[[Page 88720]]

those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549 on official business days between the hours of 
10:00 a.m. and 3:00 p.m. Copies of such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2016-162, and should 
be submitted on or before December 29, 2016.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-29386 Filed 12-7-16; 8:45 am]
 BILLING CODE 8011-01-P