Document ID: SEC-2019-0432-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market, LLC
Posted Date: 2019-04-09T04:00Z

[Federal Register Volume 84, Number 68 (Tuesday, April 9, 2019)]
[Notices]
[Pages 14183-14188]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2019-06931]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-85504; File No. SR-NASDAQ-2019-024]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend the Equity 7 Pricing Schedule, Section 139

April 3, 2019.
    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, 2019, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed

[[Page 14184]]

rule change as described in Items I, II, and III below, which Items 
have been prepared by the Exchange. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend the Equity 7 Pricing Schedule, 
Section 139, to introduce, for no additional fee, an enterprise license 
for the distribution of Nasdaq Last Sale (``NLS'') data for personal 
use. The Exchange expects the proposed license to lower the cost of 
distributing last sale data and expand its availability to the general 
investing public by: (i) Eliminating certain counting requirements for 
NLS usage, and (ii) expanding the available mechanisms for the delivery 
of NLS data. The proposed enterprise license will not increase any fee 
because it will replace the current maximum fee of $41,500 for 
distribution of NLS data with a monthly enterprise license for the same 
amount.
    The text of the proposed rule change is available on the Exchange's 
website 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.

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 introduce, for no 
additional fee, an enterprise license for the distribution of NLS data 
for personal use. The Exchange expects the proposed license to lower 
the cost of distributing last sale data and expand its availability to 
the general investing public by: (i) Eliminating certain counting 
requirements for NLS usage, and (ii) expanding the available mechanisms 
for the delivery of NLS data. The proposed enterprise license will not 
increase any fee because it will replace the current maximum fee of 
$41,500 for distribution of NLS data with a monthly enterprise license 
for the same amount.\3\
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    \3\ The Exchange initially filed the proposed rule change on 
March 14, 2019 (SR-NASDAQ-2019-018). On March 28, 2019, the Exchange 
withdrew that filing and submitted this filing.
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Nasdaq Last Sale
    NLS provides real-time last sale information for executions 
occurring within the Nasdaq Market Center and trades reported to the 
jointly-operated FINRA/Nasdaq Trade Reporting Facility (``TRF'').\4\ 
The NLS data feed, which provides price, volume and time of execution 
data for last sale transactions, includes transaction information for 
Nasdaq-listed stocks (``NLS for Nasdaq'') and for stocks listed on 
NYSE, NYSE American, and other Tape B listing venues (``NLS for NYSE/
NYSE American'').\5\ NLS is a ``non-core'' product that provides a 
subset of the ``core'' last sale data provided by securities 
information processors (``SIPs'') under the CTA Plan and the Nasdaq UTP 
Plan.\6\
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    \4\ See Securities Exchange Act Release No. 57965 (June 16, 
2008), 73 FR 35178 (June 20, 2008) (SR-NASDAQ-2006-060) (proposing 
NLS); see also Securities Exchange Act Release No. 57965 (June 16, 
2008), 73 FR 35178 (June 20, 2008) (SR-NASDAQ-2006-060) (approving 
SR-NASDAQ-2006-060, as amended by Amendment Nos. 1 and 2, to 
implement NLS on a pilot basis).
    \5\ See Securities Exchange Act Release No. 57965 (June 16, 
2008), 73 FR 35178 (June 20, 2008) (SR-NASDAQ-2006-060).
    \6\ See Securities Exchange Act Release No. 34-82723 (February 
15, 2018), 83 FR 7812 (February 22, 2018) (SR-NASDAQ-2018-010).
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    NLS was designed to enable market-data distributors ``to provide 
free access to [ ] data to millions of individual investors via the 
internet and television'' and was expected to ``increase[ ] the 
availability of N[asdaq] proprietary market data to individual 
investors.'' \7\ As Nasdaq explained when proposing to change NLS from 
a pilot to a permanent program, ``the program has vastly increased the 
availability of N[asdaq] proprietary market data to individual 
investors. Based upon data from NLS Distributors, N[asdaq] believes 
that since its launch in July 2008, the NLS data has been viewed by 
millions of investors on websites operated by Google, Interactive Data, 
and Dow Jones, among others.'' \8\
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    \7\ See SR-NASDAQ-2006-060 (Amendment No. 2, June 10, 2008), at 
3, available at http://nasdaq.cchwallstreet.com/NASDAQ/pdf/nasdaq-filings/2006/SR-NASDAQ-2006-060_Amendment_2.pdf.
    \8\ See Securities Exchange Act Release No. 71351 (January 17, 
2014), 79 FR 4200 (January 24, 2014) (SR-NASDAQ-2014-006).
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    NLS is offered through two fee schedules: One for the general 
investing public, and another for specialized usage.\9\ Distribution to 
the general investing public is available under three stair-stepped 
\10\ fee models: Per User,\11\ Per Query,\12\ and Per Device.\13\
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    \9\ See Equity 7, Section 139(b) (General Investing Public) and 
139(c) (Specialized Usage).
    \10\ Pricing is ``stair-stepped'' in that the tiered fees are 
effective for the incremental Users in the new tier. See Securities 
Exchange Act Release No. 57965 (June 16, 2008), 73 FR 35178 (June 
20, 2008) (SR-NASDAQ-2006-060).
    \11\ See Equity 7, Section 139(b)(1).
    \12\ See Equity 7, Section 139(b)(2).
    \13\ See Equity 7, Section 139(b)(3).
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    The Per User model measures usage through a username/password 
entitlement system. To adopt the Per User model, a Distributor \14\ 
must distribute NLS solely to Users \15\ for Display Usage; \16\ all 
such Users must be either Non-Professionals \17\ or Professionals \18\ 
whom the Distributor has no reason to believe are using NLS in their 
professional capacity, and the Distributor must restrict and track 
access to NLS using a username/password logon or comparable method of 
regulating access approved by Nasdaq. While many of the Recipients \19\ 
of data under such a model would be Non-Professionals, the model does 
not require a Distributor to limit distribution to Non-Professionals. 
Occasional, incidental use by a

[[Page 14185]]

Professional in connection with professional activities would not 
affect the Distributor's eligibility for the Per User fee, as long as 
the Distributor, in establishing the connection to the Professional 
User, did not have reason to believe that professional usage would 
occur.\20\
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    \14\ A ``Distributor'' is ``an entity, as identified in the 
Nasdaq Global Data Agreement (or any successor agreement), that 
executes such an Agreement and has access to Exchange Information, 
together with its affiliates having such access.'' See Equity 7, 
Section 139(f)(3).
    \15\ A ``User'' is ``a natural person who has access to Exchange 
Information.'' See Equity 7, Section 139(f)(10).
    \16\ ``Display Usage'' refers to ``any method of accessing 
Exchange Information that involves the display of such data on a 
screen or other mechanism designed for access or use by a natural 
person or persons.'' See Equity 7, Section 139(f)(2).
    \17\ ``Non-Professional'' means ``a natural person who is not: 
(A) registered or qualified in any capacity with the Securities and 
Exchange Commission, the Commodity Futures Trading Commission, any 
state securities agency, any securities exchange or association, or 
any commodities or futures contract market or association; (B) 
engaged as an `investment adviser' as that term is defined in 
Section 202(a)(11) of the Investment Advisers Act of 1940 (whether 
or not registered or qualified under that Act); or (C) 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.'' See Equity 7, Section 139(f)(6).
    \18\ ``Professional'' means ``any natural person, 
proprietorship, corporation, partnership, or other entity whatever 
other than a Non-Professional.'' See Equity 7, Section 139(f)(7).
    \19\ ``Recipient'' means ``any natural person, proprietorship, 
corporation, partnership, or other entity whatever that has access 
to Exchange Information.'' See Equity 7, Section 139(f)(8).
    \20\ See Securities Exchange Act Release No. 34-82723 (February 
15, 2018), 83 FR 7812 (February 22, 2018) (SR-NASDAQ-2018-010) 
(discussing application of the Per User model).
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    The Per Query model determines usage based on the number of queries 
received. This model is available for Distributors that disseminate NLS 
solely to Users for Display Usage and track queries using a method 
approved by Nasdaq. In contrast to a Per User model, which makes all 
data available in a streaming or a montage format, the Per Query model 
supplies only as much data as the User requests on an ad hoc basis. 
Because a Per Query model is likely to be of less use to Professionals 
acting in a professional capacity, the model does not place limitations 
on the persons to whom it is offered (as long as they are natural 
persons viewing the data through Display Usage). The model also does 
not require the Distributor to limit access through any sort of 
entitlement system. As such, Per Query data may be made available 
through a publicly accessible website.
    The Per Device model tracks usage according to the number of 
Devices \21\ that access NLS. The Per Device model is available to 
Distributors that distribute NLS for Display Usage in a manner that 
does not restrict access and which track the number of unique Devices 
that access NLS during each month using a tracking method approved by 
Nasdaq.
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    \21\ ``Device'' has the same meaning as ``Subscriber,'' which is 
``a device, computer terminal, automated service, or unique user 
identification and password combination that is not shared and 
prohibits simultaneous access, and which is capable of accessing 
Exchange Information; `Interrogation Device,' `Device' or `Access' 
have the same meaning as Subscriber. For any device, computer 
terminal, automated service, or unique user identification and 
password combination that is shared or allows simultaneous access, 
Subscriber shall mean the number of such simultaneous accesses.'' 
See Equity 7, Section 139(f)(9).
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    The current fee schedule sets a maximum fee for any Distributor 
using the Per User, Per Query, or Per Device models (or any combination 
thereof) of $41,500 per month.\22\
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    \22\ A Distributor that wishes to distribute Nasdaq Last Sale 
via television must pay the maximum fee and may then distribute 
Nasdaq Last Sale either solely via television or in combination with 
unlimited use of the Per User, Per Query, and/or Per Device model. 
See Equity 7, Section 139(b)(4).
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    A Distributor that is not able to use any of the distribution 
models for the general investing public but nevertheless wishes to 
distribute NLS will be required to pay fees applicable to a model for 
``specialized usage.'' \23\
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    \23\ See Equity 7, Section 139(c).
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Proposed Enterprise License
    The Exchange proposes to replace the current maximum fee of $41,500 
per month for a Distributor using the Per User, Per Query, or Per 
Device models for distribution to the General Investing Public with a 
monthly enterprise license for the same amount for any customer that 
would otherwise be eligible for the such fees, excluding any 
requirement to count or track usage. The proposal will not change any 
fee because any Distributor currently paying the maximum fee of $41,500 
would continue to pay the same fee for the same data, albeit using an 
enterprise license that is easier to administer and allows for more 
methods of distribution.\24\ To be eligible for the enterprise license, 
NLS must be distributed on platform(s) controlled by the Distributor 
\25\ and pre-approved by the Exchange as providing the Distributor with 
a reasonable basis to conclude that all Users of such Information are 
either Non-Professionals or Professionals whom the Distributor has no 
reason to believe are using NLS in their professional capacity.
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    \24\ Distributors that do not elect to purchase the enterprise 
license, but inadvertently exceed $41,500 in Per User, Per Query or 
Per Device fees, may purchase the enterprise license for the 
month(s) in which fees exceeded $41,500 without pre-approval.
    \25\ Any Distributor able to meet the criteria set forth under 
the Per User, Per Query or Per Device models will be able to 
demonstrate control over the platform because the applicable 
tracking requirements and other limitations necessarily require such 
control.
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    The Exchange expects the proposal to lower administrative costs for 
Distributors of NLS to the general investing public by replacing the 
counting of users, queries or devices with a ``systems'' approach in 
which the Distributor would set forth--and Nasdaq would review and 
approve--a system of distribution that provides the Distributor and the 
Exchange with a reasonable basis to conclude that all Users of such 
Information \26\ are either Non-Professionals or Professionals whom the 
Distributor has no reason to believe are using NLS in their 
professional capacity. Distributors would not be required to track 
access to NLS using a username/password logon for the Per User model, 
queries as required by the Per Query model, or the number of unique 
Devices that access NLS as required by the Per Device model.
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    \26\ ``Information'' is defined as ``any data or information 
that has been collected, validated, processed and/or recorded by the 
Exchange and made available for transmission relating to: (i) 
eligible securities or other financial instruments, markets, 
products, vehicles, indicators or devices; (ii) activities of the 
Exchange; or (iii) other information or data from the Exchange. 
Information includes, but is not limited to, any element of 
information used or processed in such a way that Exchange 
Information or a substitute for such Information can be identified, 
recalculated or re-engineered from the processed information.'' See 
Equity 7, Section 139(f)(5).
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    The Exchange would evaluate each system using the same approach 
used today to evaluate distribution through the Per User model, which 
currently requires that Distributors disseminate data to Users who are 
``either Non-Professionals or Professionals whom the Distributor has no 
reason to believe are using Nasdaq Last Sale in their professional 
capacity.'' \27\ A Distributor has ``no reason to believe'' that NLS is 
being used in a professional capacity when, for example, the data is 
made available to the general investing public in a format that would 
be ``unlikely to be of significant use to Professionals acting in a 
professional capacity,'' as in the Per Query model,\28\ or when the 
Information is ``made freely available to internet users,'' as in the 
Per Device model.\29\ Any Distributor currently eligible to disseminate 
NLS under the Per User, Per Query, or Per Device models will be able to 
demonstrate that it is disseminating Information to Non-Professionals 
or Professionals whom the Distributor has no reason to believe are 
using Nasdaq Last Sale in their professional capacity because that test 
is already inherent (or explicit) within the eligibility criteria for 
each model.\30\
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    \27\ See Section 139(b)(1).
    \28\ See Securities Exchange Act Release No. 34-82723 (February 
15, 2018), 83 FR 7812 (February 22, 2018) (SR-NASDAQ-2018-010).
    \29\ See Securities Exchange Act Release No. 34-82723 (February 
15, 2018), 83 FR 7812 (February 22, 2018) (SR-NASDAQ-2018-010).
    \30\ The ``no reason to believe'' test is explicitly part of the 
criteria for the Per User model. See Section 139(b)(1). It is 
inherent in the Per Query model because, as noted above and in the 
filing instituting that fee, this model ``is unlikely to be of 
significant use to Professionals acting in a professional capacity . 
. .'' See Securities Exchange Act Release No. 34-82723 (February 15, 
2018), 83 FR 7812 (February 22, 2018) (SR-NASDAQ-2018-010). It is 
also inherent in the Per Device model because that model is designed 
to make information ``freely available to internet users,'' and 
therefore is unlikely to be of significant use to Professionals 
acting in a professional capacity. See Id.
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    The proposed license will allow Distributors to disseminate NLS 
data to the general investing public in a manner that is not readily 
tracked using the Per User, Per Query, or Per Device models. An example 
of the type of distribution model intended to benefit from the proposed 
license is a spreadsheet program that allows the User to refresh

[[Page 14186]]

a stock price using an in-program command without copying data. Such 
usage is analogous to the Per Query model, which supplies only as much 
data as the User requests on an ad hoc basis, but is less susceptible 
to counting because the request is done using a command embedded within 
another program.
    Since the launch of NLS in July 2008, the Exchange has strived to 
make last sale data available to individual investors using the latest 
available technology, such as television and the internet. The proposed 
enterprise license continues in that tradition, making NLS data 
available to the general investing public using mechanisms in which the 
traditional methods of counting usage--Per Query, Per User and Per 
Device--are unavailable or impractical, while at the same time lowering 
administrative costs for distributors by eliminating the need to count 
users, queries and devices.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\31\ in general, and furthers the objectives of 
Sections 6(b)(4) and 6(b)(5) of the Act,\32\ 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.
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    \31\ 15 U.S.C. 78f(b).
    \32\ 15 U.S.C. 78f(b)(4) and (5).
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    The fees established under Equity 7, Section 139, reflect Nasdaq's 
expectation, in creating NLS, that it would be used by market data 
Distributors to allow widespread dissemination of last sale information 
to individual investors by various means, including websites and 
television. The statutory basis for Nasdaq's current fees for NLS has 
already been described in prior filings,\33\ and Nasdaq is not 
modifying these long-established fees except to add an enterprise 
license, for no additional fee, that would lower the cost of 
distributing last sale data and expand its availability to the general 
investing public by: (i) Eliminating certain counting requirements for 
distributors and (ii) expanding the available mechanisms for the 
delivery of last sale data to the public. The proposed change is an 
equitable allocation of reasonable dues, fees and other charges because 
it expands the availability of last sale data while also lowering the 
cost of distribution for an already established fee. The proposed 
enterprise license is furthermore consistent with an equitable 
allocation of reasonable dues, fees and other charges because it 
alleviates the administrative costs and burdens associated with 
tracking usage of the product by allowing the Distributor to purchase a 
license without counting actual usage. The change is reasonable and not 
unfairly discriminatory because it will allow for the distribution of 
NLS data to all Distributors and Users that currently have access to 
such data using a wider variety of delivery formats such as, for 
example, distributing NLS data through a spreadsheet program that 
includes a command for in-program updates of NLS data.
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    \33\ See, e.g., Securities Exchange Act Release No. 34-82723 
(February 15, 2018), 83 FR 7812 (February 22, 2018) (SR-NASDAQ-2018-
010).
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    The Act does not prohibit all distinctions among customers, but 
rather discrimination that is unfair. As the Commission has recognized, 
``[i]f competitive forces are operative, the self-interest of the 
exchanges themselves will work powerfully to constrain unreasonable or 
unfair behavior.'' \34\ Accordingly, ``the existence of significant 
competition provides a substantial basis for finding that the terms of 
an exchange's fee proposal are equitable, fair, reasonable, and not 
unreasonably or unfairly discriminatory.'' \35\
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    \34\ See Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770 (December 9, 2008) (SR-NYSEArca-2006-21).
    \35\ Id.
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    In adopting Regulation NMS, the Commission granted self-regulatory 
organizations (``SROs'') 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 broker-dealers who do not need the 
data beyond the prices, sizes, market center identifications of the 
NBBO and consolidated last sale information are not required to 
receive (and pay for) such data. The Commission also believes that 
efficiency is promoted when broker-dealers may choose to receive 
(and pay for) additional market data based on their own internal 
analysis of the need for such data.\36\
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    \36\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (``Regulation NMS Adopting 
Release'').

    The Commission was speaking to the question of whether broker-
dealers should be subject to a regulatory requirement to purchase data, 
such as depth-of-book data, that is in excess of the data provided 
through the consolidated tape feeds, and the Commission concluded that 
the choice should be left to them. Accordingly, Regulation NMS removed 
unnecessary regulatory restrictions on the ability of exchanges to sell 
their own data, thereby advancing 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.
    Products such as NLS provide additional choices to broker-dealers 
and other data consumers, in that they provide less than the quantum of 
data provided through the consolidated tape feeds but at a lower price. 
Thus, they provide broker-dealers and others with an option to use a 
lesser amount of data in circumstances where SEC Rule 603(c) does not 
require a broker-dealer to provide a consolidated display.\37\ They are 
all, however, voluntary products for which market participants can 
readily substitute the consolidated data feeds. Accordingly, Nasdaq is 
constrained from pricing the product in a manner that would be 
inequitable or unfairly discriminatory. Moreover, the fees for these 
products, like all proprietary data fees, are constrained by the 
Exchange's need to compete for order flow.\38\
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    \37\ 17 CFR 242.603(c).
    \38\ See NetCoalition v. SEC, 615 F.3d 525, 539 (DC Cir. 2010) 
(quoting Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770, 74782-83 (December 9, 2008) (SR-NYSEArca-2006-
21)). (``No 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'. . . .).
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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 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

[[Page 14187]]

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.
    In this instance, the proposed change lowers the administrative 
costs for Distributors disseminating NLS data to the general investing 
public while expanding the types of delivery mechanisms available for 
such data. The proposal will advance competition by promoting 
widespread distribution of data to investors without increasing any 
current fee.
    The market for data products is extremely competitive and firms may 
freely choose alternative venues and data vendors based on the 
aggregate fees assessed, the data offered, and the value provided. This 
rule proposal does not burden competition, since other SROs and data 
vendors continue to offer alternative data products and, like the 
Exchange, set fees, but rather reflects the competition between data 
feed vendors and will further enhance such competition.
    NLS is part of the existing market for proprietary last sale data 
products that is currently competitive and inherently contestable 
because there is fierce competition for the inputs necessary to the 
creation of proprietary data and strict pricing discipline for the 
proprietary products themselves. Numerous exchanges compete with each 
other for listings, trades, and market data itself, providing virtually 
limitless opportunities for entrepreneurs who wish to produce and 
distribute their own market data. This proprietary data is produced by 
each individual exchange, as well as other entities, in a vigorously 
competitive market.
    Transaction execution and proprietary data products are 
complementary in that market data is both an input and a byproduct of 
the execution service. In fact, market data and trade execution are a 
paradigmatic example of joint products with joint costs. The decision 
whether and on which platform to post an order will depend on the 
attributes of the platform where the order can be posted, including the 
execution fees, data quality and price, and distribution of its data 
products. Without trade executions, exchange data products cannot 
exist. Moreover, data products are valuable to many end users only 
insofar as they provide information that end users expect will assist 
them or their customers in making trading decisions. The costs of 
producing market data include not only the costs of the data 
distribution infrastructure, but also the costs of designing, 
maintaining, and operating the exchange's transaction execution 
platform and the cost of regulating the exchange to ensure its fair 
operation and maintain investor confidence. The total return that a 
trading platform earns reflects the revenues it receives from both 
products and the joint costs it incurs.
    Moreover, the operation of the exchange is characterized by high 
fixed costs and low marginal costs. This cost structure is common in 
content and content distribution industries such as software, where 
developing new software typically requires a large initial investment 
(and continuing large investments to upgrade the software), but once 
the software is developed, the incremental cost of providing that 
software to an additional user is typically small, or even zero (e.g., 
if the software can be downloaded over the internet after being 
purchased).\39\
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    \39\ See William J. Baumol and Daniel G. Swanson, ``The New 
Economy and Ubiquitous Competitive Price Discrimination: Identifying 
Defensible Criteria of Market Power,'' Antitrust Law Journal, Vol. 
70, No. 3 (2003).
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    In Nasdaq's case, it is costly to build and maintain a trading 
platform, but the incremental cost of trading each additional share on 
an existing platform, or distributing an additional instance of data, 
is very low. Market information and executions are each produced 
jointly (in the sense that the activities of trading and placing orders 
are the source of the information that is distributed) and are each 
subject to significant scale economies. In such cases, marginal cost 
pricing is not feasible because, if all sales were priced at the 
margin, Nasdaq would be unable to defray its platform costs of 
providing joint products. Similarly, data products cannot make use of 
TRF trade reports without the raw material of the trade reports 
themselves, and therefore necessitate the costs of operating, 
regulating, and maintaining a trade reporting system--costs that must 
be covered through the fees charged for use of the facility and sales 
of associated data. As such, Nasdaq's overall fee structure is designed 
to ensure a fair and reasonable use of Exchange resources by allowing 
the Exchange to recoup costs while continuing to offer its data 
products at competitive rates to firms.
    An exchange's broker-dealer customers view the costs of transaction 
executions and of data as a unified cost of doing business with the 
exchange. A broker-dealer will disfavor a particular exchange if the 
expected revenues from executing trades on the exchange do not 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.
    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 trading activity will not be 
reflected in it. Second, and perhaps more important, the product will 
be less valuable to that broker-dealer because it does not provide 
information about the venue to which it is directing its orders. Data 
from the competing venue to which the broker-dealer is directing more 
orders will become correspondingly more valuable.
    Products such as NLS can enhance order flow to Nasdaq by providing 
more widespread distribution of information about transactions in real 
time, thereby encouraging wider participation in the market by 
investors with access to the internet or television. Conversely, the 
value of such products to Distributors and investors decreases if order 
flow falls, because the products contain less content.
    Similarly, in the case of products such as NLS that may be 
distributed through market data vendors, the vendors provide price 
discipline for proprietary data products because they control the 
primary means of access to end users. Vendors impose price restraints 
based upon their business models. For example, vendors 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 impose a discipline by providing only data that will enable 
them to attract ``eyeballs'' that contribute to their advertising 
revenue.\40\ Retail broker-dealers offer their retail customers 
proprietary data only if it promotes trading and generates

[[Page 14188]]

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. Exchanges, TRFs, 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.
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    \40\ Indeed, the proposed enterprise license itself provides 
evidence of such competition as it was designed, in part, to lower 
vendor costs.
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    Competition among trading platforms can be expected to constrain 
the aggregate return each platform earns from the sale of its joint 
products, but different platforms may choose from a range of possible, 
and equally reasonable, pricing strategies as the means of recovering 
total costs. Nasdaq pays rebates to attract orders, charges relatively 
low prices for market information and charges relatively high prices 
for accessing posted liquidity. Other platforms may choose a strategy 
of paying lower liquidity rebates to attract orders, setting relatively 
low prices for accessing posted liquidity, and setting relatively high 
prices for market information. Still others may provide most data free 
of charge and rely exclusively on transaction fees to recover their 
costs. Finally, some platforms may incentivize use by providing 
opportunities for equity ownership, which may allow them to charge 
lower direct fees for executions and data.
    In this environment, there is no economic basis for regulating 
maximum prices for one of the joint products in an industry in which 
suppliers face competitive constraints with regard to the joint 
offering. Such regulation is unnecessary because an ``excessive'' price 
for one of the joint products will ultimately have to be reflected in 
lower prices for other products sold by the firm, or otherwise the firm 
will experience a loss in the volume of its sales that will be adverse 
to its overall profitability. In other words, an increase in the price 
of data will ultimately have to be accompanied by a decrease in the 
cost of executions, or the volume of both data and executions will 
fall.\41\
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    \41\ Moreover, the level of competition and contestability in 
the market is evident in the numerous alternative venues that 
compete for order flow, including SRO markets, internalizing broker-
dealers and various forms of alternative trading systems (``ATSs''), 
including dark pools and electronic communication networks 
(``ECNs''). Each SRO market competes to produce transaction reports 
via trade executions, and two FINRA-regulated TRFs compete to 
attract internalized transaction reports. It is common for broker-
dealers to further and exploit this competition by sending their 
order flow and transaction reports to multiple markets, rather than 
providing them all to a single market. Competitive markets for order 
flow, executions, and transaction reports provide pricing discipline 
for the inputs of proprietary data products. The large number of 
SROs, TRFs, broker-dealers, 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 broker-dealer is currently permitted to produce 
proprietary data products, and many currently do or have announced 
plans to do so, including Nasdaq, NYSE, NYSE American, NYSE Arca, 
IEX, and CBOE.
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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.\42\
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    \42\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    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 [email protected]. Please include 
File Number SR-NASDAQ-2019-024 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASDAQ-2019-024. 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 website (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, 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 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. Persons submitting comments are 
cautioned that we do not redact or edit personal identifying 
information from comment submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-NASDAQ-2019-024 and should be submitted 
on or before April 30, 2019.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\43\
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    \43\ 17 CFR 200.30-3(a)(12).
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Eduardo A. Aleman,
Deputy Secretary.
[FR Doc. 2019-06931 Filed 4-8-19; 8:45 am]
 BILLING CODE 8011-01-P