Document ID: SEC-2014-0144-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2014-01-24T05:00Z

[Federal Register Volume 79, Number 16 (Friday, January 24, 2014)]
[Notices]
[Pages 4191-4197]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-01405]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71352; File No. SR-NASDAQ-2014-005]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
With Respect to the Composition of NASDAQ Basic

January 17, 2014.
    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 January 9, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'')

[[Page 4192]]

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 is filing a proposal to modify the language of NASDAQ 
Rule 7047 to establish that the NASDAQ Basic market data product 
currently includes and has, since its inception, included last sale 
transaction reports from the FINRA/NASDAQ Trade Reporting Facility 
(``TRF''). The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in brackets.
* * * * *

7047. NASDAQ Basic

    (a) NASDAQ shall offer proprietary data feeds containing real-time 
market information from the NASDAQ Market Center and the FINRA/NASDAQ 
Trade Reporting Facility (``TRF'').
    (1) ``NASDAQ Basic for NASDAQ'' shall contain NASDAQ's best bid and 
offer and last sale for NASDAQ-listed stocks from NASDAQ and the FINRA/
NASDAQ TRF; and
    (2) ``NASDAQ Basic for NYSE'' shall contain NASDAQ's best bid and 
offer and last sale for NYSE-listed stocks from NASDAQ and the FINRA/
NASDAQ TRF.
    (3) ``NASDAQ Basic for [Alternext] NYSE MKT'' shall contain 
NASDAQ's best bid and offer and last sale for [Alternext] NYSE MKT-
listed stocks from NASDAQ and the FINRA/NASDAQ TRF.
    (b) User Fees
    (1) Except as provided in (b)(2) and (b)(3), for the NASDAQ Basic 
product there shall be a per subscriber monthly charge of $10 for 
NASDAQ-listed stocks, $5 for NYSE-listed stocks, and $5 for [Alternext] 
NYSE MKT-listed stocks; or
    (2) For each non-professional subscriber, as defined in Rule 
7011(b), there shall be a per subscriber monthly charge of $0.50 for 
NASDAQ-listed stocks, $0.25 for NYSE-listed stocks, and $0.25 for 
[Alternext] NYSE MKT-listed stocks; or
    (3) There shall be a per query fee for NASDAQ Basic of $0.0025 for 
NASDAQ-listed stocks, $0.0015 for NYSE-listed stocks, and $0.0015 for 
[Alternext] NYSE MKT-listed stocks.
    (4) No change.
    (c) No change.
* * * * *

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

    In its filing with the Commission, the 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
    In June of 2008, NASDAQ received Commission approval to offer the 
NASDAQ Last Sale (``NLS'') market data product on a pilot basis. NLS is 
a non-core market data product designed for distribution through 
internet portals and broadcast television, as well as distribution to 
individuals that access the data via a username/password-identified 
account and/or quote-counting mechanisms.\3\ NLS includes two data 
elements: (1) Last sale transaction reports from the NASDAQ Market 
Center, and (2) last sale transaction reports from the FINRA/NASDAQ 
TRF.\4\ Based upon information from NLS distributors, NASDAQ believes 
that since its launch in 2008, the NLS data has been viewed by millions 
of investors, and that the NLS product has greatly increased the 
availability of market data to investors.
---------------------------------------------------------------------------

    \3\ See Securities Exchange Act Release No. 57964 (June 16, 
2008), 73 FR 35178 (June 20, 2008) (SR-NASDAQ-2006-060). NASDAQ has 
renewed the Last Sale Pilot continuously since 2008, most recently 
in December 2013. Securities Exchange Act Release No. 71217 
(December 31, 2013), 79 FR 875 (January 7, 2014) (SR-NASDAQ-2013-
162).
    \4\ See NASDAQ Rule 7039.
---------------------------------------------------------------------------

    In March of 2009, NASDAQ received Commission approval for a pilot 
to offer NASDAQ Basic, another non-core market data product.\5\ As 
originally proposed, the NASDAQ Basic product was to provide two data 
feeds: (1) A feed carrying the best bid and offer on the NASDAQ Market 
Center, and (2) a feed containing NLS which, as noted above, carries 
last sale transaction reports from NASDAQ and from the FINRA/NASDAQ 
TRF. Subsequently, NASDAQ amended the NASDAQ Basic filing to remove 
from the product the last sale transaction reports from the FINRA/
NASDAQ TRF. On October 11, 2010, NASDAQ submitted an immediately 
effective proposed rule change to offer NASDAQ Basic on a permanent 
basis,\6\ and to offer a NASDAQ Basic Enterprise License, which limits 
the expense of firms that offer NASDAQ Basic to large numbers of 
users.\7\
---------------------------------------------------------------------------

    \5\ Securities Exchange Act Release No. 59582 (March 16, 2009), 
74 FR 12423 (March 24, 2009) (SR-NASDAQ-2008-102) (finding pilot to 
be consistent with Sections 6(b)(4), (5) and (8) of the Act and Rule 
603(a) under Regulation NMS). See also Securities Exchange Act 
Release No. 59933 (May 15, 2009), 74 FR 24889 (May 26, 2009) (SR-
NASDAQ-2009-208) (finding reduction in fees for NASDAQ Basic to be 
consistent with Sections 6(b)(4), (5) and (8) of the Act and Rule 
603(a) under Regulation NMS).
    \6\ See Securities Exchange Act Release No. 65527 (October 11, 
2011), 76 FR 64147 (October 17, 2011) (SR-NASDAQ-2011-129).
    \7\ See Securities Exchange Act Release No. 65526 (October 11, 
2011), 76 FR 64137 (October 17, 2011) (SR-NASDAQ-2011-130).
---------------------------------------------------------------------------

    NASDAQ has determined through an internal review that the NASDAQ 
Basic market data product currently includes and has included since its 
inception last sale transaction reports for the NASDAQ/FINRA TRF.\8\ 
While NASDAQ Rule 7039 reflects the inclusion of last sale transaction 
reports for the FINRA/NASDAQ TRF in the NLS product, NASDAQ Rule 7047 
does not reflect the inclusion of the same data element via the NASDAQ 
Basic product.
---------------------------------------------------------------------------

    \8\ The inclusion of the data appears to have stemmed from a 
misunderstanding on the part of personnel who understood NASDAQ 
Basic to be a combination of the NLS product with NASDAQ best bid 
and offer data, rather than a product containing only Exchange data, 
without data from the FINRA/NASDAQ TRF.
---------------------------------------------------------------------------

    Through this proposed rule change, NASDAQ seeks to establish that 
it may disseminate last sale transaction reports for the FINRA/NASDAQ 
TRF through NASDAQ Basic, and to modify the language of Rule 7047 to 
reflect their inclusion in that product. NASDAQ is also proposing a 
clerical change to reflect the correct name for the NYSE MKT, 
previously known as the NYSE Alternext market. NASDAQ is proposing no 
change to the fees for NASDAQ Basic through this filing.\9\
---------------------------------------------------------------------------

    \9\ NASDAQ has announced its intention to modify fees for NASDAQ 
Basic. See http://www.nasdaqtrader.com/TraderNews.aspx?id=dn2013-09. 
However, any such fee change would be effected through a separate 
proposed rule change that would fully explain the statutory basis 
for the change.
---------------------------------------------------------------------------

2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act \10\ in general, and with 
Section 6(b)(5) of the Act \11\ in particular, in that the proposal

[[Page 4193]]

is designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
The purpose of the proposed rule change is to recognize inclusion of 
FINRA/NASDAQ TRF last sale data from the NLS product in the NASDAQ 
Basic product. The NASDAQ Basic product, in turn, provides a subset of 
the data that is also provided by the Level 1 data feed available under 
the NASDAQ UTP Plan. NASDAQ believes that the proposal facilitates 
transactions in securities, removes impediments to and perfects the 
mechanism of a free and open market and a national market system, and, 
in general, protects investors and the public interest by confirming 
the availability of an additional means by which investors may access 
information about transactions reported to the FINRA/NASDAQ TRF, 
thereby providing investors with additional options for accessing 
information that may help to inform their trading decisions. Given that 
Section 11A the Act \12\ requires the dissemination of FINRA/NASDAQ TRF 
last sale reports under the NASDAQ UTP Plan, and the dissemination of 
the same data is currently permitted through the NLS product, NASDAQ 
believes that the inclusion of the same data in NASDAQ Basic is also 
consistent with the Act.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78f.
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------

    NASDAQ further notes that the current fees for NASDAQ Basic have 
been previously established, and that the Commission has either 
specifically determined them to be consistent with the Act or has 
permitted them to become effective on an immediately effective 
basis.\13\ Thus, this proposed rule change does not establish or change 
a fee of the Exchange. However, to the extent that the proposed rule 
change confirms that NASDAQ Basic may contain FINRA/NASDAQ TRF data, 
NASDAQ believes that the change also provides further justification 
that the fees for NASDAQ Basic provide for the equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using any facility or system which NASDAQ operates or 
controls, and are not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers,\14\ in that the change 
reflects the full value of the product without any increase in its 
cost.\15\
---------------------------------------------------------------------------

    \13\ Securities Exchange Act Release No. 59582 (March 16, 2009), 
74 FR 12423 (March 24, 2009) (SR-NASDAQ-2008-102) (finding current 
per user and per subscriber fees to be consistent with the Act); 
Securities Exchange Act Release No. 59933 (May 15, 2009), 74 FR 
24889 (May 26, 2009) (SR-NASDAQ-2009-208) (finding current 
distributor fees for NASDAQ Basic to be consistent with the Act); 
Securities Exchange Act Release No. 64994 (July 29, 2011), 76 FR 
47621 (August 5, 2011) (SR-NASDAQ-2011-091) (immediate effectiveness 
of optional derived data fee); Securities Exchange Act Release No. 
65526 (October 11, 2011), 76 FR 64137 (October 17, 2011) (SR-NASDAQ-
2011-130) (immediate effectiveness of enterprise license fee).
    \14\ 15 U.S.C. 78f(b)(4), (5).
    \15\ But see supra n. 9.
---------------------------------------------------------------------------

    In adopting Regulation NMS, the Commission granted self-regulatory 
organizations (``SROs'') and broker-dealers (``BDs'') increased 
authority and flexibility to offer new and unique market data to the 
public. It was believed that this authority would expand the amount of 
data available to consumers, and also spur innovation and competition 
for the provision of market data. NASDAQ believes that its NASDAQ Basic 
market data product, as amended, is precisely the sort of market data 
product that the Commission envisioned when it adopted Regulation NMS. 
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.\16\
---------------------------------------------------------------------------

    \16\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496 (June 29, 2005).

    By removing unnecessary regulatory restrictions on the ability of 
exchanges to sell their own data, Regulation NMS advanced the goals of 
the Act and the principles reflected in its legislative history. If the 
free market should determine whether proprietary data is sold to BDs at 
all, it follows that the price at which such data is sold should be set 
by the market as well.
    The decision of the United States Court of Appeals for the District 
of Columbia Circuit in NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 
2010) (``NetCoalition I''), 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 I, at 535 (quoting H.R. Rep. No. 94-229, at 92 (1975), as 
reprinted in 1975 U.S.C.C.A.N. 321, 323). The court agreed with the 
Commission's conclusion that ``Congress intended that `competitive 
forces should dictate the services and practices that constitute the 
U.S. national market system for trading equity securities.'' \17\
---------------------------------------------------------------------------

    \17\ NetCoalition I, at 535.
---------------------------------------------------------------------------

    The Court in NetCoalition I, while upholding the Commission's 
conclusion that competitive forces may be relied upon to establish the 
fairness of prices, nevertheless concluded that the record in that case 
did not adequately support the Commission's conclusions as to the 
competitive nature of the market for NYSE Arca's data product at issue 
in that case. As explained below in NASDAQ's Statement on Burden on 
Competition, however, NASDAQ believes that there is substantial 
evidence of competition in the marketplace for data that was not in the 
record in the NetCoalition I case, and that the Commission is entitled 
to rely upon such evidence in concluding fees are the product of 
competition, and therefore in accordance with the relevant statutory 
standards.\18\ Moreover, NASDAQ further notes that the product at issue 
in this filing--a NASDAQ quotation and last sale data product that 
replicates a subset of the information available through ``core'' data 
products whose fees have been reviewed and approved by the SEC--is 
quite different from the NYSE Arca depth-of-book data product at issue 
in NetCoalition I. Accordingly, any findings of the court with respect 
to that product may not be relevant to the product at issue in this 
filing. As the Commission noted in approving the initial pilot for 
NASDAQ Basic, all of the information available in NASDAQ

[[Page 4194]]

Basic is included in the core data feeds made available pursuant to the 
joint-SRO plans, the fees for which have been approved by the 
Commission.\19\ The inclusion of FINRA/NASDAQ TRF data in NASDAQ Basic 
does not alter this fact, since such data is also included in the core 
data distributed under the NASDAQ UTP Plan. As the Commission further 
determined, ``the availability of alternatives to NASDAQ Basic 
significantly affect the terms on which NASDAQ can distribute this 
market data. In setting the fees for its NASDAQ Basic service, NASDAQ 
must consider the extent to which market participants would choose one 
or more alternatives instead of purchasing the exchange's data.'' \20\ 
Thus, to the extent that the fees for core data have been determined to 
be reasonable under the Act, it follows that the fees for NASDAQ Basic 
are also reasonable, since charging unreasonably high fees would cause 
market participants to rely solely on core data rather than purchasing 
NASDAQ Basic.
---------------------------------------------------------------------------

    \18\ It should also be noted that Section 916 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank 
Act'') has amended paragraph (A) of Section 19(b)(3) of the Act, 15 
U.S.C. 78s(b)(3), to make it clear that all exchange fees, including 
fees for market data, may be filed by exchanges on an immediately 
effective basis. See also NetCoalition v. SEC, 715 F.3d 342 (D.C. 
Cir. 2013) (``NetCoalition II'') (finding no jurisdiction to review 
Commission's non-suspension of immediately effective fee changes).
    \19\ Securities Exchange Act Release No. 12425 (March 16, 2009), 
74 FR 12423, 12425 (March 24, 2009) (SR-NASDAQ-2008-102).
    \20\ Id. at 12425.
---------------------------------------------------------------------------

    Moreover, as discussed in the order approving the initial pilot, 
and as further discussed below in NASDAQ's Statement on Burden on 
Competition, data products such as NASDAQ Basic are a means by which 
exchanges compete to attract order flow. To the extent that exchanges 
are successful in such competition, they earn trading revenues and also 
enhance the value of their data products by increasing the amount of 
data they are able to provide. Conversely, to the extent that exchanges 
are unsuccessful, the inputs needed to add value to data products are 
diminished. Accordingly, the need to compete for order flow places 
substantial pressure upon exchanges to keep their fees for both 
executions and data reasonable. The inclusion of FINRA/NASDAQ TRF data 
in NASDAQ Basic increases the value of the product, the fees for which 
have previously been established as reasonable.
    The fees for NASDAQ Basic also continue to reflect an equitable 
allocation and continue not be unfairly discriminatory, because NASDAQ 
Basic is a voluntary product for which market participants can readily 
substitute core data feeds that provide additional quotation and last 
sale information not available through NASDAQ Basic. Accordingly, 
NASDAQ is constrained from pricing the product in a manner that would 
be inequitable or unfairly discriminatory. Moreover, the fee schedule 
for NASDAQ Basic is designed to ensure that the fees charged are 
tailored to the specific usage patterns of a range of potential 
customers. Thus, low per-query fees are designed for customers that use 
the product only sporadically. Fees for non-professional subscribers, 
as well as the derived data fee and enterprise license fee that provide 
for unlimited distribution to non-professional users, are intended to 
provide a means to provide for low-cost availability of the product to 
retail investors through brokerage firms and market data vendors. 
Finally, professional subscriber fees provide a means for brokerage 
customers to use the information internally. The distinction between 
fees for professional and non-professional users is consistent with the 
distinction made under Commission-approved fees for core data, and the 
applicable fees are lower than applicable fees for core data to reflect 
the lesser quantum of data made available. The range of fee options 
further ensures that customers are not charged a fee that is 
inequitably disproportionate to the use that they make of the product.

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

    NASDAQ does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. NASDAQ's ability to 
price NASDAQ Basic is constrained by (1) competition among exchanges, 
other trading platforms, and TRFs that compete with each other in a 
variety of dimensions; (2) the existence of inexpensive real-time 
consolidated data and market-specific data and free delayed 
consolidated data; and (3) the inherent contestability of the market 
for proprietary data.
    The market for proprietary data products is currently competitive 
and inherently contestable because there is fierce competition for the 
inputs necessary to the creation of proprietary data and strict pricing 
discipline for the proprietary products themselves. Numerous exchanges 
compete with each other for listings, trades, and market data itself, 
providing virtually limitless opportunities for entrepreneurs who wish 
to produce and distribute their own market data. This proprietary data 
is produced by each individual exchange, as well as other entities, in 
a vigorously competitive market. Similarly, with respect to the TRF 
data, allowing exchanges to operate TRFs has permitted them to earn 
revenues by providing technology and data in support of the non-
exchange segment of the market. This revenue opportunity has also 
resulted in fierce competition between the two current TRF operators, 
with both TRFs charging extremely low trade reporting fees and rebating 
the majority of the revenues they receive from core market data to the 
parties reporting trades.
    Transaction executions 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.\21\ 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.
---------------------------------------------------------------------------

    \21\ A complete explanation of the pricing dynamics associated 
with joint products is presented in a study that NASDAQ originally 
submitted to the Commission in SR-NASDAQ-2011-010, and which is also 
submitted as Exhibit 3 to this filing. See Statement of Janusz 
Ordover and Gustavo Bamberger at 2-17 (December 29, 2010).
---------------------------------------------------------------------------

    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).\22\ In NASDAQ's case, it is 
costly to build and maintain a trading platform, but the

[[Page 4195]]

incremental cost of trading each additional share on an existing 
platform, or distributing an additional instance of data, is very low. 
Market information and executions are each produced jointly (in the 
sense that the activities of trading and placing orders are the source 
of the information that is distributed) and are each subject to 
significant scale economies. In such cases, marginal cost pricing is 
not feasible because if all sales were priced at the margin, NASDAQ 
would be unable to defray its platform costs of providing the joint 
products. 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,\23\ 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.
---------------------------------------------------------------------------

    \22\ 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).
    \23\ It should be noted that the costs of operating the FINRA/
NASDAQ TRF borne by NASDAQ include regulatory charges paid by NASDAQ 
to FINRA.
---------------------------------------------------------------------------

    An exchange's BD customers view the costs of transaction executions 
and of data as a unified cost of doing business with the exchange. A BD 
will direct orders to a particular exchange only if the expected 
revenues from executing trades on the exchange exceed net transaction 
execution costs and the cost of data that the BD chooses to buy to 
support its trading decisions (or those of its customers). The choice 
of data products is, in turn, a product of the value of the products in 
making profitable trading decisions. If the cost of the product exceeds 
its expected value, the BD will choose not to buy it. Moreover, as a BD 
chooses to direct fewer orders to a particular exchange, the value of 
the product to that BD decreases, for two reasons. First, the product 
will contain less information, because executions of the BD's trading 
activity will not be reflected in it. Second, and perhaps more 
important, the product will be less valuable to that BD because it does 
not provide information about the venue to which it is directing its 
orders. Data from the competing venue to which the BD is directing 
orders will become correspondingly more valuable.
    Similarly, in the case of products such as NASDAQ Basic that are 
distributed through market data vendors, the vendors provide price 
discipline for proprietary data products because they control the 
primary means of access to end users. Vendors impose price restraints 
based upon their business models. For example, vendors such as 
Bloomberg and Reuters that assess a surcharge on data they sell may 
refuse to offer proprietary products that end users will not purchase 
in sufficient numbers. Internet portals, such as Google, impose a 
discipline by providing only data that will enable them to attract 
``eyeballs'' that contribute to their advertising revenue. Retail BDs, 
such as Schwab and Fidelity, offer their customers proprietary data 
only if it promotes trading and generates sufficient commission 
revenue. Although the business models may differ, these vendors' 
pricing discipline is the same: they can simply refuse to purchase any 
proprietary data product that fails to provide sufficient value. 
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. 
Moreover, NASDAQ believes that products such as NASDAQ Basic 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 data 
through their brokerage firm or other distribution sources. Conversely, 
the value of such products to distributors and investors decreases if 
order flow falls, because the products contain less content.
    Analyzing the cost of market data distribution in isolation from 
the cost of all of the inputs supporting the creation of market data 
will inevitably underestimate the cost of the data. Thus, because it is 
impossible to create exchange 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. Similarly, the inclusion of trade 
reporting data in a product such as NASDAQ Basic may assist in 
attracting customers to the product, thereby assisting in covering the 
additional costs associated with operating and regulating a TRF.
    Competition among trading platforms can be expected to constrain 
the aggregate return each platform earns from the sale of its joint 
products, but different platforms may choose from a range of possible, 
and equally reasonable, pricing strategies as the means of recovering 
total costs. NASDAQ pays rebates to attract orders, charges relatively 
low prices for market information and charges relatively high prices 
for accessing posted liquidity. Other platforms may choose a strategy 
of paying lower liquidity rebates to attract orders, setting relatively 
low prices for accessing posted liquidity, and setting relatively high 
prices for market information. Still others may provide most data free 
of charge and rely exclusively on transaction fees to recover their 
costs. Finally, some platforms may incentivize use by providing 
opportunities for equity ownership, which may allow them to charge 
lower direct fees for executions and data.
    In this environment, there is no economic basis for regulating 
maximum prices for one of the joint products in an industry in which 
suppliers face competitive constraints with regard to the joint 
offering. Such regulation is unnecessary because an ``excessive'' price 
for one of the joint products will ultimately have to be reflected in 
lower prices for other products sold by the firm, or otherwise the firm 
will experience a loss in the volume of its sales that will be adverse 
to its overall profitability. In other words, an increase in the price 
of data will ultimately have to be accompanied by a decrease in the 
cost of executions, or the volume of both data and executions will 
fall.
    The level of competition and contestability in the market is 
evident in the numerous alternative venues that compete for order flow, 
including thirteen SRO markets, as well as internalizing BDs and 
various forms of alternative trading systems (``ATSs''), including dark 
pools and electronic communication networks (``ECNs''). Each SRO market 
competes to produce transaction reports via trade executions, and two 
FINRA-regulated TRFs compete to attract internalized transaction 
reports. It is common for BDs to further and exploit this competition 
by sending their order flow and transaction reports to multiple 
markets, rather than providing them all to a single market. Competitive 
markets for order flow, executions, and transaction reports provide 
pricing discipline for the inputs of proprietary data products.
    The large number of SROs, TRFs, BDs, and ATSs that currently 
produce proprietary data or are currently capable of producing it 
provides further pricing discipline for proprietary data products.

[[Page 4196]]

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 MKT, NYSE Arca, BATS, and 
Direct Edge.
    Any ATS or BD can combine with any other ATS, BD, or multiple ATSs 
or BDs to produce joint proprietary data products. Additionally, order 
routers and market data vendors can facilitate single or multiple BDs' 
production of proprietary data products. The potential sources of 
proprietary products are virtually limitless. Notably, the potential 
sources of data include the BDs that submit trade reports to TRFs and 
that have the ability to consolidate and distribute their data without 
the involvement of FINRA or an exchange-operated TRF.
    The fact that proprietary data from ATSs, BDs, and vendors can by-
pass SROs is significant in two respects. First, non-SROs can compete 
directly with SROs for the production and sale of proprietary data 
products, as BATS and Arca did before registering as exchanges by 
publishing proprietary book data on the internet. Second, because a 
single order or transaction report can appear in a core data product, 
an SRO proprietary product, and/or a non-SRO proprietary product, the 
data available in proprietary products is exponentially greater than 
the actual number of orders and transaction reports that exist in the 
marketplace. Indeed, in the case of NASDAQ Basic, the data provided 
through that product appears both in (i) real-time core data products 
offered by the SIPs for a fee, and (ii) free SIP data products with a 
15-minute time delay, and finds a close substitute in similar products 
of competing venues.
    In addition to the competition and price discipline described 
above, the market for proprietary data products is also highly 
contestable because market entry is rapid, inexpensive, and profitable. 
The history of electronic trading is replete with examples of entrants 
that swiftly grew into some of the largest electronic trading platforms 
and proprietary data producers: Archipelago, Bloomberg Tradebook, 
Island, RediBook, Attain, TracECN, BATS Trading and Direct Edge. A 
proliferation of dark pools and other ATSs operate profitably with 
fragmentary shares of consolidated market volume.
    Regulation NMS, by deregulating the market for proprietary data, 
has increased the contestability of that market. While BDs have 
previously published their proprietary data individually, Regulation 
NMS encourages market data vendors and BDs to produce proprietary 
products cooperatively in a manner never before possible. Multiple 
market data vendors already have the capability to aggregate data and 
disseminate it on a profitable scale, including Bloomberg and Thomson 
Reuters. In Europe, Markit aggregates and disseminates data from over 
50 brokers and multilateral trading facilities.\24\
---------------------------------------------------------------------------

    \24\ http://www.markit.com/en/products/data/boat/boat-boat-data.page.
---------------------------------------------------------------------------

    In the case of TRFs, the rapid entry of several exchanges into this 
space in 2006-2007 following the development and Commission approval of 
the TRF structure demonstrates the contestability of this aspect of the 
market.\25\ Given the demand for trade reporting services that is 
itself a by-product of the fierce competition for transaction 
executions--characterized notably by a proliferation of ATSs and BDs 
offering internalization--any supra-competitive increase in the fees 
associated with trade reporting or TRF data would shift trade report 
volumes from one of the existing TRFs to the other \26\ and create 
incentives for other TRF operators to enter the space. Alternatively, 
because BDs reporting to TRFs are themselves free to consolidate the 
market data that they report, the market for over-the-counter data 
itself, separate and apart from the markets for execution and trade 
reporting services--is fully contestible.
---------------------------------------------------------------------------

    \25\ The low cost exit of two TRFs from the market is also 
evidence of a contestible market, because new entrants are reluctant 
to enter a market where exit may involve substantial shut-down 
costs.
    \26\ It should be noted that the FINRA/NYSE TRF has, in recent 
weeks, received reports for over 10% of all over-the-counter volume 
in NMS stocks. In addition, FINRA has announced plans to update its 
Alternative Display Facility, which is also able to receive over-
the-counter trade reports. See Securities Exchange Act Release No. 
70048 (July 26, 2013), 78 FR 46652 (August 1, 2013) (SR-FINRA-2013-
031).
---------------------------------------------------------------------------

    Moreover, consolidated data provides two additional measures of 
pricing discipline for proprietary data products that are a subset of 
the consolidated data stream. First, the consolidated data is widely 
available in real-time at $1 per month for non-professional users. 
Second, consolidated data is also available at no cost with a 15- or 
20- minute delay. Because consolidated data contains marketwide 
information, it effectively places a cap on the fees assessed for 
proprietary data (such as quotation and last sale data) that is simply 
a subset of the consolidated data. The mere availability of low-cost or 
free consolidated data provides a powerful form of pricing discipline 
for proprietary data products that contain data elements that are a 
subset of the consolidated data, by highlighting the optional nature of 
proprietary products.
    The competitive nature of the market for non-core ``sub-set'' 
products such as NASDAQ Basic is borne out by the performance of the 
market. In May 2008, the Internet portal Yahoo! began offering its Web 
site viewers real-time last sale data (as well as best quote data) 
provided by BATS. In response, in June 2008, NASDAQ launched NLS, which 
was initially subject to an ``enterprise cap'' of $100,000 for 
customers receiving only one of the NLS products, and $150,000 for 
customers receiving both products. The majority of NASDAQ's sales were 
at the capped level. In early 2009, BATS expanded its offering of free 
data to include depth-of-book data. Also in early 2009, NYSE Arca 
announced the launch of a competitive last sale product with an 
enterprise price of $30,000 per month. In response, NASDAQ combined the 
enterprise cap for the NLS products and reduced the cap to $50,000 
(i.e., a reduction of $100,000 per month). Although each of these 
products offers only a specific subset of data available from the SIPs, 
NASDAQ believes that the products are viewed as substitutes for each 
other and for core last-sale data, rather than as products that must be 
obtained in tandem. For example, while Yahoo! and Google now both 
disseminate NASDAQ's last sale product, several other major content 
providers, including MSN and Morningstar, use the BATS last sale 
product.
    In this environment, 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 I at 539. The existence of 
fierce competition for order flow implies a high degree of price 
sensitivity on the part of BDs with order flow, since they may readily 
reduce costs by directing orders toward the lowest-cost trading venues. 
A BD that shifted its order flow from one platform to another in 
response to order execution price differentials would both reduce the 
value of that platform's market data and reduce its own need to consume 
data from the disfavored platform. If a platform increases its market 
data fees, the change will affect the overall cost of doing business 
with the platform, and affected BDs will assess whether they can lower 
their trading costs by directing orders elsewhere and thereby lessening 
the need for the more expensive data. Similarly, increases in

[[Page 4197]]

the cost of NASDAQ Basic would impair the willingness of distributors 
to take a product for which there are numerous alternatives, impacting 
NASDAQ Basic data revenues, the value of NASDAQ Basic as a tool for 
attracting order flow, and ultimately, the volume of orders routed to 
NASDAQ and reported to the FINRA/NASDAQ TRF and the value of its other 
data products.
    In establishing the price for NASDAQ Basic, NASDAQ considered the 
competitiveness of the market for quotation and last sale data and all 
of the implications of that competition. NASDAQ believes that it has 
considered all relevant factors and has not considered irrelevant 
factors in order to establish fair, reasonable, and not unreasonably 
discriminatory fees and an equitable allocation of fees among all 
users. The existence of numerous alternatives to NASDAQ Basic, 
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 NASDAQ Basic 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

    No written comments were either solicited or received.

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(ii) of the Act \27\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\28\ 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.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \28\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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-2014-005 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-2014-005. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 
10:00 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; 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-2014-005 and should 
be submitted on or before February 14, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\29\
---------------------------------------------------------------------------

    \29\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-01405 Filed 1-23-14; 8:45 am]
BILLING CODE 8011-01-P