Document ID: SEC-2016-2139-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market LLC
Posted Date: 2016-12-06T05:00Z

[Federal Register Volume 81, Number 234 (Tuesday, December 6, 2016)]
[Notices]
[Pages 87981-87984]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-29160]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-79431; File No. SR-Nasdaq-2016-120]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order 
Instituting Proceedings To Determine Whether To Approve or Disapprove a 
Proposed Rule Change To Amend Rules 7034 and 7051 To Establish the 
Third Party Connectivity Service

November 30, 2016.

I. Introduction

    On August 16, 2016, the Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange

[[Page 87982]]

Commission (``Commission''), pursuant to Section 19(b)(1) \1\ of the 
Securities Exchange Act of 1934 (``Act'') \2\ and Rule 19b-4 
thereunder,\3\ a proposed rule change to establish the Third Party 
Connectivity Service under Rules 7034 and 7051. The proposed rule 
change was published for comment in the Federal Register on September 
2, 2016.\4\ The Commission received one comment letter regarding the 
proposal.\5\ Nasdaq responded to the comment letter.\6\ Subsequently, 
the Commission received three additional comment letters regarding the 
proposal: One from Bats responding to Nasdaq's Letter, another from 
Virtu Financial, and a third from SIFMA.\7\ This order institutes 
proceedings under Section 19(b)(2)(B) of the Act \8\ to determine 
whether to approve or disapprove the proposed rule change.
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    \1\ 15 U.S.C.78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
    \4\ See Securities Exchange Act Release No. 78713 (August 29, 
2016), 81 FR 60768 (``Notice'').
    \5\ See letter from Eric Swanson, Esq., General Counsel, Bats 
Global Markets, Inc., dated September 12, 2016 (``Bats Letter'') to 
Brent J. Fields, Secretary, Securities and Exchange Commission.
    \6\ See letter from Jeffrey S. Davis, Vice President and General 
Counsel, NASDAQ Stock Market LLC, to Brent J. Fields, Secretary, 
Commission, dated October 4, 2016 (``Nasdaq Letter'').
    \7\ See letters from Eric Swanson, dated October 12, 2016 
(``Bats Response''), Douglas A. Cifu, Chief Executive Officer, Virtu 
Financial, dated October 6, 2016 (``Virtu Letter''), and Melissa 
McGregor, Managing Director and Associate General Counsel, 
Securities Industry and Financial Markets Association, dated 
November 23, 2016 (``SIFMA Letter''), to Brent J. Fields, Secretary, 
Commission.
    \8\ 15 U.S.C. 78s(b)(2)(B).
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II. Description of the Proposed Rule Change

Proposed New Connectivity
    As described in the Notice, the Exchange is proposing to amend 
Rules 7034 and 7051 to establish the Third Party Connectivity Service. 
Under the proposal, the Exchange would segregate connectivity to the 
Exchange and its proprietary data feeds from connectivity to third 
party services and data feeds, including SIP data feeds. The Third 
Party Connectivity Service will provide customers third party market 
data feeds, including SIP data, and other non-exchange services.\9\ The 
Exchange is proposing to offer the Third Party Connectivity Service to 
co-location and non-co-location customers and will offer the service to 
customers in 10 Gb Ultra and 1 Gb Ultra hand-offs.\10\ To receive the 
SIP feeds, customers must subscribe to the 10 Gb Ultra connectivity 
option under either Rule 7034(b) or 7051(b). The proposed 1 Gb Ultra 
Third Party Connectivity Service option under Rules 7034(b) and 7051(b) 
will only support data feeds from other exchanges and markets.\11\ 
Customers seeking connectivity to the Exchange and its proprietary data 
feeds may continue to do so through existing connectivity options under 
Rules 7034(b) and Rule 7051(a).\12\
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    \9\ See Notice, 81 FR at 60769 n.10.
    \10\ See Notice, 81 FR at 60769 n.12.
    \11\ See Notice, 81 FR at 60769 n.10.
    \12\ See Notice, 81 FR at 60769 n.13.
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Proposed New Fees \13\
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    \13\ In the notice, the Exchange also states that it will offer 
services currently available to Direct Connectivity subscribers 
under Rule 7051 to subscribers to the Third Party Connectivity 
Service.
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    The Exchange is proposing to assess fees for the Third Party 
Connectivity Service under Rules 7034(b) and 7051(b), including a fee 
of $1,500 for installation of either a 10 Gb Ultra or 1 Gb Ultra Third 
Party Services co-location or direct connectivity subscription and an 
ongoing monthly fee of $5,000 for 10 Gb Ultra connection and $2,000 for 
a 1 Gb Ultra connection.

III. Comment Letters and Nasdaq's Response

    The Commission received a total of four comments on the proposed 
rule change.\14\ All of the commenters object to the proposal. The 
Commission also received a response to the Bats Letter from Nasdaq.\15\
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    \14\ See supra notes 5 and 7.
    \15\ See supra note 6.
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    In its comment letter, Bats stated that the proposed rule change 
constitutes a UTP access services fee for direct access to UTP data, 
and, as such, the fee should have been approved by the UTP Operating 
Committee.\16\ SIFMA noted its agreement with BATS's position on this 
issue.\17\ More specifically, Bats stated its belief that because 
Nasdaq is the sole provider of direct access to UTP Data, the proposal 
targets UTP Data recipients and extends the scope of the UTP system to 
include customer connectivity, because firms desiring direct access to 
UTP Data would be required to subscribe to and pay for the proposed 
Third Party Connectivity Service.\18\ Bats also stated its views that 
the proposal is anti-competitive, in that it benefits Nasdaq's 
proprietary data products over UTP data, and is technically 
unnecessary.\19\ Virtu Financial and SIFMA also questioned whether the 
proposal is technically necessary.\20\
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    \16\ See Bats Letter at 1-2. The Joint Self-Regulatory 
Organization Plan Governing the Collection, Consolidation and 
Dissemination of Quotation and Transaction Information for Nasdaq-
Listed Securities Traded on Exchanges on an Unlisted Trading 
Privileges Basis (``The UTP Plan'') is administered by its 
participants through an operating committee (``UTP Operating 
Committee'') which is composed of one representative designated by 
each participant of the plan. See, e.g., Sections IV.A., B.3, and 
IV.C.2 of the UTP Plan, and Securities Exchange Act Release No.55647 
(April 19, 2007), 72 FR 20891 (April 26, 2007).
    \17\ See SIFMA Letter at 2.
    \18\ See Bats Letter at 1-2.
    \19\ See Bats Letter at 1, 3-5.
    \20\ See Virtu Letter at 1-2 and SIFMA Letter at 2-3.
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    Nasdaq responded to the Bats Letter, stating that Nasdaq has 
controlled the network and network connectivity without input from the 
UTP Operating Committee for over 25 years,\21\ and that neither the UTP 
Plan nor the processor agreement grants the UTP Operating Committee 
authority over the network or network connectivity associated with SIP 
Data.\22\
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    \21\ See Nasdaq Letter at 2-4.
    \22\ Id.
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    Nasdaq also stated that SIP Data can be obtained from multiple 
extranet providers that compete with Nasdaq's data distribution 
services.\23\ Nasdaq further stated that extranet providers are not at 
a competitive disadvantage because extranet providers and Nasdaq 
receive SIP Data via the same switches, and therefore clients that 
receive SIP Data via direct connections do not have an advantage with 
respect to location or speed.\24\ Nasdaq also stated that the proposal 
does not target UTP data recipients because UTP SIP Data is combined 
with and carried on the same network as data from other sources.\25\ 
Nasdaq argued that it ``is proposing to charge firms less for access to 
SIP Data than it will charge for access to Nasdaq Data'' because the 
``proposed monthly fees for direct connections to the Third Party Data 
are $2000 for 1G connections and $5000 for 10G connections, where the 
current fees for direct connections to Nasdaq Data are $2500 and $7500 
for the same services.'' \26\
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    \23\ See Nasdaq Letter at 4.
    \24\ See Nasdaq Letter at 4-5.
    \25\ See Nasdaq Letter at 3.
    \26\ See Nasdaq Letter at 5.
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    With respect to technical necessity, Nasdaq stated that it has 
``done substantial analysis to support the recommendation, and it 
believes the recommendation is consistent with its limited experience 
with the new Processor.'' \27\ Nasdaq further stated that the UTP 
Operating Committee has ``input into the bandwidth

[[Page 87983]]

recommendation'' and can act to lower it further.\28\
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    \27\ See Nasdaq Letter at 5. In its letter, Nasdaq also states 
that ``[d]uring a one month period (23 trading days) this summer, 
Nasdaq observed the new UTP Trade Data binary feed exceeding a 1G 
capacity for a 1 microsecond timeframe in 18 of the trading days. If 
you add the new UTP Quote Data binary feed to that same connection, 
the combined feeds exceed 1G capacity for 1 microsecond timeframe in 
23 trading days.'' See id.
    \28\ See id.
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    In its response to Nasdaq, Bats stated its views that the Nasdaq 
Letter fails to: (i) Address Bats' assertions that the proposal is 
anti-competitive; (ii) explain why the proposed rule change is 
technically necessary; and (iii) show that the proposed rule change 
does not constitute an access services fee for UTP Data. Specifically, 
Bats stated that under the proposal, Nasdaq members who maintain direct 
connections to Nasdaq for trading and quoting purposes would continue 
to receive Nasdaq proprietary products at no additional cost, while 
those wishing to also obtain UTP Data would be required to purchase an 
additional connection via the proposed Third Party Connectivity 
Service, and pay a separate fee for that connection, thereby making 
access to UTP data materially more expensive.\29\ Bats also stated that 
it is the access to UTP Data that is at issue, and not the coupling of 
UTP Data with other third party services, or the percentage of clients 
that also take another data product via a direct connection to 
Nasdaq.\30\
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    \29\ See Bats Response at 1-2.
    \30\ See Bats Response at 4.
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    Bats also stated its view that Nasdaq SIP bandwidth recommendations 
are excessive, inconsistent with current peak UTP message traffic, and 
much higher than recommendations for Nasdaq's own proprietary data 
products.\31\ SIFMA states that Nasdaq has not provided any 
``reasonable justification for requiring member firms to use a 10Gb 
connection to receive SIP data.'' \32\ Bats stated its belief that 
using a one microsecond burst to determine a bandwidth recommendation 
is misplaced, as the observed peak is not sustained over a full 
second.\33\ Bats further stated its belief that the UTP Operating 
Committee has historically acquiesced in the current framework only 
because by ``leveraging a single physical connection to access to both 
Nasdaq and UTP services, firms can save on the total cost of access, 
which is a worthwhile benefit to direct UTP data recipients,'' \34\ and 
that this ability to leverage existing connectivity was a factor in the 
selection of Nasdaq as SIP processor.\35\
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    \31\ See Bats Response at 2-3.
    \32\ See SIFMA Letter at 2.
    \33\ See Bats Response at 2-3.
    \34\ See Bats Response at 3-4.
    \35\ Id.
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    In its letter, SIFMA agreed with issues raised by other commenters 
and asserted that the proposed rule change is not consistent with the 
statutory standards that govern fees.\36\
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    \36\ See SIFMA Letter.
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IV. Proceedings To Determine Whether To Approve or Disapprove SR-
NASDAQ-2016-120 and Grounds for Disapproval Under Consideration

    The Commission is instituting proceedings pursuant to Section 
19(b)(2)(B) of the Act \37\ to determine whether the proposed rule 
change should be approved or disapproved. Institution of proceedings is 
appropriate at this time in view of the legal and policy issues raised 
by the proposed rule change, as discussed. Institution of proceedings 
does not indicate that the Commission has reached any conclusions with 
respect to any of the issues involved. Rather, as described in greater 
detail below, the Commission seeks and encourages interested persons to 
provide additional comment on the proposed rule change.
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    \37\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
The time for conclusion of the proceedings may be extended for up to 
60 days if the Commission finds good cause for such extension and 
publishes its reasons for so finding.
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    Pursuant to Section 19(b)(2)(B) of the Act,\38\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
Specifically, the Commission is instituting proceedings to allow for 
additional analysis of, and input from commenters with respect to, the 
proposed rule change's consistency with Section 6(b)(4) of the Act, 
which requires that the rules of a national securities exchange 
``provide for the equitable allocation of reasonable dues, fees, and 
other charges among its members and issuers and other persons using its 
facilities,'' \39\ Section 6(b)(5) of the Act, which requires, among 
other things, that the rules of a national securities exchange be 
``designed to perfect the operation of a free and open market and a 
national market system'' and ``protect investors and the public 
interest,'' and not be ``designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers,'' \40\ and Section 
6(b)(8) of the Act, which requires that the rules of a national 
securities exchange ``not impose any burden on competition not 
necessary or appropriate in furtherance of the purposes of [the Act].'' 
\41\
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    \38\ 15 U.S.C. 78s(b)(2)(B).
    \39\ 15 U.S.C. 78f(b)(4).
    \40\ 15 U.S.C. 78f(b)(5).
    \41\ 15 U.S.C. 78f(b)(8).
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V. Procedure: Request for Written Comments

    The Commission requests that interested persons provide written 
submissions of their data, views, and arguments with respect to the 
concerns identified above, as well as any other concerns they may have 
with the proposed rule change. In particular, the Commission invites 
the written views of interested persons concerning whether the proposal 
is consistent with Sections 6(b)(4),\42\ 6(b)(5),\43\ 6(b)(8),\44\ or 
any other provision of the Act, or the rules and regulations 
thereunder. Although there does not appear to be any issue relevant to 
approval or disapproval which would be facilitated by an oral 
presentation of data, views, and arguments, the Commission will 
consider, pursuant to Rule 19b-4 under the Act,\45\ any request for an 
opportunity to make an oral presentation.\46\ Interested persons are 
invited to submit written data, views, and arguments regarding whether 
the proposal should be approved or disapproved by December 27, 2016. 
Any person who wishes to file a rebuttal to any other person's 
submission must file that rebuttal by January 10, 2017.
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    \42\ 15 U.S.C. 78f(b)(4).
    \43\ 15 U.S.C. 78f(b)(5).
    \44\ 15 U.S.C. 78f(b)(8).
    \45\ 17 CFR 240.19b-4.
    \46\ Section 19(b)(2) of the Act, as amended by the Securities 
Act Amendments of 1975, Public Law 94-29 (June 4, 1975), grants to 
the Commission flexibility to determine what type of proceeding--
either oral or notice and opportunity for written comments--is 
appropriate for consideration of a particular proposal by a self-
regulatory organization. See Securities Act Amendments of 1975, 
Senate Comm. on Banking, Housing & Urban Affairs, S. Rep. No. 75, 
94th Cong., 1st Sess. 30 (1975).
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    In light of the issues raised by the proposed rule change, as 
discussed above, the Commission invites additional comment on the 
proposal, as the Commission continues its analysis of the proposed rule 
change's consistency with the Act, or the rules and regulations 
thereunder. More specifically, the Commission asks that any commenters 
address the sufficiency and merit of the Exchange's statements in 
support of the proposed rule change. In addition, the Commission seeks 
comment on the relative merits and advantages or disadvantages of 
obtaining UTP Data from sources other than directly from Nasdaq via the 
proposed Third Party Connectivity Service.
    Comments may be submitted by any of the following methods:

[[Page 87984]]

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 No. SR-Nasdaq-2016-120 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 No. SR-Nasdaq-2016-120. The 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 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 Nasdaq. 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 No. SR-Nasdaq-2016-120, and 
should be submitted by December 27, 2016. Rebuttal comments should be 
submitted by January 10, 2017.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\47\
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    \47\ 17 CFR 200.30-3(a)(57).
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Eduardo A. Aleman,
Assistant Secretary.
[FR Doc. 2016-29160 Filed 12-5-16; 8:45 am]
BILLING CODE 8011-01-P