Document ID: SEC-2018-0316-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The Nasdaq Stock Market LLC
Posted Date: 2018-02-22T05:00Z

[Federal Register Volume 83, Number 36 (Thursday, February 22, 2018)]
[Notices]
[Pages 7812-7820]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2018-03568]

[[Page 7812]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-82723; File No. SR-NASDAQ-2018-010]

Self-Regulatory Organizations; The Nasdaq Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend Rule 7039 To Modify Pricing for the Nasdaq Last Sale Data Product 
and To Make Other Related Changes to Nasdaq Rules

February 15, 2018.
    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 February 2, 2018, The Nasdaq Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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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 Rule 7039 (Nasdaq Last Sale and 
Nasdaq Last Sale Plus Data Feeds) \3\ to modify pricing for the Nasdaq 
Last Sale (``NLS'') data product and to make other related changes to 
Nasdaq rules.
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    \3\ References to rules are to Nasdaq rules, unless otherwise 
noted.
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    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 this proposal is to amend Rule 7039 to modify the 
pricing framework for the NLS data product. NLS is a market data 
product that comprises two proprietary data feeds containing real-time 
last sale Information \4\ for trades executed on the Exchange or 
reported to the FINRA/Nasdaq Trade Reporting Facility (the ``FINRA/
Nasdaq TRF'').\5\ As such, 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.
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    \4\ In this filing, Nasdaq is proposing, among other things, to 
adopt new defined terms for use in Rule 7039. At a later date, 
Nasdaq intends to submit an additional proposed rule change to move 
these definitions into a new rule and propose to expand its 
applicability to all market data fee rules in the 7000 rule series. 
The term ``Information'' is a broad generic term designed to 
encompass the full range of information or data transmitted by 
Nasdaq, and as such will be defined to mean ``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.'' The 
term is not currently defined in Exchange rules. Of note, ``Derived 
Data'' is excluded from the definition of ``Information,'' and as 
discussed below, is defined separately. The term ``Information'' 
will be proposed for wider use in a future rule filing concerning 
definitions.
    \5\ See Nasdaq Rule 7039(a)-(c). See also Securities Exchange 
Act Release No. 71351 (January 17, 2014), 79 FR 4200 (January 24, 
2014) (SR-NASDAQ-2014-006) (notice of filing and immediate 
effectiveness regarding permanent approval of NLS).
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    As reflected in the filing that originally established it,\6\ NLS 
was designed to enable market-data ``distributors to provide free 
access to the data [contained in NLS] to millions of individual 
investors via the internet and television'' and was expected to 
``increase[ ] the availability of NASDAQ proprietary market data to 
individual investors.'' \7\ Similarly, in its filing to offer NLS on a 
permanent, rather than a pilot, basis, Nasdaq stated that ``[d]uring 
the pilot period, the program has vastly increased the availability of 
NASDAQ proprietary market data to individual investors. Based upon data 
from NLS Distributors, NASDAQ 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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    \6\ See SR-NASDAQ-2006-060 (Amendment No. 2, June 10, 2008) 
(available at http://nasdaq.cchwallstreet.com/NASDAQ/pdf/nasdaq-filings/2006/SR-NASDAQ-2006-060_Amendment_2.pdf). 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).
    \7\ SR-NASDAQ-2006-060 (Amendment No. 2, June 10, 2008), at 3.
    \8\ Securities Exchange Act Release No. 71351 (January 17, 
2014), 79 FR 4200 (January 24, 2014) (SR-NASDAQ-2014-006).
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    The fee schedule for NLS currently offers Distributors \9\ several 
different pricing models from which they may select in determining the 
fees applicable to distribution of the product. Specifically, in 
keeping with the goal of NLS to promote the accessibility of data to 
individual investors, Distributors may choose to distribute NLS in an 
uncontrolled fashion via television or the internet and pay under 
pricing models that require them to estimate the number of households 
or website visitors to which the data is provided. Alternatively, a 
Distributor may opt for a pricing model that requires it to count its 
customers based on a username and password system, or a model under 
which data is supplied on an ad hoc basis in response to customer 
queries. In both these cases, the pricing model assumes distribution 
through a website, such as might be provided by a broker-dealer 
(``BD'') to customers who log in using a username and password, or who 
enter ticker symbols into a website to

[[Page 7813]]

query for last sale information.\10\ Thus, consistent with the stated 
purpose of NLS, the fee structure under which NLS is made available 
reflects a model of widespread distribution to individual investors. 
The fees for these different pricing models are tiered based on volume, 
with the fees for marginal usage reduced as a Distributor achieves 
certain volume levels. Moreover, the maximum monthly fee for NLS, 
regardless of usage levels, under these distribution models is $41,500.
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    \9\ Nasdaq is proposing to define a ``Distributor'' as ``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.'' The Nasdaq Global Data Agreement is the standardized 
agreement that entities receiving Information sign to establish a 
contractual relationship with the Exchange. The word is currently 
defined in several Exchange rules--e.g., Rules 7047 (Nasdaq Basic), 
7019 (Market Data Distributor Fees), and 7023 (Nasdaq Depth-of-Book 
Data)--in terms that focus on (i) receipt of Exchange information, 
and (ii) the provision of the information to internal or external 
Subscribers. Thus, ``Distributor'' broadly covers any person that 
receives Information and makes it available. Since such persons are 
required to sign the Nasdaq Global Data Agreement to establish a 
contractual right to distribute Information, the new definition is 
intended to simplify the definition through reference to the 
objective fact of a contract, but is not intended to narrow or 
broaden the scope of the term from the manner in which it is defined 
in existing rules. In fact, Rule 7019 similarly refers to the 
requirement that distributors execute an agreement with the 
Exchange. The new definition further specifies that the term 
Distributor includes both an entity and its affiliates that have 
access to Information; the inclusion of affiliates and the reference 
to having access are both consistent with the manner in which 
current definitions are interpreted. The new definition also 
eliminates superfluous references to internal and external receipt 
and distribution.
    \10\ Nasdaq notes that BDs may provide NLS data to customers in 
circumstances where they are not required to provide a consolidated 
display by SEC Rule 603(c), 17 CFR 242.603(c). See Securities 
Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 35569 
[sic] -37570 (June 29, 2005) (File No. S7-10-04) (``Reg NMS Adopting 
Release'').
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    Many data products sold by Nasdaq and others distinguish between 
data usage based on whether the data is being used by ``Professionals'' 
or ``Non-Professionals,'' with different prices charged for each 
category.\11\ A ``Non-Professional'' is defined as ``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.'' \12\ A ``Professional'' is defined 
as ``any natural person, proprietorship, corporation, partnership, or 
other entity whatever other than a Non-Professional.'' \13\ The fee 
structure for NLS does not, however, currently contain provisions that 
make these distinctions or that clearly contemplate internal 
distribution of the product to BD employees or other Professionals. 
Rather, the fee structures and distribution models of NLS reflect 
Nasdaq's assumption that it is a product of interest to a broad range 
of individual investors, to be distributed in a relatively uncontrolled 
manner through websites (either password protected or not) or 
television.\14\
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    \11\ See, e.g., 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 Privileged Basis 
(``Nasdaq UTP Plan'') (available at http://www.utpplan.com/utp_plan); Rule 7023 (Nasdaq Depth-of-Book Data); Rule 7026 
(Distribution Models); Rule 7047 (Nasdaq Basic).
    \12\ The term ``Non-Professional'' is currently defined at Rules 
7023(a)(3)(A) and 7047(d)(3)(A). The definition of Non-Professional 
is well-established in the securities industry, and has been part of 
the Nasdaq rule book since at least 2002. See Securities Exchange 
Act Release No. 46521 (September 20, 2002), 67 FR 61179 at n.10 
(September 27, 2002) (SR-NASD-2002-33). The Exchange proposes to 
maintain that definition, correcting the citation to the definition 
of investment adviser as defined in the Investment Advisers Act of 
1940.
    \13\ Nasdaq is proposing to adopt these definitions as part of 
Rule 7039, but will propose to move them, along with similar 
definitions appearing elsewhere in the Exchange's rules, into a 
single definition rule in a subsequent filing. ``Professional 
Subscriber'' is currently defined at Rules 7023(a)(3)(B) and 
7047(d)(3)(B). The definitions proposed to be included in Rule 7039 
are substantively the same as definitions found in existing Exchange 
rules, with the clarification that either a natural person or an 
entity may be a Professional.
    \14\ Regardless of the fee structure selected, NLS Distributors 
pay a monthly Distributor fee, as provided in Rule 7039(c) (which is 
being redesignated, with certain modifications described below, as 
Rule 7039(d)). In addition, as provided in Rule 7035, all market 
data distributors pay a monthly administrative fee (formerly a 
higher annual fee) of $50 (for delayed distribution) or $100 (for 
real-time, or real-time and delayed distribution). The 
administrative fee is paid on a per distributor basis; thus, if a 
distributor is already paying the fee with respect to a product 
other than NLS, it would not incur an additional administrative fee 
if it also began to distribute NLS.
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    Nasdaq is proposing changes to the current NLS fee structure in 
order to more clearly reflect the use cases under which NLS is 
currently made available and to establish pricing for additional use 
cases. First, Nasdaq is proposing to categorize existing fee 
distribution models as ``distribution models for the general investing 
public,'' while also specifically identifying the terms and conditions 
applicable to each of these pricing categories. Thus, distribution via 
a username/password entitlement system is being defined as a ``Per 
User'' distribution model. In order to adopt the Per User model, (i) a 
Distributor must distribute NLS solely to ``Users'' for ``Display 
Usage,'' \15\ (ii) all such Users must be either Non-Professionals or 
Professionals whom the Distributor has no reason to believe are using 
NLS in their professional capacity, and (iii) the Distributor must 
restrict and track access to NLS using a username/password logon or 
comparable method of regulating access approved by Nasdaq.
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    \15\ ``User'' is being defined as ``a natural person who has 
access to Exchange Information.'' The term is not currently defined 
in Exchange rules so the definition will provide a convenient 
nomenclature for distinguishing natural persons with access to 
Exchange Information from other instances of access to Exchange 
Information. The term is currently used, but not defined, in Rule 
7039, and the new definition is intended to be consistent with the 
manner in which the term is currently construed. The Exchange 
proposes introducing a definition here to prevent any potential 
confusion between a User (a natural person who has access to 
Exchange Information), a Recipient (a natural person or entity that 
has access to Exchange Information), and a Subscriber (a method of 
accessing Exchange Information). ``Display Usage'' is being defined 
as ``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.'' This definition is 
consistent with current definitions of the term in, for example, 
Rule 7023 (Nasdaq Depth-of-Book Data). The effect of these 
definitions together is to limit the availability of this pricing 
model to visual access by natural persons, thus excluding access by 
automated processes such as trading algorithms.
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    Thus, a Per User model might be used by a BD to distribute NLS to 
customers through on-line brokerage accounts accessible after the 
customer logs in using a username and password. While many of the 
Recipients of data under such a model would be Non-Professionals, the 
model does not require a Distributor to limit distribution to Non-
Professionals. Rather, the model would allow a Distributor to provide 
the data to Professionals, as long as it has no reason to believe that 
they are using the data in a professional capacity. Thus, for example, 
if a BD makes the data available to all of its on-line customers, it 
would not have any basis to believe that customers who happen to be 
Professionals would be using the data in a Professional capacity. By 
contrast, the Per User model would not allow a BD to distribute the 
data to a set of Users consisting solely of its own employees, since it 
would be reasonable to expect that the employees would use the data in 
connection with their employment. Similarly, if a Distributor provided 
the data through terminals generally made available to Professionals in 
their place of employment, or marketed the product to persons known to 
be Professionals, it would be unreasonable for the Distributor to 
believe that the data was not being used for professional purposes.
    The proposed standard for the applicability of the Per User model 
is similar to, but less strict than, the standard adopted by Nasdaq 
with respect to the availability of an enterprise license for a BD to 
distribute Nasdaq Basic \16\ to an unlimited number of Professionals 
and Non-Professionals who are natural persons and with whom it has a 
brokerage relationship.\17\ With

[[Page 7814]]

respect to that license, a Professional may not use an instance of 
Nasdaq Basic obtained under the license in its professional capacity; 
moreover, the BD Distributor would be expected to enforce this 
limitation or jeopardize its eligibility for the reduced fee provided 
by the license. The proposed standard with respect to Nasdaq Last Sale 
is less stringent, because occasional incidental use by a Professional 
in connection with its 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. 
Nasdaq believes that a different standard that might occasionally 
result in incidental Professional use is reasonable because NLS 
contains less information and does not provide pre-trade transparency, 
and is therefore likely to be of less consistent use to a Professional 
than Nasdaq Basic or other products that provide greater pre-trade 
information. Accordingly, Nasdaq proposes to adopt a more permissive 
standard that will impose lower administrative burdens on Distributors.
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    \16\ Nasdaq Basic (Rule 7047) comprises best bid and offer and 
last sale information from the Exchange and the FINRA/Nasdaq TRF.
    \17\ Securities Exchange Act Release No. 65526 (October 11, 
2011), 76 FR 64137 (October 17, 2011) (SR-NASDAQ-2011-130) (adopting 
enterprise license for non-professional brokerage customers); 
Securities Exchange Act Release No. 72620 (July 16, 2014), 79 FR 
42572 (July 22, 2014) (expanding enterprise license to include 
professional brokerage customers).
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    A Distributor selecting the Per User model is charged based on the 
number of Users with the potential to access NLS during a month. 
However, if the Distributor is able to track the number of Users that 
actually accessed NLS during a month, the Distributor will be charged 
based on the number of such Users. This latter provision represents a 
change from current methodology, and will provide an incentive for 
Distributors to implement systems to track actual data usage, since 
this will allow them to reduce the fees that they pay. Apart from this 
change, the fees applicable to this model are not being modified.
    The ``Per Query'' model will be available if: (i) A Distributor 
distributes NLS solely to Users for Display Usage, and (ii) the 
Distributor tracks queries using a method approved by Nasdaq. Thus, in 
contrast to a Per User model, which makes all data available in a 
streaming or 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 unlikely to be of significant 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; thus, Per Query data may be made available through a publicly 
accessible website. However, if a Distributor selecting the Per Query 
model does restrict access using a username/password system, the 
Distributor may opt to be charged under the Per User model in a 
particular month if the applicable Per Query charges that month would 
exceed the applicable Per User charges.\18\ The applicable fees for the 
per query model are not being changed.
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    \18\ This is not a change from the current rule, although Nasdaq 
is clarifying the language that describes this fee cap.
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    Unrestricted distribution via the internet is being defined as a 
``Per Device'' model, and is available to a Distributor that: (i) 
Distributes NLS for Display Usage in a manner that does not restrict 
access, and (ii) tracks the number of unique Devices that access NLS 
during each month using a method approved by Nasdaq.\19\ Thus, this 
distribution method does not require the Distributor to distinguish 
among Non-Professionals or Professionals receiving the data, since the 
data is made freely available to internet users. The method would 
generally be used by internet news sites, but might also be used by a 
BD if it wished to place freely available content on its website. A 
Distributor using this method would be charged for each unique Device 
accessing the data, regardless of whether it is controlled by a 
Recipient.\20\ Thus, for example, if a single person owned a laptop, a 
smartphone, and a tablet and used all three to access the data, the 
Distributor would be charged for each Device. This is the case because 
the Distributor would track usage based on the unique characteristics 
of the Device (including, but not limited to, IP address, host name, 
and cookie data), but would likely not have data that would allow it to 
associate the Devices with a single user.\21\
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    \19\ As reflected in the definition adopted as part of this 
filing, the term ``Device'' has the same meaning as ``Subscriber.'' 
A Subscriber, in turn, is not a person, but rather means ``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 receiving 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.'' The 
definitions of these terms are consistent with the definitions found 
in IM-7023-1 (U.S. Non-Display Information) and are intended to be 
construed in a similar manner, while specifying, in accordance with 
current interpretations, that the term covers the capability to 
receive Information as well as the actual receipt. Thus, a single 
Recipient with two devices constitutes two Subscribers.
    \20\ The term ``Recipient'' is defined to mean ``any natural 
person, proprietorship, corporation, partnership, or other entity 
whatever that has access to Exchange Information.'' This term, which 
is not currently defined in Exchange Rules, simply provides a 
convenient method for referring to both natural and legal persons 
that have access to Exchange Information, and is defined to prevent 
any confusion among the terms Subscriber (a technical term 
describing how Information is received from the Exchange), Recipient 
(a natural person or entity that receives Information), and, as 
discussed above, a User (a natural person who receives Information).
    \21\ The definition of Subscriber is also proposed to be used 
with respect to proposed Rule 7039(c), as described below, and 
Nasdaq expects to propose to apply the definition to other market 
data rules in the future. However, the portion of the definition 
pertaining to ``simultaneous accesses'' is not relevant to the ``Per 
Device'' model. Accordingly, Nasdaq is proposing to add language to 
Rule 7039(b)(3) to provide that a Distributor under the Per Device 
model will be charged based on the number of unique Devices without 
regard to the number of simultaneous accesses by a single Device.
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    Rule 7039 currently uses the term ``Unique Visitors'' and requires 
the number of Unique Visitors to be validated by a Nasdaq-approved 
vendor, but does not define the term. The new term ``Device'' is 
intended to clarify that the fee is to be assessed based on the number 
of Devices that visit a site to get data, rather than the number of 
persons. While this term does not reflect a change from the manner in 
which the term ``unique visitor'' has been interpreted by the Exchange, 
Nasdaq believes that the change will make the application of the rule 
clearer. Moreover, the fees associated with particular levels of 
distribution under this model are not changing. Nasdaq is also 
replacing the requirement that the number be validated by a third party 
with a requirement that the Distributor's tracking method be approved 
by Nasdaq. This change reflects the fact that methods of tracking web 
traffic have become more developed since the time Rule 7039 was first 
adopted and therefore do not require third-party validation.
    As is currently the case, the maximum fee that any Distributor 
would be required to pay for NLS under any combination of these 
distribution models would be $41,500. However, Nasdaq is proposing to 
eliminate the existing fee schedule for television distribution and is 
instead proposing that 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

[[Page 7815]]

combination with unlimited use of the Per User, Per Query, and/or Per 
Device model. This is the case because all current television 
Distributors also distribute NLS via the internet and pay the maximum 
fee. Thus, no current Distributors would be affected by the elimination 
of the specific television schedule. Moreover, in light of the 
confluence of television and internet content, and the extent to which 
television broadcasters use both media to reach their audience, Nasdaq 
believes that providing a license for multiple means of distribution in 
tandem is reasonable. Nasdaq further believes that the maximum fee of 
$41,500 per month is a reasonable charge to assess a Distributor that 
wishes to engage in unlimited distribution of the product through 
either television or television in combination with web-based media.
    The current fee and distribution framework for NLS is not 
structured in a manner that contemplates distribution to a base of 
Professionals, such as might occur if a BD made the data available to 
its registered representatives through an employer-provided workstation 
or software application. For this reason, Nasdaq believes that it is 
appropriate to adopt a fee schedule that covers use cases that are not 
contemplated by the current fee schedule. Under the proposal, if a 
Distributor is not able to use any of the distribution models for the 
general investing public but still wishes to distribute NLS, it will be 
required to pay fees applicable to a model for ``specialized usage.'' 
In general, the model would require a Distributor to track either the 
number of Subscribers to which the data is made available or the number 
of queries made for the data, and would impose either a per Subscriber 
fee or a per query fee. The per Subscriber fee will be $13 for NLS for 
Nasdaq and $13 for NLS for NYSE/NYSE American or any Derived Data 
therefrom.\22\ The per query fee will be $0.0025 for NLS for Nasdaq and 
$0.0015 for NLS for NYSE/NYSE American. The per query fees assessed to 
Subscribers will be capped on a monthly basis at the level of the 
monthly per Subscriber fee. Thus, a particular Subscriber would not be 
charged more than $13 for NLS for Nasdaq or $13 for NLS for NYSE/NYSE 
American, regardless of the number of queries submitted by it.
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    \22\ ``Derived Data'' is defined to mean ``any information 
generated in whole or in part from Exchange Information such that 
the information generated cannot be reverse engineered to recreate 
Exchange Information, or be used to create other data that is 
recognizable as a reasonable substitute for such Exchange 
Information.'' This definition is substantially the same as the 
definition currently found in Rule 7047 (Nasdaq Basic) and the 
differences in wording are intended merely to make the language 
clearer.
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    For Distributors under the specialized usage model that provides 
``Display Usage,'' a net reporting option would be available to reduce 
the overall number of Subscribers for which a fee will be assessed.\23\ 
Under the proposed netting rules:
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    \23\ Netting does not apply to uses other than Display Usage, 
but the same rules are used for Nasdaq Basic under Rule 7047.
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     A Subscriber that receives access to NLS through multiple 
products controlled by an internal Distributor will be considered one 
Subscriber. Thus, if a BD acts as a Distributor of NLS in multiple 
forms through terminals provided to its employees, each terminal would 
be considered one Subscriber.
     A Subscriber that receives access to NLS through multiple 
products controlled by one external Distributor will be considered one 
Subscriber. Thus, if a BD arranges for its employees to receive access 
to multiple NLS products through a terminal provided by a single vendor 
on a terminal, each terminal would be considered one Subscriber.
     A Subscriber that receives access to NLS through one or 
more products controlled by an internal Distributor and also one or 
more products controlled by one external Distributor will be considered 
one Subscriber. Thus, if the BD provides employees with access through 
its own product(s) and through products from a single vendor on a 
terminal, each employee's terminal would still be considered one 
Subscriber.
     A Subscriber that receives access to NLS through one or 
more products controlled by an internal Distributor and also products 
controlled by multiple external Distributors will be treated as one 
Subscriber with respect to the products controlled by the internal 
Distributor and one of the external Distributors, and will be treated 
as an additional Subscriber for each additional external Distributor. 
Thus, a Subscriber receiving products through an internal Distributor 
and two external Distributors will be treated as two Subscribers. Put 
another way, access through an internal Distributor may be netted 
against access through one external Distributor, but netting may not 
occur beyond one external Distributor.

Distributors benefitting from net reporting must demonstrate adequate 
internal controls for identifying, monitoring, and reporting all usage. 
The burden will be on the Distributor to demonstrate that particular 
instances of netting are justified.
    As an alternative to per Subscriber or per query fees, a 
Distributor that is a BD may purchase an enterprise license for 
internal Subscribers to receive NLS or Derived Data therefrom. The fee 
is $365,000 per month; provided, however, that if the BD obtains the 
license with respect to usage of NLS provided by an external 
Distributor that controls display of the product, the fee will be 
$365,000 per month for up to 16,000 internal Subscribers, plus $2 for 
each additional internal Subscriber over 16,000; and provided further 
that the BD must obtain a separate enterprise license for each external 
Distributor that controls display of the product if it wishes such 
external Distributor to be covered by an enterprise license rather than 
per-Subscriber fees. The enterprise license is in addition to the 
applicable Distributor Fee provided in Rule 7039(d).
Nasdaq Last Sale Plus
    NLS Plus combines information available through NLS with 
information available through similar products--BX Last Sale and PSX 
Last Sale--offered by Nasdaq's affiliates, Nasdaq BX, Inc. (``BX'') and 
Nasdaq PHLX LLC (``Phlx''). Moreover, as provided in that Rule, NLS 
Plus may be received either by itself or in combination with Nasdaq 
Basic. The fees charged for NLS Plus, however, incorporate the 
underlying fees for the data elements combined through NLS Plus, 
together with an additional data consolidation fee of $350 per month. 
Thus, a Distributor receiving NLS Plus by itself would need to select a 
fee model under Rule 7039 to determine the applicable charges for the 
NLS component of NLS Plus (including the Distributor fee provided for 
by Rule 7039(d)). In addition, because a Distributor of NLS Plus is 
distributing each of the underlying components of NLS Plus, it also 
pays the administrative fees charged for distribution of Nasdaq, BX, 
and PSX data feeds.\24\ On the other hand, a Distributor receiving NLS 
Plus with Nasdaq Basic would select a fee model for Nasdaq Basic and 
pay the fees (including Distributor fees) applicable to that product, 
as well as the NLS Plus data consolidation fee and applicable

[[Page 7816]]

administrative fees for each NLS Plus component.
---------------------------------------------------------------------------

    \24\ See Nasdaq Rule 7035; BX Rule 7035; and Phlx Pricing 
Schedule Sec.  VIII. All administrative fees are charged on a per 
Distributor, rather than a per product, basis. Currently, there are 
no user or Distributor fees applicable to BX Last Sale or PSX Last 
Sale. However, if BX or Phlx were to adopt user fees for these 
products in the future, the fees would also apply to persons 
receiving these products by means of NLS Plus.
---------------------------------------------------------------------------

    Since the fees for NLS Plus sold without Nasdaq Basic incorporate 
the fees for NLS, the various pricing model options available under 
Rule 7039, including the new pricing for specialized usage, would also 
be incorporated into the pricing for NLS Plus. No change to rule 
language is needed to effectuate this, since the rule language already 
incorporates NLS fees. However, Nasdaq is proposing to amend the rule 
to reflect the recent change in the assessment period for 
administrative fees under Nasdaq Rule 7035, BX Rule 7035, and the Phlx 
Pricing Schedule from annual to monthly, and to use the new defined 
term ``Information.''
    In addition, Nasdaq is amending the description of NLS contained in 
Rule 7039(a). As described therein, NLS contains real-time last sale 
information for trades executed on Nasdaq or reported to the FINRA/
Nasdaq TRF for stocks listed on Nasdaq and on other markets. At the 
time of adoption of Rule 7039, however, it appears that the drafters of 
the rule used a reference to ``NYSE/Amex'' (subsequently amended to 
refer to ``NYSE/NYSE MKT'') as a short-hand term for stocks listed on 
venues other than Nasdaq, since NYSE and the American Stock Exchange 
were, together with Nasdaq, the primary listing venues at that 
time.\25\ In fact, NLS has always disseminated transaction reports 
associated with all three national market system plan tapes--Tape A for 
NYSE, Tape C for Nasdaq, and Tape B for other exchanges, including the 
American Stock Exchange (later known as NYSE MKT and now as NYSE 
American). Thus, as new listing venues such as the BATS Exchange 
emerged, information for transactions in securities listed on those 
exchanges were also included. Accordingly, Nasdaq is clarifying the 
language of Rule 7039(a) to include ``transaction reports for NYSE-
listed stocks and stocks listed on NYSE American and other Tape B 
listing venues.'' Nasdaq is also making additional housekeeping changes 
to the rule to: (i) Use the defined term ``Information'', (ii) 
streamline the wording of the rule's preamble, and (iii) clarify the 
language of certain pricing tiers to eliminate instances where the same 
number of Devices or queries is listed as part of two different pricing 
tiers.
---------------------------------------------------------------------------

    \25\ Securities Exchange Act Release No. 57965 (June 16, 2008), 
73 FR 35178 (June 20, 2008) (SR-NASDAQ-2006-060). See also 
Securities Exchange Act Release No. 68568 (January 3, 2013), 78 FR 
1910 (January 9, 2013) (SR-NASDAQ-2012-145).
---------------------------------------------------------------------------

    Nasdaq is amending Rule 7039(d) (formerly 7039(c)) to provide that 
the monthly Distributor fee for a Distributor under subsection (c) 
(Distribution Models for Specialized Usage) providing external, or 
external and internal, distribution, is $2,000; in all other cases, the 
Distributor fee for NLS remains $1,500. However, Nasdaq is also adding 
language to provide that a Distributor of two or more products 
containing NLS data (i.e., NLS, NLS Plus, or Nasdaq Basic) is required 
to pay a Distributor fee with respect to only one of the products. 
Thus, a Distributor of both NLS and Nasdaq Basic would not be required 
to pay both the fee provided for in Rule 7039 and the comparable fee 
provided for in Rule 7047; however, it would be required to pay the 
highest fee ($2,000 or $1,500) otherwise applicable to any of the 
products that it distributes. Finally, Nasdaq is making amendments to 
Rule 7047(b)(5) to: (i) Clarify that BDs distributing Nasdaq Basic 
thereunder also have the right to distribute Nasdaq Last Sale data to 
an unlimited number of Professionals and Non-Professionals who are 
natural persons and with whom the broker-dealer has a brokerage 
relationship (similar to the scope of Nasdaq Basic distribution), (ii) 
provide that such BDs would not be required to pay fees under Rule 
7039(b) or (c); and (iii) provide that the elimination of duplicative 
Distributor fees provided under Rule 7039(d) would also apply under 
Rule 7047(b)(5), such that the BD would pay a Distributor fee with 
respect to only one product thereunder.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\26\ in general, and with 
Sections 6(b)(4) and (5) of the Act,\27\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees, and 
other charges among its members, issuers and other persons using its 
facilities, and does not unfairly discriminate between customers, 
issuers, brokers or dealers.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78f.
    \27\ 15 U.S.C. 78f(b)(4) and (5).
---------------------------------------------------------------------------

    Rule 7039 and the fees established thereunder reflect Nasdaq's 
expectation, in creating NLS, that it would be used by market data 
Distributors (including retail BDs) to provide widespread distribution 
of last-sale information to individual investors by means of websites 
and television. The fee structure also reflects Nasdaq's assumption 
that BDs and others seeking proprietary data for Professional usage 
would purchase data with more content than NLS or NLS Plus, such as 
Nasdaq Basic or Nasdaq TotalView. Nevertheless, because there is a 
small amount of demand for use of NLS for purely Professional purposes, 
Nasdaq believes that it is appropriate to specifically define the 
circumstances to which the current fee schedule applies, while also 
establishing a set of fees for other circustances [sic], including 
usage other than Display Usage and purely Professional use.
    The statutory basis for Nasdaq's current fees for NLS has already 
been described in prior filings,\28\ and Nasdaq is not modifying these 
long-established fees except to the extent discussed below. The overall 
structure for distribution of NLS contemplates widespread distribution 
of NLS data through the internet and television, and, in general, does 
not require a Distributor to categorize data Recipients as either 
Professionals or Non-Professionals. Thus, neither the fees nor the 
distribution parameters for ``Per Query'' usage are changing, although 
Nasdaq is adding language to specify that Per Query usage contemplates 
distribution to Users through Display Usage. The change is reasonable 
because it conforms to the natural parameters under which Per Query 
usage would occur: the submission of a request followed by a display of 
the response. In making the change, however, Nasdaq makes it clear that 
Per Query usage would not allow submission of automated requests to 
obtain data for use by an algorithm or other automated process. The 
change also makes is clear, however, that a Distributor using the Per 
Query model would not be required to ascertain the identity of 
Recipients; thus, the change makes it clear that Per Query usage may be 
made available to both Professionals and Non-Professionals. For this 
reason, the change is not unfairly discriminatory. Moreover, the change 
is equitable because it will not limit access by any current 
Distributors.
---------------------------------------------------------------------------

    \28\ See supra nn. 6, 7, and 9 [sic].
---------------------------------------------------------------------------

    With respect to Per User fees (formerly username/password fees), 
Nasdaq is likewise proposing only minimal changes to state that the 
existing fee schedule requires distribution to ``Users'' (i.e., natural 
persons) for Display Usage, and all such Users must be either Non-
Professionals or Professionals whom the Distributor has no reason to 
believe are using NLS in their professional capacity. This change is 
reasonable because the level of fees associated with this use case is 
not changing. Moreover, the change is not inequitable because it will 
not limit access by any current Distributors paying under this model. 
Likewise, the change is not unfairly discriminatory

[[Page 7817]]

because it does not require a Distributor to conduct an exhaustive and 
costly inquiry into the nature of each of its Users, nor does it 
prevent distribution to Professionals, as long as the Distributor has 
no reason to believe that Professionals are using NLS in their 
professional capacity. Similarly, the change to allow a Distributor to 
track actual usage by a particular User and pay only if actual usage 
occurs during the month (as opposed to paying for all potential Users) 
is reasonable because it creates an incentive for a Distributor to 
reduce its fees by more carefully monitoring usage by its customers. 
The change is equitable and not unfairly discriminatory because Nasdaq 
believes that all Distributors are capable of implementing the change 
with minimal difficulty.
    The changes to the ``Per Device'' (formerly, unique visitor) use 
case are reasonable because they allow a Distributor to track usage 
based on readily available means of tracking unique Devices. Because 
Distributors have already adopted this methodology, the change in rule 
language makes it clear that this is the appropriate method to measure 
usage and that verification by a third-party is not required. 
Accordingly, the change imposes no additional administrative burdens on 
Distributors. The change is equitable and not unfairly discriminatory 
because all Distributors adopting this use case may readily use this 
methodology.
    The elimination of a specific model for television distribution, in 
favor of a model under which a Distributor engaging in television 
distribution pays the maximum NLS fee of $41,500 per month and may then 
distribute Nasdaq Last Sale via television to an unlimited number of 
households, either solely via television or in combination with 
unlimited use of the Per User, Per Query, and/or Per Device model, is 
reasonable because the fee allows the Distributor to engage in 
unlimited distribution of NLS via either television alone or television 
in combination with another distribution model for the general 
investing public, without the need to monitor usage or track the 
identity of Recipients. Moreover, the change is equitable and not 
unfairly discriminatory because all current television Distributors 
already pay this maximum fee. Accordingly, the change will have no 
impact on any current Distributors. Moreover, it is unlikely that under 
the current fee schedule for television, distribution by a particular 
broadcaster would occur at a level that would allow it to pay less than 
the maximum fee. As a result, the per viewer cost of television 
distribution is, and will continue to be, extremely small when 
expressed as the ratio between $41,500 and the total number of viewers.
    The introduction of a fee schedule for other use cases, including 
targeted use by Professionals and usage other than Display Usage, is 
not unfairly discriminatory because it is consistent with the fee 
schedules for numerous other data products that impose higher fees on 
Professionals in recognition of their more intensive usage of data 
feeds and the greater value they derive from such usage. Moreover, the 
proposed new fee schedule is consistent with an equitable allocation of 
fees because it recognizes the administrative costs and burdens 
associated with tracking Professional usage of the product, especially 
given the low demand for exclusively Professional use. Finally, the 
change is reasonable because the fees are geared to the actual level of 
usage, with options for either per Subscriber or per query fees. 
Moreover, Nasdaq is offering alternative pricing features that may 
allow some Distributors to reduce their level of fees, including a 
method for netting Subscribers and an enterprise license to allow 
unlimited usage by broker-dealer employees.
    Nasdaq further believes that the proposed change regarding a higher 
monthly Distributor fee for external distribution for use by 
Professionals and usage other than Display Usage (i.e., specialized 
usage) is not unreasonable because a higher fee for external, as 
opposed to solely internal, distribution is based on the observation 
that external distributors typically charge fees for external 
distribution, while internal distributors usually do not. As such, 
external distributors have the opportunity to derive greater value from 
such distribution, and that greater value is reflected in higher 
external distribution fees. The differential between external and 
internal distribution fees is well- recognized in the financial 
services industry as a reasonable distinction, and has been repeatedly 
accepted by the Commission as an equitable allocation of reasonable 
dues, fees and other charges.\29\ 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.'' \30\ 
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.'' \31\ The further change with regard to 
monthly Distributor fees is reasonable, equitable, and not unfairly 
discriminatory because it addresses a use case in which a Distributor 
is receiving two or three products that contain last sale information--
NLS, NLS Plus and/or Nasdaq Basic--and will specify that the 
Distributor is not required to pay a duplicative Distributor fee in 
that circumstance.
---------------------------------------------------------------------------

    \29\ See, e.g., Rules 7019 (Market Data Distributor Fees); 
7022(c) (Short Interest Report); 7023(c) (Enterprise License Fees 
for Depth-of-Book Data); 7047(c) (Nasdaq Basic); and 7052(c) 
(Distributor Fees for Nasdaq Daily Short Volume and Monthly Short 
Sale Transaction Files).
    \30\ See Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770 (December 9, 2008) (SR-NYSEArca-2006-21).
    \31\ Id.
---------------------------------------------------------------------------

    In adopting Regulation NMS, the Commission granted self-regulatory 
organizations (``SROs'') and 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. 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.\32\
---------------------------------------------------------------------------

    \32\ 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 BDs 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 BDs at all, it follows 
that

[[Page 7818]]

the price at which such data is sold should be set by the market as 
well.
    Products such as NLS provide additional choices to BDs 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 BDs and others with an option to use a lesser amount 
of data in circumstances where SEC Rule 603(c) does not require a BD to 
provide a consolidated display.\33\ 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.
---------------------------------------------------------------------------

    \33\ 17 CFR 242.603(c).
---------------------------------------------------------------------------

    Nasdaq believes that the defined terms being adopted in this 
proposed rule change are consistent with the provisions of Section 6 of 
the Act,\34\ in general, and with Section 6(b)(5) of the Act,\35\ in 
particular, in that they are designed to promote just and equitable 
principles of trade, 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. Specifically, the defined 
terms are designed to promote the clear and consistent interpretation 
of Rule 7039, and are intended to serve as the model for a future 
filing that will propose consistent terminology throughout the rules 
governing the Exchange's Information products. As detailed above, the 
terms ``Derived Data'', ``Display Usage'', ``Distributor'', ``Non-
Professional'', ``Professional'', ``Subscriber'', and ``Device'' are 
either substantively identical to, or are intended to be construed in a 
manner consistent with, terms already existing in the Exchange's rules, 
but are intended to be drafted in a clearer manner. Similarly, the 
terms ``Information'', ``Recipient'', and ``User'' are new, but are 
designed to provide convenient means of referring to concepts relevant 
to the application of Rule 7039 that are currently covered by undefined 
terms.
---------------------------------------------------------------------------

    \34\ 15 U.S.C. 78f.
    \35\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Finally, the Exchange notes that the housekeeping changes made by 
this filing--clarifying the scope of Tape B data included in NLS and 
the monthly nature of the administrative fee--are non-substantive in 
nature and do not affect the equitable allocation of reasonable dues, 
fees, and other charges. Rather, these changes will make affected rules 
clearer, more succinct, and easier to use. Accordingly, the Exchange 
believes that these changes are consistent with Section 6(b)(5) of the 
Act,\36\ in that they are designed to promote just and equitable 
principles of trade, 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.
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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. The proposed 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. In particular, the 
proposal with respect to existing fees and associated standards for Per 
User, Per Query, and Per Device fee models, as well as the fee for 
television distribution, are designed to promote wide distribution to 
investors by placing less emphasis on the distinction between 
Professionals and Non-Professionals than is the case with respect to 
other data products. Nasdaq believes that this approach will promote 
competition by reducing administrative burdens on Distributors. The 
addition of a fee schedule for targeted Professional or Non-Display 
usage will not place a burden on competition because Nasdaq believes 
that the demand for such usage is limited, but adopting the applicable 
fee schedule will ensure that the product is available in cases where 
such demand exists.\37\ The other proposed changes are designed to keep 
industry professionals and investors better informed about NLS and NLS 
Plus and associated fees through changes that will provide greater 
clarity and precision in affected rules. These changes include the 
adoption of definitions that are not intended to vary substantively 
from definitions and concepts already reflected in Exchange rules, but 
are intended to promote the reader's understanding of the principles 
used to construe these rules.
---------------------------------------------------------------------------

    \37\ Similarly, the external Distributor fee applicable to usage 
under that model will not impose any burden on competition because 
external Distributors typically charge fees for external 
distribution, and thereby usually derive greater value from such 
distribution than internal Distributors, which typically do not 
charge fees, and that greater value supports higher external 
distribution fees. The distinction between external and internal 
distribution fees is common in the financial services industry, and 
has been applied to other products without any anti-competitive 
effect.
---------------------------------------------------------------------------

    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 competes 
directly with existing similar products and potential products of 
market data vendors. The product 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. Similarly, with respect to the FINRA/
Nasdaq TRF data that is a component of the product, 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 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

[[Page 7819]]

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).\38\
---------------------------------------------------------------------------

    \38\ 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).
---------------------------------------------------------------------------

    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 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,\39\ 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.
---------------------------------------------------------------------------

    \39\ 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 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 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 more 
orders will become correspondingly more valuable.
    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 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 retail 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 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.
    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.\40\
---------------------------------------------------------------------------

    \40\ 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 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. 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 American, NYSE Arca, IEX, and BATS/Direct Edge.

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

[[Page 7820]]

    The proposed 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.

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)(iii) of the Act \41\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\42\
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    \41\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \42\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires a self-regulatory organization to give the Commission 
written notice of its intent to file the proposed rule change at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission. 
The Exchange has satisfied this requirement.
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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-2018-010 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-2018-010. 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-2018-010 and should be submitted 
on or before March 15, 2018.

    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,
Assistant Secretary.
[FR Doc. 2018-03568 Filed 2-21-18; 8:45 am]
 BILLING CODE 8011-01-P