Document ID: SEC-2014-1378-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2014-08-15T04:00Z

[Federal Register Volume 79, Number 158 (Friday, August 15, 2014)]
[Notices]
[Pages 48262-48264]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-19337]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72811; File No. SR-NASDAQ-2014-079]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify NASDAQ Rule 7051 Fees Relating to Pricing for Direct Circuit 
Connections

August 11, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 1, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or the 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') a proposed rule change as described in Items I and II 
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

    NASDAQ is proposing to modify NASDAQ Rule 7051 to establish direct 
connectivity and installation fees for a 1Gb Ultra connection option.
    The text of the proposed rule change is available at 
nasdaq.cchwallstreet.com at NASDAQ's principal office, 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, NASDAQ 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 those 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 parts of such 
statements.

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

1. Purpose
    NASDAQ is proposing to amend NASDAQ Rule 7051 entitled ``Direct 
Connectivity to Nasdaq'' to clarify the Exchange's direct connectivity 
services. Currently, the Exchange offers two direct connectivity 
options for customers who are not co-located at the Exchange's 
datacenter, a 10Gb circuit connection and a 1Gb circuit connection.\3\ 
Separate installation and ongoing monthly fees apply to each option. 
For 1Gb connectivity, the Exchange assesses an installation fee of 
$1,000 and ongoing monthly fees of $1,000. For 10Gb connectivity, the 
Exchange charges an installation fee of $1,000 and ongoing monthly fees 
of $5,000.
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    \3\ See Securities Exchange Act Release No. 62663 (August 9, 
2010), 75 FR 49543 (August 13, 2010) (SR-NASDAQ-2010-077).
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    In order to keep pace with changes in technology, the Exchange now 
proposes to provide a 1Gb ``Ultra'' fiber connection offering, which 
uses new lower latency switches.\4\ A switch is a type of network 
hardware that acts as the ``gatekeeper'' for all clients' orders sent 
to the system (``System'') \5\ at the NASDAQ facility and orders them 
in sequence for entry into the System for execution. Each of NASDAQ's 
current connection offerings use different switches, but the switches 
are of uniform type within each offering (i.e., all 1G connectivity 
options currently use the same switches). As a consequence, all client 
subscribers to a particular connectivity option receive the same 
latency in terms of the capabilities of their switches.
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    \4\ The term ``latency'' for the purposes of this rule filing 
means a measure of the time it takes for an order to enter into a 
switch and then exit for entry into the System.
    \5\ As defined in NASDAQ Rule 4751(a).
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    The 1Gb Ultra offering will use a low latency switch, which 
provides faster processing of orders sent to it in comparison to the 
current 1G switch in use for Exchange connectivity. As a consequence, 
direct connect clients needing only 1Gb of bandwidth, but that seek 
faster processing of those orders as they enter NASDAQ's exchange 
facility now have the option to subscribe to a faster and more 
efficient connection to the Exchange.
    The Exchange proposes an ongoing monthly subscription fee of $1,500 
for a 1Gb Ultra connection plus a one-time installation fee of $1,500. 
NASDAQ believes that the pricing reflects the hardware and other 
infrastructure and maintenance costs to NASDAQ associated with offering 
technology that is at the forefront of the industry. The $1,500 
installation fee for the 1Gb Ultra product exceeds the $1,000 
installation fee for the existing 1Gb product due to the added 
complexity of installing the Ultra product. In order to achieve lower 
latency, the Ultra product requires not only the installation of a 
fiber telecommunications line but it also requires the additional 
installation of sophisticated switching equipment.
    The new low latency service will be completely optional. Potential 
customers will make a determination based on whether they perceive a 
sufficient value in adopting the new service. This new low latency 
service decreases the time individual orders are processed and market 
data is transmitted by these new switches. The Exchange's proposal 
provides the client the option for faster switch processing, which is 
highly valued among some market participants. NASDAQ notes that other 
markets have adopted low-latency connectivity options for their users. 
For example, the International Securities Exchange LLC (``ISE'') offers 
a 10Gb low latency Ethernet connectivity option to its users, which 
provides a ``higher speed network to access [ISE's] Optimise trading 
system.'' \6\
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    \6\ See Securities Exchange Act Release No. 66525 (March 7, 
2012), 77 FR 14847 (March 13, 2012) (SR-ISE-2012-09).
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2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\7\ in general, and with 
Sections 6(b)(4) and 6(b)(5) of the Act,\8\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among members and issuers and other persons using any 
facility or system which NASDAQ operates or controls, and is not 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers.
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    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(4) and (5).
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    The Exchange believes that this proposal is consistent with Section 
6(b)(4) of the Act in that it is an equitable allocation of fees and is 
consistent with Section 6(b)(5) of the Act because the proposal is not 
unfairly discriminatory because it offers a completely optional new 
direct connectivity choice to customers who are not co-located at the 
Exchange's datacenter and all client subscribers that opt for this 
particular connectivity

[[Page 48263]]

option and associated fee will receive the same latency in terms of the 
capabilities of their switches. Also, the proposal is consistent with 
an equitable allocation of fees and is not unfairly discriminatory 
because the Exchange operates in a highly competitive market in which 
exchanges offer various connectivity services as a means to facilitate 
the trading activities of customers. Accordingly, fees charged for 
direct connectivity services are constrained by the fees charged for 
the various alternative connectivity options, including co-location, 
direct connectivity, and connecting via a third party vendor (extranet 
or ISV), as well as fees charged by other exchanges, taking into 
consideration the different costs associated with these service types. 
It should be noted, however, that the costs associated with direct 
connect clients are primarily fixed costs that include the costs of 
installing and maintaining the network and direct connections 
(including the switch and cabling). Accordingly, the Exchange 
establishes a range of direct connect fees with the goal of covering 
these same fixed costs and covering marginal costs, such as the cost of 
electricity and data center space for the equipment, labor costs 
associated with the installation and of the equipment and cabling, as 
well as for entitling the clients to the various services and feeds 
carried by these connections. The proposed optional new low latency 
direct connectivity choice simply provides one more way in which a 
customer can choose to connect.
    If a particular exchange charges excessive fees for direct 
connectivity services, affected members will opt to terminate their 
direct connectivity arrangements with that exchange, and pursue a range 
of alternative trading strategies not dependent upon the exchange's 
direct connectivity services. Accordingly, the exchange charging 
excessive fees would stand to lose not only direct connectivity 
revenues and any other revenues associated with the customer's 
operations. Moreover, all of the Exchange's fees for these services are 
equitably allocated consistent with Section 6(b)(4) of the Act and 
consistent with Section 6(b)(5) of the Act are non-discriminatory in 
that all direct connect clients are offered the same service and there 
is no differentiation among them with regard to the fees charged for 
such services.

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

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended.\9\ 
As discussed above, the Exchange believes that the proposed fees for 
direct connectivity services are comparable to the fees charged for the 
same service provided to co-locations customers. Additionally, such 
costs are constrained by the robust competition for order flow among 
exchanges and non-exchange markets, because direct connectivity exists 
to advance that competition, and excessive fees for direct connectivity 
services would serve to impair an exchange's ability to compete for 
order flow rather than burdening competition. Therefore, the Exchange 
believes that the proposed rule change enhances, rather than burdens, 
competition.
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    \9\ 15 U.S.C. 78f(b)(8).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

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

    The Exchange has filed the proposed rule change pursuant to Section 
19(b)(3)(A) of the Act \10\ and Rule 19b-4(f)(6) thereunder.\11\ 
Because the 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 prior to 
30 days from the date on which it was filed, or such shorter time as 
the Commission may designate, if consistent with the protection of 
investors and the public interest, the proposed rule change has become 
effective pursuant to Section 19(b)(3)(A) of the Act \12\ and Rule 19b-
4(f)(6) thereunder.\13\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6) 
requires the Exchange to give the Commission written notice of the 
Exchange's intent to file the proposed rule change, along with a 
brief description and text of 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 such proposed rule 
change, the Commission summarily may temporarily suspend such rule 
change if it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. If the Commission 
takes such action, the Commission shall institute proceedings to 
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml ); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2014-079 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-2014-079. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml 
). Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NW., Washington, 
DC 20549, on official business days between the hours of 10:00 a.m. and 
3:00 p.m. Copies of such filing also will be available for inspection 
and copying at the principal offices of the Exchange. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2014-079, and should 
be submitted on or before September 5, 2014.

[[Page 48264]]

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-19337 Filed 8-14-14; 8:45 am]
BILLING CODE 8011-01-P