Document ID: SEC-2009-0398-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2009-03-24T04:00Z

[Federal Register: March 24, 2009 (Volume 74, Number 55)]
[Notices]               
[Page 12423-12426]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24mr09-140]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59582; File No. SR-NASDAQ-2008-102]

 
 Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Order Approving Proposed Rule Change as Modified by Amendment No. 2 
Thereto To Establish a Pilot Program for NASDAQ Basic Data Feeds

March 16, 2009.

I. Introduction

    On December 23, 2008, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to establish a five-month pilot to offer a real-
time data feed combining both NASDAQ's Best Bid and Offer (``QBBO'') 
and the ``NASDAQ Last Sale'' (collectively, ``NASDAQ Basic''). On 
January 8, 2009, NASDAQ filed Amendment No. 1 to the proposed rule 
change. On January 12, 2009, NASDAQ replaced the original filing and 
Amendment No. 1 by filing Amendment No. 2 to the proposed rule change. 
The proposed rule change, as amended, was published for comment in the 
Federal Register on January 22, 2009.\3\ The Commission received one 
comment letter on the proposal.\4\ NASDAQ responded to the comment 
letter on March 3, 2009.\5\ This order approves the proposed rule 
change, as modified by Amendment No 2.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 59244 (January 13, 
2009), 74 FR 4065 (January 22, 2009) (``Notice'').
    \4\ See Letter from Ira D. Hammerman, Senior Managing Director 
and General Counsel, Securities Industry and Financial Markets 
Association, to Elizabeth Murphy, Secretary, Commission, dated 
February 12, 2009 (``SIFMA Letter'').
    \5\ See Letter from Jeffrey S. Davis, Vice President and Deputy 
General Counsel, NASDAQ, to Elizabeth Murphy, Secretary, Commission, 
dated March 3, 2009 (``NASDAQ Response'').
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II. Description of the Proposal

    NASDAQ proposes to establish NASDAQ Basic, a five-month pilot to 
offer real-time quotation data in combination with last sale data 
solely from the NASDAQ Market Center. There will be no fees for NASDAQ 
Basic for the first month of the pilot.
    NASDAQ Basic is a ``Level 1'' product containing two data elements: 
(1) Quotation information from the NASDAQ Market Center and (2) last 
sale data from the NASDAQ Market Center. NASDAQ Basic will be available 
in three forms, NASDAQ Basic for NASDAQ, NASDAQ Basic for NYSE, and 
NASDAQ Basic for Alternext. NASDAQ stated that it designed NASDAQ Basic 
to meet the needs of current and prospective subscribers that do not 
need or are unwilling to pay for the consolidated data provided by the 
consolidated Level 1 products.
    NASDAQ proposes to charge each professional user of the NASDAQ 
Basic product, a per subscriber monthly charge of $10 for NASDAQ-listed 
stocks, $5 for NYSE-listed stocks, and $5 for Alternext-listed stocks, 
and charge each non-professional subscriber a per subscriber monthly 
charge of $0.50 for NASDAQ-listed stocks, $0.25 for NYSE-listed stocks, 
and $0.25 for Alternext-listed stocks. For users that do not require a 
monthly subscription, there will be a per query option available for 
NASDAQ Basic, with a fee of $0.0025 for NASDAQ-listed stocks, $0.0015 
for NYSE-listed stocks, and $0.0015 for Alternext-listed stocks. 
Vendors that report per query usage to NASDAQ are permitted to convert 
to monthly subscriptions when the cost of individual users' queries 
exceeds the cost of the monthly subscription.
    As with the distribution of other NASDAQ proprietary products, all 
distributors of NASDAQ Basic will be assessed a monthly Distributor Fee 
in addition to any applicable usage fees. Each Distributor of NASDAQ 
Basic for NASDAQ-listed stocks shall pay a monthly fee of $1,500 for 
either internal or external distribution or both. Each Distributor of 
NASDAQ Basic for NYSE-listed stocks will pay a fee of $250 per month 
for internal distribution or $625 per month external distribution. Each 
Distributor of NASDAQ Basic for Alternext-listed stocks will pay a fee 
of $250 per month for internal distribution or $625 per month external 
distribution. Distributors that pay the fee for external distribution 
of NASDAQ Basic for NYSE and Alternext may distribute the same data 
internally for no additional fee. In addition, each Distributor that 
receives Direct Access to the NASDAQ Basic will also pay a monthly fee 
of $2,000 for NASDAQ-listed stocks, $1,000 for NYSE-listed stocks, and 
$1,000 for Alternext-listed stocks.

III. Summary of Comments Received and NASDAQ's Responses

    The Commission received one comment letter from the Market Data 
Subcommittee of the Securities Industry and Financial Markets 
Association (``SIFMA'') opposing NASDAQ's proposed rule change.\6\ As 
an initial matter, SIFMA objects to NASDAQ's application of the ``fair 
and reasonable'' test announced in the NYSE Arca Order \7\ to NASDAQ 
Basic's fees.\8\ NASDAQ notes that the NYSE Arca Order is a valid 
agency action; therefore, NASDAQ believes it is proper to apply the 
``fair and reasonable'' test to the NASDAQ Basic proposal.\9\ SIFMA 
notes that SIFMA members that sign up for NASDAQ's new market data 
feeds will still be required to purchase the consolidated data for 
trading purposes,\10\ and, if the other exchanges also repackage their 
own best bids and offers and last sale prices, adding together all of 
these fees could result in firms paying more, not less, for overall 
market data, and could potentially cause considerable technological and 
administrative burdens.\11\ NASDAQ agrees that NASDAQ Basic is not a 
substitute for consolidated data when trading and order routing 
decisions can be implemented,\12\ but rather a less expensive 
alternative to consolidated data when consolidated data is not required 
to be displayed, including portfolio measurement, back-office

[[Page 12424]]

operations, and certain communications with the public.\13\
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    \6\ Id.
    \7\ See infra note 27.
    \8\ See SIFMA Letter at 2.
    \9\ See NASDAQ Response at 1.
    \10\ 17 CFR 242.603(c).
    \11\ See SIFMA Letter at 2.
    \12\ 17 CFR 242.603(c).
    \13\ See NASDAQ Response at 1-2.
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    SIFMA also argues that NASDAQ's classification of this data as 
``non-core'' is inaccurate and that the resulting application of the 
``subject to significant competitive forces'' test announced in the 
NYSE Arca Order for meeting the fair and reasonable requirements of the 
Act is misplaced. SIFMA argues that best bids and offers and last sale 
prices--whether offered directly by an exchange or through a 
consolidating processor--should be classified as ``core data.'' \14\ 
NASDAQ notes that in the NYSE Arca Order the Commission states that 
core data is only the data that Commission rules require to be 
consolidated and distributed to the public by a single central 
processor. NASDAQ notes that it produces NASDAQ Basic data voluntarily, 
and while NASDAQ Basic contains a subset of core data that overlap does 
not transform it into core data.\15\ In addition, SIFMA disagrees with 
NASDAQ's assertion that this is a new and innovative market data 
product resulting from ``competitive'' forces.\16\ NASDAQ notes that 
even though the price of consolidated data is not subject to 
competitive forces, NASDAQ Basic is nevertheless competitively 
constrained by the price of consolidated data.\17\
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    \14\ See SIFMA Letter at 2-3.
    \15\ See NASDAQ Response at 2.
    \16\ See SIFMA Letter at 3.
    \17\ See NASDAQ Response at 2.
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    SIFMA finally notes that, in contrast with the NYSE OpenBook Ultra 
filing,\18\ NASDAQ has not attempted to simplify administrative burdens 
by modernizing its unit of count for assessing fees, nor has it adopted 
enterprise pricing for NASDAQ Basic that would address longstanding 
issues that SIFMA identifies, such as the ``onerous'' application of 
the ``professional'' definition to online investors seeking per query 
(non-streaming) quotes. SIFMA urges the Commission, the Consolidated 
Tape Association, the NASDAQ UTP Plan, NASDAQ, and the other individual 
exchanges to implement a uniform unit of count working in cooperation 
with its committee to avoid the administrative burdens of different 
exchanges applying different units of count.\19\ NASDAQ acknowledges 
SIFMA's suggestion to decrease the administrative burden of purchasing 
NASDAQ market data, but notes that the issue is unrelated to the 
Commission's review of the NASDAQ Basic proposal.\20\
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    \18\ See Securities Exchange Act Release No. 59198 (January 5, 
2009), 74 FR 1268 (January 12, 2009) (SR-NYSE-2008-131).
    \19\ See SIFMA Letter at 3.
    \20\ See NASDAQ Response at 2.
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IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\21\ In 
particular, it is consistent with Section 6(b)(4) of the Act,\22\ 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 parties using its facilities, 
and Section 6(b)(5) of the Act,\23\ which requires, among other things, 
that the rules of a national securities exchange be 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, 
and not be designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
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    \21\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78f(b)(4).
    \23\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds that the proposed rule change is 
consistent with the provisions of Section 6(b)(8) of the Act,\24\ which 
requires that the rules of an exchange not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act. Finally, the Commission finds that the proposed rule change 
is consistent with Rule 603(a) of Regulation NMS,\25\ adopted under 
Section 11A(c)(1) of the Act, which requires an exclusive processor 
that distributes information with respect to quotations for or 
transactions in an NMS stock to do so on terms that are fair and 
reasonable and that are not unreasonably discriminatory.\26\
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    \24\ 15 U.S.C. 78f(b)(6).
    \25\ 17 CFR 242.603(a).
    \26\ NASDAQ is an exclusive processor of NASDAQ Basic data under 
Section 3(a)(22)(B) of the Act, 15 U.S.C. 78c(a)(22)(B), which 
defines an exclusive processor as, among other things, an exchange 
that distributes information with respect to quotations or 
transactions on an exclusive basis on its own behalf.
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    The Commission has reviewed the proposal using the approach set 
forth in the NYSE Arca Order for non-core market data fees.\27\ In the 
NYSE Arca Order, the Commission stated that ``when possible, reliance 
on competitive forces is the most appropriate and effective means to 
assess whether the terms for the distribution of non-core data are 
equitable, fair and reasonable, and not unreasonably discriminatory.'' 
\28\ It noted that 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.'' \29\ If an exchange ``was subject to 
significant competitive forces in setting the terms of a proposal,'' 
the Commission will approve a proposal unless it determines that 
``there is a substantial countervailing basis to find that the terms 
nevertheless fail to meet an applicable requirement of the Exchange Act 
or the rules thereunder.'' \30\
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    \27\ Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770 (December 9, 2008) (SR-NYSEArca-2006-21) (``NYSE 
Arca Order''). In the NYSE Arca Order, the Commission describes in 
great detail the competitive factors that apply to depth-of-book 
market data products. The Commission hereby incorporates by 
reference the data and analysis from the NYSE Arca Order into this 
order.
    \28\ Id. at 74771.
    \29\ Id. at 74782.
    \30\ Id. at 74781.
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    As noted in the NYSE Arca Order, the standards in Section 6 of the 
Act and Rule 603 of Regulation NMS do not differentiate between types 
of data and therefore apply to exchange proposals to distribute both 
core data and non-core data. Core data is the best-priced quotations 
and comprehensive last-sale reports of all markets that the Commission, 
pursuant to Rule 603(b), requires a central processor to consolidate 
and distribute to the public pursuant to joint-SRO plans.\31\ In 
contrast, individual exchanges and other market participants distribute 
non-core data voluntarily. The mandatory nature of the core data 
disclosure regime leaves little room for competitive forces to 
determine products and fees. Non-core data products and their fees are, 
by contrast, much more sensitive to competitive forces. The Commission 
therefore is able to use competitive forces in its determination of 
whether an exchange's proposal to distribute non-core data meets the 
standards of Section 6 and Rule 603. Because NASDAQ's instant proposal 
relates to the distribution of

[[Page 12425]]

non-core data, the Commission will apply the market-based approach set 
forth in the NYSE Arca Order.
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    \31\ See 17 CFR 242.603(b). (``Every national securities 
exchange on which an NMS stock is traded and national securities 
association shall act jointly pursuant to one or more effective 
national market system plans to disseminate consolidated 
information, including a national best bid and national best offer, 
on quotations for and transactions in NMS stocks. Such plan or plans 
shall provide for the dissemination of all consolidated information 
for an individual NMS stock through a single plan processor.'')
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    In the NYSE Arca Order, the Commission discussed two broad types of 
competitive forces that generally apply to exchanges in their 
distribution of a non-core data product--the need to attract order flow 
and the availability of data alternatives. These forces also applied to 
NASDAQ in setting the terms of this proposal for the NASDAQ Basic data 
product: (i) NASDAQ's compelling need to attract order flow from market 
participants; and (ii) the availability to market participants of 
alternatives to purchasing NASDAQ 's data.
    Table 1 below provides a recent snapshot of the state of 
competition in the U.S. equity markets in the month of January 2009: 
\32\
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    \32\ Source: ArcaVision (available at www.arcavision.com).

                                     Table 1--Reported Share Volume in U.S.
                                  Listed Equities during January 2009 (percent)
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                     Trading venue                           All stocks        NYSE-Listed       NASDAQ-Listed
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NASDAQ.................................................               27.1               20.5               39.9
All Non-Exchange.......................................               26.7               26.2               31.0
NYSE Arca..............................................               17.9               15.7               15.8
NYSE...................................................               14.8               26.2                0.0
BATS...................................................               10.7                9.0               10.8
International Stock Exchange...........................                1.3                1.4                1.4
National Stock Exchange................................                0.6                0.7                0.7
Chicago Stock Exchange.................................                0.4                0.4                0.3
CBOE Stock Exchange....................................                0.2                0.0                0.1
NYSE Alternext.........................................                0.1                0.0                0.0
NASDAQ OMX BX..........................................                0.0                0.0                0.0
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    The market share percentages in Table 1 strongly indicate that 
NASDAQ must compete vigorously for order flow to maintain its share of 
trading volume. The need to attract order flow imposes significant 
pressure on NASDAQ to act reasonably in setting its fees for NASDAQ 
market data, particularly given that the market participants that must 
pay such fees often will be the same market participants from whom 
NASDAQ must attract order flow. These market participants particularly 
include the large broker-dealer firms that control the handling of a 
large volume of customer and proprietary order flow. Given the 
portability of order flow from one trading venue to another, any 
exchange that sought to charge unreasonably high data fees would risk 
alienating many of the same customers on whose orders it depends for 
competitive survival. Moreover, distributing data widely among 
investors, and thereby promoting familiarity with the exchange and its 
services, is an important exchange strategy for attracting order 
flow.\33\
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    \33\ See NYSE Arca Order, 73 FR at 74784 nn. 218-219 and 
accompanying text (noting exchange strategy of offering data for 
free as a means to gain visibility in the market place).
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    In addition to the need to attract order flow, the availability of 
alternatives to NASDAQ Basic significantly affect the terms on which 
NASDAQ can distribute this market data.\34\ In setting the fees for its 
NASDAQ Basic service, NASDAQ must consider the extent to which market 
participants would choose one or more alternatives instead of 
purchasing the exchange's data. For example, although the NASDAQ Basic 
data feed is separate from the core data feed made available pursuant 
to the joint-SRO plans,\35\ all the information available in NASDAQ 
Basic is included in the core data feed. This core data must be 
provided to customers when trading and order-routing decisions can be 
implemented.\36\ Data users will have a choice of purchasing NASDAQ 
Basic data for those contexts where core data is not required to be 
displayed, such as portfolio management, or simply providing core data 
in all contexts.
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    \34\ See Richard Posner, Economic Analysis of Law Sec.  9.1 (5th 
ed. 1998) (discussing the theory of monopolies and pricing). See 
also U.S. Dep't of Justice & Fed'l Trade Comm'n, Horizontal Merger 
Guidelines Sec.  1.11 (1992), as revised (1997) (explaining the 
importance of alternatives to the presence of competition and the 
definition of markets and market power). Courts frequently refer to 
the Department of Justice and Federal Trade Commission merger 
guidelines to define product markets and evaluate market power. See, 
e.g., FTC v. Whole Foods Market, Inc., 502 F. Supp. 2d 1 (D.D.C. 
2007); FTC v. Arch Coal, Inc., 329 F. Supp. 2d 109 (D.D.C. 2004). In 
considering antitrust issues, courts have recognized the value of 
competition in producing lower prices. See, e.g., Leegin Creative 
Leather Products v. PSKS, Inc., 127 S. Ct. 2705 (2007); Atlanta 
Richfield Co. v. United States Petroleum Co., 495 U.S. 328 (1990); 
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 
(1986); State Oil Co. v. Khan, 522 U.S. 3 (1997); Northern Pacific 
Railway Co. v. U.S., 356 U.S. 1 (1958).
    \35\ The three joint-industry plans are (1) the CTA Plan, which 
disseminates transaction information for securities primarily listed 
on an exchange other than Nasdaq, (2) the CQ Plan, which 
disseminates consolidated quotation information for securities 
primarily listed on an exchange other than Nasdaq, and (3) the 
Nasdaq UTP Plan, which disseminates consolidated transaction and 
quotation information for securities primarily listed on Nasdaq.
    \36\ Rule 603(c) of Regulation NMS requires broker-dealers, if 
they provide any data to customers, also to provide core data in a 
context in which a trading or order-routing decision can be 
implemented. 17 CFR 242.603(c). The Commission emphasizes that 
NASDAQ Basic may not be used as a substitute for the distribution of 
core data that is required under Rule 603(c).
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    The various self-regulatory organizations, the several Trade 
Reporting Facilities of FINRA, and ECNs that produce proprietary data, 
as well as the core data feed, are all sources of competition in non-
core data products. As Table 1 illustrates, share volume in U.S.-listed 
equities is widely dispersed among trading venues, and these venues are 
able to offer competitive data products as alternatives to NASDAQ 
Basic. The Commission believes that the availability of those 
alternatives, as well as the NASDAQ's compelling need to attract order 
flow, imposed significant competitive pressure on the NASDAQ to act 
equitably, fairly, and reasonably in setting the terms of its proposal.
    Because NASDAQ was subject to significant competitive forces in 
setting the terms of the proposal, the Commission will approve the 
proposal in the absence of a substantial countervailing basis to find 
that its terms nevertheless fail to meet an applicable requirement of 
the Act or the rules thereunder. An analysis of the proposal and the 
comment letter does not provide such a basis.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\37\ that the proposed rule change (SR-NASDAQ-

[[Page 12426]]

2008-102), as modified by Amendment No. 2, be, and it hereby is, 
approved on a five month pilot basis.
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    \37\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-6398 Filed 3-23-09; 8:45 am]

BILLING CODE 8010-01-P