Document ID: SEC-2012-0553-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: NASDAQ Stock Market LLC
Posted Date: 2012-04-09T04:00Z

[Federal Register Volume 77, Number 68 (Monday, April 9, 2012)]
[Notices]
[Pages 21125-21130]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-8462]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-66724; File No. SR-NASDAQ-2012-044]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify the Fees Applicable to Non-Display Usage of Certain NASDAQ 
Depth-of-Book Market Data

April 3, 2012.
    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 March 26, 2012, The NASDAQ Stock Market LLC (``NASDAQ'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I and II below, which Items have been 
prepared by NASDAQ. 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 filing this proposed change to modify the fees applicable 
to Non-Display Usage of certain NASDAQ Depth-of-Book market data. 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 these statements may be examined at the places specified in 
Item IV below. NASDAQ 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Growth in Use of Non-Displayed Data. The implementation of 
Regulation NMS in 2006 and 2007 triggered a dramatic change in the 
composition, speed, and consumption of market data products in U.S. 
equities trading. Regulation NMS spurred the development and 
proliferation of proprietary data products by liberalizing SEC Rule 
603, allowing self-regulatory organizations to offer on a proprietary 
basis data that previously was confined to national market system 
plans, and permit investors to use this proprietary data in 
circumstances where consolidated data previously was required. 
Regulation NMS also drove market participants to increase trading speed 
and, by necessity, the speed of market data feeds by requiring in Rule 
611 that all market participants compete to access a limited set of 
protected quotations. As a result, some market participants and 
exchanges have used Depth-of-Book data to identify liquidity in 
fragmented markets.
    Technological advancements and their use by increasingly 
sophisticated market participants have intensified the changes brought 
about by Regulation NMS. For example, the prevalence and importance of 
co-location has grown rapidly as market participants seek to access 
protected quotes faster than their competitors. Also, markets and 
market participants continually seek expanded bandwidth options to 
communicate an ever-increasing number of trading messages without 
significant latencies and improvement of determinism. Connectivity 
offerings have multiplied as new networks and technologies come on 
line.
    As technology, automation, speed, and other aspects of trading have 
evolved, so too has market data consumption. No longer is trading and 
investing dominated by individuals responding to market data displayed 
on trading screens by manually entering quotes and trades into the 
markets. Instead, the vast majority of trading is done by firms 
leveraging powerful servers running sophisticated algorithms and 
consuming massive quantities of data without displaying that data to 
individual traders. While certain groups of investors, including retail 
investors, continue to view traditional market data displays, their 
orders are generally processed, delivered, and executed by firm servers 
using non-displayed data. Non-Display Usage is used not only for 
automated order generation and program trading, but also to provide 
reference prices for algorithmic trading and order routing; and for 
various back office processes, including surveillance, order 
verification, and risk management functions.
    NASDAQ Market Data Pricing. NASDAQ's pricing model for market data 
products must keep pace with changes in data consumption patterns in 
order to allocate fees and charges fairly among Subscribers. NASDAQ's 
pricing has evolved over time in response to previous changes in market 
data consumption, and it now includes numerous factors for setting 
fees. Generally, NASDAQ allocates market data fees among Subscribers 
based on the data elements consumed, including top-of-book,\3\ Depth-
of-Book,\4\ and other, more sophisticated data products.\5\ NASDAQ also 
distinguishes between different sets of securities, NASDAQ-listed 
securities versus securities listed on other markets for which NASDAQ's 
data plays a different, often more limited, role. Moreover, NASDAQ has 
long followed industry practice by distinguishing between real-time and 
delayed data, allocating higher fees to real-time usage and lower or no 
fees to delayed data usage. Also, since 1999 NASDAQ has distinguished 
between Professional and Non-Professional Subscribers, offering lower 
fees to Non-Professional Subscribers in order to encourage use by 
average investors and also recognizing that Professional Subscribers 
make heavier use of the same data feeds.\6\ These four distinctions 
have existed in tandem for many years.
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    \3\ Compare NASDAQ Rule 7011 (top-of-book consolidated data) and 
NASDAQ Rule 7047 (top-of-book NASDAQ-only data).
    \4\ See NASDAQ Rule 7023.
    \5\ See NASDAQ Rules 7044 (Market Pathfinders), 7048 (Custom 
Data Feeds), and 7057 (NASDAQ MatchView).
    \6\ See NASDAQ Rule 7023(a)(3)(A).
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    Since the mid-2000s, in response to changes driven by Regulation 
NMS, NASDAQ has added new considerations to its pricing. Thus, in 2005, 
NASDAQ amended its Distributor fee schedule to distinguish between 
distributions [sic] that is Internal (redistribution within an entity 
that receives NASDAQ market data) versus External (redistribution 
outside that entity) to the Distributor.\7\ Also, in 2005 NASDAQ began 
differentiating between Direct Access and Indirect Access, charging 
more for firms that access data directly from NASDAQ based on the 
enhanced speed and simplicity for Subscribers and the

[[Page 21126]]

increased burden on NASDAQ of administering individual Distributor 
relationships.\8\ Later, in 2007, NASDAQ began offering enterprise 
licenses that allocate fees by volume of usage, differentiating among 
heavy consumers and lighter consumers by capping fees.\9\
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    \7\ See NASDAQ Rule 7023(a)(4).
    \8\ See NASDAQ Rule 7023(a)(5)
    \9\ See NASDAQ Rule 7023(c).
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    In March 2010, NASDAQ introduced an enterprise license for Non-
Display Usage of market data.\10\ Currently, NASDAQ offers two options 
for measuring Non-Display Usage of Depth-of-Book equities data. First, 
a firm can count and report each server or other Subscriber or device 
that uses data, whether displayed or non-displayed, and pay the 
Professional fee for each Subscriber. Second, NASDAQ offers an optional 
$30,000 per month Non-Display TotalView and OpenView fee cap for 
Internal Distribution.\11\ For firms reporting over 400 Subscribers, 
the optional fee cap offers a cost savings per Subscriber, as well as 
relief from the administrative costs of identifying, tracking, and 
reporting each covered Subscriber. NASDAQ is proposing to remove this 
enterprise license for Non-Display Usage, as described in detail below.
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    \10\ See NASDAQ Rule 7023(a)(1)((D). See also Securities 
Exchange Act Release No. 34-61700 (Mar. 12, 2010), 75 F.R. 13172 
(Mar. 18, 2010). See also NASDAQ Options Rules, Chapter XV, Section 
4(a).
    \11\ The TotalView and OpenView fee cap does not currently 
include Distributor fees. See NASDAQ Rule 7023(c)(4).
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    Current Proposal. NASDAQ is amending NASDAQ Rule 7023 to create a 
new Subscriber fee and tiered pricing structure for Direct Access to 
Depth-of-Book data that Professional Subscribers use in a Non-Display 
manner. This further refinement to NASDAQ's fees for Non-Display Usage 
of Depth-of-Book data leverages existing distinctions between 
Professional and Non-Professional Subscribers and between Direct and 
Indirect Access to data. Specifically, the proposed fee schedule for 
Direct Access is as follows:

------------------------------------------------------------------------
                       Subscribers                          Monthly fee
------------------------------------------------------------------------
1-10....................................................       $ 300 per
11-29...................................................        3,300.00
30-49...................................................        9,000.00
50-99...................................................       15,000.00
100-249.................................................       30,000.00
250+....................................................       75,000.00
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The fee for Professional Subscribers for Non-Display Usage that is 
accessed directly from NASDAQ shall apply to any Subscriber that 
accesses any data elements included in the TotalView entitlement, 
including the TotalView, OpenView, or Level 2 data elements. 
Professional Subscribers that access Depth-of-Book data indirectly and 
then use it in a Non-Display fashion will pay the same Subscriber fees 
as Professional Subscribers that use comparable Display data.
    NASDAQ has determined to apply the proposed Non-Display Usage fee 
to a finite group of Subscribers that consume high quantities of market 
data but that have, due to NASDAQ's current pricing structure, paid 
disproportionately low fees. The new fee will apply to (1) Professional 
Subscribers; (2) that are Internal Distributors; (3) via Direct Access; 
and (4) via Non-Display Usage. The historical rationales supporting 
these four existing distinctions apply with equal force to the current 
proposal.
    Empirical Data and Analysis. NASDAQ considered numerous factors in 
determining the proper level of non-display fees to assess. Based on 
NASDAQ's knowledge and experience with firm trading behavior and data 
usage reporting, NASDAQ hypothesized that these trading characteristics 
correlate highly with intense Non-Display Usage, and that firms not 
exhibiting those characteristics correlate highly with higher Display 
Usage. To test this hypothesis, NASDAQ analyzed one month's data 
regarding order intensity, liquidity removal, and time at the inside 
among firms that are co-located and those that are not and among firms 
that connect to NASDAQ via a high number of ports versus a lower number 
of ports.\12\ NASDAQ then compared overall market data costs for firms 
with high usage of non-displayed data versus firms with high usage of 
displayed market data.
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    \12\ January 2012 represents the most recent full-month of data 
available. As such, it best represents current trading and data 
usage patterns and the best prediction of the actual application of 
the proposed fees.
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    NASDAQ found that the group of firms with high order intensity is 
comprised disproportionately of firms with Non-Display Usage. NASDAQ 
analyzed maximum order entry rates for 370 firms for the month of 
January 2012. As shown on Slide 1, of 370 firms, only 38 firms had 
maximum order entry rates exceeding 5,000 orders per second. NASDAQ 
believes that 23 of those 38 firms utilize exclusively non-displayed 
data, thereby paying less for market data than the 15 other firms with 
high order intensity rates that utilize displayed data. Further 
analysis revealed that firms with high order intensity often paid lower 
market data fees than firms with lower, often substantially lower, 
order intensity.
    NASDAQ also found that firms removing high levels of liquidity and 
also utilizing high numbers of OUCH connectivity ports are 
disproportionately likely to engage in exclusively Non-Display Usage. 
As shown on Slide 2, NASDAQ determined that of the 272 firms that 
remove an average of over 100,000 shares of liquidity per day, the top 
18 liquidity takers all rely exclusively on Non-Display data.\13\ 
Again, further analysis revealed that firms removing high levels of 
liquidity, using high numbers of connectivity ports, and relying on 
non-displayed data paid disproportionately lower market data fees than 
firms removing comparable or greater liquidity and using comparable 
numbers of ports but using displayed market data.
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    \13\ NASDAQ's findings are set forth in Exhibit 3B, pages 111 
through 114 of this proposed rule change. This excludes one exchange 
that removes over 100,000 average shares of liquidity daily.
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    Additionally, NASDAQ found that firms quoting most often at the 
inside and also removing high levels of liquidity are 
disproportionately likely to use exclusively Non-Display data. As shown 
on Slide 3, NASDAQ observed 351 firms for the month of January 2012, 
measuring time at the inside and liquidity taking. High rates of 
quoting at the inside require continual quote updates and generates 
substantial message traffic. Likewise, high rates of liquidity taking 
require high levels of order submission, also generating high message 
traffic. Again, of the 351 firms covered, 27 firms that rely 
exclusively on non-displayed market data were over-represented among 
firms with high levels of both studied behaviors. Additionally, those 
27 firms were under-billed relative to firms experiencing comparable or 
lower-intensity behavior and that consumed displayed market data.
    NASDAQ found that firms that are co-located within NASDAQ's 
Carteret facility and that rely exclusively on Non-Display Usage 
account for a disproportionate percentage of overall message traffic. 
Based on data for January 2012, 23 co-located, non-display firms 
account for 70 percent of NASDAQ's overall message traffic whereas 359 
other firms that are not co-located and/or that rely on displayed data 
account for 26 percent of NASDAQ's overall message traffic. As shown on 
Slide 4, Subscribers of non-displayed data, both co-located and not, 
account for 74 percent of NASDAQ's overall message traffic. These firms 
not only consume high quantities of market data, they also create 
significant

[[Page 21127]]

quantities of market data that then must be processed, disseminated, 
and consumed by numerous industry participants.
    Finally, NASDAQ studied the market data fees paid by non-display 
firms isolated by the data in Slides 1 through 4, comparing them with 
the market fees paid by otherwise comparable firms that rely on Display 
Usage. Based on this analysis, NASDAQ concluded that firms engaged in 
quoting and trading behavior based on Display Usage of market data paid 
on average eight times more in total market data fees compared with 
firms that engaged in comparable or higher-intensity behavior based on 
Non-Display Usage. NASDAQ designed the current [sic] to rectify this 
disparity by applying [sic] only to firms that use exclusively non-
displayed data and by using Subscriber tiers that correlate to the 
trading behaviors observed.
    If, after further observation, NASDAQ determines that the proposed 
fees are either over-inclusive or under-inclusive in reaching the 
desired equalization, NASDAQ will modify the fees accordingly via a 
future proposed rule change.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\14\ in general, and with 
Section 6(b)(4) of the Act,\15\ in particular, in that it provides an 
equitable allocation of reasonable fees among Subscribers and 
recipients of NASDAQ data. In adopting Regulation NMS, the Commission 
granted self-regulatory organizations and broker-dealers 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.
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    \14\ 15 U.S.C. 78f.
    \15\ 15 U.S.C. 78f(b)(4).
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    The Commission concluded that Regulation NMS--by deregulating the 
market in proprietary data--would itself further the Act's goals of 
facilitating efficiency and competition:

    [E]fficiency is promoted when broker-dealers who do not need the 
data beyond the prices, sizes, market center identifications of the 
NBBO and consolidated last sale information are not required to 
receive (and pay for) such data. The Commission also believes that 
efficiency is promoted when broker-dealers may choose to receive 
(and pay for) additional market data based on their own internal 
analysis of the need for such data.\16\
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    \16\ Securities Exchange Act Release No. 51808 (June 9, 2005), 
70 FR 37496 (June 29, 2005).

By removing ``unnecessary regulatory restrictions'' on the ability of 
exchanges to sell their own data, Regulation NMS advanced the goals of 
the Act and the principles reflected in its legislative history. If the 
free market should determine whether proprietary data is sold to 
broker-dealers at all, it follows that the price at which such data is 
sold should be set by the market as well. Level 2, TotalView and 
OpenView are precisely the sort of market data product that the 
Commission envisioned when it adopted Regulation NMS.
    On July 21, 2010, President Barack Obama signed into law H.R. 4173, 
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 
(``Dodd-Frank Act''), which amended Section 19 of the Act. Among other 
things, Section 916 of the Dodd-Frank Act amended paragraph (A) of 
Section 19(b)(3) of the Act by inserting the phrase ``on any person, 
whether or not the person is a member of the self-regulatory 
organization'' after ``due, fee or other charge imposed by the self-
regulatory organization.'' As a result, all SRO rule proposals 
establishing or changing dues, fees, or other charges are immediately 
effective upon filing regardless of whether such dues, fees, or other 
charges are imposed on members of the SRO, non-members, or both. 
Section 916 further amended paragraph (C) of Section 19(b)(3) of the 
Exchange Act to read, in pertinent part, ``At any time within the 60-
day period beginning on the date of filing of such a proposed rule 
change in accordance with the provisions of paragraph (1) [of Section 
19(b)], the Commission summarily may temporarily suspend the change in 
the rules of the self-regulatory organization made thereby, 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 this title. If the Commission takes 
such action, the Commission shall institute proceedings under paragraph 
(2)(B) [of Section 19(b)] to determine whether the proposed rule should 
be approved or disapproved.''
    The decision of the United States Court of Appeals for the District 
of Columbia Circuit in NetCoalition v. SEC, No. 09-1042 (D.C. Cir. 
2010), although reviewing a Commission decision made prior to the 
effective date of the Dodd-Frank Act, upheld the Commission's reliance 
upon competitive markets to set reasonable and equitably allocated fees 
for market data. ``In fact, the legislative history indicates that the 
Congress intended that the market system `evolve through the interplay 
of competitive forces as unnecessary regulatory restrictions are 
removed' and that the SEC wield its regulatory power `in those 
situations where competition may not be sufficient,' such as in the 
creation of a `consolidated transactional reporting system.' '' 
NetCoalition, at 15 (quoting H.R. Rep. No. 94-229, at 92 (1975), as 
reprinted in 1975 U.S.C.C.A.N. 321, 323). The court's conclusions about 
Congressional intent are therefore reinforced by the Dodd-Frank Act 
amendments, which create a presumption that exchange fees, including 
market data fees, may take effect immediately, without prior Commission 
approval, and that the Commission should take action to suspend a fee 
change and institute a proceeding to determine whether the fee change 
should be approved or disapproved only where the Commission has 
concerns that the change may not be consistent with the Act.
    For the reasons stated above, NASDAQ believes that the proposed 
fees are fair and equitable, and not unreasonably discriminatory. As 
described above, the proposed fees are based on pricing conventions and 
distinctions that exist in NASDAQ's current fee schedule, and the fee 
schedules of other exchanges. These distinctions (top-of-book versus 
Depth-of-Book, Professional versus Non-Professional Usage, Direct 
versus Indirect Access, Internal versus External Distribution) are each 
based on principles of fairness and equity that have helped for many 
years to maintain fair, equitable, and not unreasonably discriminatory 
fees, and that apply with equal or greater force to the current 
proposal. Thus, although the proposal results in a fee increase of $224 
per Subscriber (from $76 to $300) or, at the top tier, $45,000 per 
enterprise (from $30,000 to $75,000), these increases are based on 
careful analysis of empirical data and the application of time-tested 
pricing principles already accepted by the Commission for many years.
    As described in greater detail below, if NASDAQ has calculated 
improperly and the market deems the proposed fees to be unfair, 
inequitable, or unreasonably discriminatory, firms can diminish or 
discontinue the use of their data because the proposed fee is entirely 
optional to all parties. Firms are not required to purchase Depth-of-
Book data or to utilize any specific pricing alternative if they do 
choose to purchase

[[Page 21128]]

Depth-of-Book data. NASDAQ is not required to make Depth-of-Book data 
available or to offer specific pricing alternatives for potential 
purchases. NASDAQ can discontinue offering a pricing alternative (as it 
has in the past) and firms can discontinue their use at any time and 
for any reason (as they often do), including due to their assessment of 
the reasonableness of fees charged. NASDAQ continues to create new 
pricing policies aimed at increasing fairness and equitable allocation 
of fees among Subscribers, and NASDAQ believes this is another useful 
step in that direction.

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

    NASDAQ does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended. Notwithstanding its 
determination that the Commission may rely upon competition to 
establish fair and equitably allocated fees for market data, the 
NetCoalition court found that the Commission had not, in that case, 
compiled a record that adequately supported its conclusion that the 
market for the data at issue in the case was competitive. NASDAQ 
believes that a record may readily be established to demonstrate the 
competitive nature of the market in question.
    There is intense competition between trading platforms that provide 
transaction execution and routing services and proprietary data 
products. 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 the prospect of a taking order seeing and reacting to 
a posted order on a particular platform, the posting of the order would 
accomplish little. Without trade executions, exchange data products 
cannot exist. Data products are valuable to many end Subscribers only 
insofar as they provide information that end Subscribers 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, an exchange's 
customers view the costs of transaction executions and of data as a 
unified cost of doing business with the exchange. A broker-dealer will 
direct orders to a particular exchange only if the expected revenues 
from executing trades on the exchange exceed net transaction execution 
costs and the cost of data that the broker-dealer 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 broker-dealer will choose not to buy it. 
Moreover, as a broker-dealer chooses to direct fewer orders to a 
particular exchange, the value of the product to that broker-dealer 
decreases, for two reasons. First, the product will contain less 
information, because executions of the broker-dealer's orders will not 
be reflected in it. Second, and perhaps more important, the product 
will be less valuable to that broker-dealer because it does not provide 
information about the venue to which it is directing its orders. Data 
from the competing venue to which the broker-dealer is directing orders 
will become correspondingly more valuable.
    Thus, a super-competitive increase in the fees charged for either 
transactions or data has the potential to impair revenues from both 
products. ``No one disputes that competition for order flow is 
`fierce'.'' NetCoalition at 24. However, the existence of fierce 
competition for order flow implies a high degree of price sensitivity 
on the part of broker-dealers with order flow, since they may readily 
reduce costs by directing orders toward the lowest-cost trading venues. 
A broker-dealer that shifted its order flow from one platform to 
another in response to order execution price differentials would both 
reduce the value of that platform's market data and reduce its own need 
to consume data from the disfavored platform. Similarly, if a platform 
increases its market data fees, the change will affect the overall cost 
of doing business with the platform, and affected broker-dealers will 
assess whether they can lower their trading costs by directing orders 
elsewhere and thereby lessening [sic] the need for the more expensive 
data.
    Analyzing the cost of market data distribution in isolation from 
the cost of all of the inputs supporting the creation of market data 
will inevitably underestimate the cost of the data. Thus, because it is 
impossible to create data without a fast, technologically robust, and 
well-regulated execution system, system costs and regulatory costs 
affect the price of market data. It would be equally misleading, 
however, to attribute all of the exchange's costs to the market data 
portion of an exchange's joint product. Rather, all of the exchange's 
costs are incurred for the unified purposes of attracting order flow, 
executing and/or routing orders, and generating and selling data about 
market activity. The total return that an exchange earns reflects the 
revenues it receives from the joint products and the total costs of the 
joint products.
    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. For example, some platform may choose to pay rebates to 
attract orders, charge relatively low prices for market information (or 
provide information free of charge) and charge relatively high prices 
for accessing posted liquidity. Other platforms may choose a strategy 
of paying lower rebates (or no rebates) to attract orders, setting 
relatively high prices for market information, and setting relatively 
low prices for accessing posted liquidity. 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. This would be akin to strictly 
regulating the price that an automobile manufacturer can charge for car 
sound systems despite the existence of a highly competitive market for 
cars and the availability of after-market alternatives to the 
manufacturer-supplied system.
    The market for market data products is 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.

[[Page 21129]]

    Broker-dealers currently have numerous alternative venues for their 
order flow, including ten self-regulatory organization (``SRO'') 
markets, as well as internalizing broker-dealers (``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 Trade Reporting Facilities (``TRFs'') compete to 
attract internalized transaction reports. 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 Amex, NYSEArca, and BATS.
    Any ATS or BD can combine with any other ATS, BD, or multiple ATSs 
or BDs to produce joint proprietary data products. Additionally, order 
routers and market data vendors can facilitate single or multiple 
broker-dealers' production of proprietary data products. The potential 
sources of proprietary products are virtually limitless.
    The fact that proprietary data from ATSs, BDs, and vendors can by-
pass SROs is significant in two respects. First, non-SROs can compete 
directly with SROs for the production and sale of proprietary data 
products, as BATS and Arca did before registering as exchanges by 
publishing proprietary book data on the Internet. Second, because a 
single order or transaction report can appear in an SRO proprietary 
product, a non-SRO proprietary product, or both, the data available in 
proprietary products is exponentially greater than the actual number of 
orders and transaction reports that exist in the marketplace.
    Market data vendors provide another form of price discipline for 
proprietary data products because they control the primary means of 
access to end Subscribers. Vendors impose price restraints based upon 
their business models. For example, vendors such as Bloomberg and 
Thomson Reuters that assess a surcharge on data they sell may refuse to 
offer proprietary products that end Subscribers 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 
broker-dealers, such as Schwab and Fidelity, offer their customers 
proprietary data only if it promotes trading and generates sufficient 
commission revenue. Although the business models may differ, these 
vendors' pricing discipline is the same: they can simply refuse to 
purchase any proprietary data product that fails to provide sufficient 
value. NASDAQ 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.
    In addition to the competition and price discipline described 
above, the market for proprietary data products is also highly 
contestable because market entry is rapid, inexpensive, and profitable. 
The history of electronic trading is replete with examples of entrants 
that swiftly grew into some of the largest electronic trading platforms 
and proprietary data producers: Archipelago, Bloomberg Tradebook, 
Island, RediBook, Attain, TracECN, BATS Trading and Direct Edge. A 
proliferation of dark pools and other ATSs operate profitably with 
fragmentary shares of consolidated market volume.
    Regulation NMS, by deregulating the market for proprietary data, 
has increased the contestability of that market. While broker-dealers 
have previously published their proprietary data individually, 
Regulation NMS encourages market data vendors and broker-dealers to 
produce proprietary products cooperatively in a manner never before 
possible. Multiple market data vendors already have the capability to 
aggregate data and disseminate it on a profitable scale, including 
Bloomberg, and Thomson Reuters.
    The court in NetCoalition concluded that the Commission had failed 
to demonstrate that the market for market data was competitive based on 
the reasoning of the Commission's NetCoalition order because, in the 
court's view, the Commission had not adequately demonstrated that the 
Depth-of-Book data at issue in the case is used to attract order flow. 
NASDAQ believes, however, that evidence not before the court clearly 
demonstrates that availability of data attracts order flow. For 
example, as of July 2010, 92 of the top 100 broker-dealers by shares 
executed on NASDAQ consumed NASDAQ Level 2 and 80 of the top 100 
broker-dealers consumed TotalView. During that month, the NASDAQ Level 
2 Subscribers were responsible for 94.44% of the orders entered into 
NASDAQ and TotalView Subscribers were responsible for 92.98%.
    Competition among platforms has driven NASDAQ continually to 
improve its platform data offerings and to cater to customers' data 
needs. For example, NASDAQ has developed and maintained multiple 
delivery mechanisms (IP, multi-cast, and compression) that enable 
customers to receive data in the form and manner they prefer and at the 
lowest cost to them. NASDAQ offers front end applications such as its 
``Bookviewer'' to help customers utilize data. NASDAQ has created new 
products like TotalView Aggregate to complement TotalView ITCH and/
Level 2, because offering data in multiple formatting allows NASDAQ to 
better fit customer needs. NASDAQ offers data via multiple extranet 
providers, thereby helping to reduce network and total cost for its 
data products. NASDAQ has developed an online administrative system to 
provide customers transparency into their data feed requests and 
streamline data usage reporting. NASDAQ has also expanded its 
Enterprise License options that reduce the administrative burden and 
costs to firms that purchase market data.
    Despite these enhancements and a dramatic increase in message 
traffic, NASDAQ's fees for market data have remained flat. In fact, as 
a percent of total Subscriber costs, NASDAQ data fees have fallen 
relative to other data usage costs--including bandwidth, programming, 
and infrastructure--that have risen. The same holds true for execution 
services; despite numerous enhancements to NASDAQ's trading platform, 
absolute and relative trading costs have declined. Platform competition 
has intensified as new entrants have emerged, constraining prices for 
both executions and for data.
    The vigor of competition for Depth-of-Book information is 
significant and the Exchange believes that this proposal clearly 
evidences such competition. NASDAQ is offering a new pricing model in 
order to keep pace with changes in the industry and evolving customer 
needs. It is entirely optional and is geared towards attracting new 
customers, as well as retaining existing customers.
    The Exchange has witnessed competitors creating new products and 
innovative pricing in this space over the course of the past year. 
NASDAQ continues to see firms challenge its pricing on the basis of the 
Exchange's explicit fees being higher than the zero-priced fees from 
other competitors such as BATS. In all cases, firms make decisions on 
how much and what types

[[Page 21130]]

of data to consume on the basis of the total cost of interacting with 
NASDAQ or other exchanges. Of course, the explicit data fees are but 
one factor in a total platform analysis. Some competitors have lower 
transactions fees and higher data fees, and others are vice versa. The 
market for this Depth-of-Book information is highly competitive and 
continually evolves as products develop and change.
    Additional evidence cited by NYSE Arca in SR-NYSE Arca-2010-097 
\17\ which was not before the NetCoalition court also demonstrates that 
availability of Depth-of-Book data attracts order flow and that 
competition for order flow can constrain the price of market data:
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    \17\ See Securities Exchange Act Release No. 63291 (Nov. 9, 
2010).
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    1. Terrence Hendershott & Charles M. Jones, Island Goes Dark: 
Transparence, Fragmentation, and Regulation, 18 Review of Financial 
Studies 743 (2005);
    2. Charts and Tables referenced in Exhibit 3B to that filing;
    3. PHB Hagler Bailly, Inc., ``Issues Surrounding Cost-Based 
Regulation of Market Data Prices;'' and
    4. PHB Hagler Bailly, Inc., ``The Economic Perspective on 
Regulation of Market Data.''

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

    Pursuant to Section 19(b)(3)(A)(ii) of the Act,\18\ NASDAQ has 
designated this proposal as establishing or changing a due, fee, or 
other charge imposed by the self-regulatory organization on any person, 
whether or not the person is a member of the self-regulatory 
organization, which renders the proposed rule change effective upon 
filing.
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    \18\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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 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-2012-044 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2012-044. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of the filing also will be available for 
inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2012-044 and should 
be submitted on or before April 30, 2012.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-8462 Filed 4-6-12; 8:45 am]
BILLING CODE 8011-01-P