Document ID: SEC-2014-1239-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2014-07-22T04:00Z

[Federal Register Volume 79, Number 140 (Tuesday, July 22, 2014)]
[Notices]
[Pages 42572-42578]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-17144]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-72620; File No. SR-NASDAQ-2014-070]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Modify Fees for NASDAQ Basic and To Correct an Error in the Text of 
Rule 7023

July 16, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on July 1, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or the 
``Exchange'') 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 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 filing a proposed rule change to modify fees for the 
NASDAQ Basic data product under Rule 7047 and to correct an error in 
the text of Rule 7023 (governing NASDAQ Depth-of-Book data). The 
proposal is immediately effective and will be implemented as of July 1, 
2014.
    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in brackets.
* * * * *

7023. NASDAQ Depth-of-Book Data

    (a)-(b) No change.
    (c) Enterprise License Fees
    (1) A Distributor that is also a broker-dealer pays a monthly fee 
of $25,000 for the right to provide NASDAQ TotalView and NASDAQ 
OpenView for Display Usage for Internal Distribution [to Non-
Professional Subscribers for Internal Distribution], or for External 
Distribution to Non-Professional Subscribers with whom the firm has a 
brokerage relationship. This Enterprise License shall not apply to 
relevant Level 1 and NASDAQ Level 2 fees.
    (2) A Distributor that is also a broker-dealer pays a monthly fee 
of $100,000 for the right to provide NASDAQ TotalView and NASDAQ 
OpenView for Display Usage [by Professional and Non-Professional 
Subscribers] for Internal Distribution, or for External Distribution to 
both Professional and Non-Professional Subscribers with whom the firm 
has a brokerage relationship. This Enterprise License shall not apply 
to relevant Level 1 and NASDAQ Level 2 fees.
    (3) No change.
    (d)-(e) No change.
* * * * *

7047. Nasdaq Basic

    (a) No change.
    (b) User Fees
    (1)-(4) No change.
    (5) As an alternative to (b)(1) and (b)(2), a broker-dealer may 
purchase an enterprise license at a rate of [$100,000]$350,000 per 
month for distribution through an electronic system approved by NASDAQ 
to an unlimited number of Professional and Non-Professional Subscribers 
with whom the broker-dealer has a brokerage relationship. A separate 
license would be required for each discrete electronic system used by 
the broker-dealer. [The enterprise license entitles a Distributor to 
provide Nasdaq Basic to an unlimited number of Non-Professional 
Subscribers with whom the firm has a brokerage relationship.] The 
enterprise license would allow distribution to the broker-dealer's 
employees through the approved electronic system, but would not cover 
distribution through any Distributor other than the broker-dealer 
obtaining the license and its approved system. In order to qualify for 
the enterprise license, the broker-dealer must also (i) distribute 
NASDAQ Last Sale for NASDAQ and/or NASDAQ Last Sale for NYSE/NYSE MKT 
via an internet-based electronic system approved by NASDAQ pursuant to 
Rule 7039(b)(2)(B), at a level that allows it to qualify for the fee 
cap provided for in Rule 7039(b), (ii) distribute NASDAQ TotalView and/
or NASDAQ OpenView data under an enterprise license pursuant to Rule 
7023(c)(1), and (iii) pay [The enterprise license is in addition to] 
the Distributor Fee for NASDAQ Basic [listed in] under paragraph (c)(1) 
or for NASDAQ Last Sale under Rule 7039(c). The broker-dealer must also 
report the number of Subscribers receiving NASDAQ Basic under the 
license to NASDAQ at least once per calendar year.
    (6) No change.
    (c)-(d) No change.
* * * * *

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 self-regulatory organization 
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 Basic is a proprietary data product that provides best bid 
and offer information from the NASDAQ Market Center and last sale 
transaction reports from the NASDAQ Market Center and from the FINRA/
NASDAQ Trade Reporting Facility (``FINRA/NASDAQ TRF''). As such, NASDAQ 
Basic is a ``non-core'' product that provides a subset of the ``core'' 
quotation and last sale data provided by securities information 
processors (``SIPs'') under the CQ/CT Plan and the NASDAQ UTP Plan. In 
this filing, NASDAQ is proposing to modify the existing enterprise 
license for a broker-dealer (``BD'') to provide NASDAQ Basic to Non-
Professional Subscribers with whom it has a brokerage relationship so 
that it covers distribution through the BD's approved electronic system 
to both Professional and Non-Professional Subscribers with whom it has 
a brokerage relationship, subject to certain other conditions described 
below and in the proposed rule.
    NASDAQ Basic contains three separate components, which may be 
purchased individually or in combination: (i) NASDAQ Basic for NASDAQ, 
which contains the best bid and offer on the NASDAQ Market Center and 
last sale transaction reports for NASDAQ and the FINRA/NASDAQ TRF for 
NASDAQ-listed stocks, (ii) NASDAQ Basic for NYSE, which contains the 
best bid and offer on the NASDAQ Market Center and last sale 
transaction reports for NASDAQ and the FINRA/NASDAQ TRF for NYSE-listed

[[Page 42573]]

stocks, and (iii) NASDAQ Basic for NYSE MKT, which contains the best 
bid and offer on the NASDAQ Market Center and last sale transaction 
reports for NASDAQ and the FINRA/NASDAQ TRF for stocks listed on NYSE 
MKT and other listing venues whose quotes and trade reports are 
disseminated on Tape B.
    The fee structure for NASDAQ Basic features a fee for Professional 
Subscribers and a reduced fee for Non-Professional Subscribers.\3\ The 
current monthly fees for Non-Professional Subscribers are $0.50 per 
Subscriber for NASDAQ Basic for NASDAQ, $0.25 per Subscriber for NASDAQ 
Basic for NYSE, and $0.25 per Subscriber for NASDAQ Basic for NYSE MKT. 
The current monthly fees for Professional Subscribers are $13 per 
Subscriber for NASDAQ Basic for NASDAQ, $6.50 per Subscriber for NASDAQ 
Basic for NYSE, and $6.50 per Subscriber for NASDAQ Basic for NYSE MKT. 
For use cases that do not require a monthly subscription for unlimited 
usage, there is a Per Query option, with a fee of $0.0025 for NASDAQ 
Basic for NASDAQ, $0.0015 for NASDAQ Basic for NYSE, and $0.0015 for 
NASDAQ Basic for NYSE MKT.
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    \3\ A ``Non-Professional Subscriber'' is ``a natural person who 
is not (i) registered or qualified in any capacity with the 
Commission, the Commodity Futures Trading Commission, any state 
securities agency, any securities exchange or association, or any 
commodities or futures contract market or association; (ii) engaged 
as an ``investment adviser'' as that term is defined in Section 
201(11) of the Investment Advisers Act of 1940 (whether or not 
registered or qualified under that Act); or (iii) 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.'' A ``Professional Subscriber'' is 
``any Subscriber other than a Non-Professional Subscriber.'' Thus, 
the term includes both natural persons that do not fit within the 
definition of Non-Professional Subscriber, as well as Subscribers 
that are not natural persons.
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    Distributors \4\ of NASDAQ Basic may also be assessed a monthly 
Distributor Fee. The fee is $1,500 per month for either internal or 
external distribution; however, a credit for Subscriber or Per Query 
fees may be applied against the Distributor Fee at the Distributor's 
request. A Distributor of data derived from NASDAQ Basic (but that is 
not distributing raw NASDAQ Basic content itself) may pay a fee of 
$1,500 per month (plus the applicable monthly Distributor fee) to 
distribute the derived data to an unlimited number of Non-Professional 
Subscribers. This type of Distributor will typically distribute data to 
a large number of downstream customers through web-based applications.
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    \4\ The definition of the term ``Distributor'' is ``any entity 
that receives NASDAQ Basic data directly from NASDAQ or indirectly 
through another entity and then distributes it to one or more 
Subscribers.'' Distributors may either be ``Internal Distributors'', 
which are ``Distributors that receive NASDAQ Basic data and then 
distribute that data to one or more Subscribers within the 
Distributor's own entity,'' or ``External Distributors'', which are 
``Distributors that receive NASDAQ Basic data and then distribute 
that data to one or more Subscribers outside the Distributor's own 
entity.''
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    As an alternative to monthly Subscriber fees for Non-Professional 
Subscribers, NASDAQ currently offers an enterprise license under which 
a BD may distribute NASDAQ Basic to an unlimited number of Non-
Professional Subscribers with whom the BD has a brokerage relationship 
at a rate of $100,000 per month (as well as the applicable monthly 
Distributor fee).\5\ NASDAQ is proposing to modify the license 
provision to focus its availability on BD Distributors that achieve 
wide distribution of a variety of NASDAQ data to a range of investors, 
including both Non-Professional and Professional Subscribers. Under the 
proposed modification, the enterprise license fee will increase to 
$350,000 per month, but the license will allow distribution of NASDAQ 
Basic to an unlimited number of Professional or Non-Professional 
Subscribers with whom the BD has a brokerage relationship, through an 
electronic system approved by NASDAQ (such as a password-protected Web 
site for customers to access their accounts and submit orders to the 
BD). A separate enterprise license with a separate fee would be 
required for each discrete electronic system used by the broker-dealer. 
The enterprise license would allow Internal Distribution to the BD's 
employees, but only through the approved system. The license would not 
cover distribution through any Distributor other than the BD obtaining 
the license through its approved system. Thus, a BD could not use the 
license to eliminate fees payable with respect to the distribution of 
data to its customers or employees through a third-party data provider.
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    \5\ NASDAQ also offers an enterprise license for BDs to 
distribute to internal Professional Subscribers (i.e., employees of 
the BD).
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    Because the focus of the license is to achieve the broad 
distribution of data to many investors by providing a volume discount, 
the licensee is also required to distribute NASDAQ Last Sale for NASDAQ 
and/or NASDAQ Last Sale for NYSE/NYSE MKT (``NLS'') via the internet 
pursuant to Rule 7039(b)(2)(B), at a level that allows it to qualify 
for the $50,000 fee cap provided for in Rule 7039(b). The NLS data 
feeds contain last sale activity in U.S. equities within the NASDAQ 
Market Center and reported to the FINRA/NASDAQ TRF. In certain 
instances, NLS is distributed under a per Subscriber or per query 
model, under which a fee is charged for each person that receives the 
data or for each instance in which a user accesses last sale 
information about a particular stock. In order to achieve broad 
distribution of the information to investors, NASDAQ also offers fee 
models for NLS for distribution via the internet or television, with 
fees based on the number of Web site visitors or the estimated number 
of households reached via television. In all instances, the fee payable 
for NLS is capped at $50,000 per month (plus applicable distributor 
fees, as discussed below). Although the information included in NLS is 
also included in NASDAQ Basic, the requirement for internet 
distribution of NLS would accomplish different transparency goals than 
distribution of NASDAQ Basic under the license. Specifically, while 
NASDAQ Basic would be distributed to BD customers via an electronic 
system for account access, NLS would be distributed broadly via the 
BD's public Web site, to allow for broad distribution of the 
information to current customers, potential customers, and interested 
members of the public and retail investment community.
    The licensee would also be required to distribute NASDAQ TotalView 
and/or NASDAQ OpenView under an enterprise license pursuant to Rule 
7023(c)(1). NASDAQ TotalView provides, for NASDAQ-listed securities, 
all orders and quotes from all NASDAQ members displayed in the NASDAQ 
Market Center as well as the aggregate size of such orders and quotes 
at each price level in the execution functionality of the NASDAQ Market 
Center. NASDAQ OpenView provides the same information as NASDAQ 
TotalView with respect to stocks listed on exchanges other than NASDAQ. 
Under the applicable enterprise license, a Distributor that is also a 
BD pays a monthly fee of $25,000 for the right to provide NASDAQ 
TotalView and NASDAQ OpenView for distribution to an unlimited number 
of Non-Professional Subscribers with whom the BD has a brokerage 
relationship.\6\ Thus,

[[Page 42574]]

similar to the NASDAQ Basic license, the applicable TotalView/OpenView 
license is designed to allow wide distribution of data to brokerage 
customers to facilitate informed trading decisions.
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    \6\ NASDAQ is also proposing to correct several obvious errors 
in the text of Rule 7023. In Securities Exchange Act Release No. 
66740 (April 4, 2012), 77 FR 21609 (April 10, 2012) (SR-NASDAQ-2012-
042), NASDAQ reorganized the text of Rule 7023, stating that 
``[s]ubsections (c)(1), (c)(2), and (c)(4) [of Rule 7023] reflect 
the enterprise licenses currently set forth in NASDAQ Rule (a)(1)(C) 
and (D).'' NASDAQ further stated that the proposed changes were 
``technical and administrative changes that will not impact the fees 
assessed to any Subscriber.'' Rule 7023(A)(1)(C) had formerly 
provided for ``an enterprise license at a rate of $25,000 for non-
professional subscribers or $100,000 per month for both professional 
and non-professional subscribers.'' The license further stated that 
it applied to ``an unlimited number of internal users . . . and 
external uses with whom the firm has a brokerage relationship.'' 
Employees of a BD that receive market data in connection with their 
employment do not subscribe as individuals; rather the BD subscribes 
on their behalf, such that all such subscriptions are Professional. 
However, in adopting Rule 7023(c)(1) and (c)(2), which are derived 
from former Rule 7023(a)(1)(C), SR-NASDAQ-2012-042 construed the 
language ``unlimited number of internal users'' as allowing 
distribution to ``Non-Professional Subscribers for Internal 
Distribution.'' Because all Internal Distribution by a BD would, by 
definition, constitute Professional usage, the language is clearly 
erroneous and not in accordance with the stated intention of SR-
NASDAQ-2014-042 to make no substantive changes. Accordingly, NASDAQ 
is amending Rule 7023 to eliminate the erroneous language, and make 
it clear that with respect to both 7023(c)(1) and (c)(2), the 
applicable licenses permit Internal Distribution for Display Usage 
(i.e., display of the data on a screen or other visualization 
mechanism for access or use by a natural person or persons).
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    The licensee must also pay Distributor Fees for NASDAQ Basic, under 
Rule 7047(c)(1), or for NASDAQ Last Sale under Rule 7039(c). The 
applicable fees are $1,500 per month for each product, but the licensee 
is required to pay the fee only with respect to one of the products. 
Thus, if a prospective distributor of NASDAQ Basic under the license is 
already distributing NASDAQ Last Sale and paying the fee with respect 
to that product, it is not required to pay an additional Distributor 
Fee.
    The existing license for distribution of NASDAQ Basic to Non-
Professional Subscribers is not currently being used by any customer. 
Therefore, the change will neither advantage nor disadvantage current 
Subscribers. Based on input from the retail investment community and 
members, NASDAQ has determined that the lack of demand for the license 
may be attributable to the reluctance of BDs to distinguish among their 
customers in the manner required to ensure that the data is not 
distributed to Professional Subscribers. Accordingly, by widening the 
scope of the license to any Subscriber that is a brokerage customer, 
NASDAQ believes that the license may allow BDs to achieve wide 
distribution of NASDAQ Basic, NASDAQ Last Sale, and NASDAQ TotalView/
OpenView without the need to distinguish Professional and Non-
Professional Subscribers or to pay individual fees for any single 
Subscriber. Accordingly, although the modified license may reflect a 
price increase in comparison with the existing license, NASDAQ believes 
that demand for the license will increase because of the associated 
reduction of administrative costs and the cost certainty provided by an 
enterprise license. The proposed Enterprise License will, however, 
require firms to report the number of Subscribers receiving NASDAQ 
Basic a minimum of once per calendar year to provide NASDAQ with 
accurate information to understand the scope of distribution.
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 (5) of the Act \8\ in particular, in that it 
provides for the equitable allocation of reasonable dues, fees and 
other charges among recipients of NASDAQ data and is not designed to 
permit unfair discrimination between them. 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. NASDAQ believes that its 
NASDAQ Basic market data product is precisely the sort of market data 
product that the Commission envisioned when it adopted Regulation NMS. 
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:
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    \7\ 15 U.S.C. 78f.
    \8\ 15 U.S.C. 78f(b)(4), (5).

    [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.\9\
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    \9\ 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 at all, 
it follows that the price at which such data is sold should be set by 
the market as well. NASDAQ Basic exemplifies the optional nature of 
proprietary data, since, depending on a customer's specific goals, it 
may opt to purchase core SIP data or only the subset provided through 
NASDAQ Basic. Moreover, as discussed in more detail below, the price 
that NASDAQ is able to charge is constrained by the existence of 
substitutes in the form of SIP data and competitive products offered by 
other SROs.
    The decision of the United States Court of Appeals for the District 
of Columbia Circuit in NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 
2010) (``NetCoalition I''), 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 I, at 535 (quoting H.R. Rep. No. 94-229, at 92 (1975), as 
reprinted in 1975 U.S.C.C.A.N. 321, 323). The court agreed with the 
Commission's conclusion that ``Congress intended that `competitive 
forces should dictate the services and practices that constitute the 
U.S. national market system for trading equity securities.' '' \10\
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    \10\ NetCoalition I, at 535.
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    The Court in NetCoalition I, while upholding the Commission's 
conclusion that competitive forces may be relied upon to establish the 
fairness of prices, nevertheless concluded that the record in that case 
did not adequately support the Commission's conclusions as to the 
competitive nature of the market for NYSE Arca's data product at issue 
in that case. As explained below in NASDAQ's Statement on Burden on 
Competition, however, NASDAQ believes that there is substantial 
evidence of competition in the marketplace for data that was not in the 
record in the NetCoalition I case, and that the Commission is entitled 
to rely upon such evidence in concluding fees are the product of 
competition, and therefore in accordance with the relevant statutory 
standards.\11\

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Moreover, NASDAQ further notes that the product at issue in this 
filing--a NASDAQ quotation and last sale data product that replicates a 
subset of the information available through ``core'' data products 
whose fees have been reviewed and approved by the SEC--is quite 
different from the NYSE Arca depth-of-book data product at issue in 
NetCoalition I. Accordingly, any findings of the court with respect to 
that product may not be relevant to the product at issue in this 
filing. As the Commission noted in approving the initial pilot for 
NASDAQ Basic, all of the information available in NASDAQ Basic is 
included in the core data feeds made available pursuant to the joint-
SRO plans.\12\ As the Commission further determined, ``the availability 
of alternatives to NASDAQ Basic significantly affect the terms on which 
NASDAQ can distribute this market data. 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.'' \13\ Thus, to the extent that the 
fees for core data have been established as reasonable under the Act, 
it follows that the fees for NASDAQ Basic are also reasonable, since 
charging unreasonably high fees would cause market participants to rely 
solely on core data or purchase proprietary products offered by other 
exchanges rather than purchasing NASDAQ Basic.
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    \11\ It should also be noted that Section 916 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank 
Act'') has amended paragraph (A) of Section 19(b)(3) of the Act, 15 
U.S.C. 78s(b)(3), to make it clear that all exchange fees, including 
fees for market data, may be filed by exchanges on an immediately 
effective basis. See also NetCoalition v. SEC, 715 F.3d 342 (D.C. 
Cir. 2013) (``NetCoalition II'') (finding no jurisdiction to review 
Commission's non-suspension of immediately effective fee changes).
    \12\ Securities Exchange Act Release No. 12425 (March 16, 2009), 
74 FR 12423, 12425 (March 24, 2009) (SR-NASDAQ-2008-102).
    \13\ Id. at 12425.
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    Moreover, as discussed in the order approving the initial pilot, 
and as further discussed below in NASDAQ's Statement on Burden on 
Competition, data products such as NASDAQ Basic are a means by which 
exchanges compete to attract order flow. To the extent that exchanges 
are successful in such competition, they earn trading revenues and also 
enhance the value of their data products by increasing the amount of 
data they are able to provide. Conversely, to the extent that exchanges 
are unsuccessful, the inputs needed to add value to data products are 
diminished. Accordingly, the need to compete for order flow places 
substantial pressure upon exchanges to keep their fees for both 
executions and data reasonable.
    The proposed changes do not alter the reasonableness of the fees 
for NASDAQ Basic. Although the enterprise license will be modified to 
increase the applicable fee, the modified license will also broaden the 
range of customers to which a BD can distribute the data, to include 
Professional Subscribers for which the fees for individual distribution 
are higher. In addition, the modified fee will reduce the associated 
administrative cost of the license by eliminating the need for a BD to 
distinguish between Professionals and Non-Professionals within its 
customer base. NASDAQ also notes that the individual fees associated 
with Professional use of both NASDAQ Basic and SIP data recently 
increased.\14\ As a result, it is also reasonable that an enterprise 
license to allow unlimited distribution to Professional Subscribers 
would also be higher than the fees for the current license.
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    \14\ Securities Exchange Act Release No. 71507 (February 7, 
2014), 79 FR 8763 (February 13, 2014) (SR-NASDAQ-2014-011); 
Securities Exchange Act Release No. 70953 (November 27, 2013), 78 FR 
72932 (December 4, 2014) (File No. S7-24-89).
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    The changed license fee also continues to reflect an equitable 
allocation and continues not to be unfairly discriminatory, because 
NASDAQ Basic is a voluntary product for which market participants can 
readily substitute core data feeds that provide additional quotation 
and last sale information not available through NASDAQ Basic. 
Accordingly, NASDAQ is constrained from pricing the product in a manner 
that would be inequitable or unfairly discriminatory. Moreover, the 
broadening of the license to allow distribution to both Professional 
and Non-Professional Subscribers reflects an equitable allocation of 
fees because it increases the usefulness of the license to member firms 
and thereby has the potential to broaden the distribution of NASDAQ 
Basic to customers. Similarly, the requirements for licensees also to 
distribute NLS and NASDAQ TotalView and/or NASDAQ OpenView are 
reasonable because an enterprise license is in essence a volume 
discount for BDs that distribute data to a wide extent. Because the 
goal of the license is to encourage wide distribution at a fee that is 
more reasonable than per Subscriber fees, NASDAQ believes that is 
reasonable to offer this fee reduction to members that are, in fact, 
achieving wide distribution of data to customers and the public. 
Similarly, NASDAQ believes that the requirements are consistent with an 
equitable allocation of fees and not unreasonably discriminatory 
because they limit the volume discount to those members that can both 
benefit from a fee cap due to their scope of distribution and that are 
achieving the goal of providing customers and the public with a range 
of market data.
    The proposed changes to the text of Rule 7023 are consistent with 
the Act because they are intended solely to correct clearly erroneous 
language in the text of the rule, and therefore do not modify the fees 
payable by BDs that obtain subscriptions through the applicable 
enterprise licenses thereunder. Accordingly, the changes are 
reasonable, equitable, and not unfairly discriminatory because they 
serve to promote clarity but do not alter the rights or obligations of 
Subscribers.

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. NASDAQ's ability to 
price NASDAQ Basic is constrained by (1) competition among exchanges, 
other trading platforms, and TRFs that compete with each other in a 
variety of dimensions; (2) the existence of inexpensive real-time 
consolidated data and market-specific data and free delayed 
consolidated data; and (3) the inherent contestability of the market 
for proprietary data.
    The market for proprietary data products 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 TRF 
data component of NASDAQ Basic, 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 executions and proprietary data products are 
complementary in that market data is

[[Page 42576]]

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.\15\ 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 end users expect will assist them or their customers in making 
trading decisions.
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    \15\ A complete explanation of the pricing dynamics associated 
with joint products is presented in a study that NASDAQ originally 
submitted to the Commission in SR-NASDAQ-2011-010. See Statement of 
Janusz Ordover and Gustavo Bamberger at 2-17 (December 29, 2010) 
(available at http://nasdaq.cchwallstreet.com/NASDAQ/pdf/nasdaq-filings/2011/SR-NASDAQ-2011-010.pdf).
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    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).\16\ 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,\17\ 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.
---------------------------------------------------------------------------

    \16\ 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).
    \17\ It should be noted that the costs of operating the FINRA/
NASDAQ TRF borne by NASDAQ include regulatory charges paid by NASDAQ 
to FINRA.
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    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 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 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 
orders will become correspondingly more valuable.
    Similarly, in the case of products such as NASDAQ Basic that may be 
distributed through market data vendors, the vendors provide price 
discipline for proprietary data products because they control a means 
of access to end users. 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 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 Charles 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. 
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 NASDAQ Basic 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 data 
through their brokerage firm or other distribution sources. Conversely, 
the value of such products to distributors and investors decreases if 
order flow falls, because the products contain less content.
    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 exchange 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. Similarly, the inclusion of trade 
reporting data in a product such as NASDAQ Basic may assist in 
attracting customers to the product, thereby assisting in covering the 
additional costs associated with operating and regulating a TRF.
    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

[[Page 42577]]

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 unreasonable 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.
    The level of competition and contestability in the market is 
evident in the numerous alternative venues that compete for order flow, 
including eleven SRO markets, as well as 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 MKT, NYSE Arca, BATS, and Direct Edge.
    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 BDs' 
production of proprietary data products. The potential sources of 
proprietary products are virtually limitless. Notably, the potential 
sources of data include the BDs that submit trade reports to TRFs and 
that have the ability to consolidate and distribute their data without 
the involvement of FINRA or an exchange-operated TRF.
    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 a core data product, 
an SRO proprietary product, and/or a non-SRO proprietary product, the 
data available in proprietary products is exponentially greater than 
the actual number of orders and transaction reports that exist in the 
marketplace. Indeed, in the case of NASDAQ Basic, the data provided 
through that product appears both in (i) real-time core data products 
offered by the SIPs for a fee, and (ii) free SIP data products with a 
15-minute time delay, and finds a close substitute in similar products 
of competing venues.
    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 BDs have 
previously published their proprietary data individually, Regulation 
NMS encourages market data vendors and BDs 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. In Europe, Markit aggregates and disseminates data from over 
50 brokers and multilateral trading facilities.\18\
---------------------------------------------------------------------------

    \18\ http://www.markit.com/en/products/data/boat/boat-boat-data.page.
---------------------------------------------------------------------------

    In the case of TRFs, the rapid entry of several exchanges into this 
space in 2006-2007 following the development and Commission approval of 
the TRF structure demonstrates the contestability of this aspect of the 
market.\19\ Given the demand for trade reporting services that is 
itself a by-product of the fierce competition for transaction 
executions--characterized notably by a proliferation of ATSs and BDs 
offering internalization--any supra-competitive increase in the fees 
associated with trade reporting or TRF data would shift trade report 
volumes from one of the existing TRFs to the other \20\ and create 
incentives for other TRF operators to enter the space. Alternatively, 
because BDs reporting to TRFs are themselves free to consolidate the 
market data that they report, the market for over-the-counter data 
itself, separate and apart from the markets for execution and trade 
reporting services--is fully contestable.
---------------------------------------------------------------------------

    \19\ The low cost exit of two TRFs from the market is also 
evidence of a contestible market, because new entrants are reluctant 
to enter a market where exit may involve substantial shut-down 
costs.
    \20\ It should be noted that the FINRA/NYSE TRF has, in recent 
weeks, received reports for over 8% of all over-the-counter volume 
in NMS stocks.
---------------------------------------------------------------------------

    Moreover, consolidated data provides substantial pricing discipline 
for proprietary data products that are a subset of the consolidated 
data stream. Because consolidated data contains marketwide information, 
it effectively places a cap on the fees assessed for proprietary data 
(such as quotation and last sale data) that is simply a subset of the 
consolidated data. The availability provides a powerful form of pricing 
discipline for proprietary data products that contain data elements 
that are a subset of the consolidated data, by highlighting the 
optional nature of proprietary products.
    The competitive nature of the market for non-core ``sub-set'' 
products such as NASDAQ Basic is borne out by the performance of the 
market. In May 2008, the internet portal Yahoo! began offering its Web 
site viewers real-time last sale data (as well as best quote data) 
provided by BATS. In June 2008, NASDAQ launched NLS, which was 
initially subject to an ``enterprise cap'' of $100,000 for customers 
receiving only one of the NLS products, and $150,000 for customers 
receiving both products. The majority of NASDAQ's sales were at

[[Page 42578]]

the capped level. In early 2009, BATS expanded its offering of free 
data to include depth-of-book data. Also in early 2009, NYSE Arca 
announced the launch of a competitive last sale product with an 
enterprise price of $30,000 per month. In response, NASDAQ combined the 
enterprise cap for the NLS products and reduced the cap to $50,000 
(i.e., a reduction of $100,000 per month). Similarly, the enterprise 
license being offered for NASDAQ Basic through this proposed rule 
change reflects a means by which the overall cost of the product is 
limited in accordance with the existence of competitive alternatives, 
including both core and proprietary data.
    In this environment, 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 I at 539. The existence of 
fierce competition for order flow implies a high degree of price 
sensitivity on the part of BDs with order flow, since they may readily 
reduce costs by directing orders toward the lowest-cost trading venues. 
A BD 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. If a platform increases its market 
data fees, the change will affect the overall cost of doing business 
with the platform, and affected BDs will assess whether they can lower 
their trading costs by directing orders elsewhere and thereby lessening 
the need for the more expensive data. Similarly, increases in the cost 
of NASDAQ Basic would impair the willingness of distributors to take a 
product for which there are numerous alternatives, impacting NASDAQ 
Basic data revenues, the value of NASDAQ Basic as a tool for attracting 
order flow, and ultimately, the volume of orders routed to NASDAQ and 
reported to the FINRA/NASDAQ TRF and the value of its other data 
products.
    Competition has also driven NASDAQ continually to improve its data 
offerings and to cater to customers' data needs. The NASDAQ Basic 
product itself is a product of this competition, offering a subset of 
core data to users that may not wish to receive or pay for all 
consolidated data. The existence of numerous alternatives to NASDAQ 
Basic, including real-time consolidated data, free delayed consolidated 
data, and proprietary data from other sources ensures that NASDAQ 
cannot set unreasonable fees, or fees that are unreasonably 
discriminatory, without losing business to these alternatives. 
Accordingly, NASDAQ believes that the acceptance of the NASDAQ Basic 
product in the marketplace demonstrates the consistency of these fees 
with applicable statutory standards. Likewise, the fee changes proposed 
herein will be subject to these same competitive forces. If the 
proposed change is deemed to result in an excessive fee, only NASDAQ 
will suffer, since its customers will merely migrate to competitive 
alternatives.

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 foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \21\ and paragraph (f) of Rule 19b-4 
thereunder.\22\ 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.
---------------------------------------------------------------------------

    \21\ 15 U.S.C. 78s(b)(3)(A).
    \22\ 17 CFR 240.19b-4(f).
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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-2014-070 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-2014-070. 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 
10:00 a.m. and 3:00 p.m. Copies of the filing also will be available 
for inspection and copying at the principal office of Nasdaq. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2014-070 and should 
be submitted on or before August 12, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
Kevin M. O'Neill,
Deputy Secretary.
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    \23\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 2014-17144 Filed 7-21-14; 8:45 am]
BILLING CODE 8011-01-P