Document ID: SEC-2013-0194-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market LLC
Posted Date: 2013-01-31T05:00Z

[Federal Register Volume 78, Number 21 (Thursday, January 31, 2013)]
[Notices]
[Pages 6842-6845]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-02073]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-68735; File No. SR-NASDAQ-2012-119]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving a Proposed Rule Change To Establish a New Optional Wireless 
Connectivity for Colocated Clients

January 25, 2013.
    On October 10, 2012, The NASDAQ Stock Market LLC (``Exchange'' or 
``NASDAQ'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to establish a new optional wireless connectivity 
for colocated clients. The proposed rule change was published for 
comment in the Federal Register on October 29, 2012.\3\ The Commission 
received one comment on the proposal and a response from NASDAQ.\4\ On 
December 12, 2012, the Commission extended the time period in which to 
either approve NASDAQ's proposal, disapprove NASDAQ's proposal, or 
institute proceedings to determine whether to approve or disapprove 
NASDAQ's proposal, to January 25, 2013.\5\ This order approves the 
proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 68085 (October 23, 
2012), 77 FR 65596 (``Notice'').
    \4\ See comment from Anthony C.J. Nuland, Attorney at Law, 
representing Quincy Data LLC, dated January 17, 2013 (``Quincy Data 
Letter''); see also letter from Jeff Davis, Vice President and 
Deputy General Counsel, NASDAQ, to Elizabeth M. Murphy, Secretary, 
Commission, dated January 24, 2013 (``NASDAQ Letter'').
    \5\ See Securities Exchange Act Release No. 68416 (December 12, 
2012), 77 FR 75229 (December 19, 2012).
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II. Description of the Proposal

    Under the proposal, NASDAQ would establish fees for new optional 
means for clients to receive third party market data and NASDAQ 
TotalView ITCH market data. NASDAQ would offer wireless connectivity 
for colocated clients in NASDAQ's Carteret data center to receive 
Direct Edge, BATS, NYSE, and NYSE ARCA multi-cast market data feeds. It 
also would offer remote multi-cast ITCH Wave Ports for clients 
colocated at other third party data centers, through which NASDAQ 
TotalView ITCH market data will be distributed after delivery to those 
data centers via wireless network. As noted by the Exchange, wireless 
connectivity involves the beaming of signals through the air between 
towers that are within sight of one another. Over the last year, 
wireless technology has been introduced in the financial services 
industry, according to the Exchange.
    Additionally, the proposed rule change would amend NASDAQ Rule 7034 
to establish fees for the delivery of third party market data to market 
center clients via a wireless network using millimeter wave or 
microwave technology. It also would amend NASDAQ Rule 7015 to establish 
fees for remote multi-cast ITCH Wave Ports for clients colocated at 
other third-party data centers, through which NASDAQ TotalView ITCH 
market data will be distributed after delivery to those data centers 
via wireless network.

Wireless Connectivity in Carteret

    Under the proposed rule change, NASDAQ would utilize a network 
vendor to supply wireless connectivity from its Carteret data center to 
the Secaucus Equinix data center (NY4) used by Direct Edge and other 
exchanges; the Newark data center used by NYSE as a SFTI Network Point 
of Presence; and the Weehawken Savvis data center (NJ2) used by BATS. 
The vendor would install, test and maintain the necessary communication 
equipment for this wireless network between the data centers.
    Clients who choose this optional service would have their NASDAQ 
cross connect handoffs (1G, 10G, or 40G) enabled to receive the chosen 
raw, multicast market data for Direct Edge, BATS, and/or NYSE. NASDAQ 
OMX would continue to act as re-distributor of these third party market 
data feeds, capturing the data at the originating data centers and 
transporting the data to the Carteret data center. In the Notice, the 
Exchange represented that it is offering these particular equity feeds 
because they are the feeds requested by clients. There is limited 
bandwidth available on the wireless connection, and the Exchange has 
opted to offer those that are in most demand to start. Additional feeds 
may be added based on overall client demand and bandwidth availability.
    The wireless connectivity would be an optional offering, an 
alternative to fiber optic network connectivity, and according to the 
Exchange, would provide lower latency. It would not provide a new 
market data product, but merely an alternative means of connectivity. 
The Exchange has represented that NASDAQ's wireless connectivity 
offering, in conjunction with NASDAQ's equidistant cross connect 
handoffs (1G, 10G, or 40G), would ensure that all clients colocated 
within Carteret and electing to use this wireless connectivity offering 
would receive the chosen market data at the same low latency, 
equalizing any variances that might otherwise result from differences 
in the location of client cabinets within the facility.
    To obtain wireless connectivity, clients would be charged a $2,500 
installation fee (a non-recurring charge) and a monthly recurring 
charge (MRC) that will vary depending upon the feed. The MRC for the 
NYSE multi-cast equities data feed, which includes NYSE ArcaBook 
Highspeed and NYSE OpenBook (Aggregated or Ultra), will be $10,000; the 
MRC for BATS Multicast PITCH, which includes BZX and BYX, will be 
$7,500; and the MRC for Direct Edge Depth of Book multi-cast feed, 
which includes EDGA and EDGX, will be $7,500. According to the 
Exchange, the rates are higher for the NYSE feeds because the two feeds 
are larger and take up more bandwidth than the BATS and Direct Edge 
feeds.
    Clients would place orders for the wireless connectivity via the 
CoLo Console \6\ and would be subject to a one-year minimum lock-in 
period. In the Notice, the Exchange represented that

[[Page 6843]]

the lock-in feature, which is common practice for colocation offerings, 
would ensure that the Exchange can recoup the substantial investment 
required to establish the wireless system. As an incentive to clients, 
NASDAQ would waive the first month's MRC. Clients would continue to be 
charged by NYSE, BATS and Direct Edge for the market data received, and 
NASDAQ would continue to be charged the redistribution fees by the 
other exchanges, as occurs today. No changes in these charges would 
occur as a result of this proposed offering.
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    \6\ The ``CoLo Console'' is a web-based ordering tool NASDAQ 
offers to enable members to place colocation orders.
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    In the Notice, the Exchange represented that NASDAQ OMX would 
perform substantial network testing prior to offering the service for a 
fee to members. After this ``beta'' testing period, upon initial roll-
out of the service, clients would be offered the service for a fee, and 
on a rolling basis, the Exchange would enable new clients to receive 
the feed(s) for a minimum of 30 days before incurring any monthly 
recurring fees. The wireless network would continue to be closely 
monitored and the client informed of any issues. Similar to receiving 
market data over fiber optic networks, the wireless network can 
encounter delays or outages due to equipment issues, as noted by the 
Exchange in the Notice. As wireless networks may be affected by severe 
weather events, clients would be expected to have redundant methods to 
receive this market data and would be asked by the Exchange to attest 
to having alternate methods or establishing an alternate method in the 
near future when they order this service from the Exchange.
    This new data feed delivery option would be available to all 
clients of the data center, and is in response to industry demand, as 
well as to changes in the technology for distributing market data. 
Clients opting not to pay for the wireless connectivity would still be 
able to receive market data via fiber optics and standard 
telecommunications connections, as they do currently, and under the 
same fees. According to the Exchange, receipt of trade data via 
wireless technology is completely optional. In addition, clients can 
choose to receive market data via other third-party vendors (Extranets 
or Telecommunication vendors) via fiber optic networks or wireless 
networks. They can receive the wireless service, according to the 
Exchange, by contracting with a wireless service provider to install 
the required dishes on towers near the data centers and paying the 
service provider to maintain the service.

Remote Multi-Cast ITCH (MITCH) Wave Ports

    Pursuant to the proposed rule change, NASDAQ also would offer 
remote multi-cast ITCH Wave Ports for clients colocated at other third-
party data centers. NASDAQ TotalView ITCH market data would be 
delivered to NASDAQ-owned cabinets at those data centers via a wireless 
network. Clients would have the option of cross-connecting to the MITCH 
Wave Ports in those data centers to receive the raw NASDAQ multi-cast 
data feed, TotalView ITCH. An installation charge for the remote port 
would be, at each of the locations, $2,500 for installation, and $7,500 
as a monthly recurring fee. According to the Exchange, this offering, 
which is entirely optional, would enable delivery of NASDAQ TotalView 
ITCH to the third-party data centers at the same low latency.\7\ 
Clients opting to pay for the remote MITCH Wave Ports would continue to 
be fee liable for the applicable market data fees as described in 
NASDAQ Rule 7026, NASDAQ Rule 7019 and NASDAQ Rule 7023.
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    \7\ In the Notice, NASDAQ noted that it cannot preclude minor 
latency variances in delivery of NASDAQ TotalView in the third-party 
data centers to individual clients because it does not control the 
cross-connects in those centers; however, the microwave connectivity 
would provide the same latency to all MITCH Wave Ports clients and 
according to the Exchange, offers an improvement in latency over 
fiber optic network connectivity.
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    In the Notice, the Exchange represented that the proposed fees are 
based on the cost to NASDAQ of installing and maintaining the wireless 
connectivity and on the value provided to the customer, which receives 
low latency delivery of data feeds. According to the Exchange, the 
costs associated with the wireless connectivity system are 
incrementally higher than fiber optics-based solutions due to the 
expense of the wireless equipment, cost of installation, and testing. 
Furthermore, the Exchange represented that the fees allow NASDAQ to 
make a profit, and reflect the premium received by the clients in terms 
of lower latency over the fiber optics option. In the Notice, the 
Exchange also stated that the fees for colocation services generally, 
including those proposed for wireless connectivity, are constrained by 
the robust competition for order flow among exchanges and non-exchange 
markets, and colocation exists to advance that competition.

III. Discussion and Commission's Findings

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of Section 6 of the Act \8\ 
and the rules and regulations thereunder applicable to a national 
securities exchange. Additionally, in approving this proposed rule 
change, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation, as discussed in more 
detail below.\9\ The Commission finds that the proposed rule change is 
consistent with Section 6(b)(4),\10\ which provides for the equitable 
allocation of reasonable dues, fees and other charges among members, 
and Section 6(b)(5) of the Act,\11\ which requires, among other things, 
that the Exchange's rules be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to foster cooperation and coordination with 
persons engaged in facilitating transactions in securities, to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest; and are not designed to permit unfair discrimination 
between customers, issuers, brokers, or dealers. In addition, the 
Commission finds that the proposed rule change is consistent with 
Section 6(b)(8) of the Act,\12\ which requires that the rules of the 
exchange not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
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    \8\ 15 U.S.C. 78f.
    \9\ See 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78f(b)(4).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78f(b)(8).
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    The Commission believes that the Exchange's proposal to provide 
this additional connectivity option is consistent with the requirement 
of Section 6(b)(5) of the Act. The Commission believes that the 
proposal is not designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers because the Exchange makes 
wireless connectivity available to clients of the data center on an 
equal basis. The Exchange represented that it will perform substantial 
network testing prior to offering the service for a fee to members and 
that after the testing period the network will be closely monitored and 
maintained by the vendor and clients will be informed of any issues. As 
wireless networks may be affected by severe weather events, the 
Exchange notes that clients will be expected to

[[Page 6844]]

have redundant methods to receive this market data and will be asked to 
attest to having alternate methods or establishing an alternate method 
in the near future when they order this service from the Exchange.
    The Commission also finds that consistent with Section 6(b)(8) of 
the Act the proposed rule change does not impose a burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act. The Quincy Data Letter argues that NASDAQ's proposal is 
``an anti-competitive arrangement'' because ``Nasdaq would be the only 
wireless provider permitted to install microwave dishes on the 
rooftop'' of its data center.\13\ The Quincy Data Letter states that 
this rooftop access is a ``critical ingredient'' for an alternative 
wireless network to be competitive.\14\ Ultimately, argues the Quincy 
Data Letter, by preventing other wireless networks from accessing the 
roof of the data center, NASDAQ reduces competition with its own 
wireless network and is able to charge fees for its service that ``are 
not grounded in competition.'' \15\ This arrangement would result in 
``vertical tying,'' according to the Quincy Data Letter, as customers 
desiring the lowest latency for data would have to obtain the service 
from NASDAQ.\16\
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    \13\ See Quincy Data Letter, supra note 4, at 2. The Quincy Data 
Letter also made certain comments outside of the scope of the 
proposed rule change. Quincy argues that NASDAQ can ``control, delay 
or limit'' the vendors that can distribute NASDAQ data through (1) 
the market data license application process; (2) the co-location 
application and approval process; (3) the authorized telecom 
provider and application and approval process; and (4) by 
controlling the initial dissemination and re-dissemination of NASDAQ 
data from the trading engine and distribution of other market data 
within the NASDAQ data center. Id., at 3. The Commission notes, as 
recognized in the NASDAQ Letter, that these comments are not germane 
to the proposed rule change, which deals solely with NASDAQ's 
creation of an alternative means of data transmission. Additionally, 
the processes the Quincy Data Letter notes here are subject to the 
relevant standards of the Act.
    \14\ See Id., at 2.
    \15\ See Id., at 3.
    \16\ See Id.
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    NASDAQ makes a variety of representations in the Notice and in the 
NASDAQ Letter that respond to the concerns raised by the Quincy Data 
Letter. The NASDAQ Letter responds by noting that its proposed rule 
change ``does not unduly constrain competition, nor impede a free and 
open market and national market system.'' \17\ First, NASDAQ notes that 
it does not have exclusive control of the roof rights at its data 
center. Verizon, the lessor of the facility, retains rights to the roof 
that would permit it to approve other vendors to place equipment on the 
roof of the facility for the provision of wireless network services.
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    \17\ See NASDAQ Letter, supra note 4, at 2.
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    Second, in the Notice, NASDAQ states that it has chosen not to sell 
roof rights to individual clients as it ``would quickly result in a 
lack of physical space on the data center roof to accommodate all 
clients fairly and equally.'' \18\ The NASDAQ Letter states further 
that ``practical issues--space constraints and interference between 
dishes that are placed too closely together--impose limits to the 
number of networks that can occupy the Carteret rooftop'' and that it 
is ``technologically impossible for the rooftop to support equipment 
from every provider that NASDAQ anticipates would seek rooftop 
access.'' \19\
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    \18\ See Notice, supra note 3, at 65597.
    \19\ See Id., at 5.
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    Third, even if NASDAQ were to operate the only wireless network on 
the data center roof, the Exchange notes that its wiraeless network 
service would still be subject to competition from (1) other wireless 
network providers and (2) fiber optic networks. NASDAQ responds that 
roof access is not a prerequisite for creating a competitive network, 
noting that a variety of factors are at play in determining the speed 
of a wireless network. Ultimately, NASDAQ avers that competitive 
wireless networks can be established on buildings across the street 
from the data center providing ``the same or similar data, at the same 
or similar speed, at the same or similar cost.'' \20\ The NASDAQ Letter 
also notes that fiber optic networks are also ``effective competitors 
for wireless data,'' highlighting that (1) 17 market data vendors 
currently offer connectivity to NASDAQ, and (2) fiber optic networks 
may be more attractive to some clients as they are ``more resilient 
than wireless networks, which can be more susceptible to weather 
affects.'' \21\ For these reasons, the Commission does not believe that 
the proposed rule change imposes a burden on competition not necessary 
or appropriate in furtherance of the purposes of the Act.
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    \20\ See Id., at 2.
    \21\ See Id., at 4.
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    The Commission also believes that the proposed fees for wireless 
connectivity to NASDAQ are consistent with Section 6(b)(4) of the Act. 
The Commission believes that the proposed fees are reasonable and 
equitably allocated. All Exchange members that voluntarily select this 
service option will be charged the same amount for the same services. 
The Exchange noted that they are based on the Exchange's costs to cover 
hardware, installation, testing and connection, as well expenses 
involved in maintaining and managing the enhanced connection.\22\ The 
Commission notes that, according to the Exchange, the proposed fees 
would allow the Exchange to recoup these costs and make a profit, while 
providing customers with additional data connectivity options for 
receiving data from certain third parties and NASDAQ. With respect to 
the fee differentials for receiving NYSE data feeds versus BATS and 
Direct Edge data feeds, the Exchange noted that the fees are higher for 
the NYSE feeds because the two feeds are larger and take up more 
bandwidth than the BATS and Direct Edge feeds.\23\
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    \22\ See Notice, supra note 3, at 65599.
    \23\ See Id., at 65597.
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    The Quincy Data Letter argues that NASDAQ is able to charge fees 
for the wireless distribution of market data that are ``not grounded in 
competition,'' suggesting that these fees may not be consistent with 
the Exchange Act.\24\ As described above, NASDAQ has provided a variety 
of examples of how it believes its wireless network service could be 
subject to competition. The Exchange also stated that the fees for 
colocation services generally, including those proposed for wireless 
connectivity, are constrained by the robust competition for order flow 
among exchanges and non-exchange markets, and colocation exists to 
advance that competition.\25\ For these reasons, the Commission 
believes that the proposed fees for wireless connectivity are 
consistent with Section 6(b)(4) of the Act.
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    \24\ See Quincy Data Letter, supra note 4, at 3.
    \25\ See Notice, supra note 3, at 65599.
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    The Commission also believes that the proposed wireless 
connectivity fees are consistent with Section 6(b)(5) of the Act. All 
market participants that voluntarily select this service option will be 
charged the same amount for the same services. Under the proposal, all 
colocated clients would have the option to select wireless 
connectivity, and there would be no differentiation among customers 
with regard to the fees charged for the service.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\26\ that the proposed rule change (SR-NASDAQ-2012-119) be, and it 
hereby is, approved.
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    \26\ 15 U.S.C. 78s(b)(2).

[[Page 6845]]

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    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2013-02073 Filed 1-30-13; 8:45 am]
BILLING CODE 8011-01-P