Document ID: SEC-2015-0700-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: The NASDAQ Stock Market, LLC
Posted Date: 2015-04-22T04:00Z

[Federal Register Volume 80, Number 77 (Wednesday, April 22, 2015)]
[Notices]
[Pages 22588-22591]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-09264]

[[Page 22588]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-74745; File No. SR-NASDAQ-2015-035]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Establish Distributor and Managed Data Solution Distributor Fees for an 
Optional Hardware-Based Version of NASDAQ ITCH to Trade Options

April 16, 2015.
    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 April 7, 2015, The NASDAQ Stock Market LLC (``NASDAQ'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II, and III 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 the 
Substance of the Proposed Rule Change

    NASDAQ proposes to amend Chapter XV, entitled ``Options Pricing,'' 
at Section 4 governing pricing for NASDAQ members using the NASDAQ 
Options Market (``NOM''), NASDAQ's facility for executing and routing 
standardized equity and index options. Specifically, the Exchange 
proposes to establish Distributor and Managed Data Solution (``MDS'') 
Distributor fees for an optional hardware-based version of NASDAQ ITCH 
to Trade Options (``ITTO'') data and is not offering a new market data 
product.

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 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to amend Chapter XV, 
entitled ``Options Pricing,'' at Section 4 governing pricing for NASDAQ 
members using NOM. Specifically, the Exchange proposes to establish 
Distributor and MDS Distributor fees for an optional hardware-based 
version of ITTO. This is a data feed that provides quotation 
information for individual orders on the NOM book, last sale 
information for trades executed on NOM, and Order Imbalance Information 
as set forth in NOM Rules Chapter VI, Section 8. ITTO is the options 
equivalent of the NASDAQ TotalView/ITCH data feed that NASDAQ offers 
under NASDAQ Rule 7023 with respect to equities traded on NASDAQ. As 
with TotalView, Distributors use ITTO to ``build'' their view of the 
NOM book by adding individual orders that appear on the data feed, and 
subtracting individual orders that are executed, cancelled or removed.
    This hardware-delivery mechanism option of ITTO uses field-
programmable gate array (``FPGA'') technology. In offering an FPGA 
hardware-delivery mechanism, NASDAQ is serving those customers 
requiring a predictable latency profile throughout the trading day. By 
taking advantage of hardware parallelism, FPGA technology is capable of 
processing more data packets during peak market conditions without the 
introduction of variable queuing latency.
    The proposed Distributor fee for utilizing the optional FPGA 
hardware-based delivery of NASDAQ ITTO data is $10,000 for internal 
only distribution, $1,000 for external only distribution and $11,000 
for internal and external distribution. The FPGA fee is in addition to 
any other fees for NASDAQ ITTO. There will be no change in NASDAQ ITTO 
Subscriber fees as a result of the new product implementation.
    The proposed MDS Distributor fees for Distributors utilizing the 
optional FPGA hardware-based delivery of NASDAQ ITTO data are tiered 
based upon the number of MDS Subscribers, with fees starting at $1,000 
for one MDS Subscriber, $1,250 for two MDS Subscribers, $1,500 for 
three MDS Subscribers, and $250 for each additional MDS Subscriber. The 
MDS Distributor fee is in addition to any other MDS fees.
    This new pricing option is available to all firms, regardless of 
how they choose to access the FPGA hardware-based version of NASDAQ 
ITTO, and is in response to industry demand, as well as due to changes 
in the technology to distribute and consume market data. Distributors 
opting to pay for the FPGA hardware-based delivery of NASDAQ ITTO data 
would still be fee liable for the applicable market data fees, as 
described in this rule.
    Competition for depth data is considerable and the Exchange 
believes that this proposal clearly evidences such competition. The 
Exchange is offering a new pricing model in order to keep pace with 
changes in the industry and evolving customer needs as new technologies 
emerge and products continue to develop and change. The FPGA hardware-
based version of NASDAQ ITTO is entirely optional and is geared towards 
attracting new customers, as well as retaining existing customers.
    The proposed fees are based on pricing conventions and distinctions 
that exist in NOM's current fee schedule, and the fee schedules of 
other exchanges. These distinctions (e.g., internal versus external 
distribution, as well as for MDS) for the proposed optional Distributor 
and MDS Distributor fees for FPGA hardware-based delivery of NASDAQ 
ITTO are based on a careful analysis of empirical data and the 
application of time-tested pricing principles already accepted by the 
Commission and discussed in greater depth in the Statutory Basis 
section below. Also, the costs associated with the FPGA hardware-based 
delivery system for NASDAQ ITTO data are higher than a software-based 
solution since it involves the expense of creating and maintaining the 
product, as well as creating, shipping, installing and maintaining the 
new equipment and codebase. Because it uses a distinct technology, the 
overall costs of creation and maintenance of the hardware-based version 
of ITTO are higher than the software-based version. From a messaging 
perspective, the data content and sequencing will be identical on both 
the FPGA hardware- and software-based versions of the ITTO product.
    The proposed FPGA hardware-based delivery of NASDAQ ITTO data is 
completely optional. NASDAQ is offering this FPGA hardware-based 
delivery mechanism for the NASDAQ ITTO product that is designed to 
deliver NASDAQ direct data content in a predictable manner throughout 
the trading day.

[[Page 22589]]

2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\3\ in general, and with 
Section 6(b)(4) and 6(b)(5) of the Act,\4\ in particular, in that it 
provides an equitable allocation of reasonable fees among Subscribers 
and recipients of NASDAQ data and is not designed to permit unfair 
discrimination between them. NASDAQ believes that its proposal to 
establish Distributor and MDS Distributor fees for an optional FPGA 
hardware-based version of NASDAQ ITTO reflects an equitable allocation 
of reasonable fees.
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    \3\ 15 U.S.C. 78f.
    \4\ 15 U.S.C. 78f(b)(4) and (5).
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    In adopting Regulation NMS, the Commission granted self-regulatory 
organizations (``SRO'') and broker-dealers increased authority and 
flexibility to offer new and unique market data to the public.
    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.\5\
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    \5\ 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.
    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 
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, 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).
    For the reasons stated above, NASDAQ believes that the allocation 
of the proposed fee is fair and equitable in accordance with Section 
6(b)(4) of the Act, and not unreasonably discriminatory in accordance 
with Section 6(b)(5) of the Act. As described above, the proposed fee 
is based on pricing conventions and distinctions that exist in NASDAQ's 
current fee schedule. These distinctions 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.
    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 discontinue the 
use of their data because the proposed product is entirely optional to 
all parties. Firms are not required to purchase data and NASDAQ is not 
required to make 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 establish and revise pricing policies aimed at increasing 
fairness and equitable allocation of fees among Subscribers. This also 
reflects that the market for this Depth-of-Book information is highly 
competitive and continually evolves as products develop and change.

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

    The Exchange does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended. 
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 by-product of 
the execution service. In fact, market data and trade execution are a 
paradigmatic example of joint products with joint costs. 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 both the revenues it receives from 
products and

[[Page 22590]]

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, an 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 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 platforms 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.
    Broker-dealers currently have numerous alternative venues for their 
order flow, including thirteen 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, New York Stock Exchange LLC (``NYSE''), NYSE MKT LLC, 
NYSE Arca LLC (``ARCA''), and BATS Exchange, Inc. (``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 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

[[Page 22591]]

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 and BATS Trading. 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 vigor of competition for information is significant. NASDAQ has 
made a determination to adjust the fees associated with these products 
in order to reflect more accurately the value of its products and the 
investments made to enhance them, as well as to keep pace with changes 
in the industry and evolving customer needs. These products are 
entirely optional and are geared towards attracting new customers, as 
well as retaining existing customers.
    In all cases, firms make decisions on how much and what types 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. For 
example, NOM offers one distributor fee which allows firms to access 
both the BONO and ITTO data feeds. The market for this information is 
highly competitive and continually evolves as products develop and 
change.

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)(ii) of the Act.\6\ 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.
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    \6\ 15 U.S.C. 78s(b)(3)(A)(ii).
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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, as amended, 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-2015-035 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2015-035. 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 such filing will also 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-2015-035 and 
should be submitted on or before May 13, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-09264 Filed 4-21-15; 8:45 am]
BILLING CODE 8011-01-P