[Federal Register Volume 79, Number 4 (Tuesday, January 7, 2014)]
[Notices]
[Pages 875-880]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2013-31608]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-71217; File No. SR-NASDAQ-2013-162]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Extend Fee Pilot Program for NASDAQ Last Sale
December 31, 2013.
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 December 23, 2013, The NASDAQ Stock Market LLC (``NASDAQ'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') a proposed rule change as described in Items I, II,
and III 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 proposing to extend for three months the fee pilot
pursuant to which NASDAQ distributes the NASDAQ Last Sale (``NLS'')
market data products. NLS allows data distributors to have access to
real-time market data for a capped fee, enabling those distributors to
provide free access to the data to millions of individual investors via
the internet and television. Specifically, NASDAQ offers the ``NASDAQ
Last Sale for NASDAQ'' and ``NASDAQ Last Sale for NYSE/NYSE MKT'' data
feeds containing last sale activity in U.S. equities within the NASDAQ
Market Center and reported to the FINRA/NASDAQ Trade Reporting Facility
(``FINRA/NASDAQ TRF''), which is jointly operated by NASDAQ and the
Financial Industry Regulatory Authority (``FINRA''). The purpose of
[[Page 876]]
this proposal is to extend the existing pilot program for three months,
from January 1, 2014 through March 31, 2014.\3\
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\3\ Prior to the end of this pilot period, NASDAQ expects to
submit a proposed rule change to remove the pilot status of NLS and
make the product permanent.
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This pilot program supports the aspiration of Regulation NMS to
increase the availability of proprietary data by allowing market forces
to determine the amount of proprietary market data information that is
made available to the public and at what price. During the pilot
period, the program has vastly increased the availability of NASDAQ
proprietary market data to individual investors. Based upon data from
NLS distributors, NASDAQ believes that since its launch in July 2008,
the NLS data has been viewed by millions of investors on Web sites
operated by Google, Interactive Data, and Dow Jones, among others.
The text of the proposed rule change is below. Proposed new
language is italicized; proposed deletions are in brackets.
* * * * *
7039. NASDAQ Last Sale Data Feeds
(a) For a three month pilot period commencing on [October 1, 2013]
January 1, 2014, NASDAQ shall offer two proprietary data feeds
containing real-time last sale information for trades executed on
NASDAQ or reported to the NASDAQ/FINRA Trade Reporting Facility.
(1)-(2) No change.
(b)-(c) 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
Prior to the launch of NLS, public investors that wished to view
market data to monitor their portfolios generally had two choices: (1)
Pay for real-time market data or (2) use free data that is 15 to 20
minutes delayed. To increase consumer choice, NASDAQ proposed a pilot
to offer access to real-time market data to data distributors for a
capped fee, enabling those distributors to disseminate the data at no
cost to millions of internet users and television viewers. NASDAQ now
proposes a three-month extension of that pilot program, subject to the
same fee structure as is applicable today.
NLS consists of two separate ``Level 1'' products containing last
sale activity within the NASDAQ market and reported to the jointly-
operated FINRA/NASDAQ TRF. First, the ``NASDAQ Last Sale for NASDAQ''
data product is a real-time data feed that provides real-time last sale
information including execution price, volume, and time for executions
occurring within the NASDAQ system as well as those reported to the
FINRA/NASDAQ TRF. Second, the ``NASDAQ Last Sale for NYSE/NYSE MKT''
data product provides real-time last sale information including
execution price, volume, and time for NYSE- and NYSE MKT-securities
executions occurring within the NASDAQ system as well as those reported
to the FINRA/NASDAQ TRF. By contrast, the securities information
processors (``SIPs'') that provide ``core'' data consolidate last sale
information from all exchanges and trade reporting facilities
(``TRFs''). Thus, NLS replicates a subset of the information provided
by the SIPs.
NASDAQ established two different pricing models, one for clients
that are able to maintain username/password entitlement systems and/or
quote counting mechanisms to account for usage, and a second for those
that are not. Firms with the ability to maintain username/password
entitlement systems and/or quote counting mechanisms are eligible for a
specified fee schedule for the NASDAQ Last Sale for NASDAQ Product and
a separate fee schedule for the NASDAQ Last Sale for NYSE/NYSE MKT
Product. Firms that are unable to maintain username/password
entitlement systems and/or quote counting mechanisms also have multiple
options for purchasing the NASDAQ Last Sale data. These firms choose
between a ``Unique Visitor'' model for internet delivery or a
``Household'' model for television delivery. Unique Visitor and
Household populations must be reported monthly and must be validated by
a third-party vendor or ratings agency approved by NASDAQ at NASDAQ's
sole discretion. In addition, to reflect the growing confluence between
these media outlets, NASDAQ offered a reduction in fees when a single
distributor distributes NASDAQ Last Sale Data Products via multiple
distribution mechanisms.
NASDAQ also established a cap on the monthly fee, currently set at
$50,000 per month, for all NASDAQ Last Sale products. The fee cap
enables NASDAQ to compete effectively against other exchanges that also
offer last sale data for purchase or at no charge.
As with the distribution of other NASDAQ proprietary products, all
distributors of the NASDAQ Last Sale for NASDAQ and/or NASDAQ Last Sale
for NYSE/NYSE MKT products pay a single $1,500/month NASDAQ Last Sale
Distributor Fee in addition to any applicable usage fees. The $1,500
monthly fee applies to all distributors and does not vary based on
whether the distributor distributes the data internally or externally
or distributes the data via both the internet and television.
2. Statutory Basis
NASDAQ believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\4\ in general, and with Section
6(b)(4) of the Act,\5\ in particular, in that it provides an equitable
allocation of reasonable fees among users and recipients of the data.
In adopting Regulation NMS, the Commission granted self-regulatory
organizations (``SROs'') and broker-dealers (``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.
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\4\ 15 U.S.C. 78f.
\5\ 15 U.S.C. 78f(b)(4).
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NASDAQ believes that its NASDAQ Last Sale market data products are
precisely the sort of market data product that the Commission
envisioned when it adopted Regulation NMS. The Commission concluded
that Regulation NMS--by lessening regulation of 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
[[Page 877]]
own internal analysis of the need for such data.\6\
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\6\ 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 BDs at
all, it follows that the price at which such data is sold should be set
by the market as well.
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.' '' \7\
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\7\ 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 that the fees established in
this filing are the product of competition, and therefore in accordance
with the relevant statutory standards.\8\ Moreover, NASDAQ further
notes that the product at issue in this filing--a NASDAQ 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.
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\8\ 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).
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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 its Last Sale Data Products is constrained by (1) competition
between exchanges and other trading platforms 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 last sale data.
The market for proprietary last sale 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.
Transaction execution and proprietary data products are
complementary in that market data is both an input and a byproduct of
the execution service. In fact, market data and trade execution are a
paradigmatic example of joint products with joint costs. The decision
whether and on which platform to post an order will depend on the
attributes of the platform where the order can be posted, including the
execution fees, data quality and price, and distribution of its data
products. Without 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.
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).\9\ 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.
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\9\ 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).
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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
[[Page 878]]
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 NLS that are distributed
through market data vendors, the vendors provide price discipline for
proprietary data products because they control the primary means of
access to end users. Vendors impose price restraints based upon their
business models. For example, vendors such as Bloomberg and 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 Schwab and
Fidelity, offer their customers proprietary data only if it promotes
trading and generates sufficient commission revenue. Although the
business models may differ, these vendors' pricing discipline is the
same: They can simply refuse to purchase any proprietary data product
that fails to provide sufficient value. NASDAQ and other producers of
proprietary data products must understand and respond to these varying
business models and pricing disciplines in order to market proprietary
data products successfully. Moreover, NASDAQ believes that products
such as NLS 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 internet or television. 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 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. NASDAQ pays rebates to attract orders, charges relatively
low prices for market information and charges relatively high 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 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 thirteen 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.
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 NLS, 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 last-sale 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
[[Page 879]]
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.
Moreover, consolidated data provides two additional measures of
pricing discipline for proprietary data products that are a subset of
the consolidated data stream. First, the consolidated data is widely
available in real-time at $1 per month for non-professional users.
Second, consolidated data is also available at no cost with a 15- or
20- minute delay. Because consolidated data contains marketwide
information, it effectively places a cap on the fees assessed for
proprietary data (such as last sale data) that is simply a subset of
the consolidated data. The mere availability of low-cost or free
consolidated data 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 products such as NLS 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 response, 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 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).
Although each of these products offers only a specific subset of data
available from the SIPs, NASDAQ believes that the products are viewed
as substitutes for each other and for core last-sale data, rather than
as products that must be obtained in tandem. For example, while Yahoo!
and Google now both disseminate NASDAQ's product, several other major
content providers, including MSN and Morningstar, use the BATS product.
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 NLS would impair the willingness of distributors to take a product
for which there are numerous alternatives, impacting NLS data revenues,
the value of NLS as a tool for attracting order flow, and ultimately,
the volume of orders routed to NASDAQ and the value of its other data
products.
In establishing the price for the NASDAQ Last Sale Products, NASDAQ
considered the competitiveness of the market for last sale data and all
of the implications of that competition. NASDAQ believes that it has
considered all relevant factors and has not considered irrelevant
factors in order to establish fair, reasonable, and not unreasonably
discriminatory fees and an equitable allocation of fees among all
users. The existence of numerous alternatives to NLS, 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 NLS product in the marketplace demonstrates the
consistency of these fees with applicable statutory standards.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Three comment letters were filed regarding the proposed rule change
as originally published for comment. NASDAQ responded to these comments
in a letter dated December 13, 2007. Both the comment letters and
NASDAQ's response are available on the SEC Web site at http://www.sec.gov/comments/sr-nasdaq-2006-060/nasdaq2006060.shtml. In
addition, in response to prior filings to extend the NLS pilot,\10\ the
Securities Industry and Financial Markets Association (``SIFMA'') and/
or NetCoalition \11\ filed comment letters contending that the SEC
should suspend and institute disapproval proceedings with respect to
the filing. SIFMA and NetCoalition had also filed petitions seeking
review by the United States Court of Appeals for the District of
Columbia Circuit with respect to the NLS pricing pilots in effect from
July 1, 2011 through September 30, 2011, from October 1, 2011 through
December 31, 2011, from July 1, 2012 through September 30, 2012, and
from January 1, 2013 through March 31, 2013. These appeals were stayed
pending resolution of the NetCoalition II case. On April 30, 2013, the
court issued a decision dismissing NetCoalition II, concluding that it
lacked jurisdiction to entertain the case. Subsequently, the court
issued orders dismissing each of the pending petitions seeking review
of prior extensions of the NLS pricing pilot. On May 30, 2013, SIFMA
filed with the Commission an ``Application for an Order Setting Aside
Rule Changes of Certain Self-Regulatory Organizations Limiting Access
to their Services'' that purports to challenge prior filings under
Section 19(d) and (f) of the Act.\12\ Pursuant to a Commission
procedural order, interested parties have recently completed submission
of briefs to the Commission regarding
[[Page 880]]
appropriate procedures and other threshold questions.
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\10\ Securities Exchange Act Release Nos. 69245 (March 27,
2013), 78 FR 19772 (April 2, 2013) (SR-NASDAQ-2013-053); 68568
(January 3, 2013), 78 FR 1910 (January 9, 2013) (SR-NASDAQ-2012-
145); 67376 (July 9, 2012), 77 FR 41467 (July 13, 2012) (SR-NASDAQ-
2012-078); 65488 (October 5, 2011), 76 FR 63334 (October 21, 2011)
(SR-NASDAQ-2011-132); 64856 (July 12, 2011), 76 FR 41845 (July 15,
2011) (SR-NASDAQ-2011-092); 64188 (April 5, 2011), 76 FR 20054
(April 11, 2011) (SR-NASDAQ-2011-044).
\11\ NetCoalition has since terminated its operations.
\12\ Admin. Proc. File No. 3-15351. See also Admin Proc. File
No. 13-15350 (similar proceeding with respect to NYSEArca data
product). As with prior SIFMA challenges, the pendency of SIFMA's
new action should in no way affect the continuation of the pilot for
NASDAQ Last Sale.
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It appears to NASDAQ that SIFMA's contentions in this new
proceeding are similar to the contentions in its numerous prior comment
letters, which have repeatedly argued that market data fees are
improper unless established through public utility-style rate-making
proceedings that are nowhere contemplated by the Act. In making its
arguments, SIFMA has sought to rely upon NetCoalition I, while
repeatedly mischaracterizing the import of that case. Specifically, the
court made findings about the extent of the Commission's record in
support of determinations about a depth-of-book product offered by NYSE
Arca. In making this limited finding, the court nevertheless squarely
rejected contentions that cost-based review of market data fees was
required by the Act:
The petitioners believe that the SEC's market-based approach is
prohibited under the Exchange Act because the Congress intended
``fair and reasonable'' to be determined using a cost-based
approach. The SEC counters that, because it has statutorily-granted
flexibility in evaluating market data fees, its market-based
approach is fully consistent with the Exchange Act. We agree with
the SEC.\13\
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\13\ NetCoalition I, 615 F.3d at 534.
While the court noted that cost data could sometimes be relevant in
determining the reasonableness of fees, it acknowledged that submission
of cost data may be inappropriate where there are ``difficulties in
calculating the direct costs . . . of market data,'' id. at 539. That
is the case here, due to the fact that the fixed costs of market data
production are inseparable from the fixed costs of providing a trading
platform, and the marginal costs of market data production are
minimal.\14\ Because the costs of providing execution services and
market data are not unique to either of the provided services, there is
no meaningful way to allocate these costs among the two ``joint
products''--and any attempt to do so would result in inherently
arbitrary cost allocations.\15\
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\14\ Because the fees charged for products must cover these
fixed costs, however, pricing at marginal cost is impossible.
\15\ The court also explicitly acknowledged that the ``joint
product'' theory set forth by NASDAQ's economic experts in
NetCoalition I (and also described in this filing) could explain the
competitive dynamic of the market and explain why consideration of
cost data would be unavailing. Indeed, the Commission relied on that
theory before the DC Circuit, but the court declined to reach the
question because the Commission raised it for the first time on
appeal. Id. at 541 n.16. For the purpose of providing a complete
explanation of the theory, NASDAQ is further submitting as Exhibit 3
to this filing a study that was submitted to the Commission in SR-
NASDAQ-2011-010. See Statement of Janusz Ordover and Gustavo
Bamberger at 2-17 (December 29, 2010).
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SIFMA further contended that prior filings lacked evidence
supporting a conclusion that the market for NLS is competitive,
asserting that arguments about competition for order flow and
substitutability were rejected in NetCoalition I. While the court did
determine that the record before it was not sufficient to allow it to
endorse those theories on the facts of that case, the court did not
itself make any conclusive findings about the actual presence or
absence of competition or the accuracy of these theories: Rather, it
simply made a finding about the state of the SEC's record. Moreover,
analysis about competition in the market for depth-of-book data is only
tangentially relevant to the market for last sale data. As discussed
above and in prior filings, perfect and partial substitutes for NLS
exist in the form of real-time core market data, free delayed core
market data, and the last sale products of competing venues; additional
competitive entry is possible; and evidence of competition is readily
apparent in the pricing behavior of the venues offering last sale
products and the consumption patterns of their customers. Thus,
although NASDAQ believes that the competitive nature of the market for
all market data, including depth-of-book data, will ultimately be
established, SIFMA's submissions have not only mischaracterized the
NetCoalition I decision, but have also failed to address the
characteristics of the product at issue and the evidence already
presented.
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.\16\ 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.
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\16\ 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 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 [email protected]. Please include
File Number SR-NASDAQ-2013-162 on the subject line.
Paper Comments
Send paper comments in triplicate to Elizabeth M. Murphy,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2013-162. 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 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-2013-162 and should
be submitted on or before January 28, 2014.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2013-31608 Filed 1-6-14; 8:45 am]
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DATE][NOTICES]