[Federal Register Volume 79, Number 95 (Friday, May 16, 2014)]
[Notices]
[Pages 28575-28581]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-11296]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-72153; File No. SR-NASDAQ-2014-045]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Modify Fees for the NASDAQ Basic Data Product
May 12, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on April 30, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or the
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I and
II below, which Items have been prepared by the Exchange. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASDAQ is proposing modify [sic] fees for the NASDAQ Basic data
product. The proposal, which modifies monthly fees, is effective for
the month of May 2014 and subsequent months. The text of the proposed
rule change is available on the Exchange's Web site at http://nasdaq.cchwallstreet.com, at the principal office of the Exchange, and
at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the self-regulatory organization
included statements concerning the purpose of, and basis for, the
proposed rule change and discussed any comments it received on the
proposed rule change. The text of those statements may be examined at
the places specified in Item IV below. The Exchange has prepared
summaries, set forth in sections A, B, and C below, of the most
significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
NASDAQ is proposing two modifications to the fees for NASDAQ Basic:
(1) To cap the ``per query'' fee paid by a single user at the level of
the monthly fee paid by monthly Professional and Non-Professional
subscribers and (2) to clarify the application of the recently-filed
Enterprise License fee where a single firm receives data from multiple
External Distributors.
Background. NASDAQ Basic is a proprietary data product that
provides best bid and offer information from the NASDAQ Market Center
and last sale transaction reports from the NASDAQ Market Center and
from the FINRA/NASDAQ Trade Reporting Facility (``FINRA/NASDAQ TRF'').
As such, NASDAQ Basic provides a subset of the ``core'' quotation and
last sale data provided by securities information processors (``SIPs'')
under the CQ/CT Plan and the NASDAQ UTP Plan. Earlier this year, NASDAQ
introduced a new enterprise license for Professional Subscribers to
NASDAQ Basic.\3\ In this proposed rule change, NASDAQ is proposing a
minor refinement to the enterprise license.
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\3\ Securities Exchange Act Release No. 71507 (February 7,
2014), 79 FR 8763 (February 13, 2014) (SR-NASDAQ-2014-011).
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NASDAQ Basic contains three separate components, which may be
purchased individually or in combination: (i) NASDAQ Basic for NASDAQ,
which contains the best bid and offer on the NASDAQ Market Center and
last sale transaction reports for NASDAQ and the FINRA/NASDAQ TRF for
NASDAQ-listed stocks, (ii) NASDAQ Basic for NYSE, which covers NYSE-
listed stocks, and (iii) NASDAQ Basic for NYSE MKT, which covers stocks
listed on NYSE MKT and other listing venues whose quotes and trade
reports are disseminated on Tape B.
Per Query Fee Cap. The fee structure for NASDAQ Basic features a
fee for Professional Subscribers and a reduced fee for Non-Professional
Subscribers.\4\ The current monthly fees for Non-Professional
Subscribers are $0.50 per Subscriber for NASDAQ Basic for NASDAQ, $0.25
per Subscriber for NASDAQ Basic for NYSE, and $0.25 per Subscriber for
NASDAQ Basic for NYSE MKT. The current monthly fees for Professional
Subscribers are $13 per Subscriber for NASDAQ Basic for NASDAQ, $6.50
per Subscriber for NASDAQ Basic for NYSE, and $6.50 per Subscriber for
NASDAQ Basic for NYSE MKT. For use cases that do not require a monthly
subscription for unlimited usage, there is a Per Query option, with a
fee of $0.0025 for NASDAQ Basic for NASDAQ, $0.0015 for NASDAQ Basic
for NYSE, and $0.0015 for NASDAQ Basic for NYSE MKT.
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\4\ A ``Non-Professional Subscriber'' is ``a natural person who
is not (i) registered or qualified in any capacity with the
Commission, the Commodity Futures Trading Commission, any state
securities agency, any securities exchange or association, or any
commodities or futures contract market or association; (ii) engaged
as an ``investment adviser'' as that term is defined in Section
201(11) of the Investment Advisers Act of 1940 (whether or not
registered or qualified under that Act); or (iii) employed by a bank
or other organization exempt from registration under federal or
state securities laws to perform functions that would require
registration or qualification if such functions were performed for
an organization not so exempt.'' A ``Professional Subscriber'' is
``any Subscriber other than a Non-Professional Subscriber.''
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Distributors \5\ of NASDAQ Basic may also be assessed a monthly
Distributor Fee. The fee is $1,500 per month for either internal or
external distribution; however, a credit for Subscriber or Per Query
fees may be applied against the Distributor Fee at the Distributor's
request.
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\5\ The term ``Distributor'' ``refers to any entity that
receives NASDAQ Basic data directly from NASDAQ or indirectly
through another entity and then distributes it to one or more
Subscribers.'' Distributors may either be ``Internal Distributors'',
which are ``Distributors that receive NASDAQ Basic data and then
distribute that data to one or more Subscribers within the
Distributor's own entity,'' or ``External Distributors'', which are
``Distributors that receive NASDAQ Basic data and then distribute
that data to one or more Subscribers outside the Distributor's own
entity.''
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NASDAQ is proposing to cap the ``per query'' fee paid by a single
user at the level of the monthly fee paid by monthly subscribers. The
fee structure for NASDAQ Basic features a fee for Professional
Subscribers and a reduced fee for Non-Professional Subscribers. The
current monthly fees for Non-Professional Subscribers are $0.50 per
Subscriber for NASDAQ Basic for NASDAQ, while the Per Query fee is
$0.0025 for NASDAQ Basic for NASDAQ. Under NASDAQ's proposal, a Non-
Professional user would pay the Per Query fee for the first 199 queries
during the month. However, if the Subscriber made 200 or more queries
during the month, the cap would take effect, such that the total
aggregate monthly charge for all queries by the Subscriber would be
$0.50. For NASDAQ Basic for NYSE and NYSE MKT, the corresponding
breakpoint for
[[Page 28576]]
Non-Professionals would occur at 167th query.
With respect to Professional users, under NASDAQ's proposal, a
Professional user of NASDAQ Basic for NASDAQ stocks would pay the Per
Query fee for the first 5,199 queries, but the cap would thereafter
take effect, such that the total aggregate monthly charge for all
queries by the Subscriber would be $13. For NASDAQ Basic for NYSE and
MKT stocks, the breakpoint for Professional Users would occur at 4,333
queries and the cap would thereafter take effect, such that the total
aggregate monthly charge for all queries by the Subscriber would be
$6.50.
Enterprise License Clarification. As an alternative to monthly
Subscriber fees for Non-Professional Subscribers, NASDAQ also offers an
enterprise license under which a broker-dealer may distribute NASDAQ
Basic to an unlimited number of Non-Professional Subscribers with whom
the broker-dealer has a brokerage relationship at a rate of $100,000
per month (as well as the applicable monthly Distributor fee). In
addition, a Distributor of data derived from NASDAQ Basic (but not
NASDAQ Basic itself) may pay a fee of $1,500 per month (plus the
applicable monthly Distributor fee) to distribute the derived data to
an unlimited number of Non-Professional Subscribers. This type of
Distributor will typically distribute data to a large number of
downstream customers through web-based applications.
Under new net reporting rules adopted earlier this year,\6\
Distributors may reduce the overall number of internal Professional
Subscribers deemed to be fee liable with respect to ``Display Usage''
of NASDAQ Basic: \7\
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\6\ See supra n. 3.
\7\ ``Display Usage'' means ``any method of accessing NASDAQ
Basic data that involves the display of such data on a screen or
other visualization mechanism for access or use by a natural person
or persons.'' Netting does not apply to uses other than Display
Usage (i.e., use by an automated device without visual access by
natural persons).
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A Subscriber that receives access to NASDAQ Basic through
multiple products controlled by an Internal Distributor is considered
one Subscriber. Thus, if a broker-dealer acts as a Distributor of
NASDAQ Basic in multiple forms to its employees, each employee would be
considered one Subscriber.
A Subscriber that receives access to NASDAQ Basic through
multiple products controlled by one External Distributor is considered
one Subscriber. Thus, if a broker-dealer arranges for its employees to
receive access to multiple NASDAQ Basic products provided by a single
vendor, each employee would be considered one Subscriber.
A Subscriber that receives access to NASDAQ Basic through
one or more products controlled by an Internal Distributor and also one
or more products controlled by one External Distributor is considered
one Subscriber. Thus, if the broker-dealer provides employees with
access through its own product(s) and through products from a single
vendor, each employee is still considered one Subscriber.
A Subscriber that receives access to NASDAQ Basic through
one or more products controlled by an Internal Distributor and also
products controlled by multiple External Distributors is treated as one
Subscriber with respect to the products controlled by the Internal
Distributor and one of the External Distributors, and is treated as an
additional Subscriber for each additional External Distributor. Thus, a
Subscriber receiving products through an Internal Distributor and two
External Distributors is treated as two Subscribers.
At the same time, NASDAQ also adopted a new enterprise license for
Professional Subscribers. Under the enterprise license, a broker-dealer
may distribute NASDAQ Basic for NASDAQ, NASDAQ Basic for NYSE, and
NASDAQ Basic for NYSE MKT for a flat fee of $365,000 per month;
provided, however, that if the broker-dealer obtains the license with
respect to usage of NASDAQ Basic provided by an External Distributor
that controls display of the product, the fee will be $365,000 per
month for up to 16,000 internal Professional Subscribers, plus $2 for
each additional internal Professional Subscriber over 16,000.
NASDAQ is proposing to adopt clarifying language in the rule
governing the enterprise license to make it clear that a license would
cover only one External Distributor that controls display. Thus, if a
broker-dealer used NASDAQ Basic provided by more than one such External
Distributor, it would be required to obtain a separate enterprise
license for each External Distributor. Alternatively, it could
designate that the enterprise license covered one External Distributor
and pay regular per-Subscriber fees with respect to other External
Distributor(s). The change to rule language is necessary to ensure that
the rule reflects NASDAQ's original intent with regard to the scope of
the enterprise license. Specifically, the license is intended to
provide broker-dealers with a cost-effective means of obtaining NASDAQ
Basic for internal users, but is not intended to allow it to obtain the
product through multiple External Distributors at the same fee it would
pay for just one External Distributor.
2. Statutory Basis
NASDAQ believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act \8\ in general, and with
Sections 6(b)(4) and (5) of the Act \9\ in particular, in that it
provides for the equitable allocation of reasonable dues, fees and
other charges among recipients of NASDAQ data and is not designed to
permit unfair discrimination between them. In adopting Regulation NMS,
the Commission granted self-regulatory organizations (``SROs'') and
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.
NASDAQ believes that its NASDAQ Basic market data product is precisely
the sort of market data product that the Commission envisioned when it
adopted Regulation NMS. The Commission concluded that Regulation NMS--
by deregulating the market in proprietary data--would itself further
the Act's goals of facilitating efficiency and competition:
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\8\ 15 U.S.C. 78f.
\9\ 15 U.S.C. 78f(b)(4), (5).
[E]fficiency is promoted when broker-dealers who do not need the
data beyond the prices, sizes, market center identifications of the
NBBO and consolidated last sale information are not required to
receive (and pay for) such data. The Commission also believes that
efficiency is promoted when broker-dealers may choose to receive
(and pay for) additional market data based on their own internal
analysis of the need for such data.\10\
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\10\ Securities Exchange Act Release No. 51808 (June 9, 2005),
70 FR 37496 (June 29, 2005).
By removing unnecessary regulatory restrictions on the ability of
exchanges to sell their own data, Regulation NMS advanced the goals of
the Act and the principles reflected in its legislative history. If the
free market should determine whether proprietary data is sold at all,
it follows that the price at which such data is sold should be set by
the market as well. NASDAQ Basic exemplifies the optional nature of
proprietary data, since, depending on a customer's specific goals, it
may opt to purchase core SIP data or only the subset provided through
NASDAQ Basic. Moreover, as discussed in more detail below, the price
that NASDAQ is
[[Page 28577]]
able to charge is constrained by the existence of substitutes in the
form of SIP data and competitive products offered by other SROs.
The decision of the United States Court of Appeals for the District
of Columbia Circuit in NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir.
2010) (``NetCoalition I''), upheld the Commission's reliance upon
competitive markets to set reasonable and equitably allocated fees for
market data. ``In fact, the legislative history indicates that the
Congress intended that the market system `evolve through the interplay
of competitive forces as unnecessary regulatory restrictions are
removed' and that the SEC wield its regulatory power `in those
situations where competition may not be sufficient,' such as in the
creation of a `consolidated transactional reporting system.'
NetCoalition I, at 535 (quoting H.R. Rep. No. 94-229, at 92 (1975), as
reprinted in 1975 U.S.C.C.A.N. 321, 323). The court agreed with the
Commission's conclusion that ``Congress intended that `competitive
forces should dictate the services and practices that constitute the
U.S. national market system for trading equity securities.' '' \11\
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\11\ NetCoalition I, at 535.
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The Court in NetCoalition I, while upholding the Commission's
conclusion that competitive forces may be relied upon to establish the
fairness of prices, nevertheless concluded that the record in that case
did not adequately support the Commission's conclusions as to the
competitive nature of the market for NYSE Arca's data product at issue
in that case. As explained below in NASDAQ's Statement on Burden on
Competition, however, NASDAQ believes that there is substantial
evidence of competition in the marketplace for data that was not in the
record in the NetCoalition I case, and that the Commission is entitled
to rely upon such evidence in concluding fees are the product of
competition, and therefore in accordance with the relevant statutory
standards.\12\ Moreover, NASDAQ further notes that the product at issue
in this filing--a NASDAQ quotation and last sale data product that
replicates a subset of the information available through ``core'' data
products whose fees have been reviewed and approved by the SEC--is
quite different from the NYSE Arca depth-of-book data product at issue
in NetCoalition I. Accordingly, any findings of the court with respect
to that product may not be relevant to the product at issue in this
filing. As the Commission noted in approving the initial pilot for
NASDAQ Basic, all of the information available in NASDAQ Basic is
included in the core data feeds made available pursuant to the joint-
SRO plans.\13\ As the Commission further determined, ``the availability
of alternatives to NASDAQ Basic significantly affect the terms on which
NASDAQ can distribute this market data. In setting the fees for its
NASDAQ Basic service, NASDAQ must consider the extent to which market
participants would choose one or more alternatives instead of
purchasing the exchange's data.'' \14\ Thus, to the extent that the
fees for core data have been established as reasonable under the Act,
it follows that the fees for NASDAQ Basic are also reasonable, since
charging unreasonably high fees would cause market participants to rely
solely on core data or purchase proprietary products offered by other
exchanges rather than purchasing NASDAQ Basic.
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\12\ 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).
\13\ Securities Exchange Act Release No. 12425 (March 16, 2009),
74 FR 12423, 12425 (March 24, 2009) (SR-NASDAQ-2008-102).
\14\ Id. at 12425.
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Moreover, as discussed in the order approving the initial pilot,
and as further discussed below in NASDAQ's Statement on Burden on
Competition, data products such as NASDAQ Basic are a means by which
exchanges compete to attract order flow. To the extent that exchanges
are successful in such competition, they earn trading revenues and also
enhance the value of their data products by increasing the amount of
data they are able to provide. Conversely, to the extent that exchanges
are unsuccessful, the inputs needed to add value to data products are
diminished. Accordingly, the need to compete for order flow places
substantial pressure upon exchanges to keep their fees for both
executions and data reasonable.
The enterprise license provides a means by which broker-dealers may
reduce their fees for usage of NASDAQ Basic by a large number of
internal Professional Subscribers. Accordingly, the license provides a
means of providing ensuring [sic] that the overall fees for NASDAQ
Basic paid by such broker-dealers are reasonable. The proposed change
does not alter the reasonableness of the fees, since it will help to
ensure that broker-dealers do not abuse the intent of the license by
taking receiving NASDAQ Basic through multiple External Distributors
under a single fixed-fee license. Rather, the change will ensure that
licensees that opt to obtain data through multiple External
Distributors pay a license fee that is proportion [sic] to that usage.
Similarly, the Per Query fee cap is a means of ensuring that the
overall fees for NASDAQ Basic paid by individual Non-Professional users
are reasonable. Both the Per Query fee and the monthly Non-Professional
Subscriber fees are used to limit the costs borne by Non-Professional
users. NASDAQ's current proposal ensures that the two fees interact in
a manner that is fair to Non-Professional users. Likewise, while the
fees for Professional Users of NASDAQ Basic are higher than for Non-
Professionals, NASDAQ believes that the monthly fee and the Per Query
fee must still interact in a manner that is fair to Professional users
and that the proposed fee cap satisfies that requirement.
The changed fee also continues to reflect an equitable allocation
and continues not to be unfairly discriminatory, because NASDAQ Basic
is a voluntary product for which market participants can readily
substitute core data feeds that provide additional quotation and last
sale information not available through NASDAQ Basic. Accordingly,
NASDAQ is constrained from pricing the product in a manner that would
be inequitable or unfairly discriminatory. The enterprise license helps
to ensure that fees for professional users are not inequitable or
unfairly discriminatory, because they are subject to limitations that
will enable broker-dealers with large numbers of subscribers to
moderate the fees that they would otherwise be required to pay. The
change being made to the license fee does not render the fee
inequitable or unfairly discriminatory, but rather ensures that each
broker pays a fair fee with respect to each External Distributor from
which it receives NASDAQ Basic. Specifically, the fee will ensure that
a broker-dealer that opts to receive NASDAQ Basic through more than one
External Distributor pays a fee that equitably reflects additional
usage, rather than paying the same paid [sic] by a broker receiving the
product through only one External Distributor.
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
[[Page 28578]]
of the purposes of the Act, as amended. NASDAQ's ability to price
NASDAQ Basic is constrained by (1) competition among exchanges, other
trading platforms, and TRFs that compete with each other in a variety
of dimensions; (2) the existence of inexpensive real-time consolidated
data and market-specific data and free delayed consolidated data; and
(3) the inherent contestability of the market for proprietary data.
The market for proprietary data products is currently competitive
and inherently contestable because there is fierce competition for the
inputs necessary to the creation of proprietary data and strict pricing
discipline for the proprietary products themselves. Numerous exchanges
compete with each other for listings, trades, and market data itself,
providing virtually limitless opportunities for entrepreneurs who wish
to produce and distribute their own market data. This proprietary data
is produced by each individual exchange, as well as other entities, in
a vigorously competitive market. Similarly, with respect to the TRF
data component of NASDAQ Basic, allowing exchanges to operate TRFs has
permitted them to earn revenues by providing technology and data in
support of the non-exchange segment of the market. This revenue
opportunity has also resulted in fierce competition between the two
current TRF operators, with both TRFs charging extremely low trade
reporting fees and rebating the majority of the revenues they receive
from core market data to the parties reporting trades.
Transaction executions and proprietary data products are
complementary in that market data is both an input and a byproduct of
the execution service. In fact, market data and trade execution are a
paradigmatic example of joint products with joint costs.\15\ The
decision whether and on which platform to post an order will depend on
the attributes of the platform where the order can be posted, including
the execution fees, data quality and price, and distribution of its
data products. Without trade executions, exchange data products cannot
exist. Moreover, data products are valuable to many end users only
insofar as they provide information that end users expect will assist
them or their customers in making trading decisions.
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\15\ A complete explanation of the pricing dynamics associated
with joint products is presented in a study that NASDAQ originally
submitted to the Commission in SR-NASDAQ-2011-010. See Statement of
Janusz Ordover and Gustavo Bamberger at 2-17 (December 29, 2010)
(available at http://nasdaq.cchwallstreet.com/NASDAQ/pdf/nasdaq-filings/2011/SR-NASDAQ-2011-010.pdf).
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The costs of producing market data include not only the costs of
the data distribution infrastructure, but also the costs of designing,
maintaining, and operating the exchange's transaction execution
platform and the cost of regulating the exchange to ensure its fair
operation and maintain investor confidence. The total return that a
trading platform earns reflects the revenues it receives from both
products and the joint costs it incurs. Moreover, the operation of the
exchange is characterized by high fixed costs and low marginal costs.
This cost structure is common in content and content distribution
industries such as software, where developing new software typically
requires a large initial investment (and continuing large investments
to upgrade the software), but once the software is developed, the
incremental cost of providing that software to an additional user is
typically small, or even zero (e.g., if the software can be downloaded
over the internet after being purchased).\16\ In NASDAQ's case, it is
costly to build and maintain a trading platform, but the incremental
cost of trading each additional share on an existing platform, or
distributing an additional instance of data, is very low. Market
information and executions are each produced jointly (in the sense that
the activities of trading and placing orders are the source of the
information that is distributed) and are each subject to significant
scale economies. In such cases, marginal cost pricing is not feasible
because if all sales were priced at the margin, NASDAQ would be unable
to defray its platform costs of providing the joint products.
Similarly, data products cannot make use of TRF trade reports without
the raw material of the trade reports themselves, and therefore
necessitate the costs of operating, regulating,\17\ and maintaining a
trade reporting system, costs that must be covered through the fees
charged for use of the facility and sales of associated data.
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\16\ See William J. Baumol and Daniel G. Swanson, ``The New
Economy and Ubiquitous Competitive Price Discrimination: Identifying
Defensible Criteria of Market Power,'' Antitrust Law Journal, Vol.
70, No. 3 (2003).
\17\ It should be noted that the costs of operating the FINRA/
NASDAQ TRF borne by NASDAQ include regulatory charges paid by NASDAQ
to FINRA.
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An exchange's BD customers view the costs of transaction executions
and of data as a unified cost of doing business with the exchange. A BD
will direct orders to a particular exchange only if the expected
revenues from executing trades on the exchange exceed net transaction
execution costs and the cost of data that the BD chooses to buy to
support its trading decisions (or those of its customers). The choice
of data products is, in turn, a product of the value of the products in
making profitable trading decisions. If the cost of the product exceeds
its expected value, the BD will choose not to buy it. Moreover, as a BD
chooses to direct fewer orders to a particular exchange, the value of
the product to that BD decreases, for two reasons. First, the product
will contain less information, because executions of the BD's trading
activity will not be reflected in it. Second, and perhaps more
important, the product will be less valuable to that BD because it does
not provide information about the venue to which it is directing its
orders. Data from the competing venue to which the BD is directing
orders will become correspondingly more valuable.
Similarly, in the case of products such as NASDAQ Basic that may be
distributed through market data vendors, the vendors provide price
discipline for proprietary data products because they control a means
of access to end users. Vendors impose price restraints based upon
their business models. For example, vendors such as Bloomberg and
Thomson Reuters that assess a surcharge on data they sell may refuse to
offer proprietary products that end users will not purchase in
sufficient numbers. Internet portals, such as Google, impose a
discipline by providing only data that will enable them to attract
``eyeballs'' that contribute to their advertising revenue. Retail BDs,
such as Charles Schwab and Fidelity, offer their customers proprietary
data only if it promotes trading and generates sufficient commission
revenue. Although the business models may differ, these vendors'
pricing discipline is the same: They can simply refuse to purchase any
proprietary data product that fails to provide sufficient value.
Exchanges, TRFs, and other producers of proprietary data products must
understand and respond to these varying business models and pricing
disciplines in order to market proprietary data products successfully.
Moreover, NASDAQ believes that products such as NASDAQ Basic can
enhance order flow to NASDAQ by providing more widespread distribution
of information about transactions in real time, thereby encouraging
wider participation in the market by investors
[[Page 28579]]
with access to the data through their brokerage firm or other
distribution sources. Conversely, the value of such products to
distributors and investors decreases if order flow falls, because the
products contain less content.
Analyzing the cost of market data distribution in isolation from
the cost of all of the inputs supporting the creation of market data
will inevitably underestimate the cost of the data. Thus, because it is
impossible to create exchange data without a fast, technologically
robust, and well-regulated execution system, system costs and
regulatory costs affect the price of market data. It would be equally
misleading, however, to attribute all of the exchange's costs to the
market data portion of an exchange's joint product. Rather, all of the
exchange's costs are incurred for the unified purposes of attracting
order flow, executing and/or routing orders, and generating and selling
data about market activity. The total return that an exchange earns
reflects the revenues it receives from the joint products and the total
costs of the joint products. Similarly, the inclusion of trade
reporting data in a product such as NASDAQ Basic may assist in
attracting customers to the product, thereby assisting in covering the
additional costs associated with operating and regulating a TRF.
Competition among trading platforms can be expected to constrain
the aggregate return each platform earns from the sale of its joint
products, but different platforms may choose from a range of possible,
and equally reasonable, pricing strategies as the means of recovering
total costs. NASDAQ pays rebates to attract orders, charges relatively
low prices for market information and charges relatively high prices
for accessing posted liquidity. Other platforms may choose a strategy
of paying lower liquidity rebates to attract orders, setting relatively
low prices for accessing posted liquidity, and setting relatively high
prices for market information. Still others may provide most data free
of charge and rely exclusively on transaction fees to recover their
costs. Finally, some platforms may incentivize use by providing
opportunities for equity ownership, which may allow them to charge
lower direct fees for executions and data.
In this environment, there is no economic basis for regulating
maximum prices for one of the joint products in an industry in which
suppliers face competitive constraints with regard to the joint
offering. Such regulation is unnecessary because an ``excessive'' price
for one of the joint products will ultimately have to be reflected in
lower prices for other products sold by the firm, or otherwise the firm
will experience a loss in the volume of its sales that will be adverse
to its overall profitability. In other words, an unreasonable increase
in the price of data will ultimately have to be accompanied by a
decrease in the cost of executions, or the volume of both data and
executions will fall.
The level of competition and contestability in the market is
evident in the numerous alternative venues that compete for order flow,
including 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. Notably, the potential
sources of data include the BDs that submit trade reports to TRFs and
that have the ability to consolidate and distribute their data without
the involvement of FINRA or an exchange-operated TRF.
The fact that proprietary data from ATSs, BDs, and vendors can by-
pass SROs is significant in two respects. First, non-SROs can compete
directly with SROs for the production and sale of proprietary data
products, as BATS and Arca did before registering as exchanges by
publishing proprietary book data on the internet. Second, because a
single order or transaction report can appear in a core data product,
an SRO proprietary product, and/or a non-SRO proprietary product, the
data available in proprietary products is exponentially greater than
the actual number of orders and transaction reports that exist in the
marketplace. Indeed, in the case of NASDAQ Basic, the data provided
through that product appears both in (i) real-time core data products
offered by the SIPs for a fee, and (ii) free SIP data products with a
15-minute time delay, and finds a close substitute in similar products
of competing venues.
In addition to the competition and price discipline described
above, the market for proprietary data products is also highly
contestable because market entry is rapid, inexpensive, and profitable.
The history of electronic trading is replete with examples of entrants
that swiftly grew into some of the largest electronic trading platforms
and proprietary data producers: Archipelago, Bloomberg Tradebook,
Island, RediBook, Attain, TracECN, BATS Trading and Direct Edge. A
proliferation of dark pools and other ATSs operate profitably with
fragmentary shares of consolidated market volume.
Regulation NMS, by deregulating the market for proprietary data,
has increased the contestability of that market. While BDs have
previously published their proprietary data individually, Regulation
NMS encourages market data vendors and BDs to produce proprietary
products cooperatively in a manner never before possible. Multiple
market data vendors already have the capability to aggregate data and
disseminate it on a profitable scale, including Bloomberg and Thomson
Reuters. In Europe, Markit aggregates and disseminates data from over
50 brokers and multilateral trading facilities.\18\
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\18\ http://www.markit.com/en/products/data/boat/boat-boat-data.page.
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In the case of TRFs, the rapid entry of several exchanges into this
space in 2006-2007 following the development and Commission approval of
the TRF structure demonstrates the contestability of this aspect of the
market.\19\ Given the demand for trade reporting services that is
itself a by-product of the fierce competition for transaction
executions--characterized notably by a proliferation of ATSs and BDs
offering internalization--any supra-competitive increase in the fees
[[Page 28580]]
associated with trade reporting or TRF data would shift trade report
volumes from one of the existing TRFs to the other \20\ and create
incentives for other TRF operators to enter the space. Alternatively,
because BDs reporting to TRFs are themselves free to consolidate the
market data that they report, the market for over-the-counter data
itself, separate and apart from the markets for execution and trade
reporting services--is fully contestable.
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\19\ The low cost exit of two TRFs from the market is also
evidence of a contestible market, because new entrants are reluctant
to enter a market where exit may involve substantial shut-down
costs.
\20\ It should be noted that the FINRA/NYSE TRF has, in recent
weeks, received reports for over 10% of all over-the-counter volume
in NMS stocks. In addition, FINRA has announced plans to update its
Alternative Display Facility, which is also able to receive over-
the-counter trade reports. See Securities Exchange Act Release No.
70048 (July 26, 2013), 78 FR 46652 (August 1, 2013) (SR-FINRA-2013-
031).
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Moreover, consolidated data provides substantial pricing discipline
for proprietary data products that are a subset of the consolidated
data stream. Because consolidated data contains marketwide information,
it effectively places a cap on the fees assessed for proprietary data
(such as quotation and last sale data) that is simply a subset of the
consolidated data. The availability provides a powerful form of pricing
discipline for proprietary data products that contain data elements
that are a subset of the consolidated data, by highlighting the
optional nature of proprietary products.
The competitive nature of the market for non-core ``sub-set''
products such as NASDAQ Basic is borne out by the performance of the
market. In May 2008, the internet portal Yahoo! began offering its Web
site viewers real-time last sale data (as well as best quote data)
provided by BATS. In June 2008, NASDAQ launched NLS, which was
initially subject to an ``enterprise cap'' of $100,000 for customers
receiving only one of the NLS products, and $150,000 for customers
receiving both products. The majority of NASDAQ's sales were at the
capped level. In early 2009, BATS expanded its offering of free data to
include depth-of-book data. Also in early 2009, NYSE Arca announced the
launch of a competitive last sale product with an enterprise price of
$30,000 per month. In response, NASDAQ combined the enterprise cap for
the NLS products and reduced the cap to $50,000 (i.e., a reduction of
$100,000 per month). Similarly, the enterprise license and netting
option being offered for NASDAQ Basic through this proposed rule change
reflects a means by which the overall cost of the product is limited in
accordance with the existence of competitive alternatives, including
both core and proprietary data.
In this environment, a super-competitive increase in the fees
charged for either transactions or data has the potential to impair
revenues from both products. ``No one disputes that competition for
order flow is `fierce'.'' NetCoalition I at 539. The existence of
fierce competition for order flow implies a high degree of price
sensitivity on the part of BDs with order flow, since they may readily
reduce costs by directing orders toward the lowest-cost trading venues.
A BD that shifted its order flow from one platform to another in
response to order execution price differentials would both reduce the
value of that platform's market data and reduce its own need to consume
data from the disfavored platform. If a platform increases its market
data fees, the change will affect the overall cost of doing business
with the platform, and affected BDs will assess whether they can lower
their trading costs by directing orders elsewhere and thereby lessening
the need for the more expensive data. Similarly, increases in the cost
of NASDAQ Basic would impair the willingness of distributors to take a
product for which there are numerous alternatives, impacting NASDAQ
Basic data revenues, the value of NASDAQ Basic as a tool for attracting
order flow, and ultimately, the volume of orders routed to NASDAQ and
reported to the FINRA/NASDAQ TRF and the value of its other data
products.
Competition has also driven NASDAQ continually to improve its data
offerings and to cater to customers' data needs. The NASDAQ Basic
product itself is a product of this competition, offering a subset of
core data to users that may not wish to receive or pay for all
consolidated data.
The existence of numerous alternatives to NASDAQ Basic, including
real-time consolidated data, free delayed consolidated data, and
proprietary data from other sources ensures that NASDAQ cannot set
unreasonable fees, or fees that are unreasonably discriminatory,
without losing business to these alternatives. Accordingly, NASDAQ
believes that the acceptance of the NASDAQ Basic product in the
marketplace demonstrates the consistency of these fees with applicable
statutory standards. Likewise, the fee changes proposed herein will be
subject to these same competitive forces. If the proposed fee increase
is excessive, or if the proposals for an enterprise license and netting
are unattractive to market participants, only NASDAQ will suffer, since
its customers will merely migrate to competitive alternatives.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A) of the Act \21\ and paragraph (f) of Rule 19b-4
thereunder.\22\ At any time within 60 days of the filing of the
proposed rule change, the Commission summarily may temporarily suspend
such rule change if it appears to the Commission that such action is
necessary or appropriate in the public interest, for the protection of
investors, or otherwise in furtherance of the purposes of the Act.
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\21\ 15 U.S.C. 78s(b)(3)(A).
\22\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-NASDAQ-2014-045 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2014-045. 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
[[Page 28581]]
available for Web site viewing and printing in the Commission's Public
Reference Room, 100 F Street NE., Washington, DC 20549, on official
business days between the hours of 10:00 a.m. and 3:00 p.m. Copies of
the filing also will be available for inspection and copying at the
principal office of Nasdaq. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NASDAQ-2014-045 and should be submitted on or before
June 6, 2014.
For the Commission, by the Division of Trading and Markets, pursuant
to delegated authority.\23\
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\23\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-11296 Filed 5-15-14; 8:45 am]
BILLING CODE 8011-01-P