[Federal Register Volume 79, Number 242 (Wednesday, December 17, 2014)]
[Notices]
[Pages 75207-75211]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-29499]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-73823; File No. SR-NASDAQ-2014-119]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To
Modify Certain NASDAQ Options Market Professional User and Enterprise
License Fees
December 11, 2014.
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 November 28, 2014, 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 amend certain NOM professional user (``Professional User'')
and enterprise license (``Enterprise License'') fees.
While the changes proposed herein are effective upon filing, the
Exchange has designated that the amendments be operative on January 1,
2015.
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
[[Page 75208]]
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 certain NOM
Professional User and Enterprise License fees.
Currently, the Exchange assesses recipients of the BONO options
data feed a $5 monthly internal per Professional User fee, as well as a
$5 monthly external per Professional User fee. The Exchange also
assesses recipients of the ITTO options data feed a $10 monthly
internal per Professional User fee, as well as a $10 monthly external
per Professional User fee.
The Exchange proposes to establish a single monthly $40 per
Professional User fee for internal use that will entitle such
subscriber to access both the BONO and ITTO options data feeds
combined. NASDAQ also proposes to establish a single monthly $40 per
Professional User fee for external use that will entitle such
subscriber to access both the BONO and ITTO options data feeds
combined. The monthly Professional User fees per recipient covers the
usage of both ITTO and BONO and recipients no longer will need to
report their usage separately since they will no longer be assessed
fees separately for each data product. For example, if a firm has one
Professional Subscriber accessing both BONO and ITTO options data feeds
for internal use, the firm would only report the Subscriber once and
pay $40 ($1 for Non-Professional). The Exchange believes that by
allowing access to multiple products for one price, it will allow for a
broad dissemination of NOM data overall and a wider range of consumer
choice. Moreover, this reduces the administrative burden on the firms
since they no longer need to segregate the access of each system.
Additionally, the Exchange proposes to increase the existing
monthly Enterprise License (Non-Display) Fee of $2,500 per firm to
$10,000 per firm for access to the BONO and ITTO options data feeds
combined. This pricing structure continues to offer two advantages.
First, it establishes a monthly fee cap for distributors with large
customer bases, effectively lowering average cost per user and marginal
costs per user beyond the monthly breakpoint. Second, the Enterprise
License offers administrative ease by eliminating the need for
distributors to tally, track, and report to the Exchange a specific
number of individual users every month. This is a voluntary option;
distributors are permitted to choose between per user fee pricing and
the Enterprise License.
The Exchange believes that although the above Professional User and
Enterprise License fees are higher, the value of the BONO and ITTO
options data feeds has increased significantly over the last three
years. During this period NOM has witnessed strong growth both in terms
of the number of listings, as well as trading market share.
Specifically, NOM listings increased from 663 as of June 2011 to over
2,700 today while NOM's trading market share jumped more than 250% from
July 2011 to July 2014 according to OCC data. Also, NOM technological
enhancements in 2011 (referred to as NOM 2.0) expanded NOM
functionality through the introduction of new versions of market data
specifications in an uncompressed, binary format. Additionally, NOM's
market data specifications now are the same as the market data
specifications on both the NASDAQ OMX PHLX LLC and NASDAQ OMX BX, Inc.
exchanges. The commonality among the market data specifications across
these three markets provide for greatly increased efficiency to firms
by allowing them to leverage the development work on one market across
all of three markets.
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'S proposal to establish a single
monthly $40 per Professional User fee for internal use and a separate
single monthly $40 per Professional User fee for external use that will
entitle such subscriber to access both the BONO and ITTO options data
feeds combined reflects an equitable allocation of reasonable fees. The
Commission has long recognized the fair and equitable and not
unreasonably discriminatory nature of assessing different fees for
Professional and Non-Professional users of the same data. NASDAQ also
believes it is equitable to assess a higher fee per Professional User
than to an ordinary non-professional user due to the enhanced
flexibility and lower overall costs that it offers Distributors.
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\3\ 15 U.S.C. 78f.
\4\ 15 U.S.C. 78f(b)(4) and (5).
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NASDAQ believes that the increase to the Enterprise License Fee
from the existing monthly fee of $2,500 per firm to $10,000 per firm
for access to the BONO and ITTO options data feeds combined is fair and
equitable and not unreasonably discriminatory. Enterprise Licenses have
long been accepted as an economically efficient form of volume discount
for the heaviest users of market data (see Rule 7023 enterprise
licenses). The value of the BONO and ITTO options data feeds has
increased significantly over the last three years and NASDAQ notes that
the Enterprise License Fee is entirely optional in that NASDAQ is not
required to offer it and Distributors are not required to pay it.
Accordingly, Distributors and users can discontinue use at any time and
for any reason, including due to an assessment of the reasonableness of
fees charged.
In adopting Regulation NMS, the Commission granted self-regulatory
organizations 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
[[Page 75209]]
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
self-regulatory organization (``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.
NASDAQ believes that periodically it must adjust fees to reflect
market forces and NASDAQ believes it is an appropriate time to adjust
this fee. 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 byproduct 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 the revenues it receives from both
products and 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
[[Page 75210]]
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, 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
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
[[Page 75211]]
customers, as well as retaining existing customers.
The Exchange has witnessed competitors creating new products and
innovative pricing in this space over the course of the past year.
NASDAQ continues to see firms challenge its pricing on the basis of the
Exchange's explicit fees being higher than the zero-priced fees from
other competitors such as BATS. 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)[sic](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 [email protected]. Please include
File Number SR-NASDAQ-2014-119 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-2014-119. 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 Website 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 also will be available
for inspection and copying at the principal offices 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-2014-
119, and should be submitted on or before January 7, 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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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-29499 Filed 12-16-14; 8:45 am]
BILLING CODE 8011-01-P