[Federal Register Volume 73, Number 219 (Wednesday, November 12, 2008)]
[Notices]
[Pages 66953-66956]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-26626]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-58894; File No. SR-NASDAQ-2008-086]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Order Granting Accelerated Approval of Proposed 
Rule Change To Extend the Pilot Program for NASDAQ Last Sale Data Feeds

October 31, 2008.
    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 October 31, 2008, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``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, and is approving the 
proposal on an accelerated basis.
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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

    The Exchange proposes to extend for two months the four-month pilot 
that created 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/Amex'' data feeds containing 
last sale activity in U.S. equities within the NASDAQ Market Center and 
reported to the jointly-operated FINRA/NASDAQ Trade Reporting Facility 
(``FINRA/NASDAQ TRF'').
    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 current 
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 over 50,000,000 investors on 
websites operated by Google, Interactive Data, and Dow Jones, among 
others. The text of the proposed rule change is available at NASDAQ, 
the Commission's Public Reference Room, and http://nasdaq.complinet.com.

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 III 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 four-
month pilot to offer access to real-time market data to data 
distributors for a capped fee, enabling those distributors to 
disseminate the data via the internet and television at no cost to 
millions of internet users and television viewers. NASDAQ now proposes 
a two-month extension of that pilot program asset forth in the original 
proposal as described below.
    The NLS pilot created 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,'' 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/Amex 
data product that provides real-time last sale information including 
execution price, volume, and time for NYSE- and Amex-securities 
executions occurring within the NASDAQ system as well as those reported 
to the FINRA/NASDAQ TRF.
    NASDAQ developed these product proposals in consultation with 
industry members and also market data vendors and purchasers. These 
products are designed to meet the needs of current and prospective 
subscribers that do not need or are unwilling to pay for the 
consolidated data provided by the SIP Level 1 products. NASDAQ is also 
proposing to ease the administrative burden of market data vendors that 
are receiving and using data in new ways, particularly those that 
provide the data via the internet and various television media. 
Providing investors with new options for receiving market data was a 
primary goal of the market data

[[Page 66954]]

amendments adopted in Regulation NMS.
    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 will be 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/
Amex Product: Firms that were unable to maintain username/password 
entitlement systems and/or quote counting mechanisms will also have 
multiple options for purchasing the NASDAQ Last Sale data. These firms 
chose 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. Finally, NASDAQ established cap of $100,000 
per month for NASDAQ Last Sale for NASDAQ and $50,000 per month for 
NASDAQ Last Sale for NYSE/Amex. NASDAQ believed that it is reasonable 
and appropriate to benefit small and medium-sized vendors by proposing 
a progressive fee schedule and to benefit large vendors by proposing to 
cap the monthly fees.
    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/Amex products would pay a single $1500/month NASDAQ Last Sale 
Distributor Fee in addition to any applicable usage fees. The $1,500 
monthly fee will apply to all distributors and will 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,\3\ in general and with section 
6(b)(4) of the Act,\4\ as stated above, in that it provides an 
equitable allocation of reasonable fees among users and recipients of 
NASDAQ data. 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. 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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    \3\ 15 U.S.C. 78f.
    \4\ 15 U.S.C. 78f-3(b)(4).
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    The NASDAQ Last Sale market data products proposed here appear to 
be 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:

    [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.
    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 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.
    Broker-dealers currently have numerous alternative venues for their 
order flow, including eleven self-regulatory organization (``SRO'') 
markets, as well as broker-dealers (``BDs'') and aggregators such as 
the BATS electronic communications network (``ECN''). Each SRO market 
competes to produce transaction reports via trade executions, and an 
ever-increasing number of FINRA-regulated Trade Reporting Facilities 
(``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, and ECNs that currently produce 
proprietary data or are currently capable of producing it provides 
further pricing discipline for proprietary data products. Each SRO, 
TRF, ECN and BD is currently permitted to produce proprietary data 
products, and many currently do or have announced plans to do so, 
including NASDAQ, NYSE, Amex, NYSEArca, and BATS.
    Any ECN or BD can combine with any other ECN, broker-dealer, or 
multiple ECNs or BDs to produce jointly proprietary data products. 
Additionally, non-broker-dealers such as order routers like LAVA, as 
well as 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 ECNs, 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 does today by publishing its proprietary book 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 writ large.
    Consolidated data provides two additional measures of pricing 
discipline for proprietary data products that are a subset of the 
consolidated data

[[Page 66955]]

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.
    Market data vendors provide another form of 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 that data which 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 successfully market proprietary data products.
    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 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. Today, BATS 
publishes its data at no charge on its Web site in order to attract 
order flow, and it uses market data revenue rebates from the resulting 
executions to maintain low execution charges for its users. Several 
ECNs have existed profitably for many years with a minimal share of 
trading, including Bloomberg Tradebook and NexTrade.
    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, Reuters and Thomson. New entrants are already on the 
horizon, including ``Project BOAT,'' a consortium of financial 
institutions that is assembling a cooperative trade collection facility 
in Europe. These institutions are active in the United States and could 
rapidly and profitably export the Project Boat technology to exploit 
the opportunities offered by Regulation NMS.
    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 a fair, reasonable, and not unreasonably 
discriminatory fee and an equitable allocation of fees among all users.

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. To the contrary, 
the NASDAQ Last Sale Products respond to and enhance competition that 
already exists in the market.
    On May 28, 2008, the Internet portal Yahoo! announced that it would 
offer its Web site viewers real-time last sale data provided by BATS 
Trading. NASDAQ's last sale data products would compete directly with 
the BATS product disseminated via Yahoo! because BATS Trading has 
substantially less market share in NASDAQ-listed issues and its market 
data is less complete. Preventing NASDAQ from responding to this 
competition from its less-regulated competitor runs counter to the pro-
competitive goals of the Act.
    In addition, as set forth in detail above, the market for last sale 
data is already competitive, with both real-time and delayed 
consolidated data as well as the ability for innumerable entities begin 
rapidly and inexpensively to offer competitive last sale data products. 
Moreover, the New York and American Stock Exchanges have each proposed 
to distribute competing last sale data products. Under the deregulatory 
regime of Regulation NMS, there is no limit to the number of competing 
products that can be developed quickly and at low cost. The Commission 
should not stand in the way of enhanced competition.

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.

III. 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 e-mail to [email protected]. Please include 
File Number SR-NASDAQ-2008-086 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-2008-086. This 
file number should be included on the subject line if e-mail 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

[[Page 66956]]

provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room, on official business 
days between the hours of 10 a.m. and 3 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-2008-086 and should be submitted on or before December 3, 2008.

IV. Commission's Findings and Order Granting Accelerated Approval of a 
Proposed Rule Change

    The Commission finds that the proposed rule change, to extend the 
pilot program for two months, is consistent with the requirements of 
the Act and the rules and regulations thereunder applicable to a 
national securities exchange.\6\ In particular, it is consistent with 
section 6(b)(4) of the Act,\7\ which requires that the rules of a 
national securities exchange provide for the equitable allocation of 
reasonable dues, fees, and other charges among its members and issuers 
and other parties using its facilities, and section 6(b)(5) of the 
Act,\8\ which requires, among other things, that the rules of a 
national securities exchange be designed to promote just and equitable 
principles of trade, to remove impediments to and perfect the mechanism 
of a free and open market and a national market system and, in general, 
to protect investors and the public interest, and not be designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers.
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    \6\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78f(b)(4).
    \8\ 15 U.S.C. 78f(b)(5).
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    The Commission also finds that the proposed rule change is 
consistent with the provisions of section 6(b)(8) of the Act,\9\ which 
requires that the rules of an exchange not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act. Finally, the Commission finds that the proposed rule change 
is consistent with Rule 603(a) of Regulation NMS,\10\ adopted under 
section 11A(c)(1) of the Act, which requires an exclusive processor 
that distributes information with respect to quotations for or 
transactions in an NMS stock to do so on terms that are fair and 
reasonable and that are not unreasonably discriminatory.\11\
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    \9\ 15 U.S.C. 78f(b)(8).
    \10\ 17 CFR 242.603(a).
    \11\ NASDAQ is an exclusive processor of its last sale data 
under Section 3(a)(22)(B) of the Act, 15 U.S.C. 78c(a)(22)(B), which 
defines an exclusive processor as, among other things, an exchange 
that distributes data on an exclusive basis on its own behalf.
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    The Commission approved the fee for the NASDAQ Last Sale Data Feeds 
for a pilot period which runs until October 31, 2008.\12\ The 
Commission approved the fee for the NASDAQ Last Sale Data Feeds for a 
pilot period which runs until October 31, 2008. The Commission notes 
that the Exchange proposes to extend the pilot program for two months. 
The Exchange proposes no other changes to the existing pilot program.
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    \12\ See Securities Exchange Act Release No. 57965 (June 16, 
2008), 73 FR 35178 (June 20, 2008) (SR-NASDAQ-2006-060).
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    On June 4, 2008, the Commission approved for public comment a draft 
approval order that sets forth a market-based approach for analyzing 
proposals by self-regulatory organizations to impose fees for ``non-
core'' market data products that would encompass the NASDAQ Last Sale 
Data Feeds.\13\ The Commission believes that the proposal is consistent 
with the Act for the reasons noted preliminarily in the Draft Approval 
Order. Pending review by the Commission of comments received on the 
Draft Approval Order, and final Commission action thereon, the 
Commission believes that approving NASDAQ's proposal to extend the 
pilot program that imposes a fee for the NASDAQ Last Sale Data Feeds 
for two months would be beneficial to investors and in the public 
interest, in that it should result in increased broad public 
dissemination of real-time pricing information. The broader approach 
ultimately taken by the Commission with respect to non-core market data 
fees will necessarily guide Commission action regarding fees for the 
NASDAQ Last Sale Data Feeds beyond the pilot period.
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    \13\ See Securities Exchange Act Release No. 57917 (June 4, 
2008), 73 FR 32751 (June 10, 2008) (Notice of Proposed Order 
Approving Proposal by NYSE Arca, Inc. to Establish Fees for Certain 
Market Data and Request for Comment) (``Draft Approval Order'').
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    The Commission finds good cause for approving the proposed rule 
change before the thirtieth day after the date of publication of notice 
of filing thereof in the Federal Register. Accelerating approval of 
this proposal should benefit investors by facilitating their access to 
widespread, free, real-time pricing information contained in the NASDAQ 
Last Sale Data Feeds. Therefore, the Commission finds good cause, 
consistent with Section 19(b)(2) of the Act,\14\ to approve the 
proposed rule change on an accelerated basis to extend the operation of 
the pilot until December 31, 2008, while the Commission analyzes 
comments on the Draft Approval Order.
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    \14\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act, 
that the proposed rule change (SR-NASDAQ-2008-086) is hereby approved 
on an accelerated basis until December 31, 2008.
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    \15\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\15\
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-26626 Filed 11-10-08; 8:45 am]
BILLING CODE 8011-01-P