[Federal Register Volume 74, Number 13 (Thursday, January 22, 2009)]
[Notices]
[Pages 4065-4068]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E9-1231]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-59244; File No. SR-NASDAQ-2008-102]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change and Amendment No. 2 Thereto To 
Establish a Pilot Program for NASDAQ Basic Data Feeds

January 13, 2009.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on December 23, 2008, The NASDAQ Stock Market LLC (``NASDAQ'') 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 NASDAQ. On January 8, 2009, NASDAQ filed 
Amendment No. 1 to the proposed rule change. On January 12, 2009, 
NASDAQ replaced the original filing and Amendment No. 1 by filing 
Amendment No. 2 to the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 2, NASDAQ removed data from the jointly-
operated NASDAQ/FINRA Trade Reporting Facility (``TRF'') from the 
NASDAQ Basic product. NASDAQ notes that a separate filing will be 
made in the event approval is sought to include TRF data in this 
product. In addition, NASDAQ made technical changes including 
changing the name of the Alternext market, clarifying that no fees 
will be assessed during the first month of the pilot, and explaining 
the application of internal and external distributor fees.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASDAQ is proposing a rule change to establish a five-month pilot 
to offer ``NASDAQ Basic'' which is a real time data feed combining both 
NASDAQ's Best Bid and Offer (``QBBO'') and the NASDAQ Last Sale. NASDAQ 
will offer information separately for NASDAQ-, NYSE- and Amex-listed 
stocks. NASDAQ Basic will be available free of charge for the first 
month of the five-month pilot.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.\4\
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    \4\ Changes are marked to the rule text that appears in the 
electronic NASDAQ Manual found at http://www.nasdaqtrader.com.
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* * * * *

7047. NASDAQ Basic

    (a) For a five-month pilot period commencing on February 1, 2009, 
NASDAQ shall offer proprietary data feeds containing real-time market 
information from the NASDAQ Market Center. There shall be no fee for 
NASDAQ Basic for the first month of the pilot.
    (1) ``NASDAQ Basic for NASDAQ'' shall contain NASDAQ's best bid and 
offer and last sale for NASDAQ-listed stocks; and
    (2) ``NASDAQ Basic for NYSE'' shall contain NASDAQ's best bid and 
offer and last sale for NYSE-listed stocks.
    (3) ``NASDAQ Basic for Alternext'' shall contain NASDAQ's best bid 
and offer and last sale for Alternext-listed stocks.
    (b) User Fees
    (1) Except as provided in (b)(2) and (b)(3), for the NASDAQ Basic 
product there shall be a per subscriber monthly charge of $10 for 
NASDAQ-listed stocks, $5 for NYSE-listed stocks, and $5 for Alternext-
listed stocks; or
    (2) For each non-professional subscriber, as defined in Rule 
7011(b), there shall be a per subscriber monthly charge of $0.50 for 
NASDAQ-listed stocks, $0.25 for NYSE-listed stocks, and $0.25 for 
Alternext-listed stocks; or
    (3) There shall be a per query fee for NASDAQ Basic of $0.0025 for 
NASDAQ-listed stocks, $0.0015 for NYSE-listed stocks, and $0.0015 for 
Alternext-listed stocks.
    (c) Distributor Fees
    (1) Each Distributor of NASDAQ Basic for NASDAQ-listed stocks shall 
pay a fee of $1,500 per month for either internal or external 
distribution or both.
    (2) Each Distributor of NASDAQ Basic for NYSE-listed stocks shall 
pay a fee of $250 per month for internal distribution or $625 per month 
external distribution. Distributors that pay the external distribution 
fee may distribute NASDAQ Basic for NYSE-listed stocks internally with 
no additional distribution fee.
    (3) Each Distributor of NASDAQ Basic for Alternext-listed stocks 
shall pay a fee of 250 per month for internal distribution or $625 per 
month external distribution. Distributors that pay the external 
distribution fee may distribute NASDAQ Basic for Alternext-listed 
stocks internally with no additional distribution fee.
    (4) Each Distributor that receives Direct Access to the NASDAQ 
Basic shall also pay a monthly fee of $2,000 for NASDAQ-listed stocks, 
$1,000 for NYSE-listed stocks, and $1,000 for Alternext-listed stocks.
    (5) The terms ``Distributor'' and ``Direct Access'' shall have the 
same meanings as set forth in Rule 7019.

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. The 
text of these statements may be examined at the places specified in 
Item IV below, and is set forth in Sections A, B, and C below.

[[Page 4066]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In July of 2008, NASDAQ successfully launched a market data product 
that for the first time made available to investors real-time execution 
prices based solely on proprietary data from the NASDAQ Market Center 
and FINRA/NASDAQ Trade Reporting Facility. Building on the success of 
that pilot, NASDAQ now proposes a five-month pilot to offer real-time 
quotation data in combination with last sale data solely from the 
NASDAQ Market Center as set forth below. There will be no fees for 
NASDAQ Basic for the first month of the pilot.
    NASDAQ Basic is a ``Level 1'' product containing two data elements: 
(1) Quotation information from the NASDAQ Market Center and (2) last 
sale data from the NASDAQ Market Center. NASDAQ Basic will be available 
in three forms, NASDAQ Basic for NASDAQ, NASDAQ Basic for NYSE, and 
NASDAQ Basic for Alternext.
    As with the recently-approved NASDAQ Last Sale product, NASDAQ 
Basic is 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 consolidated Level 1 products. 
Providing investors with new options for receiving market data, as 
NASDAQ proposes, was a primary goal of the market data amendments 
adopted in Regulation NMS. NASDAQ developed these product proposals in 
consultation with industry members and also market data vendors and 
purchasers that expressed an interest in exchange-only data for 
instances where consolidated data is no longer required to be purchased 
and displayed.
    Consistent with the sale of consolidated data and of NASDAQ 
proprietary data, NASDAQ proposes to charge a fee for professional use 
of NASDAQ Basic, and a reduced fee for non-professional use. 
Specifically, for each professional user of the NASDAQ Basic product, 
there will be a per subscriber monthly charge of $10 for NASDAQ-listed 
stocks, $5 for NYSE-listed stocks, and $5 for Alternext-listed stocks. 
For each non-professional subscriber, there will be a per subscriber 
monthly charge of $0.50 for NASDAQ-listed stocks, $0.25 for NYSE-listed 
stocks, and $0.25 for Alternext-listed stocks. ``Non-professional'' is 
a term that is well-understood within the vendor and user communities, 
and it will have the same meaning in this proposed rule as it currently 
has in Rule 7011(b), For users that do not require a monthly 
subscription, there will be a per query option available for NASDAQ 
Basic, with a fee of $0.0025 for NASDAQ-listed stocks, $0.0015 for 
NYSE-listed stocks, and $0.0015 for Alternext-listed stocks. Vendors 
that report per query usage to NASDAQ are permitted to convert to 
monthly subscriptions when the cost of individual users' queries 
exceeds the cost of the monthly subscription.
    As with the distribution of other NASDAQ proprietary products, all 
distributors of NASDAQ Basic will be assessed a Distributor Fee in 
addition to any applicable usage fees. Each Distributor of NASDAQ Basic 
for NASDAQ-listed stocks shall pay a fee of $1,500 per month for either 
internal or external distribution. Each Distributor of NASDAQ Basic for 
NYSE-listed stocks shall pay a fee of $250 per month for internal 
distribution or $625 per month external distribution. Each Distributor 
of NASDAQ Basic for Alternext-listed stocks shall pay a fee of $250 per 
month for internal distribution or $625 per month external 
distribution. Distributors that pay the fee for external distribution 
of NASDAQ Basic for NYSE and Alternext may distribute the same data 
internally for no additional fee. In addition, each Distributor that 
receives Direct Access to the NASDAQ Basic shall also pay a monthly fee 
of $2,000 for NASDAQ-listed stocks, $1,000 for NYSE-listed stocks, and 
$1,000 for AMEX-listed stocks. The terms ``Distributor'' and ``Direct 
Access'' are well-understood by market data distributors and will have 
the same meanings in this proposed rule as currently set forth in 
NASDAQ Rule 7019.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\5\ in general and with Section 
6(b)(4) of the Act,\6\ 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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    \5\ 15 U.S.C. 78f.
    \6\ 15 U.S.C. 78f-3(b)(4) [sic].
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    The NASDAQ Basic 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.\7\

    \7\ Securities Exchange Act Release No. 51808 (June 9, 2005), 70 
FR 37496 (June 29, 2005).
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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 NASDAQ Basic 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 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 Direct Edge and NexTrade electronic communications network 
(``ECN''). Each SRO market competes to produce transaction reports via 
trade executions,

[[Page 4067]]

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 distribution of proprietary 
data products, as Archipelago and BATS Trading did prior to registering 
as SROs. 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 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 NASDAQ Basic, NASDAQ considered the 
competitiveness of the market for BBO and 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, as 
set forth in detail above, the market for the data elements contained 
in NASDAQ Basic 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, NASDAQ expects that the New York, NYSEArca, BATS, and 
American Stock Exchanges will each respond to this proposal with a 
similar proposal to distribute competing data products. Under the 
regulatory 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

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or

[[Page 4068]]

(ii) as to which NASDAQ consents, the Commission will:
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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 e-mail to [email protected]. Please include 
File Number SR-NASDAQ-2008-102 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2008-102. 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 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 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-2008-102 and should be submitted on or before 
February 12, 2009.
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    \8\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-1231 Filed 1-21-09; 8:45 am]
BILLING CODE 8011-01-P