[Federal Register Volume 75, Number 100 (Tuesday, May 25, 2010)]
[Notices]
[Pages 29371-29374]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2010-12495]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-62112; File No. SR-NASDAQ-2010-052]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of a Proposed Rule Change and Amendment No. 1 Thereto 
To Establish a New Service and Related Fees

May 14, 2010.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934

[[Page 29372]]

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 26, 2010, 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, II, 
and III below, which Items have been prepared by Nasdaq. On May 13, 
2010, the Exchange filed Amendment No. 1. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is proposing to establish a new service and related fees. 
The Nasdaq Short Sale Volume and Monthly Short Sale Transaction files 
(the ``Service'') will establish a product that is comprised of 
aggregate reported share volume of executed short sale trades during 
regular market hours on a daily basis, as well as every short sale 
executed on the Nasdaq execution system and reported to a consolidated 
tape for Nasdaq, the New York Stock Exchange (``NYSE'') and regional 
exchange-listed securities, including the price of the trade and the 
number of shares for every short sale transaction, on a monthly basis, 
separated into daily files.
    The text of the proposed rule change is below. Proposed new 
language is italicized and proposed deletions are in brackets.
* * * * *
7051. Nasdaq Daily Short Volume and Monthly Short Sale Transaction 
Files

    (a) Daily Short Sale Volume files reflect the aggregate number of 
shares executed on the Nasdaq market during regular trading hours on a 
daily basis. At the security level, Nasdaq will show the volume for 
executed short sale trades, as well as the total trading volume for the 
Nasdaq market. The file will include short sale data for Nasdaq, NYSE 
and regional exchange-listed securities.
    (b) Monthly Short Sale Transaction files provide a trade-by-trade 
record of all short sales executed on the Nasdaq execution system and 
reported to a consolidated tape in Nasdaq, NYSE and regional exchange-
listed securities. The file will be provided on a monthly basis, 
separated into daily files. Historical monthly files are available back 
to August 2005.
    (c) Distributor Fees
    (1) The fee for each Distributor of the Short Sale Data Product 
described in paragraphs (a) and (b) above is $500 per month, which 
allows the distributor access to the downloadable FTP files and to 
distribute such files internally and externally.
* * * * *

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 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
    Nasdaq proposes to establish the new Service and related fees that 
will provide subscribers with market information and increased market 
transparency that will help bolster investor confidence. Nasdaq 
believes that in creating these data products it will be addressing the 
market demand for: (i) A short sale product that is comprised of 
aggregate reported share volume of executed short sale trades during 
regular market hours on a daily basis; and (ii) every short sale 
executed on the Nasdaq execution system and reported to a consolidated 
tape for Nasdaq, NYSE and regional exchange-listed securities, 
including the price of the trade and the number of shares for every 
short sale transaction, on a monthly basis, separated into daily files.
    Nasdaq proposes to offer the Service at $500 per subscriber, per 
month, which allows a distributor access to the downloadable FTP files 
and to distribute internally and externally. Use of the Service is 
voluntary. The proposed fee will be applied to offset the costs 
associated with establishing the Service, responding to customer 
requests, configuring Nasdaq's systems, programming to user 
specifications, and administering the service, among other things. To 
the extent that costs are covered by the proposed fee, the proposed fee 
may also provide Nasdaq with a profit.
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 Section 
6(b)(4) of the Act,\4\ in particular, 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(b)(4).
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    The Short 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.

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. As the Commission 
has recognized,\6\ the market for transaction execution and routing 
services is highly competitive, and the market for proprietary data 
products is complementary to it, since

[[Page 29373]]

the ultimate goal of such products is to attract further order flow to 
an exchange. Thus, exchanges lack the ability to set fees for 
executions or data at inappropriately high levels. Order flow is 
immediately transportable to other venues in response to differences in 
cost or value. Similarly, if data fees are set at inappropriate levels, 
customers that control order flow will not make use of the data and 
will be more inclined to send order flow to exchanges providing data at 
fees they consider more reasonable.
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    \6\ Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770 (December 9, 2008) (SR-NYSEArca-2006-21).
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    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.
    With regard to the market for executions, broker-dealers currently 
have numerous alternative venues for their order flow, including 
multiple competing self-regulatory organization (``SRO'') markets, as 
well as broker-dealers (``BDs'') and aggregators such as the Direct 
Edge and LavaFlow electronic communications network (``ECN''). Each SRO 
market competes to produce transaction reports via trade executions, 
and 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, Alternext, 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-BDs 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.
    Market data vendors provide another form of price discipline for 
proprietary data products because they control the primary means of 
access to end users. Although their business models may differ, vendors 
exercise pricing discipline because 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 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. 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.\7\ Several 
ECNs have existed profitably for many years with a minimal share of 
trading, including Bloomberg Tradebook and LavaFlow.
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    \7\ However, on April 9, 2010 the Commission approved [sic] BATS 
proposed rule change to begin offering and charging for three new 
data products, which include BATS Last Sale Feed, BATS Historical 
Data Products, and a data product called BATS Market Insight. See 
Securities Exchange Act Release No. 61885 (April 9, 2010), 75 FR 
20018 (April 16, 2010).
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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 (ii) as to 
which the self-regulatory organization 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-2010-052 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-2010-052. 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

[[Page 29374]]

those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for Web 
site viewing 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 publicly available. All 
submissions should refer to File Number SR-NASDAQ-2010-052 and should 
be submitted on or before June 15, 2010.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-12495 Filed 5-24-10; 8:45 am]
BILLING CODE 8010-01-P