[Federal Register Volume 76, Number 23 (Thursday, February 3, 2011)]
[Notices]
[Pages 6165-6167]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2011-2376]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63796; File No. SR-NASDAQ-2011-010]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Suspension of and Order Instituting Proceedings To Determine Whether To 
Approve or Disapprove a Proposed Rule Change To Link Market Data Fees 
and Transaction Execution Fees

January 28, 2011.

I. Introduction

    On January 10, 2011, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Exchange Act'' or ``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to discount certain market data 
fees and increase certain liquidity provider rebates for members that 
both (1) execute specified levels of transaction volume on NASDAQ as a 
liquidity provider, and (2) purchase specified levels of market data 
from NASDAQ. The proposed rule change was immediately effective upon 
filing with the Commission pursuant to Section 19(b)(3)(A) of the 
Act.\3\ Notice of filing of the proposed rule change was published in 
the Federal Register on January 27, 2011.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ See Securities Exchange Act Release No. 63745 (January 20, 
2011) 76 FR 4970 (``Notice''). The Commission has received one 
comment letter on the proposed rule change to date. See Letter dated 
January 13, 2011 from William O'Brien, Chief Executive Officer, 
Direct Edge to Florence E. Harmon, Deputy Secretary, Commission (the 
``Direct Edge Letter''). The commenter suggested that the proposed 
rule change should be suspended and that the Commission should 
institute proceedings to determine whether to approve or disapprove 
the proposal.
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    Under Section 19(b)(C)(3) of the Act, the Commission is (1) hereby 
temporarily suspending File No. SR-NASDAQ-2011-010, and (2) instituting 
proceedings to determine whether to approve or disapprove File No. SR-
NASDAQ-2011-010.

II. Summary of the Proposed Rule Change

    NASDAQ proposes to provide a discount on non-professional market 
data fees for NASDAQ Depth Data \5\ (``NASDAQ Depth Data Product 
Fees'') charged to a member that provides displayed liquidity through 
the NASDAQ Market Center and incurs NASDAQ Depth Data Product Fees at 
certain specified levels.\6\ Specifically, a member would qualify as a:
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    \5\ NASDAQ Depth Data includes National Quotation Data Service 
(individual market maker quotation data), TotalView (depth-of-book 
data for NASDAQ-listed securities), and OpenView (depth-of-book data 
for non-NASDAQ-listed securities) data products.
    \6\ For a more detailed description of the proposed rule change, 
see Notice, supra note 4.
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     ``Tier 1 Firm'' for purposes of pricing during a 
particular month if it (i) has an average daily volume of 12 million 
shares or more of liquidity provided through the NASDAQ Market Center 
in all securities during the month; and (ii) incurs NASDAQ Depth Data 
Product Fees during the month of $150,000 or more.
     ``Tier 2 Firm'' for purposes of pricing during a 
particular month if it (i) has an average daily volume of 35 million or 
more shares of liquidity provided through the NASDAQ Market Center in 
all securities during the month; and (ii) incurs NASDAQ Depth Data 
Product Fees during the month of $300,000 or more.
     ``Tier 3 Firm'' for purposes of pricing during a 
particular month if it (i) has an average daily volume of 65 million or 
more shares of liquidity provided through the NASDAQ Market Center in 
all securities during the month; and (ii) incurs NASDAQ Depth Data 
Product Fees during the month of $500,000 or more.
    Tier 1 Firms would receive a 15% discount on NASDAQ Depth Data 
Product Fees charged to them, Tier 2 Firms would receive a 35% discount 
on NASDAQ Depth Data Product Fees charged to them, and Tier 3 Firms 
would receive a 50% discount on NASDAQ Depth Data Product Fees charged 
to them.\7\ In addition, Tier 1 Firms would receive an increased 
liquidity provider rebate for transactions executed on NASDAQ. 
Specifically, Tier 1 Firms would receive a rebate of $0.0028 per share 
for displayed liquidity and $0.0015 per share for undisplayed 
liquidity, compared to the current liquidity provider credit of $0.0020 
per share of displayed liquidity and $0.0010 per share of non-displayed 
liquidity applicable to these firms. There is no enhancement to the 
liquidity provider credits at this time for Tier 2 and Tier 3 firms.
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    \7\ A NASDAQ member incurs non-professional fees when it offers 
NASDAQ Depth Data to natural persons that are not acting in a 
capacity that subjects them to financial industry regulation (e.g., 
retail customers).
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III. Summary of Comment Letters

    To date, the Commission has received one comment letter on NASDAQ's 
proposed rule change.\8\ In its comment letter, Direct Edge argues, 
among other things, that the proposed rule change should be suspended 
because, in its view, offering discounts on NASDAQ's market data fees 
only to customers who meet specified minimum order flow thresholds and 
provide such data to non-professional users does not meet the ``fair 
and reasonable'' standard for market data fees under the Exchange Act.
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    \8\ See Direct Edge Letter supra, note 4.
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IV. Suspension of SR-NASDAQ-2011-010

    Pursuant to Section 19(b)(3)(C) of the Act,\9\ at any time within 
60 days of the date of filing a proposed rule change pursuant to 
Section 19(b)(1) of the Act,\10\ the Commission summarily may 
temporarily suspend the change in the rules of a self-regulatory 
organization if it appears to the Commission that such action is 
necessary or appropriate in the public interest, for the protection of 
investors, or otherwise in furtherance of the purposes of the Act.
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    \9\ 15 U.S.C. 78s(b)(3)(C).
    \10\ 15 U.S.C. 78s(b)(1).
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    Under the proposal, the level of fees that a market participant 
would be charged for obtaining NASDAQ market data would be tied to the 
extent of that market participant's trading in the NASDAQ market. In 
addition, the level of transaction rebates that a market participant 
receives for trading on NASDAQ would be tied to the level of NASDAQ 
market data that it purchases. The Commission is concerned that such a 
tying arrangement may not be consistent with the statutory requirements 
applicable to a national securities exchange under the Act, as 
described below. For instance, the Commission is concerned that the 
proposal may fail to satisfy the standards under the Exchange Act and 
the rules thereunder that require market data fees to be equitable, 
fair, and not unreasonably discriminatory.\11\
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    \11\ See infra, notes 17-24.
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    Therefore, the Commission finds that it is appropriate in the 
public interest, for the protection of investors, and otherwise in 
furtherance of the purposes of the Act, to temporarily suspend the 
proposed rule change.

V. Proceedings To Determine Whether To Approve or Disapprove SR-NASDAQ-
2011-010

    The Commission is instituting proceedings pursuant to Sections

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19(b)(3)(C) \12\ and 19(b)(2) of the Act \13\ to determine whether 
NASDAQ's proposed rule change should be approved or disapproved. 
Pursuant to Section 19(b)(2)(B) of the Act,\14\ the Commission is 
providing notice of the grounds for disapproval under consideration. 
Under the proposal, the level of fees that a market participant would 
be charged for obtaining NASDAQ market data would be tied to the extent 
of that market participant's trading in the NASDAQ market. The Exchange 
Act and the rules thereunder require that market data fees must be 
equitable, fair, reasonable, and not unreasonably discriminatory.\15\ 
In this regard, the Commission has stated previously that the Exchange 
Act precludes exchanges from adopting terms for market data 
distribution that unfairly discriminate by favoring participants in an 
exchange's market or penalizing participants in other markets.\16\ The 
Commission is concerned that NASDAQ's proposal may be inconsistent with 
this standard. The Commission believes that the NASDAQ proposal raises 
significant legal and policy issues. Specifically, the Commission has 
serious concerns as to whether NASDAQ's proposal to tie market data 
fees and execution fees is consistent with the Exchange Act. The 
Commission has similar concerns with respect to NASDAQ's proposal to 
tie the level of transaction rebates paid to market participants to the 
amount of market data they purchase.
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    \12\ 15 U.S.C. 78s(b)(3)(C). Once the Commission temporarily 
suspends a proposed rule change, Section 19(b)(3)(C) of the Act 
requires that the Commission institute proceedings under Section 
19(b)(2)(B) to determine whether a proposed rule change should be 
approved or disapproved.
    \13\ 15 U.S.C. 78s(b)(2).
    \14\ 15 U.S.C. 78s(b)(2)(B). Section 19(b)(2)(B) of the Act also 
provides that proceedings to determine whether to disapprove a 
proposed rule change must be concluded within 180 days of the date 
of publication of notice of the filing of the proposed rule change. 
Id. The time for conclusion of the proceedings may be extended for 
up to 60 days if the Commission finds good cause for such extension 
and publishes its reasons for so finding. Id.
    \15\ See infra, notes 17-24.
    \16\ See Securities Exchange Act Release No. 59039 (December 2, 
2008), 73 FR 74770 at 74791 (December 9, 2008) (SR-NYSEArca-2006-21) 
(Order Setting Aside Action by Delegated Authority and Approving 
Proposed Rule Change FRelating to NYSE Arca Data) (``NYSE Arca 
Order''), vacated and remanded by NetCoalition v. SEC No. 09-1042 
(DC Cir. 2010).
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    The Commission believes it is appropriate in the public interest to 
institute disapproval proceedings at this time in view of the 
significant legal and policy issues raised by the proposal. Institution 
of disapproval proceedings does not indicate, however, that the 
Commission has reached any conclusions with respect to the issues 
involved. The sections of the Act and the rules thereunder that are 
applicable to the proposed rule change include:
     Section 6(b)(4) of the Act, 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 persons using its facilities''; \17\
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    \17\ 15 U.S.C. 78f(b)(4).
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     Section 6(b)(5) of the Act, which requires that the rules 
of a national securities exchange be designed to, among other things, 
``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''; \18\
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    \18\ 15 U.S.C. 78f(b)(5).
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     Section 6(b)(8) of the Act,\19\ which requires that the 
rules of a national securities exchange ``not impose any burden on 
competition not necessary or appropriate'' in furtherance of the Act; 
\20\
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    \19\ 15 U.S.C. 78f(b)(8).
    \20\ 15 U.S.C. 78f(b)(8).
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     Section 11A(a) of the Act, in which Congress found that it 
is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure 
``economically efficient execution of securities transactions,'' ``fair 
competition among brokers and dealers and among exchange markets,'' 
``the availability to brokers, dealers, and investors of information 
with respect to quotations for and transactions in securities,'' and 
``the practicability of brokers executing investors' orders in the best 
market''; \21\
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    \21\ 15 U.S.C. 78k-1(a)(1)(C)(i)-(iv).
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     Rule 603(a)(1) of Regulation NMS, which requires any 
exclusive processor that distributes information with respect to 
quotations for or transactions in an NMS stock, as that term is defined 
in Rule 600(b) of Regulation NMS,\22\ to a securities information 
processor to ``do so on terms that are fair and reasonable''; \23\ and
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    \22\ See 17 CFR 242.600(b)(46) and (47), defining ``NMS stock'' 
as any NMS security other than an option and defining ``NMS 
security'' as any security or class of securities for which 
transaction reports are collected, processed, and made available 
pursuant to an effective transaction reporting plan, or an effective 
national market system plan for reporting transactions in listed 
options.
    \23\ 17 CFR 242.603(a)(1).
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     Rule 603(a)(2) of Regulation NMS, which requires a 
national securities exchange that distributes information with respect 
to quotations for or transactions in an NMS stock to a securities 
information processor to ``do so on terms that are not unreasonably 
discriminatory''.\24\
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    \24\ 17 CFR 242.603(a)(2).
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VI. Commission's Solicitation of Comments

    The Commission requests written views, data, and arguments with 
respect to the concerns identified above as well as any other relevant 
concerns. Such comments should be submitted by March 21, 2011. Rebuttal 
comments should be submitted by April 4, 2011. Although there do not 
appear to be any issues relevant to approval or disapproval which would 
be facilitated by an oral presentation of views, data, and arguments, 
the Commission will consider, pursuant to Rule 19b-4, any request for 
an opportunity to make an oral presentation.\25\
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    \25\ 15 U.S.C. 78s(b)(2). Section 19(b)(2) of the Act grants the 
Commission flexibility to determine what type of proceeding--either 
oral or notice and opportunity for written comments--is appropriate 
for consideration of a particular proposal by a self-regulatory 
organization. See Securities Acts Amendments of 1975, Report of the 
Senate Committee on Banking, Housing and Urban Affairs to Accompany 
S. 249, S. Rep. No. 75, 94th Cong., 1st Sess. 30 (1975).
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    The Commission asks that commenters address the merit of NASDAQ's 
statements in support of the proposal, in addition to any other 
comments they may wish to submit about the proposed rule change. 
Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule change, 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/other.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASDAQ-2011-010 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-2011-010. The 
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

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post all comments on the Commission's Internet Web site (http://www.sec.gov/rules/other.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 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 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 publicly available. All submissions should refer to 
File Number SR-NASDAQ-2011-010 and should be submitted on or before 
March 21, 2011. Rebuttal comments should be submitted by April 4, 2011.

VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(3)(C) of the 
Act,\26\ that File No. SR-NASDAQ-2011-010, be and hereby is, 
temporarily suspended. In addition, the Commission is instituting 
proceedings to determine whether the proposed rule change should be 
approved or disapproved.
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    \26\ 15 U.S.C. 78s(b)(3)(C).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\27\
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    \27\ 17 CFR 200.30-3(a)(57) and (58).
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Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-2376 Filed 2-2-11; 8:45 am]
BILLING CODE 8011-01-P