[Federal Register Volume 79, Number 16 (Friday, January 24, 2014)]
[Notices]
[Pages 4200-4207]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-01404]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-71351; File No. SR-NASDAQ-2014-006]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
With Respect to NASDAQ Last Sale

January 17, 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 January 9, 2014, The NASDAQ Stock Market LLC (``NASDAQ'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III 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.
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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 filing with the Commission a proposal to make permanent 
the fee pilot program pursuant to which NASDAQ distributes 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/NYSE MKT'' data feeds containing last sale activity in 
U.S. equities within the NASDAQ Market Center and reported to the 
FINRA/NASDAQ Trade Reporting Facility (``FINRA/NASDAQ TRF''), which is 
jointly operated by NASDAQ and the Financial Industry Regulatory 
Authority (``FINRA'').
    The pilot program has supported 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 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 millions of investors on Web sites 
operated by Google, Interactive Data, and Dow Jones, among others. 
Accordingly, NASDAQ believes that it would be consistent with the 
protection of investors and the public interest to make the product 
permanent.
    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in brackets.
* * * * *
7039. NASDAQ Last Sale Data Feeds
    (a) [For a three month pilot period commencing on January 1, 2014,] 
NASDAQ [shall] offers two proprietary data feeds containing real-time 
last sale information for trades executed on NASDAQ or reported to the 
NASDAQ/FINRA Trade Reporting Facility.
    (1)-(2) No change.
    (b)-(c) No change.
* * * * *

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 Exchange 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. The Exchange 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
    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 pilot 
to offer access to real-time market data to data distributors for a 
capped fee, enabling those distributors to disseminate the data at no 
cost to millions of internet users and television viewers. NASDAQ now 
proposes to make the existing pilot program permanent, subject to the 
same fee structure as is applicable today.
    NLS consists of 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 is 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/NYSE MKT'' 
data product provides real-time last sale information including 
execution price, volume, and time for NYSE- and NYSE MKT-securities 
executions occurring within the NASDAQ system as well as those reported 
to the FINRA/NASDAQ TRF. By contrast, the securities information 
processors (``SIPs'') that provide ``core'' data consolidate last sale 
information from all exchanges and trade reporting facilities 
(``TRFs''). Thus, NLS replicates a subset of the information provided 
by the SIPs.
    In the pilot programs, 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. NASDAQ is proposing to 
maintain this existing structure for the permanent version of the 
product. Specifically, firms with the ability to maintain username/
password entitlement systems that enable them to track the number of 
entitled users and/or quote counting

[[Page 4201]]

mechanisms that enable them to track the number of queries made for 
data are 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/NYSE MKT Product.
    The per query model is well suited to subscribers that expect to 
access the product on a sporadic basis, while the per user model allows 
unlimited usage by a fixed number of users, at a per month cost that is 
less than the daily price of a major newspaper. Moreover, a per query 
user may cap its fees such that they would not exceed the applicable 
per user charge. The per user and per query fee schedules are as 
follows:

                                           NASDAQ Last Sale for NASDAQ
----------------------------------------------------------------------------------------------------------------
            Users/month                     Price                  Query                       Price
----------------------------------------------------------------------------------------------------------------
1-9,999...........................  $0.60/usermonth......  0-10M................  $0.003/query.
10,000-49,999.....................  $0.48/usermonth......  10M-20M..............  $0.0024/query.
50,000-99,999.....................  $0.36/usermonth......  20M-30M..............  $0.0018/query.
100,000+..........................  $0.30/usermonth......  30M+.................  $0.0015/query.
----------------------------------------------------------------------------------------------------------------


                                        NASDAQ Last Sale for NYSE/NYSE MKT
----------------------------------------------------------------------------------------------------------------
            Users/month                     Price                  Query                       Price
----------------------------------------------------------------------------------------------------------------
1-9,999...........................  $0.30/usermonth......  0-10M................  $0.0015/query.
10,000-49,999.....................  $0.24/usermonth......  10M-20M..............  $0.0012/query.
50,000-99,999.....................  $0.18/usermonth......  20M-30M..............  $0.0009/query.
100,000+..........................  $0.15/usermonth......  30M+.................  $0.000725/query.
----------------------------------------------------------------------------------------------------------------

    The higher price for NLS for NASDAQ, in comparison to NLS for NYSE/
NYSE MKT, reflects NASDAQ's higher market share in the securities that 
it lists and the correspondingly larger amount of data made available 
through the product.
    Firms that are unable to maintain username/password entitlement 
systems and/or quote counting mechanisms also have multiple options for 
purchasing the NASDAQ Last Sale data. These firms choose 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 offers a reduction in television fees when a single 
distributor distributes NASDAQ Last Sale Data Products via multiple 
distribution mechanisms. The applicable fee schedules are as follows:

                       NASDAQ Last Sale for NASDAQ
------------------------------------------------------------------------
              Unique visitors                        Monthly fee
------------------------------------------------------------------------
1-100,000.................................  $0.036/Unique Visitor.
100,000-1M................................  $0.03/Unique Visitor.
1M+.......................................  $0.024/Unique Visitor.
------------------------------------------------------------------------


                   NASDAQ Last Sale for NYSE/NYSE MKT
------------------------------------------------------------------------
              Unique visitors                        Monthly fee
------------------------------------------------------------------------
1-100,000.................................  $0.018/Unique Visitor.
100,000-1M................................  $0.015/Unique Visitor.
1M+.......................................  $0.012/Unique Visitor.
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                       NASDAQ Last Sale for NASDAQ
------------------------------------------------------------------------
                 Household                           Monthly fee
------------------------------------------------------------------------
1-1M......................................  $0.00096/Household.
1M-5M.....................................  $0.00084/Household.
5M-10M....................................  $0.00072/Household.
10M+......................................  $0.0006/Household.
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                   NASDAQ Last Sale for NYSE/NYSE MKT
------------------------------------------------------------------------
                 Household                           Monthly fee
------------------------------------------------------------------------
1-1M......................................  $0.00048/Household.
1M-5M.....................................  $0.00042/Household.
5M-10M....................................  $0.00036/Household.
10M+......................................  $0.0003/Household.
------------------------------------------------------------------------

    NASDAQ also established a cap on the monthly fee, currently set at 
$50,000 per month, for all NASDAQ Last Sale products. The fee cap 
enables NASDAQ to compete effectively against other exchanges that also 
offer last sale data for purchase or at no charge. The fee cap also 
ensures that users with large numbers of users or viewers can make the 
product available at a per user/viewer fee measured in fractions of a 
penny per month, with the per user/viewer fee dropping as the number of 
persons receiving the data increases.
    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/NYSE MKT products pay a single $1,500/month NASDAQ Last Sale 
Distributor Fee in addition to any applicable usage fees. The $1,500 
monthly fee applies to all distributors and does 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)(5) of the Act,\4\ in particular, in that the proposal is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, to foster cooperation and 
coordination with persons engaged in regulating, clearing, settling, 
processing information with respect to, and facilitating transactions 
in securities, 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. The purpose of the proposed 
rule change is to make permanent the pilot program under which NASDAQ 
has distributed the NASDAQ Last Sale product. NLS provides a subset of 
the data that is also

[[Page 4202]]

provided by the core data feeds available through the SIPs. NASDAQ 
believes that the proposal facilitates transactions in securities, 
removes impediments to and perfects the mechanism of a free and open 
market and a national market system, and, in general, protects 
investors and the public interest by making permanent the availability 
of an additional means by which investors may access information about 
securities transactions, thereby providing investors with additional 
options for accessing information that may help to inform their trading 
decisions. Given that Section 11A the Act \5\ requires the 
dissemination of last sale reports in core data, NASDAQ believes that 
the inclusion of the same data in NLS is also consistent with the Act.
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    \3\ 15 U.S.C. 78f.
    \4\ 15 U.S.C. 78f(b)(5).
    \5\ 15 U.S.C. 78k-1.
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    NASDAQ further notes that the pilot program fees for NLS have been 
previously established, and that the Commission has either specifically 
determined them to be consistent with the Act or has permitted them to 
become effective on an immediately effective basis.\6\ Thus, this 
proposed rule change does not establish or change a fee of the 
Exchange, except to the extent that it provides that the fees charged 
during the current pilot period for NLS may continue to be charged on a 
going-forward basis. However, in this filing, NASDAQ reiterates its 
bases for concluding that the fees for NLS provide for the equitable 
allocation of reasonable dues, fees and other charges among members and 
issuers and other persons using any facility or system which NASDAQ 
operates or controls, and are not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers.\7\
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    \6\ See Securities Exchange Act Release No. 57965 (June 16, 
2008), 73 FR 35178 (June 20, 2008) (SR-NASDAQ-2006-060) (approving 
initial fees for NLS on a pilot basis). See also Securities Exchange 
Act Release Nos. 58894 (October 31, 2008), 73 FR 66953 (November 12, 
2008) (SR-NASDAQ-2008-086); 59186 (December 30, 2008), 74 FR 743 
(January 7, 2009) (SR-NASDAQ-2008-103); 59652 (March 30, 2009), 74 
FR 15533 (April 6, 2009) (SR-NASDAQ-2009-027); 60201 (June 30, 
2009), 74 FR 32670 (July 8, 2009) (SR-NASDAQ-2009-062); 60990 
(November 12, 2009), 74 FR 60002 (November 19, 2009) (SR-NASDAQ-
2009-095); 61872 (April 8, 2010), 75 FR 19444 (April 14, 2010) (SR-
NASDAQ-2010-045); 62428 (July 1, 2010), 75 FR 39315 (July 8, 2010) 
(SR-NASDAQ-2010-081); 63092 (October 13, 2010), 75 FR 64375 (October 
19, 2010) (SR-NASDAQ-2010-129); 63641 (January 4, 2011), 76 FR 2164 
(January 12, 2011) (SR-NASDAQ-2010-172); 64188 (April 5, 2011), 76 
FR 20054 (April 11, 2011) (SR-NASDAQ-2011-044); 64856 (July 12, 
2011), 76 FR 41845 (July 15, 2011) (SR-NASDAQ-2011-092); 65488 
(October 5, 2011), 76 FR 63334 (October 12, 2011) (SR-NASDAQ-2011-
132); 66095 (January 4, 2012), 77 FR 1537 (January 10, 2012) (SR-
NASDAQ-2011-174); 66706 (March 30, 2012), 77 FR 20666 (April 5, 
2012) (SR-NASDAQ-2012-045); 67376 (July 9, 2012), 77 FR 41467 (July 
13, 2012) (SR-NASDAQ-2012-078); 67979 (October 4, 2012), 77 FR 61810 
(October 11, 2012) (SR-NASDAQ-2012-108); 68568 (January 3, 2013), 78 
FR 1910 (January 9, 2013) (SR-NASDAQ-2012-145); 69245 (March 27, 
2013), 78 FR 19722 (April 2, 2013) (SR-NASDAQ-2013-053); 69908 (July 
2, 2013), 78 FR 41178 (July 9, 2013) (SR-NASDAQ-2013-089); 70575 
(September 30, 2013), 78 FR 62820 (October 22, 2013) (SR-NASDAQ-
2013-126); 71217 (December 31, 2013), 79 FR 875 (January 7, 2014) 
(SR-NASDAQ-2013-162).
    \7\ 15 U.S.C. 78f(b)(4), (5).
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    In adopting Regulation NMS, the Commission granted self-regulatory 
organizations (``SROs'') and broker-dealers (``BDs'') 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. NASDAQ believes that its NLS market 
data products are 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.\8\
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    \8\ 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 BDs at 
all, it follows that the price at which such data is sold should be set 
by the market as well.
    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). The court agreed with the 
Commission's conclusion that ``Congress intended that `competitive 
forces should dictate the services and practices that constitute the 
U.S. national market system for trading equity securities.' '' \9\
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    \9\ NetCoalition I, at 535.
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    The Court in NetCoalition I, while upholding the Commission's 
conclusion that competitive forces may be relied upon to establish the 
fairness of prices, nevertheless concluded that the record in that case 
did not adequately support the Commission's conclusions as to the 
competitive nature of the market for NYSE Arca's data product at issue 
in that case. As explained below in NASDAQ's Statement on Burden on 
Competition, however, NASDAQ believes that there is substantial 
evidence of competition in the marketplace for data that was not in the 
record in the NetCoalition I case, and that the Commission is entitled 
to rely upon such evidence in concluding fees are the product of 
competition, and therefore in accordance with the relevant statutory 
standards.\10\ Moreover, NASDAQ further notes that the product at issue 
in this filing--a NASDAQ last sale data product that replicates a 
subset of the information available through ``core'' data products 
whose fees have been reviewed and approved by the SEC--is quite 
different from the NYSE Arca depth-of-book data product at issue in 
NetCoalition I. Accordingly, any findings of the court with respect to 
that product may not be relevant to the product at issue in this 
filing.
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    \10\ It should also be noted that Section 916 of the Dodd-Frank 
Wall Street Reform and Consumer Protection Act of 2010 (``Dodd-Frank 
Act'') has amended paragraph (A) of Section 19(b)(3) of the Act, 15 
U.S.C. 78s(b)(3), to make it clear that all exchange fees, including 
fees for market data, may be filed by exchanges on an immediately 
effective basis. See also NetCoalition v. SEC, 715 F.3d 342 (D.C. 
Cir. 2013) (``NetCoalition II'') (finding no jurisdiction to review 
Commission's non-suspension of immediately effective fee changes).
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    All of the information made available through NLS is also included 
in the core data feeds made available pursuant to the joint-SRO plans, 
the fees for which have been approved by the Commission. As the 
Commission determined in approving the initial pilot program for NASDAQ 
Basic, another product that offers a subset of information also made 
available through the joint-SRO plans,

[[Page 4203]]

``the availability of alternatives to NASDAQ Basic significantly affect 
the terms on which NASDAQ can distribute this market data. In setting 
the fees for its NASDAQ Basic service, NASDAQ must consider the extent 
to which market participants would choose one or more alternatives 
instead of purchasing the exchange's data.'' \11\ Analogously, it 
follows that the fees for NLS are reasonable, since charging 
unreasonably high fees would cause market participants to rely solely 
on core data rather than purchasing NLS.
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    \11\ Securities Exchange Act Release No. 12425 (March 16, 2009), 
74 FR 12423, 12425 (March 24, 2009) (SR-NASDAQ-2008-102).
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    Moreover, as further discussed below in NASDAQ's Statement on 
Burden on Competition, data products such as NLS are a means by which 
exchanges compete to attract order flow. To the extent that exchanges 
are successful in such competition, they earn trading revenues and also 
enhance the value of their data products by increasing the amount of 
data they are able to provide. Conversely, to the extent that exchanges 
are unsuccessful, the inputs needed to add value to data products are 
diminished. Accordingly, the need to compete for order flow places 
substantial pressure upon exchanges to keep their fees for both 
executions and data reasonable.
    The fees for NLS also continue to reflect an equitable allocation 
and continue not to be unfairly discriminatory, because NLS is a 
voluntary product for which market participants can readily substitute 
core data feeds that provide additional last sale information not 
available through NLS. Accordingly, NASDAQ is constrained from pricing 
the product in a manner that would be inequitable or unfairly 
discriminatory. Moreover, the fee schedule for NLS is designed to 
ensure that the fees charged are tailored to the specific usage 
patterns of a range of potential customers, in a manner designed to 
avoid charging fees that are inequitably allocated or unfairly 
discriminatory. Thus, customers that intend to distribute data through 
the internet or television can avail themselves of a pricing model 
under which per ``unique visitor'' or ``household'' charges drop as the 
number of persons receiving the data through these media increases. 
Likewise, subscribers distributing data through both television and the 
internet receive a discount for their use of both media. Similarly, for 
users that limit usage to a finite number of users, or that wish to 
avail themselves of the data on a limited per query basis, pricing 
models are available to ensure that fees bear an equitable relation to 
the volume of usage, with per user and per query fees dropping as the 
volume of usage increases and with per query fees subject to a cap to 
ensure that users opting for this method do not exceed corresponding 
per user fees in a month of high usage. In all instances, charges for 
NASDAQ Last Sale for NYSE/NYSE MKT are lower than charges for NASDAQ 
Last Sale for NASDAQ to reflect the lower volume of data available 
through the former product and to provide users with a choice of 
receiving all NASDAQ Last Sale data or only a portion of it. Finally, 
all fees are subject to a monthly cap. Thus, the range of fee options 
ensures that customers are not charged a fee that is inequitably 
disproportionate to the use that they make of the product; rather, 
depending on the use that they intend to make of the product, they may 
select the fee model that will best minimize their costs.

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. 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 market-specific 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. Similarly, with respect to the FINRA/NASDAQ TRF 
data that is a component of NLS, allowing exchanges to operate TRFs has 
permitted them to earn revenues by providing technology and data in 
support of the non-exchange segment of the market. This revenue 
opportunity has also resulted in fierce competition between the two 
current TRF operators, with both TRFs charging extremely low trade 
reporting fees and rebating the majority of the revenues they receive 
from core market data to the parties reporting trades.
    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. The decision 
whether and on which platform to post an order will depend on the 
attributes of the platform where the order can be posted, including the 
execution fees, data quality and price, and distribution of its data 
products. Without trade executions, exchange data products cannot 
exist. Moreover, data products are valuable to many end users only 
insofar as they provide information that end users 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, the operation of the 
exchange is characterized by high fixed costs and low marginal costs. 
This cost structure is common in content and content distribution 
industries such as software, where developing new software typically 
requires a large initial investment (and continuing large investments 
to upgrade the software), but once the software is developed, the 
incremental cost of providing that software to an additional user is 
typically small, or even zero (e.g., if the software can be downloaded 
over the internet after being purchased).\12\ In NASDAQ's case, it is 
costly to build and maintain a trading platform, but the incremental 
cost of trading each additional share on an existing platform, or 
distributing an additional instance of data, is very low. Market 
information and executions are each produced jointly (in the sense that 
the activities of trading and placing orders are the source of the 
information that is distributed) and are each subject to

[[Page 4204]]

significant scale economies. In such cases, marginal cost pricing is 
not feasible because if all sales were priced at the margin, NASDAQ 
would be unable to defray its platform costs of providing the joint 
products. Similarly, data products cannot make use of TRF trade reports 
without the raw material of the trade reports themselves, and therefore 
necessitate the costs of operating, regulating,\13\ and maintaining a 
trade reporting system, costs that must be covered through the fees 
charged for use of the facility and sales of associated data.
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    \12\ See William J. Baumol and Daniel G. Swanson, ``The New 
Economy and Ubiquitous Competitive Price Discrimination: Identifying 
Defensible Criteria of Market Power,'' Antitrust Law Journal, Vol. 
70, No. 3 (2003).
    \13\ It should be noted that the costs of operating the FINRA/
NASDAQ TRF borne by NASDAQ include regulatory charges paid by NASDAQ 
to FINRA.
---------------------------------------------------------------------------

    An exchange's BD customers view the costs of transaction executions 
and of data as a unified cost of doing business with the exchange. A BD 
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 BD 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 BD will choose not to buy it. Moreover, as a BD 
chooses to direct fewer orders to a particular exchange, the value of 
the product to that BD decreases, for two reasons. First, the product 
will contain less information, because executions of the BD's trading 
activity will not be reflected in it. Second, and perhaps more 
important, the product will be less valuable to that BD because it does 
not provide information about the venue to which it is directing its 
orders. Data from the competing venue to which the BD is directing 
orders will become correspondingly more valuable.
    Similarly, in the case of products such as NLS that are distributed 
through market data vendors, the vendors provide 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 data that will enable them to attract ``eyeballs'' that 
contribute to their advertising revenue. Retail BDs, 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. Exchanges, TRFs, 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. Moreover, NASDAQ 
believes that products such as NLS can enhance order flow to NASDAQ by 
providing more widespread distribution of information about 
transactions in real time, thereby encouraging wider participation in 
the market by investors with access to the internet or television. 
Conversely, the value of such products to distributors and investors 
decreases if order flow falls, because the products contain less 
content.
    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. Similarly, the inclusion of TRF trade reporting data in 
a product such as NLS may assist in attracting customers to the 
product, thereby assisting in covering the additional costs associated 
with operating and regulating a TRF.
    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. NASDAQ pays rebates to attract orders, charges relatively 
low prices for market information and charges relatively high prices 
for accessing posted liquidity. Other platforms may choose a strategy 
of paying lower liquidity rebates to attract orders, setting relatively 
low prices for accessing posted liquidity, and setting relatively high 
prices for market information. Still others may provide most data free 
of charge and rely exclusively on transaction fees to recover their 
costs. Finally, some platforms may incentivize use by providing 
opportunities for equity ownership, which may allow them to charge 
lower direct fees for executions and data.
    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. Such regulation is unnecessary because an ``excessive'' price 
for one of the joint products will ultimately have to be reflected in 
lower prices for other products sold by the firm, or otherwise the firm 
will experience a loss in the volume of its sales that will be adverse 
to its overall profitability. In other words, an increase in the price 
of data will ultimately have to be accompanied by a decrease in the 
cost of executions, or the volume of both data and executions will 
fall.
    The level of competition and contestability in the market is 
evident in the numerous alternative venues that compete for order flow, 
including thirteen SRO markets, as well as internalizing 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 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, 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, NYSE, NYSE MKT, NYSE Arca, BATS, and Direct Edge.
    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

[[Page 4205]]

single or multiple BDs' production of proprietary data products. The 
potential sources of proprietary products are virtually limitless. 
Notably, the potential sources of data include the BDs that submit 
trade reports to TRFs and that have the ability to consolidate and 
distribute their data without the involvement of FINRA or an exchange-
operated TRF.
    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 proprietary book data on the internet. Second, because a 
single order or transaction report can appear in a core data product, 
an SRO proprietary product, and/or a non-SRO proprietary product, the 
data available in proprietary products is exponentially greater than 
the actual number of orders and transaction reports that exist in the 
marketplace. Indeed, in the case of NLS, the data provided through that 
product appears both in (i) real-time core data products offered by the 
SIPs for a fee, and (ii) free SIP data products with a 15-minute time 
delay, and finds a close substitute in last-sale products of competing 
venues.
    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, BATS Trading and Direct Edge. 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 BDs have 
previously published their proprietary data individually, Regulation 
NMS encourages market data vendors and BDs 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. In Europe, Markit aggregates and disseminates data from over 
50 brokers and multilateral trading facilities.\14\
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    \14\ http://www.markit.com/en/products/data/boat/boat-boat-data.page.
---------------------------------------------------------------------------

    In the case of TRFs, the rapid entry of several exchanges into this 
space in 2006-2007 following the development and Commission approval of 
the TRF structure demonstrates the contestability of this aspect of the 
market.\15\ Given the demand for trade reporting services that is 
itself a by-product of the fierce competition for transaction 
executions--characterized notably by a proliferation of ATSs and BDs 
offering internalization--any supra-competitive increase in the fees 
associated with trade reporting or TRF data would shift trade report 
volumes from one of the existing TRFs to the other \16\ and create 
incentives for other TRF operators to enter the space. Alternatively, 
because BDs reporting to TRFs are themselves free to consolidate the 
market data that they report, the market for over-the-counter data 
itself, separate and apart from the markets for execution and trade 
reporting services--is fully contestable.
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    \15\ The low cost exit of two TRFs from the market is also 
evidence of a contestable market, because new entrants are reluctant 
to enter a market where exit may involve substantial shut-down 
costs.
    \16\ It should be noted that the FINRA/NYSE TRF has, in recent 
weeks, received reports for over 10% of all over-the-counter volume 
in NMS stocks. In addition, FINRA has announced plans to update its 
Alternative Display Facility, which is also able to receive over-
the-counter trade reports. See Securities Exchange Act Release No. 
70048 (July 26, 2013), 78 FR 46652 (August 1, 2013) (SR-FINRA-2013-
031).
---------------------------------------------------------------------------

    Moreover, 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.
    The competitive nature of the market for products such as NLS is 
borne out by the performance of the market. In May 2008, the Internet 
portal Yahoo! began offering its Web site viewers real-time last sale 
data (as well as best quote data) provided by BATS. In response, in 
June 2008, NASDAQ launched NLS, which was initially subject to an 
``enterprise cap'' of $100,000 for customers receiving only one of the 
NLS products, and $150,000 for customers receiving both products. The 
majority of NASDAQ's sales were at the capped level. In early 2009, 
BATS expanded its offering of free data to include depth-of-book data. 
Also in early 2009, NYSE Arca announced the launch of a competitive 
last sale product with an enterprise price of $30,000 per month. In 
response, NASDAQ combined the enterprise cap for the NLS products and 
reduced the cap to $50,000 (i.e., a reduction of $100,000 per month). 
Although each of these products offers only a specific subset of data 
available from the SIPs, NASDAQ believes that the products are viewed 
as substitutes for each other and for core last-sale data, rather than 
as products that must be obtained in tandem. For example, while Yahoo! 
and Google now both disseminate NASDAQ's product, several other major 
content providers, including MSN and Morningstar, use the BATS product.
    In this environment, a super-competitive 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 I at 539. The existence of 
fierce competition for order flow implies a high degree of price 
sensitivity on the part of BDs with order flow, since they may readily 
reduce costs by directing orders toward the lowest-cost trading venues. 
A BD 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 from the disfavored platform. If a platform increases its market 
data fees, the change will affect the overall cost of doing business 
with the platform, and affected BDs will assess whether they can lower 
their trading costs by directing orders elsewhere and thereby lessening 
the need for the more expensive data. Similarly, increases in the cost 
of NLS would impair the willingness of distributors to take a product 
for which there are numerous alternatives, impacting NLS data revenues, 
the value of NLS as a tool for attracting order flow, and ultimately, 
the volume of orders routed to NASDAQ and the value of its other data 
products.
    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

[[Page 4206]]

implications of that competition. NASDAQ believes that it has 
considered all relevant factors and has not considered irrelevant 
factors in order to establish fair, reasonable, and not unreasonably 
discriminatory fees and an equitable allocation of fees among all 
users. The existence of numerous alternatives to NLS, including real-
time consolidated data, free delayed consolidated data, and proprietary 
data from other sources ensures that NASDAQ cannot set unreasonable 
fees, or fees that are unreasonably discriminatory, without losing 
business to these alternatives. Accordingly, NASDAQ believes that the 
acceptance of the NLS product in the marketplace demonstrates the 
consistency of these fees with applicable statutory standards.

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 NLS 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. In addition, in response to prior 
filings to extend the NLS pilot,\17\ the Securities Industry and 
Financial Markets Association (``SIFMA'') and/or NetCoalition \18\ 
filed comment letters contending that the SEC should suspend and 
institute disapproval proceedings with respect to the filing. SIFMA and 
NetCoalition had also filed petitions seeking review by the United 
States Court of Appeals for the District of Columbia Circuit with 
respect to the NLS pricing pilots in effect from July 1, 2011 through 
September 30, 2011, from October 1, 2011 through December 31, 2011, 
from July 1, 2012 through September 30, 2012, and from January 1, 2013 
through March 31, 2013. These appeals were stayed pending resolution of 
the consolidated NetCoalition II case. On April 30, 2013, the court 
issued a decision dismissing NetCoalition II, concluding that it lacked 
jurisdiction to entertain the case. Subsequently, the court issued 
orders dismissing each of the pending petitions seeking review of prior 
extensions of the NLS pricing pilot. On May 30, 2013, SIFMA filed with 
the Commission an ``Application for an Order Setting Aside Rule Changes 
of Certain Self-Regulatory Organizations Limiting Access to their 
Services'' that purports to challenge prior filings under Section 19(d) 
and (f) of the Act.\19\ Pursuant to a Commission procedural order, 
interested parties have recently completed submission of briefs to the 
Commission regarding appropriate procedures and other threshold 
questions.
---------------------------------------------------------------------------

    \17\ Securities Exchange Act Release Nos. 70575 (September 30, 
2013), 78 FR 62820 (October 22, 2013) (SR-NASDAQ-2013-126); 69245 
(March 27, 2013), 78 FR 19772 (April 2, 2013) (SR-NASDAQ-2013-053); 
68568 (January 3, 2013), 78 FR 1910 (January 9, 2013) (SR-NASDAQ-
2012-145); 67376 (July 9, 2012), 77 FR 41467 (July 13, 2012) (SR-
NASDAQ-2012-078); 65488 (October 5, 2011), 76 FR 63334 (October 12, 
2011) (SR-NASDAQ-2011-132); 64856 (July 12, 2011), 76 FR 41845 (July 
15, 2011) (SR-NASDAQ-2011-092); 64188 (April 5, 2011), 76 FR 20054 
(April 11, 2011) (SR-NASDAQ-2011-044).
    \18\ NetCoaltion recently terminated its operations.
    \19\ Admin. Proc. File No. 3-15351. See also Admin Proc. File 
No. 13-15350 (similar proceeding with respect to NYSEArca data 
product).
---------------------------------------------------------------------------

    It appears to NASDAQ that SIFMA's contentions in this new 
proceeding are similar to the contentions in its numerous prior comment 
letters, which have repeatedly argued that market data fees are 
improper unless established through public utility-style rate-making 
proceedings that are nowhere contemplated by the Act. In making its 
arguments, SIFMA has sought to rely upon NetCoalition I, while 
repeatedly mischaracterizing the import of that case. Specifically, the 
court made findings about the extent of the Commission's record in 
support of determinations about a depth-of-book product offered by NYSE 
Arca. In making this limited finding, the court nevertheless squarely 
rejected contentions that cost-based review of market data fees was 
required by the Act:

    The petitioners believe that the SEC's market-based approach is 
prohibited under the Exchange Act because the Congress intended 
``fair and reasonable'' to be determined using a cost-based 
approach. The SEC counters that, because it has statutorily-granted 
flexibility in evaluating market data fees, its market-based 
approach is fully consistent with the Exchange Act. We agree with 
the SEC.\20\
---------------------------------------------------------------------------

    \20\ NetCoalition I, 615 F.3d at 534.

    While the court noted that cost data could sometimes be relevant in 
determining the reasonableness of fees, it acknowledged that submission 
of cost data may be inappropriate where there are ``difficulties in 
calculating the direct costs . . . of market data,'' id. at 539. That 
is the case here, due to the fact that the fixed costs of market data 
production are inseparable from the fixed costs of providing a trading 
platform, and the marginal costs of market data production are 
minimal.\21\ Because the costs of providing execution services and 
market data are not unique to either of the provided services, there is 
no meaningful way to allocate these costs among the two ``joint 
products''--and any attempt to do so would result in inherently 
arbitrary cost allocations.\22\
---------------------------------------------------------------------------

    \21\ Because the fees charged for products must cover these 
fixed costs, however, pricing at marginal cost is impossible.
    \22\ The court also explicitly acknowledged that the ``joint 
product'' theory set forth by NASDAQ's economic experts in 
NetCoalition I (and also described in this filing) could explain the 
competitive dynamic of the market and explain why consideration of 
cost data would be unavailing. Indeed, the Commission relied on that 
theory before the DC Circuit, but the court declined to reach the 
question because the Commission raised it for the first time on 
appeal. Id. at 541 n.16. For the purpose of providing a complete 
explanation of the theory, NASDAQ is further submitting as Exhibit 3 
to this filing a study that was submitted to the Commission in SR-
NASDAQ-2011-010. See Statement of Janusz Ordover and Gustavo 
Bamberger at 2-17 (December 29, 2010).
---------------------------------------------------------------------------

    SIFMA further contended that prior filings lacked evidence 
supporting a conclusion that the market for NLS is competitive, 
asserting that arguments about competition for order flow and 
substitutability were rejected in NetCoalition I. While the court did 
determine that the record before it was not sufficient to allow it to 
endorse those theories on the facts of that case, the court did not 
itself make any conclusive findings about the actual presence or 
absence of competition or the accuracy of these theories: rather, it 
simply made a finding about the state of the SEC's record. Moreover, 
analysis about competition in the market for depth-of-book data is only 
tangentially relevant to the market for last sale data. As discussed 
above and in prior filings, perfect and partial substitutes for NLS 
exist in the form of real-time core market data, free delayed core 
market data, and the last sale products of competing venues; additional 
competitive entry is possible; and evidence of competition is readily 
apparent in the pricing behavior of the venues offering last sale 
products and the consumption patterns of their customers. Thus, 
although NASDAQ believes that the competitive nature of the market for 
all market data, including depth-of-book data, will ultimately be 
established, SIFMA's submissions have not only mischaracterized the 
NetCoalition I decision, but have also failed to address the 
characteristics of the product at issue and the evidence already 
presented.

[[Page 4207]]

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A)(ii) of the Act \23\ and 
subparagraph (f)(6) of Rule 19b-4 thereunder.\24\ 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: (i) Necessary or appropriate in the 
public interest; (ii) for the protection of investors; or (iii) 
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.
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \24\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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 email to [email protected]. Please include 
File Number SR-NASDAQ-2014-006 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-2014-006. 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 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 10:00 a.m. and 
3:00 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-2014-006 and should 
be submitted on or before February 14, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\25\
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    \25\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-01404 Filed 1-23-14; 8:45 am]
BILLING CODE 8011-01-P