[Federal Register Volume 79, Number 228 (Wednesday, November 26, 2014)]
[Notices]
[Pages 70600-70604]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-28026]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73662; File No. SR-NASDAQ-2014-106]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change 
Relating to Short Interest Reports

November 20, 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 November 12, 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 the 
Substance of the Proposed Rule Change

    The Exchange proposes to change the model of pricing for Short 
Interest Reports under the category of Historical Research and 
Administrative Reports under NASDAQ Rule 7022. Specifically, NASDAQ 
proposes to replace the current subscriber-based model with a fee based 
on internal or external distribution of the reports. Although the 
proposed rule is effective upon filing, NASDAQ plans to implement the 
fee on January 1, 2015.
    The text of the proposed rule change is below; proposed new 
language is italicized; proposed deletions are in brackets.
* * * * *

7022. Historical Research and Administrative Reports

    (a) No Change.
    (b) The charge to be paid by the purchaser of an Historical 
Research Report regarding a Nasdaq security that wishes to obtain a 
license to redistribute the information contained in the report to 
subscribers shall be determined in accordance with the following 
schedule:

                                              Number of Subscribers
----------------------------------------------------------------------------------------------------------------
                                       1-500          501-999       1,000-4,999     5,000-9,999       10,000+
----------------------------------------------------------------------------------------------------------------
A. Market Summary Statistics:
    More often than once a month            $250            $350            $450            $550            $750
    Once a month, quarter, or                125             175             225             275             375
     year.......................
B. Reserved.
C. Nasdaq Issues Summary
 Statistics:
    More often than once a month            [500             600             700             800          1,000]
        Internal Distribution...           1,000           1,000           1,000           1,000           1,000
        External Distribution...           2,500           2,500           2,500           2,500           2,500
    Once a month, quarter, or                250             300             350             400             500
     year.......................
    Aggregation of data on an              3,000           3,000           3,000           3,000           3,000
     annual basis...............
D. Intra-Day Quote and Intra-Day
 Time and Sales Data:
    For a security and/or a                  200             300             400             500             700
     market participant for a
     day........................
    For all market participants            1,000           1,500           2,500           3,500           5,000
     for a day or for all
     securities for a day.......
----------------------------------------------------------------------------------------------------------------

    (c) No change.
    (d) 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
    NASDAQ proposes to modify the pricing model for historical research 
and administrative reports categorized as Nasdaq Issues Summary 
Statistics under subsection C of NASDAQ Rule 7022(b). The current 
pricing schedule for Nasdaq Issues Summary Statistics

[[Page 70601]]

reports currently includes only short interest information.\3\ The fee 
schedule is currently divided into two tranches depending upon whether 
the report is distributed once per month or less, or more than once 
monthly. Within each tranche, the fee depends upon how many subscribers 
receive the report from a given Distributor. This proposal affects only 
the tranches of reports that are distributed more than once per month, 
meaning it will apply only to Short Interest Reports.
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    \3\ In 2013, NASDAQ moved the Daily List and Fundamental Data 
formerly covered by this rule into new NASDAQ Rule 7022(d). See 
Exchange Act Release No. 68636 (Jan. 11, 2013). In the future, this 
category may include other information that properly falls within 
the category of Nasdaq Issues Summary Statistics.
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    For this category only, NASDAQ has determined to replace the 
subscriber-based tiers with a fee based on internal versus external 
distribution, a model already utilized by NASDAQ for multiple products. 
Internal distribution is defined as distribution of NASDAQ data by a 
given firm or other entity that receives data from NASDAQ only to 
recipients within that firm or entity. Conversely, external 
distribution is defined as distribution of NASDAQ data by a given firm 
or other entity that receives data from NASDAQ to recipients either 
outside of the entity or both within and outside of that firm or 
entity. Replacing the per-subscriber fee with a Distributor fee will 
reduce the administrative burden on firms by eliminating the 
requirement to control and/or count the number of recipients of the 
report. In addition, external distributors will continue to be 
permitted to use the Information internally without additional charges.
    NASDAQ has determined to assess a monthly per Distributor fee of 
$1,000 for internal distribution and $2,500 for external distribution. 
NASDAQ determined to assess higher fees for external Distributors based 
on historical experience that external distributors offer wider 
distribution than internal Distributors, and they therefore derive 
higher value than internal Distributors while typically maintaining a 
lower fee per unit.
2. Statutory Basis
    NASDAQ believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\4\ in general, and with Section 
6(b)(4) and 6(b)(5) of the Act,\5\ in particular, in that it provides 
an equitable allocation of reasonable fees among Subscribers and 
recipients of NASDAQ data and is not designed to permit unfair 
discrimination between them. 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.
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    \4\ 15 U.S.C. 78f.
    \5\ 15 U.S.C. 78f(b)(4) and (5).
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    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.\6\
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    \6\ 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.
    On July 21, 2010, President Barack Obama signed into law H.R. 4173, 
the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 
(``Dodd-Frank Act''), which amended Section 19 of the Act. Among other 
things, Section 916 of the Dodd-Frank Act amended paragraph (A) of 
Section 19(b)(3) of the Act by inserting the phrase ``on any person, 
whether or not the person is a member of the self-regulatory 
organization'' after ``due, fee or other charge imposed by the self-
regulatory organization.'' As a result, all self-regulatory 
organization (``SRO'') rule proposals establishing or changing dues, 
fees, or other charges are immediately effective upon filing regardless 
of whether such dues, fees, or other charges are imposed on members of 
the SRO, non-members, or both. Section 916 further amended paragraph 
(C) of Section 19(b)(3) of the Act to read, in pertinent part, ``At any 
time within the 60-day period beginning on the date of filing of such a 
proposed rule change in accordance with the provisions of paragraph (1) 
[of Section 19(b)], the Commission summarily may temporarily suspend 
the change in the rules of the self-regulatory organization made 
thereby, 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 this title. If the 
Commission takes such action, the Commission shall institute 
proceedings under paragraph (2)(B) [of Section 19(b)] to determine 
whether the proposed rule should be approved or disapproved.''
    The decision of the United States Court of Appeals for the District 
of Columbia Circuit in NetCoalition v. SEC, No. 09-1042 (D.C. Cir. 
2010), although reviewing a Commission decision made prior to the 
effective date of the Dodd-Frank Act, 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, at 15 (quoting H.R. Rep. No. 94-229, at 92 (1975), as 
reprinted in 1975 U.S.C.C.A.N. 321, 323).
    For the reasons stated above, NASDAQ believes that the allocation 
of the proposed fee is fair and equitable in accordance with Section 
6(b)(4) of the Act, and not unreasonably discriminatory in accordance 
with Section 6(b)(5) of the Act. As described above, the proposed fee 
is based on pricing conventions and distinctions that exist in NASDAQ's 
current fee schedule. These distinctions are each based on principles 
of fairness and equity that have helped for many years to maintain 
fair, equitable, and not unreasonably discriminatory fees, and that 
apply with equal or greater force to the current proposal.
    NASDAQ believes that the $1,000 and $2,500 Distributor fees for the 
short interest report are fair and equitable and not unreasonably 
discriminatory. The Internal Distributor Fee represents an increase of 
no more than $500 per month, with many Distributors paying a smaller 
increase or no increase at all. The higher External Distributor Fee is 
fair and equitable because External Distributors derive higher value 
from the report and, therefore, should bear a higher burden than 
internal Distributors. In addition, all Distributors benefit from the 
reduced administrative burden of counting subscribers. NASDAQ further 
believes that the distinction between internal and external 
distribution is fair and

[[Page 70602]]

equitable and not unreasonably discriminatory because external 
distributors have the potential to, and generally do, distribute to a 
larger number of subscribers. As noted earlier, NASDAQ and other 
exchanges have utilize this pricing model for many years.
    As described in greater detail below, if NASDAQ has calculated 
improperly and the market deems the proposed fees to be unfair, 
inequitable, or unreasonably discriminatory, firms can discontinue the 
use of their data because the proposed product is entirely optional to 
all parties. Firms are not required to purchase data and NASDAQ is not 
required to make data available or to offer specific pricing 
alternatives for potential purchases. NASDAQ can discontinue offering a 
pricing alternative (as it has in the past) and firms can discontinue 
their use at any time and for any reason (as they often do), including 
due to their assessment of the reasonableness of fees charged. NASDAQ 
continues to establish and revise pricing policies aimed at increasing 
fairness and equitable allocation of fees among Subscribers.

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. Notwithstanding its 
determination that the Commission may rely upon competition to 
establish fair and equitably allocated fees for market data, the 
NetCoalition court found that the Commission had not, in that case, 
compiled a record that adequately supported its conclusion that the 
market for the data at issue in the case was competitive. NASDAQ 
believes that a record may readily be established to demonstrate the 
competitive nature of the market in question.
    There is intense competition between trading platforms that provide 
transaction execution and routing services and proprietary data 
products. 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. Data products 
are valuable to many end Subscribers only insofar as they provide 
information that end Subscribers 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, an exchange's 
customers view the costs of transaction executions and of data as a 
unified cost of doing business with the exchange. A broker-dealer 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 broker-dealer 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 broker-dealer will choose not to buy it. 
Moreover, as a broker-dealer chooses to direct fewer orders to a 
particular exchange, the value of the product to that broker-dealer 
decreases, for two reasons. First, the product will contain less 
information, because executions of the broker-dealer's orders will not 
be reflected in it. Second, and perhaps more important, the product 
will be less valuable to that broker-dealer because it does not provide 
information about the venue to which it is directing its orders. Data 
from the competing venue to which the broker-dealer is directing orders 
will become correspondingly more valuable.
    Thus, an 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 at 
24. However, the existence of fierce competition for order flow implies 
a high degree of price sensitivity on the part of broker-dealers with 
order flow, since they may readily reduce costs by directing orders 
toward the lowest-cost trading venues. A broker-dealer 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. Similarly, if a platform increases its market data fees, the 
change will affect the overall cost of doing business with the 
platform, and affected broker-dealers will assess whether they can 
lower their trading costs by directing orders elsewhere and thereby 
lessening the need for the more expensive data.
    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.
    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. For example, some platforms may choose to pay rebates to 
attract orders, charge relatively low prices for market information (or 
provide information free of charge) and charge relatively high prices 
for accessing posted liquidity. Other platforms may choose a strategy 
of paying lower rebates (or no rebates) to attract orders, setting 
relatively high prices for market information, and setting relatively 
low prices for accessing posted liquidity. 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. This would be akin to strictly 
regulating the price that an automobile manufacturer can charge for car 
sound systems despite the existence of a highly competitive market for 
cars and the availability of after-market alternatives to the 
manufacturer-supplied system.
    The market for market data products is 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

[[Page 70603]]

data is produced by each individual exchange, as well as other 
entities, in a vigorously competitive market.
    Broker-dealers currently have numerous alternative venues for their 
order flow, including thirteen SRO markets, as well as internalizing 
broker-dealers (``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 Trade Reporting 
Facilities (``TRFs'') compete to attract internalized transaction 
reports. 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, New York Stock Exchange LLC (``NYSE''), NYSE MKT LLC, 
NYSE Arca LLC, and BATS Exchange, Inc. (``BATS'').
    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 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 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 data on the Internet. Second, because a single order or 
transaction report can appear in an SRO proprietary product, a non-SRO 
proprietary product, or both, the data available in proprietary 
products is exponentially greater than the actual number of orders and 
transaction reports that exist in the marketplace.
    Market data vendors provide another form of price discipline for 
proprietary data products because they control the primary means of 
access to end Subscribers. Vendors impose price restraints based upon 
their business models. For example, vendors such as Bloomberg and 
Thomson Reuters that assess a surcharge on data they sell may refuse to 
offer proprietary products that end Subscribers 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 
broker-dealers, such as Schwab and Fidelity, offer their customers 
proprietary data only if it promotes trading and generates sufficient 
commission revenue. Although the business models may differ, these 
vendors' pricing discipline is the same: They can simply refuse to 
purchase any proprietary data product that fails to provide sufficient 
value. NASDAQ and other producers of proprietary data products must 
understand and respond to these varying business models and pricing 
disciplines in order to market proprietary data products successfully.
    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 broker-dealers 
have previously published their proprietary data individually, 
Regulation NMS encourages market data vendors and broker-dealers to 
produce proprietary products cooperatively in a manner never before 
possible. Multiple market data vendors already have the capability to 
aggregate data and disseminate it on a profitable scale, including 
Bloomberg, and Thomson Reuters.
    The vigor of competition for information is significant. NASDAQ has 
made a determination to adjust the fees associated with this product in 
order to reflect more accurately the value of its products and the 
investments made to enhance them, as well as to keep pace with changes 
in the industry and evolving customer needs. This product is entirely 
optional and is geared towards attracting new customers, as well as 
retaining existing customers.
    The Exchange has witnessed competitors creating new products and 
innovative pricing in this space over the course of the past year. 
NASDAQ continues to see firms challenge its pricing on the basis of the 
Exchange's explicit fees being higher than the zero-priced fees from 
other competitors such as BATS. In all cases, firms make decisions on 
how much and what types of data to consume on the basis of the total 
cost of interacting with NASDAQ or other exchanges. Of course, the 
explicit data fees are but one factor in a total platform analysis. 
Some competitors have lower transactions fees and higher data fees, and 
others are vice versa.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were either solicited or received.

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act.\7\
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    \7\ 15 U.S.C. 78s(b)(3)(A)(ii).
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    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.

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-2014-106 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASDAQ-2014-106. This 
file number should be included on the subject line if email is used. To 
help the Commission process and review your

[[Page 70604]]

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 
such filing also will be available for inspection and copying at the 
principal offices 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-2014-106, and should be submitted on or before 
December 17, 2014.
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    \8\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
Kevin M. O' Neill,
Deputy Secretary.
[FR Doc. 2014-28026 Filed 11-25-14; 8:45 am]
BILLING CODE 8011-01-P