[Federal Register Volume 81, Number 152 (Monday, August 8, 2016)]
[Notices]
[Pages 52486-52490]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-18703]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78462; File No. SR-NASDAQ-2016-101]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Add Nasdaq Rule 7046 
(Nasdaq Trading Insights)

August 2, 2016.
    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 July 26, 2016, 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 and II below, which Items have been prepared by Nasdaq. 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 proposes to add Nasdaq Rule 7046 (Nasdaq Trading Insights) 
to the Nasdaq rule book.
    The text of the proposed rule change is available at http://nasdaq.cchwallstreet.com/, at Nasdaq's principal office, and at the 
Commission's Public Reference Room.

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

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

[[Page 52487]]

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

1. Purpose
    The Exchange proposes to add Nasdaq Rule 7046 (Nasdaq Trading 
Insights) to the Nasdaq rule book. The Nasdaq Trading Insights product 
is an optional market data service comprised of four distinct market 
data components. Specifically, and as described in greater detail 
below, the market data components include: (a) Missed Opportunity--
Liquidity; (b) Missed Opportunity--Latency; (c) Peer Benchmarking; and 
(d) Liquidity Dynamics Analysis. Market participants may opt to choose 
to receive any or all of the market data components and the 
corresponding fee will be assessed based on the number of components 
selected.\3\
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    \3\ A separate filing will address the pricing for the Nasdaq 
Trading Insights product, which also will be implemented on 
September 1, 2016, if approved by the SEC.
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    Currently, Nasdaq provides real-time prices and analytics in the 
marketplace. The Exchange believes that the additional data points from 
the matching engine outlined below may help market participants to gain 
a better understanding about their interactions with the Exchange. The 
four optional market data components that comprise the Nasdaq Trading 
Insights product will help market participants by providing them with a 
chance to learn more about when they may have better opportunities to 
access liquidity and to receive better execution rates. The proposed 
market data product will increase transparency and democratize 
information so that all firms that themselves may not have the 
expertise to generate such information may elect to subscribe to one or 
all of the components of the Nasdaq Trading Insights product. None of 
the components are real-time market data products.
(a) Missed Opportunity--Liquidity
    Trading firms may seek to submit orders for the greatest number of 
shares possible without exceeding the amount of shares actually 
available. This component identifies when an order from a market 
participant might have been increased in size and thus executed more 
shares.\4\
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    \4\ The data elements for this component, in summary, are the: 
(i) Issue (Nasdaq symbol for the issue); (ii) Buy/Sell Indicator 
(side of the market at which the market participants are quoting); 
(iii) Price (the price (inclusive of decimal point) at which Nasdaq 
Market Center market participants had order interest for the given 
security at the given time); (iv) Order Reference Number (the unique 
reference number assigned to the new order at the time of receipt); 
(v) Order Entry Time Stamp (the time order was received in the 
system); (vi) Share Quantity (total number of shares submitted on 
original order); and (vii) Missed Opportunity Quantity (total number 
of shares missed).
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    For example, if a firm sends in an order that was fully executed 
and subsequently sends another order (or multiple orders) at the same 
or inferior price-level than originally executed, this indicates that 
they could have oversized their original order. This missed opportunity 
could have resulted in a larger fill which will allow firms to change 
their trading patterns to trade more efficiently. The Exchange will 
provide this information to firms on a T + 1 basis. The Missed 
Opportunity--Liquidity component may also benefit firms by providing 
greater visibility into exactly what was missed in trading so they may 
optimize their models and trading patterns to yield better returns.
    The data included in this component is unique for each market 
participant's port and only that market participant is eligible to 
receive this data upon voluntarily opting to pay the corresponding fee 
(as previously noted, the corresponding fees will be included in a 
future filing). The Exchange will ensure that each market participant 
receives only their own unique data and will not be able to obtain any 
other market participant's unique data.
    Market participants may already be able to derive the same data 
that is provided by this component based on their executions and 
algorithms that they have created. As more firms create increasingly 
sophisticated algorithms, they are able to determine where hidden 
pockets of liquidity exist. With this component, the Exchange is 
providing the information necessary for market participants interested 
in gaining insight into hidden pockets of liquidity and potentially 
improving their trading performance. For example, if a firm 
continuously executes against hidden orders and creates a model to 
potentially identify the amount of hidden liquidity for individual 
securities at certain time periods, it will be able to essentially 
recreate this product for itself.
(b) Missed Opportunity--Latency
    Market participants generally would use liquidity accessing orders 
if there is a high probability that it will execute an order resting on 
the Exchange order book. This component identifies by how much time an 
order that may have been marketable missed executing.\5\ As with the 
Missed Opportunity--Liquidity component described above, this component 
also will provide greater visibility into exactly what was missed in 
trading so market participants may optimize their models and trading 
patterns to yield better execution results. No specific information 
about resting orders on the Exchange book will be provided.
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    \5\ The data elements for this component, in summary, are the: 
(i) Issue (Nasdaq symbol for the issue); (ii) Buy/Sell Indicator 
(side of the market at which the market participants are quoting); 
(iii) Price (the price (inclusive of decimal point) at which Nasdaq 
Market Center market participants had order interest for the given 
security at the given time); (iv) Order Reference Number (the unique 
reference number assigned to the new order at the time of receipt); 
(v) Order Size; (vi) Matching Engine times for incoming orders; 
(vii) Missed Opportunity times; and (viii) Reasons for not getting 
fills.
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    This component will help market participants to better understand 
by how much time they missed specific orders, thus determining whether 
they want to invest in the technology to mitigate the misses. For 
example, if a market participant sends in a marketable order, but an 
order resting on the Exchange order book was subsequently canceled or 
executed, the Exchange will let the market participant know for each of 
these orders submitted by how much time they missed an execution. The 
Exchange will provide this information to firms on a T + 1 basis.
    Additionally, the data included in this component will be based 
only on the data of the market participant that opts to pay the 
corresponding fee to receive it (as previously noted, the corresponding 
fees will be included in a future filing). The Exchange will restrict 
all other market participants from receiving another market 
participant's data.
(c) Peer Benchmarking
    This component ranks the quality of a market participant's trading 
performance against its peers.\6\ Market

[[Page 52488]]

participants will be able to view their own trading activity broken out 
by port with each being ranked independently for each metric against 
their peers trading with the Exchange. By understanding its ranking and 
its associated ranking with peers, market participants will have a 
better idea of how the competition is performing vis-[agrave]-vis their 
own trading.
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    \6\ The data elements for this component, in summary, include: 
(i) Total Dollar Volume; (ii) Total Share Volume, Share Volume of 
Liquidity Provision and Accessible for Tape A, Tape B and Tape C; 
(iii) Number of Trades, including Hidden Orders and Number of Hidden 
Trades; (iv) Mean/Median Trade Size; (v) Mean/Median Size of Hidden 
Orders; (vi) Number of Buy/Sell Orders Received; (vii) Number of 
Aggressive Orders, Mean Size of Aggressive Buy/Sell Orders; (viii) 
Number of Passive Orders, Mean Size of Displayed Passive Order, 
Hidden Passive for Buy and Sell Orders; (ix) Number of Orders at 
Best Bid/Ask Level; (x) Mean Cost to Execute for Buy and Sell for 
1000, 5000, 10000 Shares; (xi) Number of Modified/Cancelled Buy/Sell 
Orders; (xii) Mean Buy/Sell Price Range; (xiii) Total Number of Buy/
Sell Price; (xiv) Number, Mean--Resting Buy/Sell Price Points; (xv) 
Missed Opportunities--Liquidity, Latency; (xvi) Mean Share Volume 
Against Hidden, Mean Quote Rotation Time.
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    Peer Benchmarking will help market participants better understand 
trending over time and whether behavioral changes they make translate 
into the expected results. Additionally, this component will assist 
market participants in understanding their rankings independent of any 
trading pattern changes the market participant may have made. It will 
let market participants know what their metric is ranked within their 
peer group and the market participant can glean how it is changing over 
time. Each port will be categorized into a peer grouping that will be 
based upon a given set of metrics that will share similar trading 
behavior characteristics and must include at least ten peers within a 
security. The Exchange will provide this information to firms on a T + 
1 basis.
    The data included in Peer Benchmarking is specific to a particular 
market participant's port and only the market participant who pays the 
optional fee to receive the component is eligible to receive Peer 
Benchmarking. Nasdaq will restrict all other market participants from 
receiving this market participant's Peer Benchmark (as previously 
noted, the corresponding fees will be included in a future filing).
(d) Liquidity Dynamics Analysis
    This component offers extensive historical insight into aggregated 
displayed and hidden orders on the Exchange for Reg NMS securities 
listed on Nasdaq, the New York Stock Exchange, and other U.S. equity 
exchanges. Specifically, this component will contain aggregated metrics 
and statistics about the liquidity on Nasdaq, including hidden 
liquidity on a security level.\7\ This will be presented as an FTP \8\ 
file with calculated statistics over a time window of 30 seconds, 
subject to change. The data will be analyzed every 30 seconds starting 
at 10 minutes prior to the market open and 10 minutes after the market 
close and it will include all orders that are visible, anonymous or 
non-displayed for each security. The Exchange will provide this 
information to firms on a T + 1 basis.
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    \7\ The data elements for this component, in summary, are the: 
(i) Issue (Nasdaq symbol for the issue); (ii) Start Time; (iii) End 
Time; (iv) Side (identifies buy vs. sell side); (v) Level (level 
associated with the price); (vi) Average Depth (average depth of the 
book); (vii) Minimum Depth (minimum depth of the book); (viii) 
Maximum Depth (maximum depth of the book); (ix) Standard Deviation 
Depth; (x) Average Price; (xi) Minimum Price (minimum price in the 
book); (xii) Maximum Price (maximum price in the book); (xiii) 
Median Price (median price in the book); (xiv) Standard Deviation--
Price; (xv) Minimum Distance from the QBBO; (xvi) Maximum Distance 
from the QBBO; (xvii) Mean Distance from the QBBO; (xviii) Median 
Distance from the QBBO; and (xix) Standard Deviation--Distance from 
QBBO.
    \8\ FTP means a File Transfer Protocol, which is a standard 
network protocol used to transfer computer files between a client 
and server on a computer network.
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    Market participants may opt to utilize this component to better 
understand when pockets of accessible liquidity exist. This may help 
market participants optimize their algorithm and Smart Order Router to 
potentially oversize orders and get better fill rates.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the provisions of Section 6 of the Act,\9\ in general and with 
Sections 6(b)(5) of the Act,\10\ in particular in that it 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. This proposal is in keeping 
with those principles in that it promotes increased transparency 
through the dissemination of the optional Nasdaq Trading Insights 
market data product to those interested in paying to receive any or all 
of the four distinct market data components comprising the product.
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    \9\ 15 U.S.C. 78f.
    \10\ 15 U.S.C. 78f(b)(5).
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    The Exchange also believes this proposal is consistent with Section 
6(b)(5) of the Act because it protects investors and the public 
interest and promotes just and equitable principles of trade by 
providing investors with new options for receiving market data as 
requested by potential purchasers. The proposed rule change would 
benefit investors by facilitating their prompt access to the value 
added information that is included in the Nasdaq Trading Insights 
market data product, which includes the following components: (a) 
Missed Opportunity--Liquidity; (b) Missed Opportunity--Latency; (c) 
Peer Benchmarking; and (d) Liquidity Dynamics Analysis.
    In adopting Regulation NMS, the Commission granted self-regulatory 
organizations (``SROs'') and broker dealers increased authority and 
flexibility to offer new and unique market data to consumers of such 
data. It was believed that this authority would expand the amount of 
data available to users and consumers of such data and also spur 
innovation and competition for the provision of market data. The 
Exchange believes that the Nasdaq Trading Insights product is 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.\11\
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    \11\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005) (``Regulation NMS Adopting 
Release'').

    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. 
This proposed new market data product provides investors with new 
options for receiving market data, which was a primary goal of the 
market data amendments adopted by Regulation NMS.\12\
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    \12\ See Regulation NMS Adopting Release, supra, at 37503.
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(a) Missed Opportunity--Liquidity
    This component is designed for trading firms that seek to submit 
orders for the greatest number of shares possible without exceeding the 
amount of shares actually available. It identifies when an order from a 
market participant might have been increased in size and thus executed 
more shares.
    The Exchange believes that providing this optional liquidity to 
interested market participants for a fee is consistent with 
facilitating transactions in securities, removing impediments to and 
perfecting the mechanism of a free and open market and a national 
market system, and, in general, protecting investors and the public 
interest

[[Page 52489]]

because it provides greater visibility into exactly what was missed in 
trading so market participants may optimize their models and trading 
patterns to yield better execution results by identifying when an order 
from a market participant might have been increased in size and thus 
executed more shares.
(b) Missed Opportunity--Latency
    This component is designed for market participants that are 
interested in gaining insight into latency in connection with orders 
that failed to execute against an order resting on the Exchange order 
book since it identifies by how much time an order that may have been 
marketable missed executing.
    The Exchange believes that providing this optional latency data to 
interested market participants for a fee is consistent with 
facilitating transactions in securities, removing impediments to and 
perfecting the mechanism of a free and open market and a national 
market system, and, in general, protecting investors and the public 
interest because it provides greater visibility into exactly what was 
missed in trading so market participants may optimize their models and 
trading patterns to yield better execution results by identifying by 
how much time an order that may have been marketable missed executing.
(c) Peer Benchmarking
    This component is designed for market participants that are 
interested in gaining insight into the quality of its trading 
performance against its peers trading with the Exchange.
    The Exchange believes that providing this optional Peer 
Benchmarking data to interested market participants for a fee is 
consistent with facilitating transactions in securities, to removing 
impediments to and perfecting the mechanism of a free and open market 
and a national market system, and, in general, protecting investors and 
the public interest because it provides additional insight for market 
participants into how the competition is performing vis-[agrave]-vis 
their own trading, as well as helping market participants better 
understand trending over time and whether behavioral changes they make 
translate into the expected results.
(d) Liquidity Dynamics Analysis
    This component is designed for market participants that are 
interested in gaining insight into when pockets of accessible liquidity 
exist. This component may help market participants optimize their 
algorithm and Smart Order Routers to potentially oversize orders and 
get better fill rates.
    The Exchange believes that providing this optional data concerning 
historical insight into aggregated displayed and hidden orders on the 
Exchange for Reg NMS securities listed on Nasdaq, the New York Stock 
Exchange, and other U.S. equity exchanges, to interested market 
participants for a fee is consistent with facilitating transactions in 
securities, removing impediments to and perfecting the mechanism of a 
free and open market and a national market system, and, in general, 
protecting investors and the public interest because it provides 
greater visibility into when pockets of accessible liquidity exist. 
This, in turn, may help market participants optimize their algorithm 
and Smart Order Routers to potentially oversize orders and get better 
fill rates.
    In summary, the Nasdaq Trading Insights market data product will 
help to protect a free and open market by providing additional non-core 
data (offered on an optional basis for a fee) to the marketplace and by 
providing investors with greater choices.\13\ Additionally, the 
proposal would not permit unfair discrimination because each component 
of the product will be available to all of the Exchange's participants.
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    \13\ See Sec. Indus. Fin. Mkts. Ass'n (SIFMA), Initial Decision 
Release No. 1015, 2016 SEC LEXIS 2278 (ALJ June 1, 2016) (finding 
the existence of vigorous competition with respect to non-core 
market data).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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. In 
fact, the Exchange believes that the Nasdaq Trading Insights market 
data product will enhance competition \14\ by providing new options for 
receiving market data to market participants, which was a primary goal 
of the market data amendments adopted by Regulation NMS.\15\
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    \14\ Id.
    \15\ See Regulation NMS Adopting Release, supra, at 37503.
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    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 BATS/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 
(``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, Cinnober aggregates and 
disseminates data from over 40 brokers and multilateral trading 
facilities.\16\
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    \16\ See http://www.cinnober.com/boat-trade-reporting.
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    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.\17\ 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 \18\ 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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    \17\ 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.
    \18\ It should be noted that the FINRA/NYSE TRF has, in recent 
weeks, received reports for almost 10% of all over-the-counter 
volume in NMS stocks.
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    In this instance, the proposed rule change to offer the optional 
four components that comprise the Nasdaq Trading Insights market data 
product for a fee is subject to market participant interest. 
Additionally, some market participants may already be able to derive 
the same data that is provided by this component based on their 
executions and algorithms that they have created.
    In sum, if the four distinct market data components that comprise 
the Nasdaq Trading Insights product and that are the subject of the 
rule change

[[Page 52490]]

proposed herein are unattractive to market participants, market 
participants will opt not to purchase any of the four components. 
Accordingly, the Exchange does not believe that the proposed change 
will impair the ability of members or competing order execution venues 
to maintain their competitive standing in the financial markets.

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

    Written comments were neither solicited nor received.

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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please 
include File Number SR-NASDAQ-2016-101 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-2016-101. 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-2016-101 and should 
be submitted on or before August 29, 2016.
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    \19\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-18703 Filed 8-5-16; 8:45 am]
 BILLING CODE 8011-01-P