[Federal Register Volume 82, Number 110 (Friday, June 9, 2017)]
[Notices]
[Pages 26820-26823]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2017-11961]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-80856; File No. SR-NASDAQ-2017-051]


Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing and Immediate Effectiveness of Proposed Rule Change To 
Amend the Exchange's Fees at Rule 7046

June 5, 2017.
    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 May 23, 2017, 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

    The Exchange proposes to amend the Exchange's fees at Rule 7046 to: 
(i) Introduce a new fee structure that would allow members to sponsor 
their customers to receive Nasdaq Trading Insights for a $1,000 per 
month sponsorship fee to be paid by the member, and fees based on the 
number of ports to be paid by the sponsored firm; and (ii) extend a 
free trial offer period from 14 to 30 days. The changes are described 
in further detail below.
    The text of the proposed rule change is available on the Exchange's 
Web site at http://nasdaq.cchwallstreet.com, at the principal office of 
the Exchange, 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, 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
    The purpose of the proposed rule change is to amend the Exchange's 
fees at Rule 7046 to: (i) Introduce a new fee structure that would 
allow members to sponsor their customers to receive Nasdaq Trading 
Insights for a $1,000 per month sponsorship fee to be paid by the 
member, and fees based on the number of ports to be paid by the 
sponsored firm; and (ii) extend a free trial offer period from 14 to 30 
days.
Nasdaq Trading Insights
    Nasdaq Trading Insights is an optional market data service that 
employs advanced analytics and machine learning to analyze order 
activity. It is comprised of three active market data components: (a) 
Missed Opportunity--Liquidity; (b) Missed Opportunity--Latency; and (c) 
Peer Benchmarking. The initial filing for this product had also 
proposed a fourth component--a Liquidity Dynamics Analysis--which, as 
reported in a prior filing,\3\ has been delayed in development.
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    \3\ See Securities Exchange Release No. 79119 (October 19, 
2016), 81 FR 73157 (October 24, 2016) (SR-NASDAQ-2016-138).
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    The Missed Opportunity--Liquidity component identifies when an 
order from a market participant could have been increased in size, 
resulting in the execution of additional shares. This component is 
designed to provide information to a market participant interested in 
gaining insight into hidden pockets of liquidity.
    The Missed Opportunity--Latency component identifies the amount of 
time by which an otherwise marketable order missed execution. This 
component is designed to provide information to market participants 
interested in optimizing their models and trading patterns.
    The Peer Benchmarking component ranks the quality of a market 
participant's trading performance against its peers, allowing market 
participants to view their relative trading performance by port,\4\ 
with each port ranked independently by each metric against the ports of 
peer firms trading on the Exchange.
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    \4\ A port is a means by which a member firm connects to 
Nasdaq's systems.
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    Each market participant is eligible to receive information 
regarding only its own data for each Trading Insights component. That 
data is provided on a T+1 basis.
    The initial proposal to create Trading Insights, filed in August of 
2016,\5\ included a Liquidity Dynamics Analysis component, which was to 
help market participants identify pockets of accessible liquidity. In 
October of 2016, the Exchange announced that this component would be 
delayed and unavailable to subscribers.\6\
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    \5\ See Securities Exchange Act Release No. 78462 (August 2, 
2016), 81 FR 52486 (August 8, 2016) (SR-NASDAQ-2016-101).
    \6\ See Securities Exchange Release No. 79119 (October 19, 
2016), 81 FR 73157 (October 24, 2016) (SR-NASDAQ-2016-138).
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    A subscription to Nasdaq Trading Insights is currently available 
for a monthly fee based on the number of ports for which the market 
participant subscribes to such information: $1,500 for 1-5 ports; 
$2,000 for 6-15 ports; $2,500 for 16-25 ports; and $3,500 for 26 ports 
or more. There is no current fee structure that would allow members to 
sponsor their customers to receive Nasdaq Trading Insights.
Proposed Changes
    The Exchange proposes two changes to the Trading Insights product: 
(i) Introduce a new fee structure that would allow members to sponsor 
their customers to receive Nasdaq Trading Insights for a $1,000 per 
month sponsorship fee to be paid by the member, and fees based on the 
number of ports to be paid by the sponsored firm; and (ii) extend a 
free trial offer period from 14 to 30 days.
a. Sponsorship Fee
    The Exchange proposes to introduce a new fee structure that would 
allow members to sponsor an unlimited number of their customers to 
obtain access to Trading Insights' analytics for a $1,000 per month 
sponsorship fee to

[[Page 26821]]

be paid by the member, as well as standard fees based on the number of 
ports to be paid by the sponsored firm(s) set forth in Rule 7046(b)(2). 
Standard fees for both members and sponsored firms will be at the 
current rates: $1,500 for 1-5 ports; $2,000 for 6-15 ports; $2,500 for 
16-25 ports; and $3,500 for 26 ports or more. A sponsoring member may 
receive data from the same port as a sponsored firm, but only the 
sponsored firm would be charged a fee for that data. The sponsoring 
member will be charged a Standard Fee for Trading Insights on all ports 
transmitting the proprietary data of that member, but the sponsoring 
member will not be charged for any data on ports subscribed by a 
sponsored firm.\7\
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    \7\ For example, a member firm that subscribes to Trading 
Insights information on six ports, and sponsors a firm to subscribe 
to Trading Insight information on one of those six ports, will be 
charged Standard Fees for five ports, while the sponsored firm will 
be charged Standard Fees for one port.
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    A member will only be able to view data concerning ports that 
contain information related to its own proprietary trading or its 
customers' trading.\8\ A sponsored firm will only be able to view data 
on ports that contain its own trading information. A member will not be 
able to view data concerning the ports of other members or the 
customers of other members. A customer will not be able to view data 
concerning the ports of other customers.
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    \8\ In Securities Exchange Act Release No. 78462 (August 2, 
2016), 81 FR 52486 (August 8, 2016) (SR-NASDAQ-2016-101), the 
Exchange stated that it would ensure that each market participant 
receives only its own unique data and would not be able to obtain 
any other market participant's unique data. As a narrow exception to 
this general proposition, it is appropriate for a member to have 
access to its customer's information because the customer itself 
discloses trading activity to the member, and the Trading Insights 
information will enable the member to act more effectively on its 
customer's behalf.
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    This proposed change will increase market transparency by creating 
a fee structure designed to encourage the dissemination of Trading 
Insights information to non-members by setting a sponsorship fee that 
remains flat notwithstanding the number of non-members receiving that 
information. As such, the proposed change is fair and reasonable.
b. Trial Offers
    The Exchange proposes to extend the current 14 day free trial offer 
to 30 days. The trial may be repeated if the Exchange elects to release 
a new version of the product. The Exchange has found that the 
additional time is necessary for potential subscribers to thoroughly 
test the product, and the Exchange believes that such enhanced testing 
will lead to more subscriptions to the product. The Exchange will offer 
additional free trials if Nasdaq elects to release a new version of the 
product that warrants new testing. The Exchange will report the release 
of any new version of the product on the Nasdaq Trader Web site 
(www.nasdaqtrader.com), or a successor Web site.
    There is also a technical change to Rule 7046(b)(1), the paragraph 
including the trial offer provision, to delete a sentence stating that 
the product will not be pro-rated. This sentence is unnecessary because 
it is repeated in Rule 7046(b)(2).
    Fees for Trading Insights are optional in that they apply only to 
firms that elect to purchase the product. The proposed changes do not 
impact the cost of any other Nasdaq product.
2. Statutory Basis
    The Exchange believes that its proposal is consistent with Section 
6(b) of the Act,\9\ in general, and furthers the objectives of Sections 
6(b)(4) and 6(b)(5) of the Act,\10\ in particular, in that it provides 
for the equitable allocation of reasonable dues, fees and other charges 
among members and issuers and other persons using any facility, and is 
not designed to permit unfair discrimination between customers, 
issuers, brokers, or dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(4) and (5).
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    This proposal creates a fee structure designed to encourage the 
dissemination of Nasdaq Trading Insights to non-members by setting a 
sponsorship fee that remains flat notwithstanding the number of non-
members receiving that information. Lengthening trial periods for new 
potential subscribers will also increase distribution by allowing 
potential subscribers to become more familiar with the benefits of the 
product, which may lead to additional subscriptions.
    The proposal provides for the equitable allocation of reasonable 
dues, fees and other charges among members and issuers and other 
persons using any facility because the proposed fee structure 
reasonably reflects the value that members and sponsored customers 
receive for their service. The new $1,000 per month sponsorship fee for 
members enables them to distribute Trading Insights information to an 
unlimited number of customers for a flat fee, and provides the member 
with an opportunity to view customer port data without paying the 
Standard Fees paid by their customers. The Standard Fees paid by 
customers will allow them to obtain port information at exactly the 
same rates that would be paid by members. The fee structure therefore 
reflects the value of Trading Insights to both customers and members, 
respectively.
    Moreover, all similarly-situated persons will be charged the same 
fee for the same service. All members that opt to purchase the service 
or sponsor a customer for that service will be charged the same 
standard and sponsorship fees. All customers that are sponsored by a 
member and opt to purchase the service will be charged the same 
standard fees for information on their ports. The service is not 
available to non-members and customers not sponsored by a member 
because the information provided by this service pertains only to ports 
used by members and their customers.
    In adopting Regulation NMS,\11\ the Commission granted SROs and 
broker-dealers increased authority and flexibility to offer new and 
unique market data to the public. It was believed that this authority 
would expand the amount of data available to consumers, and also spur 
innovation and competition for the provision of market data. Nasdaq 
believes that Nasdaq Trading Insights--which employs advanced analytics 
and machine learning to analyze order activity--is precisely the sort 
of market data product that the Commission envisioned when it adopted 
Regulation NMS. The Commission concluded that Regulation NMS--
deregulating the market in proprietary data--would further the Act's 
goals of facilitating efficiency and competition:
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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'').

    [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.\12\
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    \12\ Id.

    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.
    In NetCoalition v. Securities and Exchange Commission \13\ 
(``NetCoalition'') the D.C. Circuit upheld the Commission's use of a 
market-based

[[Page 26822]]

approach in evaluating the fairness of market data fees against a 
challenge claiming that Congress mandated a cost-based approach.\14\ As 
the court emphasized, the Commission ``intended in Regulation NMS that 
`market forces, rather than regulatory requirements' play a role in 
determining the market data . . . to be made available to investors and 
at what cost.'' \15\ ``No one disputes that competition for order flow 
is `fierce.' . . . As the SEC explained, `[i]n the U.S. national market 
system, buyers and sellers of securities, and the broker-dealers that 
act as their order-routing agents, have a wide range of choices of 
where to route orders for execution'; [and] `no exchange can afford to 
take its market share percentages for granted' because `no exchange 
possesses a monopoly, regulatory or otherwise, in the execution of 
order flow from broker dealers'. . . .'' \16\
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    \13\ NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
    \14\ See NetCoalition, at 534-535.
    \15\ Id. at 537.
    \16\ Id. at 539 (quoting Securities Exchange Act Release No. 
59039 (December 2, 2008), 73 FR 74770, 74782-83 (December 9, 2008) 
(SR-NYSEArca-2006-21)).
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    Data products such as Nasdaq Trading Insights 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 provide. The need to compete for order flow places 
substantial pressure upon exchanges to keep their fees for both 
executions and data reasonable.\17\
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    \17\ 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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    The proposed changes are consistent with Section 6(b)(5) of the Act 
because they increase transparency by promoting the distribution of 
sophisticated trading analyses to sponsored firms and providing longer 
trial periods to allow potential subscribers to become more familiar 
with the benefits of the product. The proposed changes would not permit 
unfair discrimination because the Exchange will apply the same fee to 
all similarly-situated members.
    Fees for Trading Insights are optional in that they apply only to 
firms that elect to purchase the product, which, like all proprietary 
data products, they may cancel at any time.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. Indeed, the Exchange believes 
that the Nasdaq Trading Insights product enhances competition by 
providing new options for analyzing market data.
    The market for data products is extremely competitive and firms may 
freely choose alternative venues and data vendors based on the 
aggregate fees assessed, the data offered, and the value provided. 
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. 
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 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).\18\ 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 significant scale economies.
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    \18\ 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).
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    Competition among trading platforms can be expected to constrain 
the aggregate return each platform earns from the sale of its joint 
products. The level of competition and contestability in the market is 
evident in the numerous alternative venues that compete for order flow, 
including 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, and the BATS exchanges.
    In this competitive environment, an ``excessive'' price for one 
product will have to be reflected in lower prices for other products 
sold by the Exchange, or otherwise the Exchange may experience a loss 
in sales that may adversely affect its profitability.
    In this instance, the proposed rule change enhances competition by 
creating a fee structure that encourages the dissemination of Nasdaq 
Trading Insights to non-members and expanding free trial offers to 
allow members and non-members to become more familiar with the product. 
If Nasdaq Trading Insights were to become unattractive to members and 
sponsored firms, those

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firms would opt not to purchase the product

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.\19\
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    \19\ 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-2017-051 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-2017-051. 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 such filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASDAQ-2017-051, and should 
be submitted on or before June 30, 2017.
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    \20\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2017-11961 Filed 6-8-17; 8:45 am]
 BILLING CODE 8011-01-P