Notice2024-28258
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order Disapproving Proposed Rule Change To Increase Fees for Certain Market Data and Connectivity Products and To Maintain the Current Fees for Such Products if Members Meet a Minimum Average Daily Displayed Volume Threshold
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 3, 2024
Issuing agencies
Securities and Exchange Commission
Full Text
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<title>Federal Register, Volume 89 Issue 232 (Tuesday, December 3, 2024)</title>
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[Federal Register Volume 89, Number 232 (Tuesday, December 3, 2024)]
[Notices]
[Pages 95822-95832]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-28258]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-101766; File No. SR-NASDAQ-2024-016]
Self-Regulatory Organizations; The Nasdaq Stock Market LLC; Order
Disapproving Proposed Rule Change To Increase Fees for Certain Market
Data and Connectivity Products and To Maintain the Current Fees for
Such Products if Members Meet a Minimum Average Daily Displayed Volume
Threshold
November 26, 2024.
I. Introduction
On March 22, 2024, The Nasdaq Stock Market LLC (``Nasdaq'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Exchange Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to increase fees for certain
market data and connectivity products and to maintain the current fees
for such products if members meet a minimum average daily displayed
volume threshold (``Proposal'').\3\ The proposed rule change was
immediately effective upon filing with the Commission pursuant to
Section 19(b)(3)(A) of the Exchange Act.\4\ The proposed rule change
was published for comment in the Federal Register on April 5, 2024.\5\
The Commission has received comment letters on the proposed rule change
and a letter responding to comments from Nasdaq.\6\ On May 21, 2024,
the Commission issued an order temporarily suspending the proposed rule
change pursuant to Section 19(b)(3)(C) of the Exchange Act \7\ and
simultaneously instituting proceedings under Section 19(b)(2)(B) of the
Exchange Act \8\ to determine whether to approve or disapprove the
proposed rule change.\9\ On October 1, 2024, the Commission designated
a longer period for Commission action on the proposed rule change.\10\
This order disapproves the proposed rule change.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 99879 (April 1,
2024), 89 FR 24070 (``Notice'').
\4\ 15 U.S.C. 78s(b)(3)(A). A proposed rule change may take
effect upon filing with the Commission if it is designated by the
exchange as ``establishing or changing a due, fee, or other charge
imposed by the self-regulatory organization on any person, whether
or not the person is a member of the self-regulatory organization.''
15 U.S.C. 78s(b)(3)(A)(ii).
\5\ See Notice, supra note 3. As part of the Proposal, the
Exchange included an Exhibit 3 containing a paper in support of its
proposed rule change written by Nasdaq Economic Research. See Phil
Mackintosh & Michael Normyle, Nasdaq Economic Research, ``How
Exchanges Compete: An Economic Analysis of Platform Competition''
(February 2024), available at <a href="https://www.sec.gov/files/rules/sro/nasdaq/2024/34-99879-ex3.pdf">https://www.sec.gov/files/rules/sro/nasdaq/2024/34-99879-ex3.pdf</a> (``Nasdaq Paper'').
\6\ Comments received on the Proposal are available at <a href="https://www.sec.gov/comments/sr-nasdaq-2024-016/srnasdaq2024016.htm">https://www.sec.gov/comments/sr-nasdaq-2024-016/srnasdaq2024016.htm</a>. All
comments received opposed the proposed rule change.
\7\ 15 U.S.C. 78s(b)(3)(C).
\8\ 15 U.S.C. 78s(b)(2)(B).
\9\ See Securities Exchange Act Release No. 100188, 89 FR 46243
(May 28, 2024) (``Order Instituting Proceedings'').
\10\ See Securities Exchange Act Release No. 101224, 89 FR 81129
(October 7, 2024).
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This order disapproves the proposed rule change because, as
discussed below, the Exchange has not met its burden under the Exchange
Act and the Commission's Rules of Practice to demonstrate that the
Proposal is consistent with the requirements of Sections 6(b)(4),
(b)(5), and (b)(8) of the Exchange Act, in particular the requirements
that the rules of a national securities exchange ``provide for the
equitable allocation of reasonable dues, fees, and other charges among
its members and issuers and other persons using its facilities,'' not
be ``designed to permit unfair discrimination between customers,
issuers, brokers, or dealers,'' and ``not impose any burden on
competition not necessary or appropriate in furtherance of the purposes
of [the Exchange Act];'' as well as Section 11A of the Exchange Act and
Rules 603(a)(1) and 603(a)(2) of Regulation NMS which, among other
things, require the Exchange to distribute market data on terms that
are ``fair and reasonable'' and ``not unreasonably
discriminatory.''\11\
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\11\ 15 U.S.C. 78f(b)(4), (5), and (8), 15 U.S.C. 78k-
1(a)(1)(C)(i)-(iv), 17 CFR 242.603(a)(1) and 17 CFR 242.603(a)(2).
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II. Description of the Proposed Rule Change and Exchange's
Representations
As described in more detail in the Notice and Order Instituting
Proceedings, the Exchange proposes to increase non-member and member
firm fees for Non-Display Usage \12\ of depth-of-book data and the fees
for the Exchange's 40Gb and 10Gb Ultra high-speed connections to the
Exchange. However, the Exchange proposes to continue to charge the
current fees for
[[Page 95823]]
Non-Display Usage of depth-of-book data and the 40Gb and 10Gb Ultra
high-speed connections to member firms that meet a minimum average
daily displayed volume (``Minimum ADV''). The Exchange proposes Minimum
ADV to mean the introduction by a member firm of at least one million
shares of added executed displayed liquidity on average per trading day
in all securities through one or more of the member firm's market
participant identifiers (``MPIDs'') on Nasdaq.\13\ Average daily volume
is calculated as the total volume of shares executed for all added
displayed orders in all securities during the trading month divided by
the number of trading days in that month, averaged over the six-month
period preceding the billing month, or the date the firm became a
member, whichever is shorter.\14\ New members will be deemed to meet
the Minimum ADV for the first month of operation.\15\ Minimum ADV
excludes sponsored access by a member on behalf of a third party.\16\
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\12\ See Notice, supra note 3, at 24070 (stating that Non-
Display Usage is any method of accessing Nasdaq U.S. information
that involves access or use by a machine or automated device without
access or use of a display by a natural person and providing
examples of Non-Display Usage). The Exchange also states that,
although either top-of-book or depth-of-book data can be used for
Non-Display Usage, the Proposal modifies fees for depth-of-book data
only. See id. (citing Equity 7, Section 123 (Nasdaq Depth-of-Book
data)).
\13\ See Notice, supra note 3, at 24070.
\14\ See Notice, supra note 3, at 24070-71.
\15\ See Notice, supra note 3, at 24071.
\16\ See Notice, supra note 3, at 24071.
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The Exchange currently assesses non-member and member firms Non-
Display Usage fees for depth-of-book data on a per-subscriber or per-
firm basis with monthly fees of $375 per subscriber for 1-39
subscribers; $15,000 per firm for 40-99 subscribers; $30,000 per firm
for 100-249 subscribers; and $75,000 per firm for 250 or more
subscribers.\17\ The Exchange currently assesses monthly fees of
$21,100 for the 40Gb fiber connection and $15,825 for the 10Gb Ultra
connection to the Nasdaq equities and options exchanges.\18\ The
Exchange proposes to maintain these fees for member firms that meet the
Minimum ADV.\19\ Under the Proposal, non-member firms and member firms
that do not meet the Minimum ADV would pay higher monthly fees of $500
per subscriber for 1-39 subscribers; $20,000 per firm for 40-99
subscribers; $40,000 per firm for 100-249 subscribers; and $100,000 per
firm for 250 or more subscribers.\20\ Non-member firms and member firms
that do not meet the Minimum ADV would also pay higher monthly fees of
$23,700 for the 40Gb fiber connection and $17,800 for the 10Gb Ultra
connection.\21\
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\17\ See Notice, supra note 3, at 24070. ``Subscriber'' is
defined as a device or computer terminal or an automated service
which is entitled to receive information. See id.
\18\ See Notice, supra note 3, at 24070.
\19\ See Notice, supra note 3, at 24070.
\20\ See Notice, supra note 3, at 24070.
\21\ See Notice, supra note 3, at 24070.
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The Exchange states that the Minimum ADV is set at a level that any
member should be able to meet without significant effort.\22\ The
Exchange also states that, because the Minimum ADV applies to displayed
liquidity only, the proposed rule should not impact the best execution
obligations of any member.\23\ The Exchange states that, if all its
members were to meet the Minimum ADV, the proposed rule would add an
incremental 60-80 million shares to Nasdaq's accessible liquidity.\24\
The Exchange proposes higher fees for non-members that do not post
displayed liquidity to the market because, according to the Exchange,
non-members do not directly contribute order flow to the Exchange, but
nevertheless benefit from that order flow through tighter spreads,
better prices, and the other advantages of a more liquid platform.\25\
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\22\ See Notice, supra note 3, at 24071.
\23\ See Notice, supra note 3, at 24071.
\24\ See Notice, supra note 3, at 24071.
\25\ See Notice, supra note 3, at 24071.
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III. Discussion and Commission Findings
A. Applicable Standard of Review
Under Section 19(b)(2)(C) of the Exchange Act,\26\ the Commission
shall approve the proposed rule change of a self-regulatory
organization (``SRO'') if the Commission finds that the proposed rule
change is consistent with the requirements of the Exchange Act and the
applicable rules and regulations thereunder; if it does not make such a
finding, the Commission shall disapprove the proposed rule change.
Additionally, under Rule 700(b)(3) of the Commission's Rules of
Practice, the ``burden to demonstrate that a proposed rule change is
consistent with [the Exchange Act] and the rules and regulations issued
thereunder . . . is on the self-regulatory organization that proposed
the rule change.'' \27\ The description of a proposed rule change, its
purpose and operation, its effect, and a legal analysis of its
consistency with applicable requirements must be sufficiently detailed
and specific to support an affirmative Commission finding.\28\ Any
failure of an SRO to provide this information may result in the
Commission not having a sufficient basis to make an affirmative finding
that a proposed rule change is consistent with the Exchange Act and the
applicable rules and regulations issued thereunder that are applicable
to the SRO.\29\ Moreover, ``unquestioning reliance'' on an SRO's
representations in a proposed rule change is not sufficient to justify
Commission approval of a proposed rule change.\30\
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\26\ 15 U.S.C. 78s(b)(3)(C).
\27\ Rule 700(b)(3), Commission Rules of Practice, 17 CFR
201.700(b)(3).
\28\ See id.
\29\ See id.
\30\ Susquehanna Int'l Group, LLP v. Securities and Exchange
Commission, 866 F.3d 442, 447 (D.C. Cir. 2017).
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In the Order Instituting Proceedings, the Commission expressed
concern, among other things, that the Proposal may fail to satisfy the
standards under the Exchange Act and the rules thereunder that require
market data and connectivity fees to be reasonable, equitably
allocated, not unfairly discriminatory, and not an undue burden on
competition.\31\ In reviewing the proposed rule change, the Commission
has analyzed information provided by the Exchange and issues raised by
commenters. Based on the information before the Commission, for each of
the reasons discussed below (whether viewed independently or in
combination), the Commission is unable to find that the Exchange has
met its burden to show that the proposed rule change is consistent with
the Exchange Act and the applicable rules and regulations thereunder,
including Exchange Act Sections 6(b)(4), 6(b)(5), 6(b)(8), 11A and
Rules 603(a)(1) and 603(a)(2) of Regulation NMS, and is therefore
unable to find that the Proposal is consistent with the Exchange Act.
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\31\ See Order Instituting Proceedings, supra note 9, at 46249.
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B. The Exchange Has Not Met Its Burden To Demonstrate That the Proposal
Is an Equitable Allocation of Reasonable Fees, Is Not Designed To
Permit Unfair Discrimination, and Does Not Impose Any Burden on
Competition Not Necessary or Appropriate in Furtherance of the Exchange
Act
1. Reasonable Fees and ``Platform Competition''
a. Exchange Statements
As discussed in greater detail in the Notice, Nasdaq states that
exchanges, like all trading venues, ``compete as platforms,'' \32\ and
that all the elements of the platform--trade executions, market data,
connectivity, membership,
[[Page 95824]]
and listings--operate in concert.\33\ Specifically, the Exchange states
that trade executions increase the value of market data; market data
functions as an advertisement for on-exchange trading; listings
increase the value of trade executions and market data; and greater
liquidity on the exchange enhances the value of ports and colocation
services.\34\ The Exchange continues that reliance on competitive
solutions is fundamental to the Exchange Act, and that where
significant competitive forces constrain fees, fee levels meet the
Exchange Act's standard for the ``equitable allocation of reasonable
dues, fees, and other charges among members and issuers and other
persons using its facilities,'' \35\ unless there is a substantial
countervailing basis to find that a fee does not meet some other
requirement of the Exchange Act.\36\ The Exchange states that evidence
of what it calls ``platform competition'' demonstrates that each
exchange product is sold in a competitive environment, and its fees
will be an equitable allocation of reasonable dues, fees, and other
charges, provided that nothing about the product or its fee structure
impairs competition.\37\
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\32\ Nasdaq states that, as explained in the Nasdaq Paper,
exchanges are multi-sided platforms, whose value is dependent on
attracting users to multiple sides of the platform. See Notice,
supra note 3, at 24071. The Exchange states that issuers need
investors, and every trade requires two sides to trade, and to make
its platform attractive to multiple constituencies, an exchange must
consider inter-side externalities, meaning demand for one set of
platform services depends on the demand for other services. See id.
\33\ See Notice, supra note 3, at 24071.
\34\ See Notice, supra note 3, at 24071.
\35\ See Notice, supra note 3, at 24071 and 15 U.S.C. 78f(b)(4).
\36\ See Notice, supra note 3, at 24071 (citing the staff
document ``Staff Guidance on SRO Rule filings Relating to Fees''
(May 21, 2019), available at <a href="https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees">https://www.sec.gov/tm/staff-guidance-sro-rule-filings-fees</a> (``Staff Fee Guidance'') (``If significant
competitive forces constrain the fee at issue, fee levels will be
presumed to be fair and reasonable, and the inquiry is whether there
is a substantial countervailing basis to find that the fee terms
nevertheless fail to meet an applicable requirement of the Exchange
Act (e.g., that fees are equitably allocated, not unfairly
discriminatory, and not an undue burden on competition).'')). Staff
documents represent the views of Commission staff and are not a
rule, regulation, or statement of the Commission. The Commission has
neither approved nor disapproved the content of staff documents,
and, like all staff documents, they have no legal force or effect,
do not alter or amend the applicable law, and create no new or
additional obligations for any person.
\37\ See Notice, supra note 3, at 24071. The Exchange further
states that nothing in the Exchange Act requires proof of product-
by-product competition, and Congress directed the Commission to
``rely on `competition, whenever possible, in meeting its regulatory
responsibilities for overseeing the SROs and the national market
system.' '' See id. (citing NetCoalition v. SEC, 715 F.3d 342, 534-
35 (D.C. Cir. 2013); H.R. Rep. No. 94-229 at 92 (1975) (``[I]t is
the intent of the conferees that the national market system evolve
through the interplay of competitive forces as unnecessary
regulatory restrictions are removed.'')). The Exchange also states
that the Commission and the courts have repeatedly expressed their
preference for competition over regulatory intervention to determine
prices, products, and services in the securities markets and states
that the Commission has highlighted the importance of market forces
in determining prices and SRO revenues. See id. (citing Securities
Exchange Act Release No. 51808 (June 9, 2005), 70 FR 37496, 37499
(June 29, 2005) (``Regulation NMS Adopting Release'') (the national
market system ``has been remarkably successful in promoting market
competition in its broader forms that are most important to
investors and listed companies.''). The Exchange further states that
the Commission has long relied on competitive forces to determine
whether a fee proposal is equitable, fair, reasonable, and not
unreasonably or unfairly discriminatory ``[i]f significant
competitive forces constrain the fee at issue, fee levels will be
presumed to be fair and reasonable . . . .'' See id. (citing Staff
Fee Guidance). The Exchange also cites to a 2008 Commission Order
stating ``[i]f competitive forces are operative, the self-interest
of the exchanges themselves will work powerfully to constrain
unreasonable or unfair behavior.'' See id. (citing Securities
Exchange Act Release No. 59039 (December 2, 2008), 73 FR 74770
(December 9, 2008) (SR-NYSEArca-2006-21)). The Exchange explains
that, accordingly, ``the existence of significant competition
provides a substantial basis for finding that the terms of an
exchange's fee proposal are equitable, fair, reasonable, and not
unreasonably or unfairly discriminatory'' and states that Commission
Staff have indicated that they would only look at factors outside of
the competitive market if a ``proposal lacks persuasive evidence
that the proposed fee is constrained by significant competitive
forces.'' See Notice, supra note 3, at 24071. As discussed in
Sections III.B.1.c. and III.B.2.c. below, the Commission does not
find that Nasdaq has sufficiently demonstrated that the proposed
fees are subject to competition. In addition, the Exchange states
that, in the Staff Fee Guidance, the Staff indicated that ``[w]hen
reviewing rule filing proposals . . . [it] is mindful of recent
opinions by the D.C. Circuit,'' including Susquehanna International
Group, LLP v. SEC, 866 F.3d 442 (D.C. Cir. 2017). See Notice, supra
note 3, at 24072. However, the Exchange states that the decision of
the U.S. Court of Appeals for the District of Columbia Circuit
(``D.C. Circuit'') in Susquehanna is irrelevant to the Commission's
review of immediately effective SRO fee filings. See id. The
Exchange states that Susquehanna involved the Commission's approval
of a rule proposed under Section 19(b)(2) of the Exchange Act, not
its evaluation of whether to temporarily suspend an SRO's
immediately effective fee filing under Section 19(b)(3). See id. The
Exchange states that a comparison of Sections 19(b)(2) and 19(b)(3)
of the Exchange Act makes clear that the Commission is not required
to undertake the same independent review, and make the same findings
and determinations, for Section 19(b)(3) filings that it must for
Section 19(b)(2) filings and, Section 19(b)(2) requires the
Commission to ``find[ ] that [a] proposed rule change is consistent
with the'' Exchange Act before approving the rule. 15 U.S.C.
78s(b)(2)(C)(i). The Exchange states that Section 19(b)(3), by
contrast, imbues the Commission with discretion, stating that it
``may temporarily suspend'' an immediately effective rule filing
where ``it appears to the Commission that such action is necessary
or appropriate.'' See id. The Exchange further states that, as the
Supreme Court has explained, statutes stating that an agency
``may''--but need not--take certain action are ``written in the
language of permission and discretion.'' See id. (citing S. Ry. Co.
v. Seaboard Allied Milling, 442 U.S. 444, 455 (1979); see also
Crooker v. SEC, 161 F.2d 944, 949 (1st Cir. 1947) (per curiam)). The
Exchange states that the ``contrast'' between Sections 19(b)(2) and
19(b)(3), ``reflects the fundamental difference in the way Congress
intended for different types of rules to be treated'' and ``while
the Commission's authority to suspend a fee under Subsection (3)(C)
is permissive, its duties under Subsection (2) are stated in
mandatory terms. See Notice, supra note 3, at 24072 (citing Brief of
Respondent SEC, NetCoalition v. SEC, 715 F.3d 342-43 (D.C. Cir.
2013) (Nos. 10-1421 et al.).''). Thus, the Exchange states that
neither Susquehanna, nor Section 19(b)(3) of the Exchange Act,
requires the Commission to make independent findings that an
immediately effective SRO fee filing such as this one is consistent
with the Exchange Act and that to the degree that the Susquehanna
decision is applicable to any Commission action, however, the court
held that the Commission is required to ``itself find or determine''
that a proposal meets statutory requirements, explaining that the
Commission is ``obligated to make an independent review'' of an
SRO's proposal, and not rely solely on the work of the SRO. See id.
(citing 866 F.3d at 4). When the Commission suspends an immediately
effective rule filing, ``Section 19(b)(3) [of the Exchange Act]
requires that the Commission institute proceedings to determine
whether the proposed rule change should be approved or disapproved
under Section 19(b)(2)(B) [of the Exchange Act],'' and the
``Exchange Act's requirements for approving a proposed rule change
apply equally, regardless of whether the proposed rule were
initially filed pursuant to Section 19(b)(2) or 19(b)(3) [of the
Exchange Act].'' See Securities Exchange Act Release No. 88493
(March 27, 2020), 85 FR 18617, 18622 (April 2, 2020) (``BOX
Order''). Consistent with that approach, the Commission critically
evaluated the representations made and conclusions drawn by Nasdaq
in the Proposal and determined based on the record that Nasdaq has
failed to meet its burden to demonstrate that the Proposal is
consistent with the Exchange Act, as set forth in Sections
III.B.1.c. and III.B.2.c. below.
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The Exchange states that the Proposal to increase connectivity and
market data fees for firms that do not meet the Minimum ADV is designed
to promote competition by providing an incentive for members to provide
displayed liquidity, thus attracting investors and increasing the
overall interest in and value of the platform, enhancing and enriching
the market data distributed to the industry.\38\ The Exchange states
that this will also enable it to offer investors a more robust, lower-
cost trading experience through tighter spreads and more efficient
trading, placing it in a better competitive position relative to other
exchanges and trading venues.\39\ The Exchange states that nothing in
the Exchange Act requires the examination of fees in isolation and that
the equitable allocation of reasonable dues, fees, and other charges
among members and issuers refers generally to ``reasonable dues, fees,
and other charges'' as a whole, not individual fees.\40\
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\38\ See Notice, supra note 3, at 24071.
\39\ See Notice, supra note 3, at 24071. The Exchange further
states that, to the degree that the additional liquidity is moved
from off-exchange venues to on-exchange platforms, overall market
transparency will improve as well. See id.
\40\ See Notice, supra note 3, at 24072.
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The Exchange states that the fact that the market for order flow is
competitive has long been recognized by the courts.\41\ In addition,
the Exchange
[[Page 95825]]
states that competition is not just limited to order flow.\42\ The
Exchange states that ``platform competition'' constrains platform fees
and results in ``all-in'' costs becoming equal across platforms, and
that evidence that ``all-in'' costs to users have equalized is evidence
that competition constrains prices ``at a platform level.'' \43\
According to the Exchange, because platform competition can be
demonstrated solely by examining and comparing ``all-in'' costs to
users, there is no need for the Exchange to analyze platform
returns.\44\ Nasdaq states that data presented in the Nasdaq Paper
shows that the combination of explicit ``all-in'' costs to trade and
other implicit costs has largely equalized the cost to trade across
venues.\45\ Nasdaq states that this is a function of the fact that, if
the ``all-in'' cost to the user of interacting with an exchange
``exceeds market price,'' customers can and do shift their purchases
and trading activity to other exchanges; therefore, an exchange must
adjust one or more of its fees to attract customers.\46\
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\41\ See Notice, supra note 3, at 24072 (citing NetCoalition,
615 F.3d at 539 (D.C. Cir. 2010) (quoting Securities Exchange Act
Release No. 59039 (December 2, 2008), 73 FR 74770, 74782-83
(December 9, 2008) (SR-NYSEArca-2006-21)) (``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.' '')).
\42\ See Notice, supra note 3, at 24072.
\43\ See Notice, supra note 3, at 24072, n.22.
\44\ See Notice, supra note 3, at 24072, n.22. Nasdaq states
that the Staff Fee Guidance states that platform competition
requires that the ``overall return of the platform, rather than the
return of any particular fees charged to a type of customer, . . .
be used to assess the competitiveness of the platform's market,''
and that ``[a]n SRO that wishes to rely on total platform theory
must provide evidence demonstrating that competitive forces are
sufficient to constrain the SRO's aggregate return across the
platform.'' See id. (citing Staff Fee Guidance; Exchange's
emphasis). The Exchange states that it does not know, and cannot
determine, whether returns (as opposed to fees) are equalized across
platforms, because it does not have detailed cost information from
other exchanges. See id. The statement that the Exchange does not
know, and cannot determine, whether returns (as opposed to fees) are
equalized across platforms is not relevant given that the Exchange
has elected to seek to establish that equal fees (i.e., ``all-in''
costs) across platforms is evidence of competitive constraint on
platforms. See Section III.B.1.c. infra addressing the merit of the
Exchange's argument that equal ``all-in'' costs is evidence of
competition between platforms. In addition, the Staff Fee Guidance
does not state that knowledge of the returns of other platforms is
needed when using platform theory to demonstrate a competitive
environment. Rather, the Staff Fee Guidance highlights relevant
evidence regarding a platform's own returns. For example, the Staff
Fee Guidance states ``[a]n SRO that wishes to rely on total platform
theory must provide evidence demonstrating that competitive forces
are sufficient to constrain the SRO's aggregate return across the
platform. In this context, at a minimum an SRO must present data and
analysis demonstrating that its aggregate return is constrained by
competition at the platform level. Examples of relevant data would
include evidence of the SRO's sources and amounts of revenues,
costs, and gross return of the entire platform. More specifically,
an analysis of baseline revenues, costs, and profitability (before
the proposed fee change) and the expected revenues, costs, and
profitability (following the proposed fee change) would provide
helpful data and analysis to support a finding that competitive
forces are operating on the entire platform.'' See Staff Fee
Guidance, supra note 36 (emphasis added).
\45\ See Notice, supra note 3, at 24072. See also Nasdaq Paper,
supra note 5.
\46\ See Notice, supra note 3, at 24072.
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The Exchange states that different exchanges engage in a variety of
business models and offer an array of pricing options to appeal to
different customer types; specifically, that the largest exchanges
operate maker-taker platforms, offering rebates to attract trading
liquidity, which allows them to maintain actionable quotes with high
liquidity and offer high-quality market data.\47\ The Exchange further
states that the negative price charged to liquidity providers through
rebates is part of the platform because it serves to create features
attractive to other participants, including oftentimes tight spreads,
actionable and lit quotes, and more valuable market data.\48\ The
Exchange states that there are a wide range of other pricing models and
product offerings among the dozens of lit and unlit trading venues that
compete in the marketplace.\49\ The Exchange further states that
different strategies among exchanges also manifest in the pricing of
other services, such as market data and connectivity, noting that some
exchanges charge for such services, while others charge little or
nothing (typically because the exchange is new or has little
liquidity), just as some exchanges charge a fee per trade, while others
pay rebates.\50\
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\47\ See Notice, supra note 3, at 24072.
\48\ See Notice, supra note 3, at 24072. The Exchange states
that, in contrast, inverted venues have the opposite price
structure--liquidity providers pay to add liquidity, while liquidity
takers earn a rebate--these platforms offer less liquidity, but
better queue priority, faster fills, and lower effective spreads for
investors. See id.
\49\ See Notice, supra note 3, at 24072.
\50\ See Notice, supra note 3, at 24072.
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In assessing competition for exchange services, the Exchange states
that both explicit costs, such as fees for trading, market data, and
connectivity, and implicit cost of trading on an exchange must be
considered, and that ``[t]he realized spread, or markout, captures the
implicit cost to trade on a platform.'' \51\ The Exchange further
states that, considering both the explicit costs charged by exchanges
for their various joint products and the implicit costs incurred by
traders to trade on various exchanges, as set forth in the Nasdaq
Paper, the data show that ``all-in'' trading costs across exchanges are
largely equalized, regardless of different trading strategies offered
by each platform for each individual service.\52\ The Exchange states
that this serves to show that ``platform competition'' has resulted in
a competitive environment in the market for exchange services, in which
trading platforms are constrained by other platforms' offerings, taking
into consideration the ``all-in'' cost of interacting with the
platform.\53\ The Exchange further states that this constraint is a
natural consequence of competition and that no exchange platform can
charge excessive fees and expect to remain competitive, thereby
constraining fees on all products sold as part of the platform.\54\ The
Exchange finally states that the existence of ``platform competition''
also explains why some consumers route orders to the exchange with the
highest explicit trading costs even though other exchanges offer free
or a net rebate for trading.\55\
---------------------------------------------------------------------------
\51\ The Exchange states that the concept of markout was created
by market makers trying to capture the spread while providing a two-
sided (bid and offer) market. See Notice, supra note 3, at 24072.
The Exchange states that, for market makers, being filled on the bid
or the offer can cause a loss if the fill changes market prices. See
id. (stating as an example, a fill on a market maker's bid just as
the stock price falls results in a ``virtual loss,'' because the
market maker has a long position with a new bid lower than the
fill). The Exchange states that negative markouts can be beneficial.
See id. (stating as an example, if an institutional investor is
working a large buy order, negative markouts represent fills as the
market falls, allowing later orders to be placed sooner, and likely
at a better price, reducing the opportunity costs as well as
explicit cost of building the position). The Exchange further states
that data suggests that market participants employ sophisticated
analytic tools to weigh the cost of immediate liquidity and lower
opportunity costs against better spread capture (lower markouts) and
explicit trading costs. See Notice, supra note 3, at 24073. The
Exchange states that, as discussed in greater detail in the Nasdaq
Paper, the venues with the highest explicit costs--typically
inverted and fee-fee venues--have the lowest implicit costs from
markouts and vice versa. See id. The Exchange also states that
higher positive markouts mean more spread capture, but those venues
also tend to have the highest explicit costs, and provide the least
liquidity, and positive externalities, to the market. See id.
\52\ See Notice, supra note 3, at 24073.
\53\ See Notice, supra note 3, at 24073.
\54\ See Notice, supra note 3, at 24073.
\55\ The Exchange states that empirical evidence also shows that
market data is more valuable from exchanges with more liquidity.
According to the Exchange, many customers decide not to take data
from smaller markets, even though they are free or much lower cost
than larger markets. See Notice, supra note 3, at 24073.
---------------------------------------------------------------------------
The Exchange states that exchange customers are differentiated in
the value they place on the different products offered by exchanges and
in their willingness to pay for those products on both a firm-wide and
a per-transaction
[[Page 95826]]
basis; for example, individual customers ``multi-home,'' meaning they
are customers on multiple platforms, and are thus able to route
different trades to different platforms to take advantage of favorable
opportunities offered on a trade-to-trade basis.\56\ The Exchange
states that exchanges compete by offering differentiated packages of
pricing and products to attract different categories of customer, and
that consumers will ``vote with their feet,'' incentivizing platforms
to supply an array of pricing and product offerings that suit diverse
consumer needs far more effectively than a uniform, one-size-fits-some
rigid product offering.\57\ The Exchange further states that if an
exchange misprices a particular product such that its total return is
boosted above competitive levels, competing exchanges will quickly
attract customer volume through more attractive ``all-in'' trading
costs.\58\ In addition, the Exchange states that if a particular
package of pricing and products is not attractive to a sufficient
volume of customers in a particular category, those customers may elect
not to purchase the service and that this is why exchanges compete at a
product level, as well as based on ``all-in'' trading costs.\59\
---------------------------------------------------------------------------
\56\ See Notice, supra note 3, at 24073.
\57\ See Notice, supra note 3, at 24073.
\58\ See Notice, supra note 3, at 24073.
\59\ See Notice, supra note 3, at 24073.
---------------------------------------------------------------------------
The Exchange states that the number of transactions completed on
non-exchange venues has been growing, that ``allowing exchanges to
compete as platforms'' will help exchanges compete against non-exchange
venues, and, to the extent order flow is shifted from non-exchange to
exchange venues, overall market transparency will improve.\60\ The
Exchange states that exchanges have a unique role to play in market
transparency because they publish an array of pre- and post-trade data
that non-exchange venues, almost entirely, do not. The Exchange also
states that the Proposal will contribute to market quality because it
will help bring new order flow to the Exchange, and greater displayed
liquidity on the Exchange offers investors deeper, more liquid markets
and execution opportunities.\61\ The Exchange states that increased
order flow benefits investors by deepening the Exchange's liquidity
pool, potentially providing greater execution incentives and
opportunities, offering additional flexibility for all investors to
enjoy cost savings, supporting the quality of price discovery,
promoting market transparency, and lowering spreads between bids and
offers and thereby lowering investor costs.\62\ The Exchange states
that, to the degree that liquidity is attracted from dark venues, that
liquidity also increases transparency for the market overall, providing
investors with more information about market trends.\63\
---------------------------------------------------------------------------
\60\ See Notice, supra note 3, at 24073 (citing Regulation NMS:
Minimum Pricing Increments, Access Fees, and Transparency of Better
Price Orders, Securities Exchange Act Release No. 96494 (File No.
S7-30-22) and stating that non-exchange venues rely on market data
distributed by exchanges to set prices and greater transparency
allows both exchange and non-exchange venues to operate more
effectively and efficiently).
\61\ See Notice, supra note 3, at 24074.
\62\ See Notice, supra note 3, at 24074.
\63\ See Notice, supra note 3, at 24074.
---------------------------------------------------------------------------
The Exchange states that ``allowing exchanges to compete
effectively as platforms'' has other positive network effects: larger
trading platforms offer lower average trading costs and, as trading
platforms attract more liquidity, bid-ask spreads tighten, search costs
fall (by limiting the number of venues that a customer needs to check
to assess the market), and connection costs decrease, as customers have
no need to connect to all venues.\64\ The Exchange states that the
Proposal will help members that meet the Minimum ADV maintain lower
costs and will benefit them through the many positive externalities
associated with a more liquid exchange.\65\
---------------------------------------------------------------------------
\64\ In addition, the Exchange states that its experience shows
that fewer customers connect with smaller trading venues than with
larger venues. See Notice, supra note 3, at 24073.
\65\ See Notice, supra note 3, at 24074.
---------------------------------------------------------------------------
The Exchange states that smaller established trading platforms
provide specialized services that cater to individual customer needs,
but that these specialized services help the smaller exchanges grow by
driving liquidity to their platforms, and, if they are successful,
achieve the economies of scale that benefit the larger enterprises.\66\
The Exchange states that, in line with its claim that the total costs
of interacting with an exchange are roughly equal, smaller exchanges
offset higher trading costs with lower connectivity, market data, or
other fees.\67\ The Exchange states that, while the mix of fees will
change as exchanges grow, the ``all-in'' cost of interacting with the
exchange remains roughly the same.\68\
---------------------------------------------------------------------------
\66\ See Notice, supra note 3, at 24073.
\67\ See Notice, supra note 3, at 24073.
\68\ See Notice, supra note 3, at 24073.
---------------------------------------------------------------------------
The Exchange states that the competition among exchanges as trading
platforms, as well as the competition between exchanges and alternative
trading venues, constrain exchanges from charging excessive fees for
any exchange products, including trading, listings, ports, and market
data.\69\ The Exchange also states that the fees that arise from the
competition among trading platforms may be too low because they fail to
reflect the benefits to the market as a whole of exchange products and
services, allowing other venues to free-ride on these investments by
the exchange platforms, increasing fragmentation and search costs.\70\
The Exchange states that, as long as total returns are constrained by
competitive forces, there is no regulatory basis to be concerned with
pricing of particular elements offered on a platform and that
regulatory constraints in this environment are likely to reduce
consumer welfare by constraining certain exchanges from offering
packages of pricing and products that would be attractive to certain
sets of consumers, thus impeding competition with venues that are not
subject to the same regulatory limitations and reducing the benefits of
competition to customers.\71\
---------------------------------------------------------------------------
\69\ See Notice, supra note 3, at 24074.
\70\ See Notice, supra note 3, at 24074.
\71\ See Notice, at 24074 (emphasis original). See also Letter
from John M. Yetter, Vice President and Senior Deputy General
Counsel, Nasdaq, to Vanessa Countryman, Secretary, Commission, dated
July 19, 2024 (``Nasdaq Response Letter''), at 8.
---------------------------------------------------------------------------
b. Opposing Comments and Exchange Response
All commenters oppose the Proposal.\72\ Multiple commenters state
that the Exchange mischaracterizes the Proposal as a discount instead
of a possible fee increase.\73\ Commenters state that the Proposal
would raise fees on a number of Nasdaq market data and connectivity
products and one commenter states that no Nasdaq member or non-member
would benefit from lower fees under the Proposal; instead, some market
participants would be charged higher fees.\74\ Commenters also state
that the Proposal, including the Nasdaq Paper, does not include
sufficient or meaningful data or justification to support the fee
increase
[[Page 95827]]
or the tying of costs from one product, market data, to another
product, transactions.\75\ Commenters disagree with the Proposal's
claim that, due to ``platform competition,'' the Commission does not
need to look at the data for these specific fees, and state that the
Exchange has not offered any relevant facts or analysis to support the
imposition of these specific increased fees.\76\ One commenter states
that the increase of 33% appears to be arbitrary, rather than the
result of changes to explicit costs and rigorous analysis,\77\ and
another commenter states that the Proposal fails to provide an analysis
to support the reasonableness of the fee increases.\78\ One commenter
states that the Exchange has not shared any analysis of how many, what
types, and how firms will be impacted by the proposed fee change, which
makes it difficult to provide meaningful comment on this aspect of the
Proposal.\79\
---------------------------------------------------------------------------
\72\ See Letters from Tyler Gellasch, President and CEO, Healthy
Markets Association, to Vanessa Countryman, Secretary, Commission,
dated April 24, 2024 (``HMA Letter''); Adrian Griffiths, Head of
Market Structure, MEMX LLC to Vanessa Countryman, Secretary,
Commission, dated June 12, 2024 (``MEMX Letter''); and Ellen Greene,
Managing Director, Equities and Options Market Structure and Joseph
Corcoran, Managing Director, Associate General Counsel, Securities
Industry and Financial Markets Association to Vanessa Countryman,
Secretary, Commission, dated May 17, 2024 (``SIFMA Letter'').
\73\ See HMA Letter, supra note 72, at 4; MEMX Letter, supra
note 72, at 2; SIFMA Letter, supra note 72, at 2.
\74\ See HMA Letter, supra note 72, at 4; MEMX Letter, supra
note 72, at 2-3; SIFMA Letter, supra note 72, at 2.
\75\ See HMA Letter, supra note 72, at 4-5; MEMX Letter, supra
note 72, at 3-6; SIFMA Letter, supra note 72, at 3-5.
\76\ See HMA Letter, supra note 72, at 4-5; SIFMA Letter, supra
note 72, at 4-5.
\77\ See HMA Letter, supra note 72, at 5.
\78\ See SIFMA Letter, supra note 72, at 5.
\79\ See SIFMA Letter, supra note 72, at 6. This specific
commenter states that the Proposal ``did not include the number or
size of members that currently trade in volumes that meet the
definition of the proposed term `Minimum ADV,' how many additional
members it would expect to cross the threshold as a result of the [
] Proposal, or comparison of these statistics at various volume
threshold levels.'' Id. at 8.
---------------------------------------------------------------------------
Commenters also state that the Exchange has not demonstrated that
``platform competition'' constrains the specific market data and
connectivity fees subject to the Proposal. One commenter states that
the Proposal and the Nasdaq Paper do not address how the fees for the
specific products are constrained by ``platform competition,'' how the
purported competition impacts the levels at which the Exchange has
determined to set the proposed fees for these products, whether there
are reasonable substitutes for the relevant products, any revenue or
cost analysis to demonstrate the need for the increased fees, or any
evidence that the increased fees would not result in supra-competitive
profits for the Exchange.\80\ This same commenter also states that the
evidence offered in the Nasdaq Paper is insufficient to demonstrate
that the Exchange has been subject to significant competitive forces in
setting the fees. The commenter states that they, along with other
market participants, have previously provided evidence that rebuts the
argument that ``platform competition'' constrains an exchange's market
data fees and demonstrates that an exchange's decision to offer
multiple products (trading services and market-data products) does not
constrain prices in the manner contemplated when a platform facilitates
a multi-sided transaction.\81\ The commenter specifically states that
it has provided evidence to the Commission that shows that, while
trading on various exchanges can be substitutable, trade data from
various exchanges is not.\82\ The commenter states that the prices that
exchanges charge for trading are roughly reasonable, while the prices
for trading data have in some cases increased significantly in the past
years with no apparent competition-based reason.\83\ Another commenter
states that the Proposal's reliance on platform theory ignores the
Exchange's pricing power for its market data products.\84\
---------------------------------------------------------------------------
\80\ See SIFMA Letter, supra note 72, at 5.
\81\ See SIFMA Letter, supra note 72, at 4. The commenter cites
to two reports, see Lawrence R. Glosten, ``Economics of the Stock
Exchange Business: Proprietary Market Data'' (January 2020) and
Expand & SIFMA, ``An Analysis of Market Data Fees'' (August 2018),
available at <a href="https://www.sifma.org/wp-content/uploads/2019/01/Expand-and-SIFMA-An-Analysis-of-Market-Data-Fees-08-2018.pdf">https://www.sifma.org/wp-content/uploads/2019/01/Expand-and-SIFMA-An-Analysis-of-Market-Data-Fees-08-2018.pdf</a>.
\82\ See SIFMA Letter, supra note 72, at 4 (citing Glosten,
``Economics of the Stock Exchange Business; Proprietary Market
Data,'' at 4, supra note 81).
\83\ See SIFMA Letter, supra note 72, at 4.
\84\ See HMA Letter, supra note 72, at 5.
---------------------------------------------------------------------------
A different commenter states that the data and analysis in the
Proposal and the Nasdaq Paper do not establish that ``platform
competition'' constrains the Exchange's fees, that competitive forces
are sufficient to constrain the Exchange's aggregate return across the
platform, or that market participants can avoid purchasing the
Exchange's services if the price of those services, either individually
or as a whole, is unreasonable.\85\ The commenter states that the data
provided by the Exchange does not include evidence that would be
relevant to demonstrate ``platform competition,'' including evidence of
its sources and amounts of revenues, costs, and the gross return of the
entire platform.\86\ The commenter states that, at most, Nasdaq's
analysis shows that certain other large exchange groups may similarly
charge unreasonable fees today, free of competitive constraints felt by
smaller exchanges with lower fees that Nasdaq largely ignores in its
analysis.\87\
---------------------------------------------------------------------------
\85\ See MEMX Letter, supra note 72, at 3. The commenter is
another national securities exchange and states that other
exchanges, including the commenter, have justified their non-
transaction fees by providing detailed financial information to the
Commission.
\86\ See MEMX Letter, supra note 72, at 3-4 (citing Staff Fee
Guidance, supra note 36).
\87\ See MEMX Letter, supra note 72, at 4. The commenter states
that the analysis provided by Nasdaq generally reflects the 2021
data related to trading on exchanges operated by the three incumbent
exchange groups and one independent exchange with a unique market
model (IEX) and that data about the cost of trading on new maker/
taker exchanges that compete more directly with the three incumbent
exchange groups, including the commenter and MIAX Pearl, LLC, are
excluded from various analysis. Id. at 4 n.14. Additionally, the
commenter states that the data on trading on all three independent
U.S. equities exchanges is stale and does not reflect relevant
changes made by each of those markets in the last three years. Id.
---------------------------------------------------------------------------
The Exchange submitted a Response Letter, which reiterates many of
the arguments made in the Proposal.\88\ The
[[Page 95828]]
Exchange states that reliance on competitive solutions is fundamental
to the Exchange Act and that the Nasdaq Paper and its supporting
evidence demonstrate that the proposed fees are subject to competitive
forces and will enhance competition and benefit investors by
incentivizing liquidity on the Exchange.\89\ The Exchange states that
the services in the Proposal are inextricable from the operation of
exchanges as a platform and the competitiveness of these fees must be
analyzed ``at the platform level'' rather than by positing the
existence of a product-by-product market existing in isolation from the
platform.\90\ The Exchange also again states its belief that the
Commission and the courts have expressed a preference for competition
over regulatory intervention to determine prices, products, and
services in the securities market.\91\ The Exchange states that
regulatory constraints in this environment are likely to reduce
consumer welfare by constraining certain exchanges from offering
packages of pricing and products that would be attractive to certain
sets of consumers, thus impeding competition with venues that are not
subject to the same regulatory limitations and reducing the benefits of
competition to consumers.\92\ The Exchange also states that its
research shows that the combination of ``all-in'' costs to trade and
other implicit costs has largely equalized the cost to trade across
venues, which demonstrates that competition has helped constrain
fees.\93\ The Exchange states that allowing ``platform competition''
means that the exchanges will be better able to compete against non-
exchange venues, and, to the degree order flow is shifted from non-
exchange to exchange venues, overall market transparency is improved
which enables non-exchange venues to provide more accurate pricing to
their customers, and play their own role in capital formation more
efficiently and effectively.\94\
---------------------------------------------------------------------------
\88\ See Nasdaq Response Letter, supra note 71. In the Response
Letter, Nasdaq also raised certain procedural issues. See id. at 4,
20-22. The Exchange states that the Commission itself, and not staff
acting under delegated authority, must act within the statutorily
prescribed timing requirements of the Dodd-Frank Act, or the
proposal will be deemed approved. See id. at 4 and 21. This argument
lacks merit. See BOX Order, supra note 37, at 18625. The Exchange
also states that if staff, under delegated authority, disapprove the
proposal prior the statutorily provided time limit, and then the
Commission exercises its discretionary right to review, either on
its own initiative or upon petition, then the staff's disapproval
will not constitute action by the Commission, and thus, unless the
Commission makes a final determination of the proposal within the
statutory prescribed 240-day period, then the proposal is considered
to have been deemed approved. See Nasdaq Response Letter, supra note
71, at 21-22. Orders issued by delegated authority ``are issued will
the full authority of the Commission and are signed by the
Secretary's office on behalf of the Commission.'' See Securities
Exchange Act Release Nos. 93229 (October 1, 2021), 86 FR 55873,
55879 (October 7, 2021) (SR-CboeBZX-2020-053) (``CboeBZX Order'')
and 93230 (October 1, 2021), 86 FR 55881, 55887 (October 7, 2021)
(SR-CboeBZX-2020-070). Section 4A of the Exchange Act authorizes the
Commission to delegate certain functions, including the approval or
disapproval of a proposed rule change under Section 19, to a
``division of the Commission,'' 15 U.S.C. 78d-1(a), and the
Commission's Rules of Practice are clear that ``an action made
pursuant to delegated authority shall have immediate effect and be
deemed the action of the Commission.'' See Commission Rule of
Practice 431(e), 17 CFR 201.431(e). See also, e.g., Rule of Practice
430(c), 17 CFR 201.430(c) (referring to ``a final order entered
pursuant to [delegated authority]''); Rule of Practice 431(f), 17
CFR 201.431(f) (giving an order by delegated authority operative
effect, even when review has been sought, until a person receives
actual notice that it was been stayed, modified, or reversed on
review). Furthermore, as the Commission has stated, Congress was
aware of the Commission's ability to delegate authority to approve
SRO rule filings when the time restrictions in Exchange Act Section
19(b)(2)(D) were enacted; and, to construe Section 19(b)(2), as
Nasdaq does, to require Commission review of an order by delegated
authority to be completed within 240 days ``would undermine both the
specific deadlines set forth in the statute and the Commission's
ability to delegate functions'' and such a construction is not
necessary to fulfill Congress's purpose in enacting the deadlines to
``streamline'' the rule filing process. See, e.g., BOX Order, supra
note 37, at 18625-26 and Securities Exchange Act Release No. 82727
(February 15, 2018), 83 FR 7793, 7799 (February 22, 2017).
\89\ See Nasdaq Response Letter, supra note 71, at 1-2.
\90\ See Nasdaq Response Letter, supra note 71, at 5 n.18.
\91\ See Nasdaq Response Letter, supra note 71, at 5.
\92\ See Nasdaq Response Letter, supra note 71, at 8.
\93\ See Nasdaq Response Letter, supra note 71, at 7. The
Response Letter also states that ``if the all-in cost to the user of
interacting with an exchange--taking into account the amount of
liquidity on the exchange--exceeds market price, customers shift
purchases away from that exchange, and therefore the exchange must
adjust one or more of its fees to attract customers. The `all-in'
cost includes not only explicit costs, such as fees for trading,
market data, and connectivity, but also the implicit costs of
trading on an exchange.'' Id.
\94\ See Nasdaq Response Letter, supra note 71, at 14.
---------------------------------------------------------------------------
The Exchange states that ``platform competition'' has constrained
market data fees over the last two decades, because customers can and
routinely do shift their purchases to another national securities
exchange in response to competitive pricing alternatives and that fees
have been constrained because customers have a choice in market data
and connectivity.\95\ Nasdaq states that the fact that customers are
turning to other sources for their data needs demonstrates that there
is a competitive constraint on the fees that an exchange can
charge.\96\ Nasdaq states that customers similarly have a choice in
whether they purchase connectivity services and that of all the
customers on the Exchange, only 4% purchase any colocation services at
all, and only 22% purchase depth-of-book information.\97\
---------------------------------------------------------------------------
\95\ See Nasdaq Response Letter, supra note 71, at 9, 11. In
2022, for example, Nasdaq reported that the introduction of fees for
the five MRX data feeds caused an approximately 15% reduction in the
number of customers with access to those feeds. Nasdaq states that
it has also had cancellations of BX and PSX data feeds because the
liquidity available on those exchanges has been insufficient to
support the cost of market data. Id.
\96\ See Nasdaq Response Letter, supra note 71, at 11. Nasdaq
states that, as an example, 54% (15 out of 28) of market
participants report on Form ATS-N that they purchase proprietary
real time market data, while the remaining market participants rely
on the Securities Information Processors (``SIPs'') for market
information. Id.
\97\ See Nasdaq Response Letter, supra note 71, at 12. The
Exchange states that, while most of their top 25 customers purchase
colocation services, that percentage drops below 60% for the next
top 25, drops to only about 20% for the next 50, and approaches zero
for most other customers. Id.
---------------------------------------------------------------------------
c. Analysis of ``Platform Competition'' Arguments in the Proposal \98\
---------------------------------------------------------------------------
\98\ As an initial matter, this proposed fee change would be an
increase for all non-members and members who do not attain the
required Minimum ADV. The Exchange refers to the proposed rule
change as a fee increase in its Response Letter. See Nasdaq Response
Letter, supra note 71, at 4.
---------------------------------------------------------------------------
As described above, Nasdaq states that exchanges are multi-sided
platforms, whose value is dependent on attracting users to multiple
sides of the platform.\99\ Nasdaq's justification that the Proposal
provides for reasonable fees as required by Section 6(b)(4) of the
Exchange Act, is that the Exchange is a platform that is subject to
competition from other exchanges and trading venues ``at the platform
level'' (not just the product level).\100\ Nasdaq states that this
competition constrains fees for all of the products that the platform
produces because the products are sold in a competitive environment
(i.e., the competitive platform environment, not necessarily a
competitive product environment).\101\ Accordingly, Nasdaq states that
any fee for a product of its platform is reasonable, ``provided that
nothing about the product or its fee structure impairs competition.''
\102\
---------------------------------------------------------------------------
\99\ See Notice, supra note 3, at 24071.
\100\ See Notice, supra note 3, at 24072-73.
\101\ See Notice, supra note 3, at 24072.
\102\ See Notice, supra note 3, at 24071.
---------------------------------------------------------------------------
Nasdaq states that a result of ``platform competition'' is that the
``all-in'' costs (both explicit and implicit costs) for a user to
interact with an exchange are largely equal across exchanges because,
if an exchange ``exceeds market price'' for its package of products,
customers can and do shift their purchases and trading activity to
other exchanges.\103\ Nasdaq states that ``platform competition'' can
be demonstrated by examining the ``all-in'' costs to users and the
Nasdaq Paper seeks to demonstrate that the ``all-in'' costs to users
are largely equal across platforms.\104\ Accordingly, the Proposal
relies on the Nasdaq Paper and its analysis of user costs to attempt to
demonstrate that competition between exchanges constrains fees and, in
turn, that the proposed fees are reasonable.
---------------------------------------------------------------------------
\103\ See Notice, supra note 3, at 24072.
\104\ See Notice, supra note 3, at 24072, n.22, and Nasdaq
Paper, supra note 5.
---------------------------------------------------------------------------
The Exchange does not explain how equal ``all-in'' user costs to
trade across all exchanges establish that the Exchange's fees for the
market data and connectivity products subject to the Proposal are
subject to competitive constraint. Even assuming that ``all-in'' user
costs reflect the prices that users pay, equal ``all-in'' users costs
would not be sufficient to establish the presence of sufficient
competitive forces that would constrain the level of the Exchange's
proposed fees for the market data and connectivity products subject to
the Proposal and ensure that such fees are reasonable.\105\ This is
because a concentrated market where firms have significant market power
can also have equal prices.\106\ As a result, establishing that prices
are equal across firms does not establish the degree of competition
between these firms. Accordingly, the Commission agrees with the
opposing commenters' statements above that
[[Page 95829]]
Nasdaq has not demonstrated that the specific market data and
connectivity fees subject to the Proposal are constrained by
competition.\107\ Therefore, the Commission finds that Nasdaq has
failed to meet its burden under the Exchange Act to demonstrate that
the proposed fees are reasonable as required under Section 6(b)(4) of
the Exchange Act.
---------------------------------------------------------------------------
\105\ See also MEMX Letter, supra note 72, at 4 (``[e]ven taken
at face value, at most Nasdaq's analysis shows that certain other
large exchange groups may similarly charge unreasonable fees
today'').
\106\ See, e.g., W. Kip Viscusi, Joseph E. Harrington, Jr., &
David E.M. Sappington, Economics of Regulation and Antitrust (5th
ed. 2018), at 128-130 and 177-178. See also supra notes 82-84 and
accompanying text (commenters stating that there is a lack of
competition for exchange market data products and that Nasdaq has
pricing power for its market data products).
\107\ See HMA Letter, supra note 72, at 4-5; MEMX Letter, supra
note 72, at 3-6; SIFMA Letter, supra note 72, at 3-5 (stating that
``neither the proposal or the [Nasdaq Paper] demonstrate that
platform competition constrains the specific market data and co-
located connectivity fees as issue in the [Proposal].'').
---------------------------------------------------------------------------
The evidence that Nasdaq provides is flawed in other ways as well.
Nasdaq's two-step analysis,\108\ which it states shows that competition
equalizes ``all-in'' user costs across exchanges, uses a methodology
that does not allow those costs to be compared accurately across
exchanges. Nasdaq first claims to examine explicit ``all-in'' user
costs and finds that these costs vary significantly across
exchanges.\109\ Nasdaq then adds implicit costs for users to trade on
each venue, which Nasdaq claims broadly equalizes costs to the user
across venues.\110\ Nasdaq's analysis of explicit ``all-in'' user costs
across exchanges uses a methodology to determine user costs by taking
the annual revenues ``per category'' of costs for each exchange group
and dividing by the total number of trades for each exchange group,
respectively.\111\ This methodology to determine user costs as revenue
normalized ``per trade'' (i.e., annual exchange revenue per cost
category/total annual trades for the exchange) does not allow for an
accurate comparison of an individual trader's ``all-in'' costs across
exchanges--where there are potentially very different order flow levels
and average order sizes that vary by trader.
---------------------------------------------------------------------------
\108\ See Nasdaq Paper, supra note 5, at 60.
\109\ See Nasdaq Paper, supra note 5, at 59-60. In an updated
version of the analysis, Nasdaq states that instead, using updated
data, competition has essentially equalized the explicit ``all-in''
costs of the three largest exchange families. See Nasdaq Letter at
11. This analysis does not change the Commission's view that
Nasdaq's analysis of ``all-in'' costs is flawed. First, even if
explicit costs are ``equalized'' across these three exchanges in
2022, they were shown to vary significantly in the older version of
the analysis from 2021. It is not clear whether Nasdaq is showing
that the exchange was not subject to the same degree of competition
in 2021 and 2022, or if there was a mistake in the 2021 analysis.
Comparing the updated analysis to the previous one at the least
shows that their results are not particularly robust over time.
Additionally, even if the updated figure is the ``correct'' one,
there is no evidence that the costs from the updated figures are
also equalized once implicit costs are considered.
\110\ See Nasdaq Paper, supra note 5, at 60.
\111\ See Nasdaq Paper, supra note 5, at 60 (Figure 2: 2021 All-
In Cost to Trade by Exchange); and Nasdaq Response Letter, supra
note 71, at 11 (Figure 2: 2002 Estimated All-In Cost to Trade).
These categories include revenues related to colocation and ports,
data, SIP revenue, and trading, as well as estimated data center
costs.
---------------------------------------------------------------------------
As Nasdaq acknowledges, connectivity and data costs are fixed costs
\112\--meaning that, all else being equal, these costs will be the same
regardless of the number of transactions effected by the trader. First,
dividing fixed costs by the number of trades will make these costs for
exchanges that execute more trades appear lower than for exchanges that
execute fewer trades, even when it is not the case. For example,
consider a trader that purchases fiber connections to three exchanges
(A, B and C), each of which costs $20,000 per month and are otherwise
identical. The trader executes a 100-share order on each exchange.
Assume that this is the only trade executed on Exchange A, while
Exchange B executes a single additional 9,900-share order from a
different trader, and Exchange C executes 99 additional 100-share
orders, again from different traders. Following Nasdaq's methodology,
this would create the misleading result of connectivity costs (per
trade) of $20,000 on Exchange A, $10,000 on Exchange B, and $200 on
Exchange C, which does not reflect the fact that the trader paid the
same $20,000 to connect to and execute an identical trade on each
exchange. Second, since variable costs are typically assessed on a per-
share, and not per-trade, basis, Nasdaq's methodology will similarly
make user costs for exchanges with a smaller number of trades appear
higher, all else equal.\113\ Accordingly, Nasdaq's methodology for
measuring explicit user costs does not provide for an accurate
comparison of such costs across exchanges.\114\
---------------------------------------------------------------------------
\112\ See, e.g., Nasdaq Paper, supra note 5, at 71 (referencing
``market data, connectivity, and other fixed costs''); and at 75
(referencing ``the cost of market data and other fixed costs'').
\113\ To see this, consider the example from above and assume
that each exchange charges a liquidity take fee of $0.001 per share.
The trader's actual total transaction cost for each 100-share order
would be $0.10 on each exchange. However, Nasdaq's methodology would
calculate user transaction costs as $5 on Exchange B (i.e., the
exchange's total transaction revenue-$0.001 * 10,000 executed shares
= $10-divided by the number of trades, which is 2).
\114\ The issues with using ``per-trade'' costs are illustrated
by ``Figure 1: Industry-Wide All-In Cost to Trade'' in the Nasdaq
Response Letter which shows a drop in Nasdaq's ``all-in'' cost
measure (defined as revenues divided by trades) since 2019 and which
Nasdaq states shows that the explicit all-in costs per trade have
fallen industry-wide since 2019 (excluding markouts). See Nasdaq
Response Letter, supra note 71, at 10. However, Nasdaq does not
acknowledge that this same figure also shows that there was a
significant increase in trading volume in 2019. Nasdaq does not
address the likelihood that, unless there was a particularly
significant drop in revenues beginning in 2019, this ``drop'' in the
ratio of revenues to trades was most likely driven by an increase in
the number of trades (i.e., the denominator) rather than a decrease
in revenues (i.e., the numerator).
---------------------------------------------------------------------------
Additionally, Nasdaq draws unsupported conclusions from certain
intermediate steps in its reasoning. Many of Nasdaq's arguments
conflate the fact that exchanges are able to attract customers despite
different business models as evidence that competition constrains
``all-in'' user costs.\115\ For example, in reference to ``Table 1:
Heatmap of Different Exchange Models and Their Characteristics,''
Nasdaq assumes that the ability of exchanges with different business
models and cost structures to attract customers means that all-in costs
``must'' be constrained by competition.\116\ However, the ability of an
exchange to attract customers to its market data and connectivity
products is not evidence of competition for those products; the same
result could also hold were the exchange to have market power or be a
monopolist for its market data and connectivity products.
---------------------------------------------------------------------------
\115\ See, e.g., Nasdaq Paper, supra note 5, at 67 (stating that
``U.S. exchanges operate a number of different platform business
models today, and each is able to attract customers and compete,''
and ``how do all these different business models compete unless all-
in costs to users are constrained?'').
\116\ See Nasdaq Paper, supra note 5, at 68 (Table 1: Heatmap of
Different Exchange Models and Their Characteristics).
---------------------------------------------------------------------------
Nasdaq then goes on to discuss how different exchanges ``compete''
(i.e., attract customers) despite their vastly different explicit
costs, and it concludes that it must be the case that ``all-in'' user
costs at some point must equalize (i.e., through implicit costs)
\117\--questioning why else a customer would choose to purchase from a
more expensive exchange when a cheaper one is available. This
discussion ignores the fact that disparate prices are also consistent
with certain products of the exchanges simply being different; and
potentially different enough such that some products, such as the
market data and connectivity products subject to the Proposal, do not
even compete. Therefore, this line of reasoning does not provide
support for the role Nasdaq presents for implicit costs, which in any
case is never empirically demonstrated, as discussed below.
---------------------------------------------------------------------------
\117\ See also Nasdaq Paper, supra note 5, at 60, stating that
``implicit costs explain how venues with far higher explicit costs
manage to compete with seemingly much cheaper venues'' and at 61,
stating that ``[t]aking all explicit costs to trade into account,
however, reveals significant differences across exchanges . . . Such
a sizeable disparity suggests that there is another factor that
keeps these exchanges in competition.''
---------------------------------------------------------------------------
In order for the Exchange to rely on its proposition that ``all-
in'' costs to
[[Page 95830]]
users being equal across exchanges implies that there is competition
between exchanges that constrains fees across exchange products, the
Exchange must at least establish that the ``all-in'' costs to users
across exchanges are in fact largely equal. The Exchange claims to have
demonstrated that users' ``all-in'' costs are largely equal across
trading venues,\118\ including explicit costs related to connectivity,
data, and transactions in its discussion, as well as implicit
transaction costs, as measured by realized spreads.\119\ Nasdaq states
that ``[d]emonstrating that exchanges compete at the platform level,
and that [`]all-in['] costs to the user are already constrained by that
competition, requires a two-step analysis.'' \120\ First, Nasdaq claims
to analyze the ``all-in'' explicit costs for the user to trade across
exchanges, which Nasdaq states vary significantly.\121\ Second, Nasdaq
claims to analyze the implicit costs for a user to trade on each venue,
which Nasdaq states broadly equalizes the costs to users across
venues.\122\ Nasdaq's claim that ``all-in'' costs to users are largely
equal across exchanges, which Nasdaq claims is a sign of competition
between platforms constraining fees for the market data and
connectivity products subject to the Proposal, cannot be verified by
the supplied data. This is because the Exchange's figures do not
combine all of the costs the Exchange claims are relevant to a user's
decision to trade on a given exchange.\123\ For example, in the Nasdaq
Paper, ``Figure 2: 2021 All-In Cost to Trade by Exchange'' \124\
includes data, connectivity, and explicit transaction costs, but not
implicit transaction costs; ``Figure 3: Per-Trade Markouts and Net
Transaction Fees by Exchange,'' \125\ ``Figure 4: All-In Trading Costs
by Venue,'' \126\ and ``Table 1: Heatmap of Different Exchange Models
and Their Characteristics'' \127\ include explicit and implicit
transaction costs but not data or connectivity costs; ``Figure 6:
Maker-Taker Venues Have Most Time at NBBO and Highest value data''
\128\ and ``Figure 7: The SIP incentive structure rewards venues that
contribute most to the NBBO'' \129\ purport to establish a link between
data fees and transaction volumes, showing a large variation in data-
related fees and revenues across trading venues, but do not combine
this with information about other costs.\130\ The Exchange has not
provided a figure that combines all costs, both implicit and explicit
and both transaction-related and data/connectivity-related, that the
Exchange itself states are part of a user's decision to participate on
a trading venue. It is also not clear how the figures provided by
Nasdaq should be combined,\131\ or whether the figures provided by
Nasdaq are calculated using the same units.\132\
---------------------------------------------------------------------------
\118\ See, e.g., Notice, supra note 3, at 24072 (stating that
``[d]ata shows that the combination of explicit all-in costs to
trade and other implicit costs has largely equalized the cost to
trade across venues.'') and Nasdaq Paper, supra note 5, at 60
(stating that ``it is clear . . . that all-in costs to users are
roughly equal across exchanges.''), and at 81 (stating that ``[a]s
we have shown . . . , platform competition has already resulted in
rough equalization of all-in costs for users across exchange
venues.'').
\119\ See, e.g., Notice, supra note 3, at 24072, and Nasdaq
Paper, supra note 5, at 59 (stating that ``[c]ustomers consider the
all-in cost for them to trade at each venue, including the explicit
costs of trading, connectivity, membership, and data,'' and that
``implicit costs to trade cannot be overlooked in assessing
competition.'').
\120\ See Nasdaq Paper, supra note 5, at 59.
\121\ See Nasdaq Paper, supra note 5, at 59.
\122\ See Nasdaq Paper, supra note 5, at 60.
\123\ See Nasdaq Paper, supra note 5, at 60-72.
\124\ See Nasdaq Paper, supra note 5, at 60 (Figure 2: 2021 All-
In Cost to Trade by Exchange).
\125\ See Nasdaq Paper, supra note 5, at 62 (Figure 3: Per-Trade
Markouts and Net Transaction Fees by Exchange).
\126\ See Nasdaq Paper, supra note 5, at 65 (Figure 4: All-In
Trading Costs by Venue).
\127\ See Nasdaq Paper, supra note 5, at 68 (Table 1: Heatmap of
Different Exchange Models and Their Characteristics).
\128\ See Nasdaq Paper, supra note 5, at 70 (Figure 6: Maker-
Taker Venues Have Most Time at NBBO and Highest value data).
\129\ See Nasdaq Paper, supra note 5, at 71 (Figure 7: The SIP
incentive structure rewards venues that contribute most to the
NBBO).
\130\ Similarly, Nasdaq included in its response letter a
``Figure 1: Industry-Wide All-In Cost to Trade'' that purports to
show changes in industry-wide explicit costs to trade over time,
during the period from 2017-2021, but does not include implicit
costs, and furthermore does not allow for a comparison of costs
across individual exchanges. Nasdaq Response Letter, supra note 71,
at 10.
\131\ Nasdaq's implicit cost analysis and explicit cost analysis
do not clearly reflect the costs incurred by similar groups of
traders so cannot be combined. For example, while the connectivity
and market data costs in Figure 2 are presumably incurred by all
traders that connect to the exchange, the analysis of realized
spreads in Figure 3 only considers the estimated fees/rebates paid
by a ``large market marker.'' See id. Furthermore, as Nasdaq
acknowledges, ``markouts,'' i.e., realized spreads, measure the
theoretical profitability from the perspective of a liquidity
provider, which represents a cost to the liquidity taker. See Nasdaq
Paper, supra note 5, at 61 n.35. As such, they reflect a cost
incurred by one group of market participants on an exchange, but the
theoretical profits of another group.
\132\ For example, while Figure 2, Figure 3, and Table 1 are
presented in units of ``mils'' (i.e., 1/1,000th of a dollar); Figure
4 is presented in basis points (i.e., 0.01 percentage points). See
Nasdaq Paper, supra note 5, at 60-72. In addition, while Figures 2
and 3 are presented ``per trade,'' it is not clear whether Table 1
and Figure 4 are presented per trade or per share. See id.
---------------------------------------------------------------------------
Because Nasdaq has not sufficiently demonstrated that ``all-in''
costs to users across exchanges are in fact largely equal, which Nasdaq
claims is the fundamental basis for its finding that it is subject to
competition for all of its joint platform products, the Commission is
unable to find that Nasdaq has met its burden to demonstrate that the
proposed fees are reasonable as required by Section 6(b)(4) of the
Exchange Act.
2. Equitable Allocation of Reasonable Fees, Unfair Discrimination, and
Burden on Competition
a. Exchange Arguments
The Exchange states that the proposed fees are equitable and
reasonable because they will be subject to competition.\133\ The
Exchange states that the Proposal is not unfairly discriminatory and
that Non-Display Usage of depth-of-book data and the Exchange's 40Gb
and 10Gb Ultra high-speed connections will be offered to all members
and non-members on like terms.\134\ The Exchange states that incentive
programs have been widely adopted by exchanges, and are reasonable,
equitable, and non-discriminatory because they are open on an equal
basis to similarly situated members and provide additional benefits or
discounts that are reasonably related to the value to an exchange's
market quality and activity.\135\ The Exchange also states that the
Proposal is not unfairly discriminatory with respect to either members
or non-members as it is not unfair to charge more to firms that do not
directly contribute order flow to the Exchange, but nevertheless
benefit from that order flow through tighter spreads, better prices,
and the other advantages of a more liquid platform.\136\ The Exchange
states that all members that meet the ADV threshold will be charged
lower fees and Nasdaq offers rebates to members that offer displayed
liquidity.\137\ The Exchange states that, with these rebates, any
member--even smaller members--should have the ability to post
sufficient displayed liquidity to meet the ADV threshold.\138\ The
Exchange also states that the Proposal is not unfairly discriminatory
with respect to non-members that are broker-dealers because they have
the option of becoming members to obtain the lower fees, and because
they realize the benefits of higher liquidity, including tighter
spreads and better prices, and it is not unfair discrimination to
charge a higher fee for that benefit.\139\ The Exchange further states
that the Proposal is not unfairly
[[Page 95831]]
discriminatory with respect to non-member firms that are not broker-
dealers, such as market data vendors and index providers, because they
also benefit from the value that the additional liquidity generated by
this Proposal will provide to the trading platform.\140\ The Exchange
states that discounts for specific categories of market participants
are well-established, and include non-professional fees, broker-dealer
enterprise licenses, and a media enterprise license.\141\
---------------------------------------------------------------------------
\133\ See Notice, supra note 3, at 24074.
\134\ See Notice, supra note 3, at 24074.
\135\ See Notice, supra note 3, at 24073.
\136\ See Notice, supra note 3, at 24074.
\137\ See Notice, supra note 3, at 24074.
\138\ See Notice, supra note 3, at 24074.
\139\ See Notice, supra note 3, at 24074.
\140\ See Notice, supra note 3, at 24074.
\141\ See also Notice, supra note 3, at 24074 (citing as an
example The Nasdaq Stock Market, Price List--U.S. Equities,
available at <a href="http://www.nasdaqtrader.com/Trader.aspx?id=DPUSData">http://www.nasdaqtrader.com/Trader.aspx?id=DPUSData</a>
(providing discounts for Non-Professional subscribers for Nasdaq
TotalView and other market data products, enterprise licenses for
broker-dealers for multiple market data products, and a digital
media enterprise license for Nasdaq Basic)).
---------------------------------------------------------------------------
b. Opposing Comments and Exchange Response
Multiple commenters state that the Proposal is unfairly
discriminatory, as well as an undue burden on competition, and
inconsistent with a past Commission order disapproving a similar Nasdaq
proposed rule change.\142\ One commenter states that the Proposal is an
example of Nasdaq leveraging its market power to reduce competition
``by offering discounts on overpriced services'' to Nasdaq members who
route order flow to Nasdaq.\143\
---------------------------------------------------------------------------
\142\ See HMA Letter, supra note 72, at 6-8 and SIFMA Letter,
supra note 72, at 3 (both citing portions of Release No. 65362
(September 20, 2011), 76 FR 59466 (September 26, 2011) (SR-NASDAQ-
2011-010) (Order Disapproving a Proposed Rule Change to Link Market
Data Fees and Transaction Execution Fees) (``NASDAQ-2011-010
Disapproval Order'') (specifically citing the Commission statements
that ``[t]he Commission also does not believe NASDAQ has
demonstrated that the incremental step of linking the pricing of
trade executions and market data is an equitable allocation of fees,
or is not unfairly or unreasonably discriminatory . . . exchanges
that do not provide market data, or that already do not charge any
participant for market data, would not be able to respond to
NASDAQ's proposal with a similar pricing scheme,'' ``preventing the
linking of market data fees to trade executions will help bolster
competitive forces in the area of market data, because exchange
market data fees must appeal simultaneously to market participants
that trade directly on an exchange and those that do not trade
directly on an exchange . . . . The Commission believes it is
important to preserve competitive forces for market data as much as
possible,'' and ``The Commission is similarly concerned about
placing an undue burden on competition in the execution services
market. NASDAQ's proposal would allow it to use significant
discounts on fees for its market data products as an inducement to
attract order flow rather than relying on the quality of its
transaction services and the level of its transaction fees to
compete for orders. NASDAQ states that any competitor exchange could
choose to respond to the proposed pricing by NASDAQ by offering its
own discounts on its data products.''). See also MEMX Letter, supra
note 72, at 5-8 (further questioning why the Exchange would file
such a similar proposal to the one that was disapproved in 2011, and
states that the Proposal may be a pre-emptive response to
anticipated changes to Regulation NMS and its market structure rules
limiting transaction-based incentives as it would potentially
preserve the ability for incumbent exchanges to influence market
participant routing behavior and stating that the Proposal ``offers
a potential end run around such changes by allowing larger incumbent
exchanges to provide `incentives' through increasing fees charged
for related services and then `discount[ing]' those fees for firms
that meet specified volume thresholds'' which would ``preserve the
ability for incumbent exchanges to influence market participant
routing behavior in a world where explicitly transaction-based
incentives are more difficult to offer due to regulatory
constraints'' and ``[s]maller exchanges that price their services
fairly, as required by the [Exchange] Act, would not be able to
provide comparable incentives as the incentives are predicated on
charging excessive fees that are then reduced for market
participants that route order flow to the exchange implementing the
fee instead of one of many competitive execution venues.'').
\143\ See MEMX Letter, supra note 72, at 2.
---------------------------------------------------------------------------
One commenter states that any Nasdaq member trading less than the
proposed Minimum ADV would be disadvantaged by having to pay higher
connectivity fees or by having to alter its order routing in a way that
the current volume on Nasdaq suggests would be sub-optimal for
business, creating a massive burden on competition, and discriminating
against those who cannot or do not qualify, as well as other trading
venues.\144\ Another commenter states that non-members will always pay
higher fees as well as members who do not meet the threshold, which
benefits the larger members on the Exchange, and the Exchange itself,
at the expense of smaller members and non-members and creates a
significant competitive imbalance in the markets for the relevant
market data and connectivity services.\145\ Another commenter similarly
states that the Proposal is an undue burden on competition and
discriminates against those who are not members or who cannot meet the
Minimum ADV as market data and connectivity are indispensable to
broker-dealers and other market participants.\146\
---------------------------------------------------------------------------
\144\ See HMA Letter, supra note 72, at 5. This same commenter
states that ``[i]n the face of that reality, Nasdaq's wholly
unsupported claim that these fees, in particular, should be
permitted because they are somehow part of an overall competitive
environment rings hollow.'' Id.
\145\ See SIFMA Letter, supra note 72, at 3 and 5 (also stating
that there is not sufficient information or analysis provided in the
Proposal to overcome these concerns).
\146\ See MEMX Letter, supra note 72, at 5-6 (also stating that
the fact that the Minimum ADV required is low does not make the
Proposal any less unfairly discriminatory or anti-competitive).
---------------------------------------------------------------------------
In response, Nasdaq states that there is nothing inherently unfair
or discriminatory about offering different prices to different
categories of customers based on the type or quantity of the service
purchases, including providing incentives to certain customers to
direct more order flow to an exchange.\147\ Nasdaq further states that
offering pricing incentives to attract customer orders is
procompetitive behavior and states that Commission ``has approved
differential pricing on numerous prior occasions.'' \148\ Nasdaq states
that a prohibition against all differential pricing would suppress
competition and harm buyers because the sellers would likely respond by
not making any price cuts at all to avoid the cost of extending them to
all buyers, which would in effect establish an artificial price
floor.\149\ Nasdaq states that differentiation and variation in product
offerings are hallmarks of competition and beneficial to customers and
consumer welfare.\150\ Nasdaq also states that the Minimum ADV is
reasonable because the burden on any member is expected to be minor and
such a burden is offset by the significant benefit to all market
participants of more efficient trading and lower costs.\151\
---------------------------------------------------------------------------
\147\ See Nasdaq Response Letter, supra note 71, at 15.
\148\ See Nasdaq Response Letter, supra note 71, at 16-17.
Nasdaq states that Commission ``has acknowledged that exchanges can
offer different prices to `particular classes of subscribers' based
on market conditions such as `their economic circumstances and their
needs for and use of . . . information.' '' Id. at 17 (citing
Concept Release, Regulation of Market Information Fees and Revenues,
64 FR 70613, 70630 (December 17, 1999).
\149\ See Nasdaq Response Letter, supra note 71, at 16.
\150\ See Nasdaq Response Letter, supra note 71, at 17.
\151\ See Nasdaq Response Letter, supra note 71, at 19.
---------------------------------------------------------------------------
Nasdaq reiterates that the Proposal is neither unfairly
discriminatory to a non-member broker-dealer because the non-member
broker-dealers have the option of becoming members to obtain the
proposed lowered fee and they also realize the benefits of more
liquidity on the exchange, nor to non-member firms that are not broker-
dealers since those non-members also benefit from the additional
liquidity expected by the Proposal.\152\ Finally, Nasdaq states that
the Proposal does not place an undue burden on competition and that
providing discounts is not anti-competitive,\153\ and that bundled
discounts are also pro-competitive.\154\
---------------------------------------------------------------------------
\152\ See Nasdaq Response Letter, supra note 71, at 19-20.
\153\ See Nasdaq Response Letter, supra note 71, at 20 (stating
that courts are wary about claims that offering discounts is anti-
competitive because lower prices benefit customers regardless of how
those prices are set, as long as they are above predatory levels).
\154\ See Nasdaq Response Letter, supra note 71, at 20.
---------------------------------------------------------------------------
[[Page 95832]]
c. Analysis of Arguments Regarding Equitable Allocation, Unfair
Discrimination, and Burden on Competition Not Necessary or Appropriate
Nasdaq proposes to increase fees for certain market data and
connectivity products and to maintain the current fees for such
products if members meet the Minimum ADV. The Proposal would thereby
link the level of Nasdaq trading volume (i.e., executed displayed
volume) to the level of fees for Nasdaq market data and connectivity
products. In disapproving a prior Nasdaq proposal to link market data
pricing to transaction volume, the Commission cited its previous
statement that the Exchange Act precludes exchanges from adopting terms
for market data distribution that unfairly discriminate by favoring
participants in an exchange's market or penalizing participants in
other markets.\155\ Nasdaq has not demonstrated that the incremental
step of linking the pricing of market data and connectivity to Nasdaq
trading volume (i.e., the Minimum ADV) is an equitable allocation of
fees as required by Section 6(b)(4) of the Exchange Act, is not
unfairly discriminatory as required by Section 6(b)(5) of the Exchange
Act, and is consistent with Section 11A of the Exchange Act and Rules
603(a)(1) and 603(a)(2) of Regulation NMS which, among other things,
require the Exchange to distribute market data on terms that are ``fair
and reasonable'' and ``not unreasonably discriminatory.'' Nasdaq states
that the marketplace is intensely competitive, and states that
competitive forces ensure that the Proposal is equitable and not
unfairly discriminatory. The Proposal would result in market
participants paying different fees for the same market data from Nasdaq
depending on the amount of their executed displayed volume on the
Exchange.\156\ Thus, the Proposal adopts terms for market data
distribution that unfairly discriminate by favoring participants in an
exchange's market or penalizing participants in other markets.\157\
---------------------------------------------------------------------------
\155\ See NASDAQ-2011-010 Disapproval Order, supra note 142.
``[A]n exchange proposal that seeks to penalize market participants
for trading in markets other than the proposing exchange would
present a substantial countervailing basis for finding unreasonable
and unfair discrimination and likely would prevent the Commission
from approving an exchange proposal.'' See Securities Exchange Act
Release No. 59039 (December 2, 2008), 73 FR 74770, 74791 (December
9, 2008) (SR-NYSEArca-2006-21) (Order Setting Aside Action by
Delegated Authority and Approving Proposed Rule Change Relating to
NYSE Arca Data), vacated and remanded by NetCoalition v. SEC, No.
09-1042 (D.C. Cir. 2010) but on other grounds.
\156\ The Commission agrees with the commenter who states that
the absence of an analysis of how many, what types, and how firms
will be impacted by the proposed fee change makes it difficult to
evaluate the proposed Minimum ADV threshold. See SIFMA Letter, supra
note 72, at 6. This specific commenter states that the Proposal
``did not include the number or size of members that currently trade
in volumes that meet the definition of the proposed term `Minimum
ADV,' how many additional members it would expect to cross the
threshold as a result of the [ ] Proposal, or comparison of these
statistics at various volume threshold levels.'' Id.
\157\ See supra note 155.
---------------------------------------------------------------------------
The Commission is concerned that the Proposal would result in an
inequitable allocation of fees and unfairly discriminate against market
participants who are users of market data and connectivity but are not
significant users of execution services and do not meet the Minimum ADV
requirement, and thus would not qualify for the lower market data and
connectivity fees. This could include, for example, market participants
who divide their liquidity provision among multiple exchanges that
trade NMS stocks, or that utilize market data but do not trade on
Nasdaq, and thus do not provide sufficient executed displayed volume to
Nasdaq to qualify for the lower market data fees. In this regard, the
Commission is concerned that linking market data and connectivity fees
to executed displayed volume would essentially allow Nasdaq to charge
significantly higher fees for market data and connectivity to market
participants that choose to provide liquidity at other exchanges, by
charging them more than those Nasdaq members that meet the Minimum ADV
on Nasdaq. By requiring market participants to become members of the
Exchange (and then meet the Minimum ADV) to receive the proposed
pricing benefit for market data and connectivity, the Proposal would
penalize market participants for not being a member of the Exchange and
thus the Proposal would adopt terms for market data distribution that
would unfairly discriminate against those market participants that
cannot or will not become members of the Exchange.
Nasdaq has not demonstrated that the incremental step of linking
the pricing of market data and connectivity to Nasdaq trading volume
(i.e., the Minimum ADV) would not impose any burden on competition not
necessary or appropriate in furtherance of the purposes of the Exchange
Act as required by Section 6(b)(8) of the Exchange Act. As discussed
above, Nasdaq states it currently faces intense ``competition as a
platform,'' and that its proposal is providing an incentive for members
who provide a requisite level of liquidity lower fees for market data
and connectivity.\158\ Nasdaq states that ``[p]roviding discounts is
not anti-competitive'' and states its view that ``courts have also
deemed `bundled' discounts, like the Proposal, to be pro-competitive.''
\159\ Nasdaq acknowledges, however, that a bundled discount might harm
competition `when it is offered by firms holding or on the verge of
gaining monopoly power in the relevant market.' '' \160\ However,
Nasdaq has not adequately articulated why the linking of market data
and connectivity fees to the Minimum ADV will not negatively impact the
competition that exists today in the market for order flow. The
Proposal would allow Nasdaq to use a significant discount on the fee
for its market data product as an inducement to attract liquidity
rather than relying on the quality of its transaction services to
compete for displayed liquidity. As discussed above, Nasdaq fails to
demonstrate that its market data and connectivity products are subject
to competitive forces, and preventing the linking of market data fees
to executed displayed volume will help prevent exchanges from using
their advantages in the area of market data to reduce competitive
forces in the market for order flow.\161\
---------------------------------------------------------------------------
\158\ See Notice, supra note 3, at 24071.
\159\ See Nasdaq Response Letter, supra note 71, at 20.
\160\ See Nasdaq Response Letter, supra note 71, at 20.
\161\ See supra notes 82-84 and accompanying text (commenters
stating that there is a lack of competition for exchange market data
products and that Nasdaq has pricing power for its market data
products).
---------------------------------------------------------------------------
IV. Conclusion
For the reasons set forth above, the Commission does not find that
the proposed rule change is consistent with the Exchange Act and the
rules and regulations thereunder applicable to a national securities
exchange, and, in particular, with Sections 6(b)(4), 6(b)(5), 6(b)(8),
and 11A of the Exchange Act and with Rules 603(a)(1) and 603(a)(2) of
Regulation NMS thereunder.
It is therefore ordered, pursuant to Section 19(b)(3)(C) of the
Exchange Act,\162\ that File No. SR-NASDAQ-2024-016, be and hereby is,
disapproved.
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\162\ 15 U.S.C. 78s(b)(3)(C).
\163\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\163\
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2024-28258 Filed 12-2-24; 8:45 am]
BILLING CODE 8011-01-P
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</html>Indexed from Federal Register on December 3, 2024.
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