FR 2024-28258

The Securities and Exchange Commission (SEC) recently addressed a proposed rule change by The Nasdaq Stock Market LLC. Nasdaq intended to increase fees for some of its market data and connection products unless firms met a specific trading volume threshold. The SEC decided against this proposal because it was not convinced that Nasdaq's fee changes would be fair, reasonable, or even-handed, nor did they find that the proposal would not hinder competition in financial markets.

General Summary

Nasdaq aimed to raise fees on market data and connectivity for companies that did not meet a minimum level of daily trading activity on their exchange. Companies that did meet these trading thresholds would see no change in fees. While Nasdaq argued that these changes would encourage more active trading, the SEC expressed skepticism. The Commission was not persuaded that the fee adjustments were justified, fair, or competitive. Moreover, the SEC stressed that the plan might lead to unfair economic pressure on firms that chose to trade on other exchanges.

Significant Issues and Concerns

A key issue with Nasdaq's proposal was the concept of "platform competition." This term refers to the idea that exchanges like Nasdaq compete with one another in providing a platform that includes data, connectivity, and trading services. However, the SEC criticized Nasdaq for not adequately demonstrating how this competition influences fees for the specific products in question.

Another concern was the complexity of calculating what Nasdaq calls "all-in" user costs, which combine explicit fees and other implicit costs of trading on an exchange. The SEC found that Nasdaq's method of assessing these costs did not clearly show whether the increased fees would be reasonable or competitive.

Moreover, the SEC feared that linking data and connectivity fees to trading volume could disadvantage firms that participate in other markets. By making such connections, the proposal could coercively steer trade toward Nasdaq at the expense of other exchanges.

Public Impact

For the general public, especially investors, the SEC's decision underscores a commitment to ensuring that pricing structures in financial markets are fair and transparent. This oversight helps maintain the integrity of the market environment, ensuring that no single exchange can unfairly leverage its position to stifle competition.

Impact on Stakeholders

Positive Impacts:

• Other Exchanges: By disapproving the proposal, the SEC maintains the competitive balance, preventing Nasdaq from using its market position to extract higher fees from firms that trade elsewhere.
• Regulatory Bodies: The decision reinforces the SEC’s role in overseeing fair operations of trade exchanges, ensuring that all market players operate within these equitable frameworks.

Negative Impacts:

• Nasdaq: This decision is a setback for Nasdaq, as it limits their ability to adjust fees in a way that could potentially enhance their revenue model through increased trading activity.
• Trading Participants: Firms that trade on multiple exchanges may see this decision as relieving unfair financial pressures that could have made their trading strategies more expensive if the proposal had been approved.

In summary, the SEC's disapproval of Nasdaq's proposal reflects a broader concern with ensuring that exchanges maintain fair pricing strategies that do not disadvantage smaller trading entities or those doing business across multiple platforms.

The document outlines a proposed rule change by the Nasdaq Stock Market LLC that involves increasing certain fees while offering reduced rates contingent on meeting a specific trading volume. The primary financial elements discussed in this proposal revolve around connectivity fees and market data products.

Summary of Financial References

The proposal includes specific fee adjustments for both members and non-members of Nasdaq. Under the current system, firms engaging in Non-Display Usage for depth-of-book data are charged on a per-subscriber or per-firm basis, with monthly fees structured as follows:

• $375 per subscriber for 1-39 subscribers
• $15,000 per firm for 40-99 subscribers
• $30,000 per firm for 100-249 subscribers
• $75,000 per firm for 250 or more subscribers

For connectivity, the 40Gb fiber connection costs $21,100 per month, and the 10Gb Ultra connection is $15,825 per month.

The proposal suggests these fees should remain the same for member firms that achieve a Minimum Average Daily Volume (ADV) of trades. However, firms not meeting this threshold would face increased fees:

• $500 per subscriber for 1-39 subscribers
• $20,000 per firm for 40-99 subscribers
• $40,000 per firm for 100-249 subscribers
• $100,000 per firm for 250 or more subscribers

Non-member firms and those not meeting the Minimum ADV would pay $23,700 for the 40Gb fiber connection and $17,800 for the 10Gb Ultra connection.

Financial Allocations and Issues

One of the central issues with these financial allocations is the absence of a clear definition for some of the terms used, such as "Non-Display Usage" and "depth-of-book data," which might limit understanding among those unfamiliar with industry jargon. The proposal heavily relies on the concept of "platform competition" without adequately supporting it with clear and comprehensive data to justify the fee increases. This reliance seems insufficient, especially when the fees are set to increase by significant margins for those not meeting the Minimum ADV.

The document further fails to provide detailed examples or analyses that illuminate the practical impact of these fee changes on various market participants. This makes it challenging to assess the proposal's fairness and reasonableness, as shifting financial responsibilities onto certain entities without transparent justification could raise competitive and equitable concerns.

Additional Context

For a trader engaging with different exchanges, the proposal indicates misleading financial analysis methods, such as calculating user transaction costs that can distort actual costs due to varying trade volumes across different platforms. An example provided shows how misleading results can arise from this method, where the cost to connect and execute trades appears different due to the number of transactions instead of the inherent fee costs. This illustrates potential inaccuracies that might complicate the assessment of what constitutes reasonable and fair fees on Nasdaq versus other exchanges.

Overall, the financial references concern significant increases for those not meeting the specified volume threshold, which presents issues of fairness and reasonableness, especially in a competitive financial environment where detailed cost analyses are expected but not provided in the proposal documentation.