Solicitation Of Comments For The Nasdaq Stock Market LLC

Potential Changes to the Definitions of Professional and
Non-Professional Usage for Market Data Fee Filings

Your comments on this complex topic are a critical component to advancing potential solutions. In order to ensure flexibility when completing the feedback, Nasdaq has provided an option on the right hand side of this page, as well as a form at the conclusion of this webpage. Both forms will submit directly to Nasdaq for review. Also, attachments can be sent directly to TotalMarketsFeedback@Nasdaq.com if the preference is to submit comments outside of this web interface.

June 13, 2019

Nasdaq prices market data fees through the application of specific criteria designed to provide for the equitable allocation of reasonable dues, fees and other charges to customers and to meet Nasdaq’s other statutory obligations as a self-regulatory organization.  Among these criteria, Nasdaq and most other exchanges have instituted special rates for Non-Professional customers, and the Commission has approved such rates as consistent with the requirements of the Act and the rules and regulations thereunder.[i]  These special rates are significantly lower than the corresponding Professional rates for the same data to encourage participation in the markets by Main Street investors.  Exchanges have argued, and the Commission and industry has accepted, that it is equitable to allocate market data fees based upon the purpose and usage of the data by different customer groups. 

As part of Nasdaq’s initiative to modernize the U.S. capital markets and engage with the public to foster a dialogue about Nasdaq rules as set forth in TotalMarkets: A Blueprint for a Better Tomorrow, Nasdaq believes that it is time to revisit how the terms “Professional” and “Non-Professional” are defined and applied. 

Before filing with the SEC for approval for this change, however, Nasdaq would like to launch a dialogue with public investors, especially Main Street investors and retail-facing institutions to ensure we are taking all viewpoints into account.  As such, Nasdaq is seeking comment, input and guidance from the public, including investors, companies and their representatives.  These comments will be reviewed by Nasdaq staff to guide revisions to the definitions of Professional and Non-Professional. 

While all comments on this subject are welcome, the following discussion identifies a number of discrete proposed rule changes for which Nasdaq is seeking particular input, and Nasdaq asks for views on the impact of these potential changes on investors and the public interest. 

The comment period will run until July 26, 2019.  Email responses are preferred and may be addressed to TotalMarketsFeedback@nasdaq.com.  Mail responses may be sent to:

Nasdaq Office of General Counsel 
Attn: Daniel A. Cantu
805 King Farm Blvd. 
Rockville, MD 20850

Following a review of comments, if Nasdaq determines to proceed with a proposed rule change, that proposal will be subject to public notice and comment as part of the applicable review process by the Securities and Exchange Commission. Please note that Nasdaq must include any comments provided in response to this solicitation as part of its filing with the SEC, and therefore any comments submitted will become publicly available.

Thank you for your comments and your attention to this important matter.

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Making the Case for Market Structure Reform

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DEFINITION OF “PROFESSIONAL” AND “NON-PROFESSIONAL”

Many data products sold by Nasdaq and other entities have different fees based on whether the data is used by “Professionals” or “Non-Professionals.”[ii]  A “Non-Professional” is “a natural person who is not:    

  • registered or qualified in any capacity with the Securities and Exchange Commission, the Commodity Futures Trading Commission, any state securities agency, any securities exchange or association, or any commodities or futures contract market or association;
  • engaged as an ‘investment adviser’ as that term is defined in Section 202(a)(11) of the Investment Advisers Act of 1940 (whether or not registered or qualified under that Act); or  
  • employed by a bank or other organization exempt from registration under federal or state securities laws to perform functions that would require registration or qualification if such functions were performed for an organization not so exempt.”[iii]

A “Professional” is defined as “any natural person, proprietorship, corporation, partnership, or other entity whatever other than a Non-Professional.”[iv] 

This distinction is well-established in the securities industry.  It is used by the Securities Information Processors (UTP and CTA Plans), other stock exchanges, and has been approved by the Commission as consistent with the requirements of the Act and the rules and regulations thereunder for decades.[v]  Exchanges have argued, and the Commission has accepted, that it is equitable to allocate market data fees across a diverse group of users by distinguishing among them based upon the purpose and usage of the data. 

Nasdaq proposes to revisit this distinction to more accurately reflect whether data is actually used in a manner consistent with each category.  For example, should a person trading hundreds of thousands of dollars daily at a home office be considered a Non-Professional?  Similarly, should a plumbing service in the legal form of a limited liability company (“LLC”) be charged a professional fee if that LLC is a small business that has no connection with trading? 

In addition, Nasdaq is concerned that the current distinction between Professional and Non-Professional customers complicates market data administration and adds costs, especially for firms catering to retail investor accounts. 

As Nasdaq considers how to modify the Professional/Non-Professional dichotomy, the Exchange would like input on a number of questions designed to clarify the contours of a proposed new rule. 

1. DEFINING PERSONAL USE BY PROFESSIONALS

Professionals currently using market data for their own personal brokerage accounts would be charged at a Professional rate.  The Exchange is now considering changing those rules to charge the Non-Professional rate for any use of data in the context of an individual’s brokerage account, whether or not that person is a professional.[vi] As such, the Exchange requests commentary on the following questions:

  • Do commenters support the proposed approach of classifying Professionals using market data for their own personal brokerage accounts as Non-Professionals? Why or why not?
  • What are the administrative costs or burdens, if any, of this proposed approach?

2. DEFINING PROFESSIONAL USE BY NON-PROFESSIONALS

Under current rules, any person who does not meet the employment or registration criteria of a Professional is a Non-Professional, even if that person is trading hundreds of thousands of dollars daily at a home office.  Given that one of the key goals of the Professional/Non-Professional distinction is to set fees based on the purpose and usage of the data, Nasdaq is considering changing that definition so that any individual conducting a high level of trading activity would be considered a Professional for any month in which the trading threshold is crossed. 

According to an analysis of the Survey of Consumer Finances (SCF) commissioned by the Department of Labor using data from 2001 to 2013,[vii] brokerage account-owning households at the 99th percentile of trading activity (i.e., households that trade more than 99 percent of all other brokerage account-owning households) engaged in between 156 and 260 trades per year between 2001 and 2013.[viii]  Taking a very conservative view of the data, Nasdaq is considering setting a level of 400 trades per month (equivalent to 4,800 trades per year), as the point of demarcation between Non-Professional and Professional use.  This proposed line of demarcation for trading activity is, on an annual basis, nearly 20 times more than the highest level of annual trading activity at the 99th percentile of households between 2001 and 2013.[ix]

To assist in our analysis, the Exchange requests commentary on the following questions:

  • Do commenters support the proposed approach of classifying individuals who execute an average of 400 trades per month as Professionals? Why or why not?
  • What are the administrative costs or burdens, if any, of this proposed approach?

3. IDENTIFYING NON-PROFESSIONAL USE BY FIRMS

All firms and other entities are currently classified as Professionals, no matter the size of the firm or the type of business. 

Nasdaq is considering changing the definition of Non-Professional so that small businesses not involved in the financial services industry are classified as such.  To do so, Nasdaq is considering using a table published by the U.S. Small Business Administration (“SBA”) to identify small businesses.[x]  The “Table of Small Business Size Standards Matched to North American Industry Classification Codes” sets a threshold for small businesses based on either the average annual receipts or the average employment of a firm, and that threshold varies according to industry as defined by North American Industry Classification System (“NAICS”) Codes.  Nasdaq’s goal in using these guidelines is to employ an existing benchmark to identify small businesses and non-financial firms in order to minimize administrative costs for our customers.  With the aid of the SBA chart, the Exchange proposes classifying all non-financial entities (that is, all firms not classified under the category “Finance and Insurance” under Section 52 of the NAICS) that also meet the SBA’s small business criteria under their category as Non-Professionals.  To assist in our analysis, the Exchange requests commentary on the following questions:

  • Do commenters support the proposed approach of using the SBA’s Table of Small Business Size Standards Matched to NAICS Codes to identify businesses that should be classified as Non-Professionals? Why or why not?
  • What are the additional administrative costs or burdens, if any, of the proposed approach?

4. ADMINISTRATIVE BURDENS ON REPORTING FIRMS

Nasdaq is aware of complaints from certain customers that, notwithstanding good-faith efforts to report Professional and Non-Professional usage accurately, they have been penalized with audit findings for errors beyond their control.  To eliminate this point of contention, Nasdaq is considering a rule change that would exempt customers that implement a pre-approved reporting system that is reasonably designed to identify reporting errors from audit liability.  Pre-approval by Nasdaq would be based on a customer submission that would identify systems, processes and procedures to identify and correct reporting errors on a timely basis.  Failure by a customer to implement a pre-approved system would result in audit liability for reporting errors. 

To assist in our analysis, the Exchange requests commentary on the following questions:

  • Do commenters support the proposed exemption from audit liability for customers that implement a reasonable, pre-approved system for reporting Professional and Non-Professional users from audit liability? Why or why not?
  • What are the additional administrative costs or burdens, if any, of the proposed approach, and would such costs or burdens be offset by lower audit invoices?

Thank you for your input on this important matter.  Your comments are an important part of our ongoing dialogue with investors, particularly Main Street investors, that will enable us to improve how we serve our Professional and Non-Professional customers.

We appreciate your feedback on this matter

[i]           See, e.g., Securities Exchange Act Release No. 34-21856 (March 15, 1985), 50 FR 11472 (March 21, 1985) (SR-NASD-85-1) (order approving proposed NASD rule change to establish reduced fees for non-professional subscribers to Nasdaq Level 1 service as consistent with the requirements of the Act and the rules and regulations thereunder). 

[ii]           See, e.g., Joint Self-Regulatory Organization Plan Governing the Collection, Consolidation and Dissemination of Quotation and Transaction Information for Nasdaq-Listed Securities Traded on Exchanges on an Unlisted Trading Privileged Basis (“Nasdaq UTP Plan”) (available at http://www.utpplan.com/utp_plan); Nasdaq Stock Market LLC Rules, Equity Rules, Equity 7 Pricing Schedule, §§ 123 (Depth-of-Book Data), 126 (Distribution Models), and 147 (Nasdaq Basic). 

[iii]           See Nasdaq Stock Market LLC Rules, Equity Rules, Equity 7 Pricing Schedule, § 139(f)(6). 

[iv]           See Id. § 139(f)(7). 

[v]           See, e.g., Securities Exchange Act Release No. 34-21856 (March 15, 1985), 50 FR 11472 (March 21, 1985) (SR-NASD-85-1) (order approving proposed NASD rule change to establish reduced fees for non-professional subscribers to Nasdaq Level 1 service as consistent with the requirements of the Act and the rules and regulations thereunder). 

[vi]           The Exchange already offers a number of enterprise licenses that allow broker-dealers to distribute market data to both Professionals and Non-Professionals at a special rate in the context of a brokerage relationship.  See, e.g., The Nasdaq Stock Market Rules, Equity Rules, Equity 7 Pricing Schedule, §§ 123(c) (enterprise licenses for Nasdaq TotalView); 132 (Market Data Enterprise License for Display Usage); and 147(b)(5) (enterprise license for Nasdaq Basic). 

[vii]           See Constantijn Panis and Michael Brien, Brokerage Accounts in the United States (November 30, 2015), available at https://www.dol.gov/sites/default/files/ebsa/researchers/analysis/retirement/brokerage-accounts-in-the-us.pdf.  The Survey of Consumer Finances is sponsored by the Federal Reserve Board in cooperation with the Department of the Treasury, and administered by the National Organization for Research at the University of Chicago. 

[viii]           See Id. at 5 (Table 5.  Summary Statistics of Trading Frequency among Holders of Brokerage Accounts, by Year).  

[ix]           See Id. at 5.  Annual trading among holders of brokerage accounts at the 99th percentile was 250 in 2001; 260 in 2004; 250 in 2007; 156 in 2010; and 260 in 2013. 

[x]           See U.S. Small Business Administration, Table of Small Business Size Standards Matched to North American Industry Classification System Codes (February 26, 2016), available at: https://www.sba.gov/sites/default/files/files/Size_Standards_Table.pdf.  The NAICS codes, as modified by the Office of Management and Budget, are effective as of January 1, 2012.  The methodology for calculating average annual receipts and average employment is published in the Federal Register.  See 13 CFR § 121.104 and 13 CFR § 121.106.