Now here is something you don’t see every day: SEC Order Disapproving a Proposed Rule Change to Link Market Data Fees and Transaction Execution Fees Read SEC release here We have been vigilantly watching the SEC filings for the past few years and this is the first time that we have seen the SEC not approve a rule change request from an exchange. The rule change in this case was proposed by Nasdaq and it was related to their fee schedule. Nasdaq had requested a rule change “to discount certain market data fees and increase certain liquidity provider credits for members that both (1) execute specified levels of transaction volume on NASDAQ as a liquidity provider, and (2) purchase specified levels of market data from NASDAQ”.

Of course, these discounts would only apply to their best customers. In order to get a discount, you would need to be adding at least 12 million shares of liquidity per day on Nasdaq and spending at least $150,000 per month on data fees from Nasdaq per month. Discounts would have ranged from 15% to 50% depending on how much liquidity you provided.

Clearly, Nasdaq was trying to bundle their products and lower their fees to attract more order flow from the high frequency trading community. If 80% of your business was generated by 2% of your clients, you had better do some creative things to maintain that business. Heck, you may even try doing things that you know are not fair for all investors (flashy flash) but are good for your bottom line.

So, what happened here? Why did the SEC disapprove this filing? The answer is because they received three comment letters complaining about this new “unfair” pricing scheme. Of course, one of the comment letters was from a competing exchange who was not happy about these lower fees (think airline ticket pricing here). The SEC states:

“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 argues that any competitor exchange could choose to respond to the proposed pricing by NASDAQ by offering its own discounts on its data products. However, 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. ”

Bravo SEC for catching this slight of hand that Nasdaq was proposing. But be careful, we are sure they will be back proposing something very similar in the near future or their HFT clients may just take their “liquidity” to another exchange.