[Federal Register Volume 61, Number 58 (Monday, March 25, 1996)]
[Notices]
[Pages 12122-12124]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-7153]



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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-36985; File No. S7-24-89]


Joint Industry Plan; Solicitation of Comments on Amendment No. 9 
to, and Order Granting Request To Extend Effectiveness of, Reporting 
Plan for Nasdaq/National Market Securities Traded on an Exchange on an 
Unlisted or Listed Basis, Submitted by the National Association of 
Securities Dealers, Inc., and the Boston, Chicago, and Philadelphia 
Stock Exchanges

March 18, 1996.
    On March 15, 1996, the National Association of Securities Dealers, 
Inc., and the Boston, Chicago, and Philadelphia Stock Exchanges 
(collectively, ``Participants'') \1\ submitted to the Commission 
proposed Amendment No. 9 to a joint transaction reporting plan 
(``Plan'') for Nasdaq/National Market securities traded on an exchange 
on an unlisted or listed basis.\2\ Amendment No. 9 would provide for 
cost allocation and revenue sharing under the Plan among the 
Participants. By letter attached to the filing, the National 
Association of Securities Dealers, on behalf of all the Participants, 
also requests that the Commission extend the effectiveness of the pilot 
approval of the Plan for an additional six months.\3\ This notice and 
order solicits comment on proposed Amendment No. 9 to the Plan and on 
certain substantive matters identified below, and extends the 
effectiveness of the Plan through September 15, 1996.

    \1\ The signatories to the Plan, i.e., the National Association 
of Securities Dealers, Inc. (``NASD''), the Chicago Stock Exchange, 
Inc. (``Chx'') (previously, the Midwest Stock Exchange, Inc.), 
Philadelphia Stock Exchange, Inc. (``Phlx''), and the Boston Stock 
Exchange, Inc. (``BSE''), are the ``Participants.'' The BSE, 
however, joined the Plan as a ``Limited Participant,'' and reports 
quotation information and transaction reports only in Nasdaq/
National Market (previously referred to as ``Nasdaq/NMS'') 
securities listed on the BSE. Originally, the American Stock 
Exchange, Inc., was a Participant to the Plan, but did not trade 
securities pursuant to the Plan, and withdrew from participation in 
the Plan in August 1994.
    \2\ Section 12 of the Act generally requires an exchange to 
trade only those securities that the exchange lists, except that 
Section 12(f) of the Act permits unlisted trading privileges 
(``UTP'') under certain circumstances. For example, Section 12(f), 
among other things, permits exchanges to trade certain securities 
that are traded over-the-counter (``OTC/UTP''), but only pursuant to 
a Commission order or rule. The present order fulfills this Section 
12(f) requirement. For a more complete discussion of this Section 
12(f) requirement, see November 1995 Extension Order, infra note 5, 
at n. 2.
    \3\ See letter from Robert E. Aber, Vice President, General 
Counsel and Secretary, Nasdaq, to Mr. Jonathan G. Katz, Secretary, 
Commission, dated March 15, 1996.
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I. Background

    The Commission originally approved the Plan on June 26, 1990.\4\ 
The Plan governs the collection, consolidation, and dissemination of 
quotation and transaction information for Nasdaq/National Market 
securities listed on an exchange or traded on an exchange pursuant to 
UTP. The Commission has extended the effectiveness of the Plan eight 
times since then to allow the Participants to trade pursuant to the 
Plan while they finalize their

[[Page 12123]]
negotiations for revenue sharing under the Plan.\5\

    \4\ See Securities Exchange Act Release No. 28146 (June 26, 
1990), 55 FR 27917 (``1990 Approval Order''). For a detailed 
discussion of the history of UTP in OTC securities, and the events 
that led to the present plan and pilot program, see 1994 Extension 
Order, infra note 5.
    \5\ See Securities Exchange Act Release No. 34371 (July 13, 
1994), 59 FR 37103 (``1994 Extension Order''). See also Securities 
Exchange Act Release No. 35221 (January 11, 1995), 60 FR 3886 
(``January 1995 Extension Order''), Securities Exchange Act Release 
No. 36102 (August 14, 1995), 60 FR 43626 (``August 1995 Extension 
Order''), Securities Exchange Act Release No. 36226 (September 13, 
1995), 60 FR 49029 (``September 1995 Extension Order''), Securities 
Exchange Act Release No. 36368 (October 13, 1995), 60 FR 54091 
(``October 1995 Extension Order''), Securities Exchange Act No. 
36481 (November 13, 1995), 60 FR 58119 (``November 1995 Extension 
Order''), Securities Exchange Act Release No. 36589 (December 13, 
1995), 60 FR 65696 (``December 13, 1995 Extension Order''), 
Securities Exchange Act Release No. 36650 (December 28, 1995), 60 FR 
358 (``December 28, 1995 Extension Order''), and Securities Exchange 
Act Release No. 36934 (March 6, 1996), 61 FR 10408 (``March 6, 1996 
Extension Order'').
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    As originally approved by the Commission, the Plan required the 
Participants to complete their negotiations regarding revenue sharing 
during the one-year pilot period. Recently, the Participants concluded 
those negotiations, as evidenced by the present filing. The substance 
of the agreement, as described by the NASD in its March 15 letter,\6\ 
is below.

    \6\ See supra note 3.
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II. Description of the Proposal

A. Proposed Revenue Sharing Agreement

    Under the proposed Revenue Sharing Plan, Exchange Participants will 
receive annual payments in quarterly installments out of total net 
distributable operating revenue based on their percentage of total 
Nasdaq volume,\7\ subject to certain specified minimum and maximum 
payments for an initial period of four-and-one-half years (``buy-in 
period''). Thereafter, once the ``buy-in'' period elapses with respect 
to a particular Exchange Participant, that exchange will receive annual 
payments in quarterly installments out of total net distributable 
operating revenue proportional to its percentage of total Nasdaq 
volume, without regard to any minimum or maximum payment amounts. Plan 
Participants would not be eligible to receive revenue under the Plan 
until they have established an automated interface with Nasdaq for the 
transmission of quotations and transaction information. Once an 
Exchange Participant is eligible to receive revenue under the Revenue 
Sharing Plan, that Exchange Participant also will be eligible to 
receive revenue based on its volume for the preceding twelve-month 
period, up to the maximum payment amount discussed below.\8\

    \7\ An Exchange Participant's percentage of total Nasdaq volume 
will be based on the average of that Exchange's proportion of total 
Nasdaq trade volume reported to Nasdaq and disseminated to 
securities information vendors, and total Nasdaq share volume 
reported to Nasdaq and disseminated to securities information 
vendors.
    \8\ Because the Chx is the only Exchange Participant that has 
implemented and maintained an automated interface with Nasdaq for 
the reporting of transaction and quotation information pursuant to 
the Plan, the Chx will receive a lump-sum payment of $444,525 
payable thirty days after the effective date of the Revenue Sharing 
Plan. The Commission notes that this amount is based on the 
following payments for previous periods: (1) For the six-month 
period ending December 1993, $50,000; (2) for the one-year period 
ending December 1994, $100,000; and (3) for the period between 
January 1, 1995 and March 5, 1996, $294,525. For the period March 6 
to December 31, 1996, the NASD is scheduled to pay the Chx a pro 
rata amount of its payment for 1996.
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    Specifically, the maximum payment amount for any Exchange 
Participant will be an amount based on total net distributable 
operating revenue under the Plan for 1995. This maximum payment amount 
figure will be calculated and furnished to all Exchange Participants by 
the NASD by April 30, 1996. Based on revenue calculations performed by 
the NASD in the last quarter of 1995, it is expected that the maximum 
payment amount will be somewhere in the range of $820,000 and $880,000, 
but this figure could be higher or lower depending on the eventual 
revenue for 1995. Over time, this maximum payment amount will be 
adjusted upward or downward depending on fluctuations in net operating 
revenue relative to revenue in 1995. The minimum payment amount for the 
Chx would be $250,000 and likewise would be adjusted upward or downward 
depending on fluctuations in net operating revenue relative to revenue 
in 1995. The minimum payment for other exchanges becoming eligible to 
receive revenue under the Plan would be set relative to the trading 
volume of the Exchange Participant with the highest trading volume 
among Exchange Participants during the year before the Participant 
became eligible to receive revenue under the Plan. The minimum payment 
amount to other Exchange Participants also would be adjusted annually 
in the same manner as that of the Chx. Accordingly, for a period of 
four-and-one-half years, if an Exchange Participant's share of 
distributable revenue is less than its minimum payment amount, it would 
receive the minimum payment amount; if its share is equal to or greater 
than its minimum payment amount but less than its maximum payment 
amount, it would receive that share of revenue; and, if its share is 
greater than the maximum payment amount, it would receive the maximum 
payment amount. The interim plan found in the proposal for the buy-in 
period also contains provisions for the pro rata diminution of the 
minimum payment amount in the event that an Exchange Participant 
becomes eligible or ineligible to receive revenue during a calendar 
year. After this initial buy-in period, an Exchange Participant would 
receive a relative proportion of net distributable operating revenue 
based on its trading volume.\9\

    \9\ The Commission notes that the NASD, in its letter attached 
to the present proposed amendment to the Plan, states its strong 
belief that Participants should address the fact that, absent an 
additional amendment to the Plan, Participants would have the right 
to receive revenue for late trade reports. The NASD ``believes it is 
improper to reward a market center for transmitting stale 
transactions that, at best, have questionable, if any, redeeming 
economic value to market participants and, at worse, are potentially 
disruptive to the marketplace.'' The NASD also notes the numerous 
benefits that it believes would be derived from limiting 
Participant's revenues to those associated with timely-reported 
transactions. Supra note 3.
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B. Extension of the Operation of the Plan and Certain Exemptive Relief

    First, the Participants request that the Commission extend the 
operation of the Plan for an additional six months. The NASD, in its 
letter on behalf of all the Participants, states that the extension of 
the Plan will afford the Participants an opportunity collectively and 
cooperatively to address two outstanding issues identified by the Plan 
Participants and the Commission concerning the operation of the Plan. 
Specifically, the NASD states that the Plan Participants intend 
cooperatively to address and resolve: (1) Whether the best bid and 
offer calculation for the Nasdaq securities subject to the Plan should 
be based on a price/time/size algorithm (as currently is the case) or a 
price/size/time methodology; and (2) whether there is a need for an 
intermarket linkage for routing and executing orders in Nasdaq 
securities subject to the Plan and an accompanying trade-through rule.
    Second, in conjunction with the Plan, on a temporary basis 
scheduled to expire on March 15, 1996, the Commission granted an 
exemption from Rule 11Ac1-2 under the Act regarding the calculated best 
bid and offer (``BBO''), and granted the BSE an exemption from the 
provision of Rule 11Aa3-1 under the Act that requires transaction 
reporting plans to include market identifiers for transaction reports 
and last sale data.
    This order extends the operation of the Plan and the above 
exemptive relief through September 15, 1996. The Commission believes it 
is appropriate to grant these extensions so that the Participants may 
conclude their

[[Page 12124]]
negotiations concerning the above items, and so the Commission will 
have sufficient opportunity to review any comments it receives on the 
present notice. Finally, as with previous extensions of this pilot 
program, this extension will remain in effect only if the Plan 
continues in effect through that date pursuant to a Commission 
order.\10\ In this regard, the Commission continues to believe that the 
above extension of exemptive relief is appropriate through September 
15, 1996.

    \10\ In the March 6 Extension Order, the Commission extended 
these exemptions through March 15, 1996. Pursuant to a request made 
by the NASD, this order further extends the effectiveness of the 
relevant exemptions through September 15, 1996. See supra, note 3.
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III. Comments on the Operation of the Plan

    In the January 1995, August 1995, September 1995, October 1995, 
November 1995, December 13, 1995, December 28, 1995, and March 6, 1996 
Extension Orders, the Commission solicited, among other things, comment 
on: (1) Whether the BBO calculation for the relevant securities should 
be based on price and time only (as currently is the case) or if the 
calculation should include size of the quoted bid or offer; and (2) 
whether there is a need for an intermarket linkage for order routing 
and execution and an accompanying trade-through rule. The Commission 
continues to solicit comment on these matters.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the Submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Room. All submissions should refer to 
File No. S7-24-89 and should be submitted by April 15, 1996.

V. Conclusion

    The Commission finds that an extension of temporary approval of the 
operation of the Plan through September 15, 1996, is appropriate and in 
furtherance of Section 11A of the Act. The Commission finds further 
that extension of the exemptive relief through September 15, 1996, as 
described above, also is consistent with the Act and the Rules 
thereunder. Specifically, the Commission believes that these extensions 
should serve to provide the Participants with more time to conclude 
their review of the BBO calculation and make appropriate 
recommendations concerning the need for an intermarket linkage and/or a 
trade-through rule now that the Participants have agreed on revenue 
sharing. This, in turn, should further the objectives of the Act in 
general, and specifically those set forth in Sections 12(f) and 11A of 
the Act and in Rules 11Aa3-1 and 11Aa3-2 thereunder.
    It is therefore ordered, pursuant to Sections 12(f) and 11A of the 
Act and (c)(2) of Rule 11Aa3-2 thereunder, that the Participants' 
request to extend the effectiveness of the Joint Transaction Reporting 
Plan for Nasdaq/National Market securities traded on an exchange on an 
unlisted or listed basis and certain exemptive relief through September 
15, 1996, is approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(29).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-7153 Filed 3-22-96; 8:45 am]
BILLING CODE 8010-01-M