[Federal Register Volume 61, Number 197 (Wednesday, October 9, 1996)]
[Notices]
[Pages 52980-52982]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-25924]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37772; File No. S7-24-89]
Joint Industry Plan; Solicitation of Comments and Order Approving
Request To Extend Temporary Effectiveness of Plan, Including Temporary
Effectiveness of Revised Amendment 9 Thereto, 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
October 1, 1996.
The National Association of Securities Dealers, Inc., on behalf of
itself and the Boston, Chicago, and Philadelphia Stock Exchanges
(collectively, ``Participants'') \1\ has submitted to the Commission a
request \2\ to extend through March 30, 1997, operation of a joint
transaction reporting plan (``Plan'') and certain related exemptive
relief for trading of Nasdaq/National Market securities traded on an
exchange on an unlisted or listed basis.\3\ This notice and order
solicits comment on certain related substantive matters identified
below and extends the effectiveness of the Plan and the exemptive
relief discussed below. Temporary approval of the Plan incorporates
temporary approval of Amendment No. 9, as revised, to the Plan relating
to revenue sharing, through March 30, 1997.\4\
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\1\ The signatories to the Plan, i.e., the National Association
of Securities Dealers, Inc. (``NASD''), and 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. (``Amex''), 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\ See letter from Robert E. Aber, Vice President, General
Counsel and Secretary, Nasdaq, to Mr. Jonathan G. Katz, Secretary,
Commission, dated September 30, 1996.
\3\ 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.
\4\ On March 18, 1996, the Commission, solicited comment on a
revenue sharing agreement among the participants. See Securities
Exchange Act Release No. 36985 (March 18, 1996), 61 FR 12122
(``March 18, 1996 Extension Order''). Thereafter, the Participants
submitted certain technical revisions to the revenue sharing
agreement (``revised Amendment 9''). See letter from Robert E. Aber,
Vice President, General Counsel, and Secretary, Nasdaq, to Jonathan
G. Katz, Secretary, Commission, dated September 13, 1996. See also
Securities Exchange Act Release No. 37689, (September 16, 1996),
(notice and order recognizing receipt of revised Amendment No. 9)
(``September 16, 1996 Extension Order'').
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I. Background
The Commission originally approved the Plan on June 26, 1990.\5\
The Plan
[[Page 52981]]
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 UTP. Commission
approval of operation of the Plan was previously scheduled to expire
September 30, 1996. Recently, the Commission received certain technical
revisions to Amendment No. 9 to the Plan, which was originally noticed
for comment on March 18, 1996, concerning the proposed revenue sharing
agreement. In order to provide the Commission with an opportunity to
review the revised Amendment No. 9 to the Plan, the Commission extended
temporary approval of the Plan through September 30, 1996. The
Commission received no comment letters on Amendment No. 9 to the Plan,
either as originally proposed or as revised.
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\5\ 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 also 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 Release 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''), Securities Exchange Act
Release No. 36934 (March 6, 1996), 61 FR 10408 (``March 6 1996
Extension Order''), March 18, 1996 Extension Order, and September
16, 1996 Extension Order.
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II. Description of the Proposal
As originally approved by the Commission, the Plan required the
Participants to complete their negotiations regarding revenue sharing
during the one-year pilot period. The Participants have now concluded
those negotiations, as evidenced by their submission to the Commission
of revised Amendment No. 9 to the Plan.
Under the Revenue Sharing Plan, Exchange Participants will receive
annual payments in quarterly installments out of total net
distributable operating revenue \6\ 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'').\8\ 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.\9\
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\6\ Revised Amendment No. 9 clarifies that net distributable
operating revenue for any particular calendar year shall be
calculated by adding all revenues from Level 1, Level 2, (non-market
maker revenue only), Nasdaq/NMS/Last Sale, and NQDS, including
revenues from the dissemination of information among Eligible
Securities to foreign marketplaces, and subtracting from such
revenues all operating and administrative expenses of the Processor
in connection with the collection from the Participants, and
consolidation and dissemination to Vendors and Subscribers, of
Quotation Information and Transaction Reports in Eligible
Securities.
\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\ Revised Amendment No. 9 clarifies that each Participant
becoming a signatory to the Plan after June 26, 1990, shall as a
condition to become a Participant, pay to the other Plan
Participants a proportionate share of the aggregate development
costs previously paid by Plan Participants to the Processor, which
aggregate development costs totaled $439,530, with the result that
each Exchange Participant's share of all development costs is the
same. In this regard, the Commission notes that the Amex, prior to
its withdrawal as a Participant to the Plan, presumably paid a share
of development costs to the Processor. The Commission believes that,
if the Amex rejoins as a participant to the Plan, the Amex would not
be expected to repay any development costs that it has already paid.
The Commission believes, however, that an open issue remains as to
the proper handling of any payments received by the Participants
from a new Participant to the Plan given any contribution to
development costs made by the Amex. Specifically, it is not clear
whether the Amex, either as a non-Participant to the Plan or after
possibly rejoining as a Participant, would be due a proportionate
share of development costs paid by a new Participant to the Plan.
\9\ 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
rate 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 distribution operating revenue
based on its trading volume.\10\ Payment dates are calculated based on
the effective date of this order or, for amounts due after 1996, as of
actual dates specified in revised Amendment No. 9.
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\10\ The Commission notes that the NASD, as discussed in the
March 18, 1996 Extension order, 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. The Commission
believes this to be an open matter, and expects the Plan
participants to resolve the NASD's concerns in this regard.
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III. Exemptive Relief
In conjunction with the Plan, on a temporary basis scheduled to
expire on September 30, 1996, the Commission
[[Page 52982]]
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.
IV. 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, March 6, 1996,
March 18, 1996, and September 16, 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.
V. Solicitation of Comment
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, N.W., Washington, D.C. 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. 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 October 30, 1996.
VI. Conclusion
The Commission finds that an extension of temporary approval of the
operation of the Plan through March 30, 1997, is appropriate and in
furtherance of Section 11A of the Act as it will provide the
Participants with additional time to make reasonable proposals
concerning: (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. While the
Commission continues to solicit comment on these matters, the
Commission believes that these matters should be addressed directly by
the Participants during the extension period so that issues presented
by these matters will be resolved prior to March 30, 1997.
Concerning incorporation of the revenue sharing agreement within
the present temporary approval of the operation of the Plan, the
Commission believes that it is appropriate and in furtherance of the
Act and the rules thereunder to approve revised Amendment No. 9 to the
Plan. Accordingly, revised Amendment No. 9 to the Plan will be
temporarily approved, as are all other elements of the Plan, through
March 30, 1997. Consequently, any Participants due payments under
revised Amendment No. 9 to the Plan (currently, the Chx) during the
extension period are to be paid in accordance with the agreement within
the time periods described in revised Amendment No. 9 as of this
effective date.
The Commission finds further that extension of the exemptive relief
through March 30, 1997, as described above, also is consistent with the
Act, the Rules thereunder, and specifically with the objectives set
forth in Sections 12(f) and 11A of the Act and in Rules 11Aa3-1 and
11Aa3-2 thereunder.
VII. Conclusion
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, incorporating revised Amendment No. 9
thereto, and certain exemptive relief, through March 30, 1997, is
approved.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority, 17 CFR 200.30-3(a)(29).
Jonathan G. Katz,
Secretary.
[FR Doc. 96-25924 Filed 10-8-96; 8:45 am]
BILLING CODE 8010-01-M