[Federal Register Volume 62, Number 3 (Monday, January 6, 1997)]
[Notices]
[Pages 780-782]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-152]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38084; File No. SR-NASD-96-48]


Self-Regulatory Organizations; Notice of Proposed Rule Changes by 
the National Association of Securities Dealers, Inc. Relating to: (1) 
Rule 4770 of the SOES Rules, Regarding the Fees Charged for Executions 
and Cancellation of Orders Entered in SOES, and (2) Rule 7010, Related 
to Charges for Orders and Cancellation of Orders Entered Into SelectNet

December 24, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December 
16, 1996, the Nasdaq Stock Market, Inc. (``Nasdaq'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by Nasdaq. The Commission is publishing this 
notice to solicit comments on the proposed rule change from interested 
persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Pursuant to the provisions of Section 19(b)(1) under the Securities 
Exchange Act of 1934 (``Act''), The Nasdaq Stock Market, Inc., 
(``Nasdaq''), a wholly owned subsidiary of the National Association of 
Securities Dealers, Inc. (``NASD'' or ``Association''), is herewith 
filing a proposed rule change to amend: (1) Rule 4770 of the Small 
Order Execution System (``SOES'') Rules, regarding the fees charged for 
executions and cancellation of orders entered in SOES, and (2) Rule 
7010, related to charges for orders and cancellation of orders entered 
into SelectNet. Nasdaq has requested that the Commission approve the 
proposed rule change on an accelerated basis. Below is the text of the 
proposed rule change. Proposed new language is underlined; proposed 
deletions are in brackets.
Rule 4700  Small Order Execution System (SOES)
* * * * *
    Rule 4770.

[A fee of $.005 per share shall be assessable to SOES Market Makers for 
all transactions executed through SOES provided, however, that the 
minimum charge per execution shall be $.50 and the maximum charge per 
execution shall be $1.00.]

    (a) A fee for orders executed through SOES shall be assessed, to be 
allocated as follows: the SOES Market Maker executing the order shall 
be assessed $0.50 per transaction and the SOES Order Entry Firm of SOES 
Market Maker entering the order shall be assessed $0.50 per order.
    (b) For each order entered by a SOES Order Entry Firm of a SOES 
Market Maker that is cancelled, the SOES Order Entry Firm or SOES 
Market Maker that cancels such order shall be assessed a fee of $0.25.
* * * * *
Rule 7000  Charges for Services and Equipment
* * * * *
Rule 7010  System Services
    (a)-(d) No changes.
    (e) SelectNet Service.
    The following charges shall apply to the use of SelectNet:

Transaction Charge--$2.50/side
Cancellation Fee--$.25/per order

[[Page 781]]

II. Self-Regulatory Organization's Statement of the Purpose of and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change.The text 
of these statements may be examined at the places specified in Item IV 
below. Nasdaq has prepared summaries, set forth in Sections (A), (B), 
and (C) below, of the most significant aspects of such statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    The NASD and Nasdaq have evaluated the current fee structures for 
SOES and the SelectNet system that will be changed to accommodate the 
new SEC rules regarding a Nasdaq market maker's order handling 
obligations, i.e., Rule 11Ac1-4 (the customer limit order display rule) 
and amended Rule 11Ac1-1 (amendments to the firm quote rule regarding 
the display of priced orders entered by market makers or specialists 
into electronic communications networks (``ECNs'').\1\ The NASD and 
Nasdaq have determined, as explained below, to restructure SOES and 
SelectNet fees because of changes to their operation as addressed in 
recently filed NASD proposed rule changes stemming from the SEC's new 
rules. All of the recommended fee changes are contingent upon 
commencement of the new NASD rules.
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    \1\ See Securities Exchange Act Release No. 37619A (September 6, 
1996); 61 FR 48290 (September 12, 1996) (Order Handling Rules 
Adopting Release).
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(1) SOES Fees
    SOES is Nasdaq's small order execution system in which orders 1,000 
shares or less are automatically executed against available Nasdaq 
market makers.
    In a separate rule filing before the Commission,\2\ Nasdaq has 
proposed to make significant changes to SOES to permit market makers to 
comply with new obligations to display customer limit orders in their 
quotations and to execute orders at such quotes only up to actual 
displayed size, as opposed to an artificial ``tier size'', as currently 
occurs. Moreover, among other things, the NASD and Nasdaq have proposed 
to allow market makers to enter customer market and marketable limit 
orders into SOES, unlike the current SOES Rules which prohibit market 
maker entry of such orders, unless the market makers self-preference 
those orders, i.e., direct them to themselves. Because the order 
handling rules change the current approach to market maker quoting in 
Nasdaq securities from a pure dealer-driven quote to a more order-
driven quote, the NASD and Nasdaq believe that the disparate 
application of the current SOES fee structure to the market maker 
should be changed to take into account the new process by which quotes 
are established and orders are executed. Accordingly, the NASD and 
Nasdaq propose to establish a charge assessed against both sides to the 
transaction regardless of the size of the transaction--both the order 
entry firm and the market maker will be charged for the execution in 
SOES. Under the new fee structure, if an order entry firm or a market 
maker were to enter an order of 1,000 shares into SOES, and that order 
were executed against a single market maker, the firm entering the 
order (whether a market maker or order entry firm) would be assessed 
$.50 and the market maker executing the order would be assessed $.50. 
If a SOES order entered by an order entry firm were executed against 
multiple market makers, the order entry firm would be charged a single 
$0.50 fee while each market maker participating in the executions would 
also be charged a $.50 fee.
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    \2\ See Securities Exchange Act Release No. 38008 (December 2, 
1996); 61 FR 64550 (December 5, 1996); (publishing notice of filing 
of SR-NASD-96-43).
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    The NASD and Nasdaq have proposed this charge against both parties 
to an execution in recognition of the significant market structure 
changes caused by the SEC rules, the respective use of Nasdaq 
facilities to support SOES operations by both market makers and order 
entry firms, and the significant benefits that both sides of the trade 
receive in the new SOES. Unlike in the past when the quotations 
represented solely market maker proprietary interest, in the new 
environment market makers may be displaying a priced order under the 
customer limit order display rule. Because market makers may be quoting 
a particular price in order to attract order flow, it is appropriate to 
assess them a reasonable fee for using SOES to obtain executions.
    The fee structure is fair and reasonable in that it is similar to 
transaction charges assessed in the securities industry for automatic 
executions. The system that the NASD and Nasdaq are providing to the 
membership attempts to provide members with an economically efficient 
means of accessing public quotations and executing securities 
transactions at these published prices. Moreover, it equitably 
allocates charges to both sides of the transaction that are utilizing 
this public facility, both of whom benefit from the execution and both 
of whom consume resources in utilizing the system. In this new 
structure, there is no reason to allocate all of the costs in operating 
SOES to the market maker. Instead, the more equitable allocation of 
costs is to charge both the order entry firm and the order execution 
firm. In this way, both parties to the transaction are allocated the 
costs that Nasdaq incurs in developing and operating this system.\3\
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    \3\ Under NASD Rules, members are permitted to either absorb the 
costs assessed, or to pass the fee along to the ultimate customer.
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(2) SOES and SelectNet Cancellation Fees
    The NASD and Nasdaq also authorized a new fee related to 
cancellations entered into SOES and SelectNet.\4\ The fee adopted for 
orders entered into either system is $0.25 for each order cancelled. 
Neither SOES nor SelectNet currently have an order cancellation fee. 
However, Nasdaq has taken note of the significant number of orders 
entered into both systems and cancelled, sometimes almost 
simultaneously with order entry. By way of example, on a typical day, 
approximately 161,400 SelectNet orders may be entered, while 
approximately 125,600 of such orders are cancelled. Only 19,000 are 
executed. In SOES, of approximately 100,000 orders entered, 30,000 
typically are cancelled.\5\ Moreover, many cancellations occur within a 
30 second period after order entry. For example, on November 8, 1996, 
the heaviest user of SelectNet entered 70,000 orders, and cancelled a 
total of almost 64,000 orders, of which 30,000 were cancelled within 30 
seconds of order entry. Such use of the system requires that Nasdaq 
construct its system to handle the large system and network utilization 
that occurs in such use. Accordingly, recognizing that order 
cancellations consume significant system resources, Nasdaq adopted a 
cancellation fee to achieve an equitable allocation of the 
communications costs associated with the Nasdaq network

[[Page 782]]

among all firms that utilize the capacity of the system.
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    \4\ It should be noted that SelectNet fees will remain as 
currently structured. It should also be noted that the SelectNet 
transaction fee applies to both sides of the transaction. Moreover, 
the fee will apply to all parties using the system, including 
electronic communications networks whose priced orders are accessed 
by NASD members entering orders into SelectNet,
    \5\ Data was extracted from November 20, 1996, data.
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    Nasdaq believes that for the foregoing reasons the proposed rule 
change is consistent with the provisions of Section 15A(b)(5) of the 
Act in that the proposed fees provide for the equitable allocation of 
reasonable fees among members using facilities and systems operated by 
Nasdaq meet the requirements of Section 15A(b)(5) of the Act.

(B) Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

(C) Self-Regulatory Organization's Statement on Comments on the 
Proposed Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the NASD consents, the Commission will:
    A. by order approve such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

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, 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 in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-96-48 and should 
be submitted by January 27, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-152 Filed 1-3-97; 8:45 am]
BILLING CODE 8010-01-M