[Federal Register Volume 63, Number 181 (Friday, September 18, 1998)]
[Notices]
[Pages 49937-49939]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-25013]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40434; File No. SR-NASD-98-62]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to Fees for Nasdaq's Workstation II 
Service for NASD Members

September 11, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on August 20, 1998, as amended on September 10, 1998,\3\ the National 
Association of Securities Dealers, Inc. (``NASD'') through is wholly-
owned subsidiary, 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On September 10, 1998, Nasdaq filed Amendment No. 1 with the 
Commission. See Letter from Robert Aber, Senior Vice President and 
General Counsel, Nasdaq, to Richard Strasser, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated 
September 10, 1998. Amendment No. 1 clarified the circumstances 
under which Nasdaq would apply the Additional Circuit/SDP Charge to 
subscribers, and clarified the way that Nasdaq would adjust the size 
of the deposits required from subscribers who ordered NWII service 
in July and August 1998.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq is proposing to amend NASD Rule 7010(h)(2) relating to 
Nasdaq Workstation II (``NWII'') and network fees. The proposed rule 
change amends the current fee schedule for NWII service for NASD 
members. The NASD has filed a parallel proposal to effect the similar 
amendments to the NWII fee structure to apply to non-NASD members.\4\ 
Nasdaq also is eliminating Digital Interface Service fees as Nasdaq no 
longer provides this service. Below is the text of the proposed rule 
change. Proposed new language is italicized; proposed deletions are in 
brackets.
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    \4\ See File No. SR-NASD-98-63.
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* * * * *
NASD Rule 7010. System Services
    (a)-(g) No Change.
    (h) Nasdaq Workstation Service.
    (1) No Change.
    (2) The following charges shall apply to the receipt of Level 2 or 
Level 3 Nasdaq Service via equipment and communications linkages 
prescribed for the Nasdaq Workstation II Service:


Service Charge...............  [$100] $1,500/month per [server] service 
                                delivery platform (``SDP'').            
Display Charge...............  [$500] $525/month per presentation device
                                (``PD'').                               
Additional Circuit/SDP Charge  [$1,150 per] $2,700/month.*              
                                                                        

    A subscriber that accesses Nasdaq Workstation II Service via an 
application programming interface (``API'') shall be assessed the 
Service Charge for each of the subscriber's SDPs and shall be assessed 
the Display Charge for each of the subscriber's API linkages, including 
an NWII substitute or quote-update facility. API subscribers also shall 
be subject to the Additional Circuit/SDP Charge.
    (3) No Change.
    [(j)] Digital Interface Service.
    The following charges shall apply to the receipt of Level 3 Nasdaq 
service via the Digital Interface Service:


Service Charge.........................  $1,300/month                   
                                         per server.                    
Display Charge.........................  $345/month per                 
                                         terminal display.              
Additional Circuit.....................  $500/month.                    
Equipment Charge.......................  $290/month per                 
                                         server].                       
                                                                        

    (k)-(n) Re-designated as subparagraphs (j)-(m)
    * A subscriber shall be subject to the Additional 
Circuit/SDP Charge when the subscriber has not maximized capacity on 
its SDP(s) by placing eight PDs and/or API servers on an SDP and 
obtains an additional SDP(s); in such case, the subscriber shall be 
charged the Additional Circuit/SDP Charge (in lieu of the Service 
Charge) for each ``underutilized'' SDP(s) (i.e., the difference between 
the number of SDPs a subscriber has and the number of SDPs the 
subscriber would need to support its PDs and/or API servers, assuming 
an eight-to-one ratio). A subscriber also shall be subject to the 
Additional Circuit/SDP Charge when the subscriber has not maximized 
capacity on its existing T1 circuit(s) by placing six SDPs on a T1 
circuit and obtains an additional T1 circuit(s); in such case, the 
subscriber shall be charged the Additional Circuit/SDP Charge (in lieu 
of the Service Charge) for each ``unutilized'' slot on the existing T1 
circuit(s). Regardless of SDP allocation across T1 circuits, a 
subscriber will not be subject to the Additional Circuit/SDP Charge if 
the subscriber does not exceed the minimum number of T1 circuits needed 
to support its SDPs, assuming a six-to-one ratio.
* * * * *

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 purpose of this filing is to amend the subscriber fees 
applicable to NASD members that use the Nasdaq Workstation II 
(``NWII''). In 1994, Nasdaq rolled out the NWII service, which provided 
many enhancements to the then-existing Nasdaq Workstation service.\5\ 
As part of the NWII rollout, Nasdaq installed a network, known as the 
Enterprise Wide Network (``EWN I''), to deliver NWII functionality. To 
access NWII service, each subscriber location has at least one service 
delivery platform (``SDP''), or server, that resides on the network and 
connects to Nasdaq by a dedicated circuit. The SDP functions as the 
subscriber's gateway from the NWII to the enterprise-wide network.\6\ 
Each SDP currently is permitted to support up to eight presentation 
devices (``PD''), or Nasdaq

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Workstation IIs,\7\ although a firm may elect to have fewer than eight 
PDs on a single SDP. In addition, a subscriber may obtain NWII service 
through an application programming interface (``API''), which 
essentially allows a firm to obtain NWII Service using the firm's own 
hardware (e.g., personal computer) and software systems to access, 
display, interface with, and operate NWII service.\8\
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    \5\ NWII provides a widows-based environment and several data 
management facilities not previously available in Nasdaq's former 
(pre-1994) workstation service.
    \6\ Under EWN I, each dedicated circuit supported one SDP. Under 
Nasdaq's proposed new network--known as ``EWN II''--each dedicated 
circuit (``T1 circuit'') will be capable of supporting up to six 
SDPs.
    \7\ This also will be true of EWN II.
    \8\ API provides an electronic interface between a subscriber's 
systems and the NWII system. Through the use of the API, a 
subscriber may build its own workstation presentation software to 
integrate the NWII service into the subscriber's existing 
presentation facilities. The API allows a subscriber to emulate the 
NWII presentation software with equivalent functionality, capacity 
utilization and through-put capability, in addition to providing 
enhanced capability to develop customized internal presentations for 
use in support of a subscriber's activities. API also allows a 
subscriber to operate a quote-update facility to assist solely in 
complying with the SEC's Order Handling Rules. Generally, a 
subscriber establishes an API ``linkage'' such as an NWII substitute 
or quote-update facility, which in turn connects to an SDP via an 
API server.
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    Due to the ongoing growth in the Nasdaq market and unprecedented 
increases in daily share volume since EWN I was installed, Nasdaq 
became concerned that its existing enterprise-wide network capacity was 
rapidly approaching maximization. Specifically, the network's 
bandwidth--the amount of data that can be transmitted through a given 
communications circuit in a fixed amount of time--currently can handle 
one and one-half billion shares per day. The 1998 average daily share 
volume to date is 750 million, with a high single-day volume of 1.250 
billion shares. In addition, on October 28, 1997, Nasdaq experienced 
its largest daily share volume ever with 1,354,164,600 shares traded. 
In Nasdaq's view, these dramatic increases in average and peak share 
volumes clearly mandate the creation of a new network with increased 
capacity.
    Moreover, based on the average rate of circuit additions for both 
new and existing subscribers, EWN I is expected to reach maximum 
circuit capacity during the second quarter of 1999.\9\ To respond to 
these concerns and to avoid the potential for any disruption to the 
Nasdaq market, Nasdaq contracted in late 1997 with MCI Communications 
Corporation (``MCI'') to build a new network--EWN II--to accommodate 
increased usage and provide increased circuit capacity.
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    \9\ Similar to any other private network, EWN I was designed to 
have a maximum circuit capacity (i.e., 2,100 circuits). In 1995, the 
projected average circuit growth between 1995 and 1999 was estimated 
to be seven circuits per month, so that by 1,999 there would be a 
total of 1,400 circuits. In 1996, however, there was an average 
growth of 35 circuits per month. For 1998, Nasdaq is averaging 10 
circuits per month. Nasdaq projects that by 1999, there will be 
2,100 circuits, and that Nasdaq will exhaust circuit capacity 
without the EWN II upgrade.
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    Nasdaq notes that concerns about present and future system capacity 
have been repeatedly expressed by the Commission as part of its 
releases recommending that self-regulatory organizations voluntarily 
establish automation review policies to comprehensively plan, test, and 
assess the trading capacity of their systems.\10\ This emphasis on 
sufficient trading-system capacity reflects the Commission's 
recognition of the significant negative impact system failures can have 
on public investors, broker-dealer risk exposure, and market 
efficiency. Moreover, Congress has specifically found that ``the 
maintenance of stable and orderly markets with maximum capacity for 
absorbing trading imbalances without undue price movements'' is a 
paramount objective of a national market system.\11\ EWN II is Nasdaq's 
response to these mandates.
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    \10\ Securities Exchange Act Release No. 27445 (November 16, 
1989), 54 FR 48703 (November 24, 1989) (Automation Review Policy); 
Securities Exchange Act Release No. 29185 (May 9, 1991), 56 FR 22490 
(May 15, 1991) (Second Automation Review Policy).
    \11\ See S. Rep. No. 94-75, at 7, reprinted in 1975 U.S.C.C.A.N. 
179, 185 (report accompanying bill enacted as Securities Acts 
Amendments of 1975) (emphasis added).
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    EWN II will be a significant improvement over EWN I. First EWN II 
will have a four billion share per day capacity by the year 2001, with 
the additional capability to be expanded to a daily eight billion share 
capacity. EWN II's design contains certain features that are aimed at 
significantly reducing the likelihood of a network failure. These 
features are designed to ensure that Nasdaq, and the market 
professionals and individual investors who rely on its facilities, are 
provided with the most robust and flexible system available, thereby 
ensuring the smooth functioning of the public securities markets both 
now and in the future.
    Nasdaq shortly will begin converting existing subscribers to EWN 
II. Specifically, on or about September 1, 1998, Nasdaq will begin 
replacing subscribers' existing dedicated circuits to accommodate the 
new network. The installation process should be completed by May 1999. 
As with previous technology roll-outs (e.g., EWN I and NWII), the EWN 
II conversion will be implemented regionally and each firm will be pre-
scheduled for a particular conversion date.\12\
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    \12\ See Securities Exchange Act Release No. 35,189 (January 3, 
1995), 60 FR 3014 (January 12, 1995) (EWN I rollout). Thus, while 
the rollout proceeds, some subscribers will continue to utilize EWN 
I and pay the fees for that service, until they are upgraded to EWN 
II.
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    In light of the increased costs and value-added benefits of EWN II, 
Nasdaq is proposing to revise the current NWII fee structure. Under the 
proposal, the fee charged to a subscriber for a SDP would change from 
$100 per month for each server, to $1,500 per month for each server. 
The display charge would change from $500 per month for each PD, to 
$525 per month for each PD. The charge associated with an unutilized or 
underutilized circuit or SDP would change from $1,150 per month to 
$2,700 per month.\13\ Thus, under the new fee

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structure, a firm with one SDP ($1,500) and eight PDs (8  x  $525 = 
$4,200) would be charged a monthly fee of $5,700, while a firm with one 
SDP ($1,500) and two PDs (2  x  $525 = $1,050) would be charged a 
monthly fee of $2,550.
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    \13\ As noted above, a T1 circuit supports up to six SDPs, and 
an SDP supports up to eight PDs. A subscriber shall be subject to 
the Additional Circuit/SDP Charge when the subscriber has not 
maximized capacity on its SDP(s) by placing eight PDs and/or API 
servers on an SDP and obtains an additional SDP(s). In such case, 
the subscriber shall be charged the Additional Circuit/SDP Charge 
(in view of the Service Charge) for each ``underutilized'' SDP(s) 
(i.e., the difference between the number of SDPs a subscriber has 
and the number of SDPs the subscriber would need to support its PDs 
and/or API servers, assuming an eight-to-one ratio). A subscriber 
also shall be subject to the Additional Circuit/SDP Charge when the 
subscriber has not maximized capacity on its existing T1 circuits by 
placing six SDPs on a T1 circuit and obtains an additional T1 
circuit(s). In such case, the subscriber shall be charged the 
Additional Circuit/SDP Charge for each ``unutilized'' slot on the 
existing T1 circuit(s). Regardless of SDP allocation across T1 
circuits, a subscriber will not be subject to the Additional 
Circuit/SDP Charge if the subscriber does not exceed the minimum 
number of T1 circuits needed to support its SDPs, assuming a six-to-
one ratio.
    For example, if a subscriber has four SDPs (each with eight PDs) 
on an existing T1 circuit, and the subscriber orders a second T1 on 
which the Subscriber places one SDP (with eight PDs), the subscriber 
would pay on a monthly basis: (1) $1,500 for each of the four fully 
utilized SDPs on the first T1 circuit, plus $525 for each of the PDs 
on the circuit; (2) 2,700 for each of the two unutilized SDP slots 
on the first circuit; and (3) $1,500 for the SDP on the second T1 
circuit, plus $525 for each of the PDs on that circuit.
    As a second example, if a subscriber has five SDPs, (each with 
eight PDs) on an existing T1 circuit, and the subscriber orders a 
second T1 circuit on which the subscriber places two SDP (with eight 
PDs), the subscriber would pay on a monthly basis 1,500 for each 
SDPs on the first and second T1 circuit, plus $525 for each of the 
PDs on the SDPs. The firm would not be subject to the Additional 
Circuit/SDP Charge because it has seven SDPs and needs two T1 
circuits to support this number of SDPs.
    As a third example, if a subscriber has on a T1 circuit four 
SDPs each with four PDs, the subscriber would pay on a monthly basis 
(1) $525 for each of the 16 PDs; and (2) $1,500 for two of the SDPs 
and $2,700 for two SDPs because two SDPs are fully utilized while 
two SDPs are not. This is, to support the firm's 16 PDs, the firm 
only needs two SDPs. Thus there are two ``underutilized'' or 
``nonessential'' SDPs, for which the firm must pay the Additional 
Circuit/SDP Charge.
    This pricing structure encourages subscribers to maximize 
circuit capacity and is aimed at preventing the premature exhaustion 
of such capacity. Furthermore, Nasdaq notes that under EWN II, each 
T1 will be a dual circuit, and that there will be a virtually 
seamless switch-over from one circuit to the next if one of the 
circuits fails. Thus, it is anticipated that, due to the new 
features of EWN II, subscribers will be less likely to order 
additional circuits without first optimizing capacity on existing 
circuits(s).
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    The proposed rule change also clarifies that the fees in NASD Rule 
7010(h)(2) likewise apply to NWII service obtained via API. 
Specifically, if a subscriber chooses to access NWII through API, the 
subscriber would be assessed the service charge for each SDP, the 
display charge for each of the subscriber's linkages (e.g., NWII 
substitute, quote-update facility), as well as the additional circuit 
charge.\14\
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    \14\ Since July and August 1998, new subscribers to NWII service 
have placed work order for EWN II technology (instead of EWN I 
technology). During this period, Nasdaq charged new subscribers the 
required security deposit using the EWN I pricing structure, as the 
new EWN II pricing structure had not yet been filed (NASD Rule 7070 
provides that new subscribers to Nasdaq Workstation service shall be 
subject to a deposit in the amount of: estimated telecommunications 
provider charges for network infrastructure, connection and testing; 
two months circuit charges; and estimated telecommunications 
provider disconnect charges.) Nasdaq processed new work orders for 
EWN II (instead of EWN I) to avoid these subscribers having to pay 
for the installation and subsequent deinstallation of soon-to-be 
obsolete EWN I technology, and the installation of EWN II technology 
in September 1998 (when the upgrade is set to begin).
    With this filing, new subscribers that are members and that have 
placed work orders during July and August 1998, will be billed for 
the security deposit for an amount equal to the differential under 
the EWN I and the EWN II fee structures. Nasdaq believes that this 
is a fair approach in that all subscribers should be required to pay 
the same fees for the EWN II technology, regardless of the timing of 
their order.
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    Although NASD Rule 7010(h)(2) generally applies to both members and 
non-member subscribers to NWII service, this filing will only effect a 
change to the fees charged to NASD members. The NASD has filed a 
separate but virtually identical proposed rule change to impose the 
proposed new fees on non-member subscribers. Lastly, the proposed rule 
filing reserves the fee schedule for ``Digital Interface Service,'' as 
Nasdaq no longer offers this service.
    Nasdaq believes that the proposed rule change is consistent with 
Section 15A(b)(5) of the Act,\15\ which requires that the rules of a 
registered securities association provide for the equitable allocation 
of reasonable dues, fees and other charges among members and issuers 
and other persons using any facility or system which the NASD operates 
or controls. Nasdaq notes that the proposed fees, which will only apply 
to those that utilize NWII service, are reasonable and proportionate to 
the projected costs of operating and maintaining EWN II.
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    \15\ 15 U.S.C. 78o-3(b)(5).
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    Although the proposed fees are higher than those associated with 
EWN I, Nasdaq believes that these fees are both reasonable and 
necessary. Specifically, Nasdaq notes that EWN II will be faster, more 
secure, and provide greater capacity, all of which are essential to 
protecting the integrity of the Nasdaq market and maintaining the 
confidence of the investing public. In addition, the new fees will more 
fairly allocate system costs among Nasdaq market participants.\16\
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    \16\ According to Nasdaq, the proposed fee schedule's Service 
Charge, like the prior fee schedule, does not pass on all of the 
SDP/server costs that MCI charges the NASD. The proposed fee 
schedule's Display Charge, like the prior fee schedule, in part 
helps the NASD recoup its subsidy of the SDP/server costs, and 
permits the NASD to recoup other expenses associated with the 
development and the maintenance of NWII. See Conversation between 
John Malitzis, Senior Attorney, Nasdaq, and Joshua Kans, Attorney, 
Division, Commission, September 10, 1998.
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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.

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

    Because the foregoing rule change establishes or changes a due, fee 
or other charge on NASD members, it has become effective upon filing 
pursuant to Section 19(b)(3)(A)(ii) of the Act \17\ and subparagraph 
(e)(2) of Rule 19b-4 thereunder.\18\ At any time within 60 days of the 
filing of a rule change pursuant to Section 19(b)(3)(A) of the Act, the 
Commission may summarily abrogate the rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.
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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 17 CFR 240.19b-4(e)(2).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act.\19\ Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 25049. 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-98-62 and should be submitted by October 9, 1998.

    \19\ In reviewing the proposed rule change, the Commission has 
considered its impact on efficiency, competition and capital 
formation. 15 U.S.C. 78c(f).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ See 17 CFR 200.30-3(a)(12).
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Maragret H. McFarland,
Deputy Secretary.
[FR Doc. 98-25013 Filed 9-17-98; 8:45 am]
BILLING CODE 8010-01-M