[Federal Register Volume 63, Number 198 (Wednesday, October 14, 1998)]
[Notices]
[Pages 55167-55169]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-27512]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40521; File No. SR-NASD-98-63]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Fees for Nasdaq's Workstation II Service for Those Subscribers Who 
Are Not Members of the NASD

    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 15, 1998,\3\ the National 
Association of Securities Dealers, Inc. (``NASD'') through its 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On September 23, 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 23, 1998. Amendment No. 1 clarified the circumstances 
under which Nasdaq would apply the Additional Circuit. SDP Charge to 
subscribers, clarified the way that Nasdaq would adjust the size of 
the deposits required from subscribers who ordered NWII service 
starting in July 1998, stated Nasdaq's intent to bill the new fee 
structure retroactively for non-member subscribers who receive EWN 
II technology prior to the approval of this proposed rule change, 
and made technical corrections to the filing.
---------------------------------------------------------------------------

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 is intended to amend the current fee schedule for subscribers to 
the NWII service who are not NASD members. The NASD has filed a 
parallel rule filing to effect the same amendments to the NWII fee 
structure to apply to 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.
---------------------------------------------------------------------------

    \4\See File No. SR-NASD-98-62.
---------------------------------------------------------------------------

* * * * *
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 access 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 for subscribers to Nasdaq Workstation II (``NWII'') who are 
not NASD members. In 1994, Nasdaq rolled out the NWII service, which 
provided many

[[Page 55168]]

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 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\
---------------------------------------------------------------------------

    \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--know as ``EWN II''--each dedicated 
circuit (``T1 circuit'') will be capable of supporting up to six 
SDPs.
    \7\ This also will be true for 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 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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 1999 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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    EWN II will be a significant improvement over EWIN 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., EWIN I and NWII), the EWN 
II conversion will be implemented regionally and each firm will be pre-
scheduled for a particular conversion date.\12\
---------------------------------------------------------------------------

    \12\ See  Securities Exchange Act Release No. 35189 (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.
---------------------------------------------------------------------------

    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 an 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

[[Page 55169]]

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.
---------------------------------------------------------------------------

    \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 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 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 
circuit 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 of 
the 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. That 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 subcribers 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 circuit(s).
---------------------------------------------------------------------------

    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 linkage (e.g., NWII 
substitute, quote-update facility), as well as the additional circuit 
charge.\14\
---------------------------------------------------------------------------

    \14\ Since July 1998, new subscribers to NWII service have 
placed work orders 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).
    Upon approval of this filing, new subscribers that are non-
members and that have placed work orders form July 1998 forward, 
will be billed for the security deposit for an amount equal to the 
differential under the EWN I and the EWN II fee structures. 
Additionally, if non-member subscribers receive EWN II technology 
prior to approval of the EWN II fees proposed herein, upon approval 
of this filing, Nasdaq will bill these non-member subscribers in an 
amount equal to the differential under the EWN I and 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.
---------------------------------------------------------------------------

    Although NASD Rule 7010(h)(2) generally applies to both members and 
non-member subscribers to NWII service, this filing will only affect a 
change to the fees charged to those subscribers who are not 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 removes the fee schedule for ``Digital 
Interface Service,'' as Nasdaq no longer offers this service.
    Nasdaq believes that the proposed rule change is consistent with 
the 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.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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

    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 self-regulatory organization 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, including whether the proposed rule 
change is consistent with the Act. 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. 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-98-63 and should 
be submitted by November 4, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

    \17\ See 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-27512 Filed 10-13-98; 8:45 am]
BILLING CODE 8010-01-M