[Federal Register Volume 64, Number 218 (Friday, November 12, 1999)]
[Notices]
[Pages 61680-61682]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-29602]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42095; File No. SR-NASD-99-59]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to Transaction Credits

November 3, 1999.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given 
that on October 13, 1999, the National Association of Securities, 
Dealers, Inc. (``NASD'' or ``Association''), 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. Nasdaq has designated this proposal 
as one constituting the establishment or change of a due, fee or other 
charge imposed by the Association under Section 19(b)(3)(A)(ii) \3\ of 
the Act which renders the rule effective upon the Commission's receipt 
of this filing. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 USC 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 USC 78S(B)(3)(A)(ii).
---------------------------------------------------------------------------

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

    Nasdaq is filing a proposed rule change to amend Rule 7010 of the 
NASD. Below is the text of the proposed rule change. Proposed new 
language is italicized; proposed deletions are in brackets.
* * * * *
7010 System Services
    (a)-(b) No Change.
    (c).
    (1) Consolidated Quotation Service, Existing Paragraph remains the 
same.
    (2) Listed Securities Transaction Credit. For a pilot period, 
qualified NASD members that trade securities listed on the NYSE and 
Amex in over-the-counter transactions reported by the NASD to the 
Consolidated Tape Association may receive from the NASD transaction 
credits based on the number of trades so reported. [To qualify for the 
credit with respect to either Tape A reports or Tape B reports, An NASD 
member must have accounted for 500 or more average daily Tape A or Tape 
B reports of over-the-counter transactions (but not in combination) as 
reported to the Consolidated Tape by the NASD over the period of July 
1, 1998 to December 31, 1998, and must continue to average either 500 
or more daily Tape A or 500 or more daily Tape B reports (but not in 
the combination) of over-the-counter transactions reported to the 
Consolidated Tape by the NASD during the term of the pilot.] To qualify 
for the credit with respect to Tape A reports, an NASD member must 
account for 500 or more average daily Tape A reports of over-the-
counter transactions as reported to the Consolidated Tape during the 
concurrent calendar quarter. To quality for the credit with respect to 
Tape B reports, an NASD must account for 500 or more average daily Tape 
B reports of over-the-counter transactions as reported to the 
Consolidated Tape during the concurrent calendar quarter. If an NASD 
member is so qualified to earn credits based either on its Tape A 
activity, or its Tape B activity, or both, that member may earn credits 
from one or both pools maintained by the NASD, each pool representing 
40% of the revenue paid by the Consolidated Tape Association to the 
NASD for each of Tape A and Tape B transactions. A qualified NASD 
member may earn credits from such pools according to the member's pro 
rata share of the NASD's over-the-counter trade reports in each of Tape 
A and Tape B for each calendar quarter starting with [October 1, 1998, 
and ending with the calendar quarter starting on April 1, 1999.] July 
1, 1999, and ending with the calendar quarter starting on October 1, 
1999.\4\
---------------------------------------------------------------------------

    \4\ Pursuant to a telephone conversation between Thomas P. 
Moran, Assistant General Counsel, Office of General Counsel, The 
Nasdaq Stock Market, Inc. and Jennifer L. Colihan, Staff Attorney, 
Division of Market Regulation, SEC on November 4, 1999, NASD Rule 
7010(c)(2) as written in the original filing was deleted. NASD Rule 
7010(c)(3) as identified in the original filing was renumbered as 
NASD Rule 7010(c)(2).
---------------------------------------------------------------------------

* * * * *

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

    Nasdaq is proposing to extend, for an additional six months (from 
July 1, 1999 through December 31, 1999), its pilot program to provide a 
transaction credit \5\ to NASD members who exceed certain levels of 
trading activity in exchange-listed securities. The NASD established 
its transaction credit pilot to assist in finding ways to lower 
investor costs associated with trading listed securities, and to 
respond to steps taken by other

[[Page 61681]]

exchanges that compete with Nasdaq for investor order flow in those 
issues.
---------------------------------------------------------------------------

    \5\ The transaction credit can be applied to any and all charges 
imposed by NASD or its non-SRO affiliates. Any remaining balance may 
be paid directly to the member.
---------------------------------------------------------------------------

1. Background
    Nasdaq's Third Market is a quotation, communication and execution 
system which allows NASD members to trade stocks listed on the New York 
Stock Exchange (``NYSE'') and the American Stock Exchange (``AMEX''). 
The Third Market competes with regional exchanges like the Chicago 
Stock Exchange (``CHX'') and the Cincinnati Stock Exchange (``CSE'') 
for retail order flow in stocks listed on the NYSE and AMEX 
exchanges.\6\ The NASD collects quotations from broker-dealers that 
trade these securities over-the-counter (``OTC'') and provides such 
quotations to the Consolidated Quotation System for dissemination. 
Additionally, the NASD collects trade reports from these broker-dealers 
trading such securities in the OTC market and provides the trade 
reports to the Consolidated Tape Association (``CTA/CQA'') for 
inclusion in the Consolidated Tape. As a participant in the CTA/CQA, 
the NASD earns a share of those organizations' revenue from trades that 
it reports in NYSE-listed securities (``Tape A'') and in AMEX-listed 
securities (``Tape B''). It is from the NASD's share of these revenues 
that Nasdaq created the credit pools for qualified pilot participants.
---------------------------------------------------------------------------

    \6\ CHX and CSE have established similar programs. See 
Securities Exchange Act Release No. 38237 (February 4, 1997), 2 FR 
6592 (February 12, 1997); and Securities Exchange Act Release No. 
39395 (December 3, 1997), 62 FR 65113 (December 10, 1997). To remain 
competitive with these markets, the NASD believes that it must 
evaluate programs designed to effectively respond to other markets' 
approaches to trading the same securities.
---------------------------------------------------------------------------

    Nasdaq's original transaction credit pilot and the proposed 
extension are intended to lower costs for Third Market Makers, and 
their customers, who execute trades in exchange-listed stocks through 
NASD members and Nasdaq facilities. The NASD believes that lowering the 
cost of trading increases competition among market centers trading 
listed securities. Continuation of the pilot will also allow Nasdaq to 
continue to evaluate the efficacy of its revenue sharing model and 
continue to effectively compete for the retention of Third Market 
participants with other regional exchanges who have adopted similar 
revenue distribution methodologies.
2. Pilot Program
    Under the original pilot proposal, Nasdaq first calculated two 
separate pools of revenue from which credits could have been earned. 
One pool represents 40% of the gross revenues received from the CTA/CQA 
for providing trade reports in NYSE-listed securities executed in the 
Third Market for dissemination by CTA/CQA (``Tape A''). The other pool 
represents 40% of the gross revenue received from CTA/CQA for reporting 
AMEX trades (``Tape B''). These revenue pools will remain at the same 
40% level during the pilot's extension.
    In response to requests from market participants to expand 
eligibility for Tape A and B transaction credits, the NASD has chosen 
to change the transaction credit program for these transactions. Unlike 
the original pilot, eligibility for transaction credits during the 
pilot's extension will not be based on historical trading levels 
derived from previous calendar quarter measures of trading activity, 
but instead will be expanded to give new participants the potential to 
receive transaction credits based on concurrent quarterly trading 
activity. For example, a Third Market participant that newly entered 
the market for Tape A or Tape B securities during the third quarter of 
1999 and printed either an average of 500 daily trades of Tape A 
securities, or one who averaged 500 daily Tape B prints during the 
third quarter, would be eligible to receive transaction credits based 
on its trades during that quarter. As in the original pilot, only those 
NASD members who continue to average an appropriate daily execution 
level during the term of the pilot's extension will be eligible for 
transaction credits and thus, will be able to receive a pro-rata 
portion of the 40% revenue pools.\7\ The NASD has chosen to create 
these thresholds to permit the NASD to recover appropriate 
administrative costs related to NASD members that do not exceed the 
threshold and to encourage NASD members to actively trade in these 
securities.
---------------------------------------------------------------------------

    \7\ As explained in Nasdaq's original pilot filing, the 
qualification thresholds were selected based on Nasdaq's belief that 
such numbers represent clear examples of a member's commitment to 
operating in the Third Market and competing for order flow.
---------------------------------------------------------------------------

    If an NASD member qualifies for a transaction credit, it will be 
calculated by taking the members' percentage of total Third Market 
Transactions during the applicable calculation period and providing an 
equivalent percentage from the appropriate Tape A or B revenue pool. 
Thus, for each calendar quarter beginning July 1, 1999, the NASD will 
measure a qualified member's trade reports for that calendar quarter in 
each of Tape A and B transactions and create a credit for that member 
based upon such activity. For example, should a qualifying NASD 
member's transactions represent 10% of the NASD's Tape A transactions, 
that member would receive a 10% share of the Tape A 40% revenue pool.
    It must again be noted that Nasdaq's transaction credit program is 
being proposed on a pilot basis only. There can be no guarantee that 
transaction credits will be available to qualifying NASD members beyond 
the term of the pilot.\8\
---------------------------------------------------------------------------

    \8\ Nasdaq also reserves the right to terminate the transaction 
credit pilot at any time.
---------------------------------------------------------------------------

    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) \9\ of the Act in that the proposal 
is designed to promote just and equitable principles of trade and to 
remove impediments to and perfect the mechanism of a national market 
system and, in general, to protect investors and the public interest. 
Nasdaq's pilot is also consistent with Section 15A(b)(5) \10\ of the 
Act in that it provides 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 association operates or 
controls.
---------------------------------------------------------------------------

    \9\ 15 USC 78o-3(b)(6).
    \10\ USC 78o3(b)(5).
---------------------------------------------------------------------------

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

    The foregoing rule change has become immediately effective pursuant 
to Section 19(b)(3)(A)(ii) \11\ of the Act and subparagraph (f)(2) of 
Rule 19b-4 thereunder \12\ in that it establishes or changes a due, fee 
or other charge imposed by the Association.
---------------------------------------------------------------------------

    \11\ 15 USC 78s(b)(A)(ii).
    \12\ 17 CFR 240.19-b4(f)(2).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate such 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 purpose of the Act.

[[Page 61682]]

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. 20549-0609. 
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 the File Number SR-NASD-99-59 and 
should be submitted by December 3, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-29602 Filed 11-10-99; 8:45 am]
BILLING CODE 8010-01-M