[Federal Register Volume 65, Number 77 (Thursday, April 20, 2000)]
[Notices]
[Pages 21225-21227]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-9878]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42672; File No. SR-NASD-00-10]


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

 April 12, 2000.
    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 March 6, 2000, 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 (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by Nasdaq. Nasdaq filed an amendment to the proposed rule change on 
March 31, 2000,\3\ which amendment replaces and supersedes the original 
proposal. The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter to Katherine A. England, Assistant Director, 
Commission, from Robert E. Aber, Senior Vice President and General 
Counsel, Nasdaq, dated March 30, 2000 (``Amendment No. 1''). 
Amendment No. 1 makes certain technical corrections to the proposed 
rule change.
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I. Self Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq is filing a proposed rule change amending NASD Rule 7010 to 
extend Nasdaq's transaction credit pilot program for an additional six 
months for Tape A reports and to discontinue the pilot program for Tape 
B reports. Below is the text of the proposed rule change. Proposed new 
language is in italic; proposed deletions are in brackets.

7010  System Services

    (a)-(b) No Change.
    (c)(1) No Change.
    (2) Exchange-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 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 qualify for the credit with respect to Tape B 
reports, an NASD member 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 (as the case may be, depending on the 
qualification standards) pools] the Tape A pool maintained by the NASD, 
[each] such 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] the Tape A pool 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 [July 1, 1999, and 
ending with the calendar quarter starting on October 1, 1999] January 
1, 2000, and ending with the calendar quarter starting on April 1, 
2000.

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.

[[Page 21226]]

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

1. Purpose
    Nasdaq is proposing to extend, for an additional six months, its 
pilot program to provide a transaction credit \4\ to NASD members that 
exceed certain levels of over-the-counter (``OTC'') trading activity in 
securities listed on the New York Stock Exchange (``NYSE''). In 
addition, Nasdaq is proposing to discontinue the pilot program for OTC 
trading in securities listed on the American Stock Exchange (``Amex''). 
The NASD established its transaction credit pilot program to assist in 
finding ways to lower investor costs associated with trading listed 
securities, and to respond to steps taken by other exchanges that 
compete with Nasdaq for investor order flow in those issues.
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    \4\ The transaction credit can be applied to any and all charges 
imposed by the NASD or its non-self-regulatory organization 
affiliates. Any remaining balance may be paid directly to the 
member.
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    Background. Nasdaq's Third Market is a quotation, communication, 
and execution system that allows NASD members to trade stocks listed on 
the NYSE and the Amex. The Third Market competes with the 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 the Amex. The NASD collects quotations from broker-dealers 
that trade these securities OTC and provides such quotations to the 
Consolidated Quotation System for dissemination. Additionally, the NASD 
collects trade reports from broker-dealers trading these securities in 
the OTC market and provides the trade reports to the Consolidated Tape 
Association (``CTA'') for inclusion in the Consolidated Tape. As a 
participant in the CTA, the NASD earns a share of the revenue from 
trades that it reports on behalf of those broker-dealers in NYSE-listed 
securities (``Tape A'') and in Amex-listed securities (``Tape B''). 
Nasdaq created the credit pools for qualified pilot participants from 
the NASD's share of these revenues.
    Nasdaq's transaction credit pilot program is 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 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 
that have adopted similar revenue distribution methodologies.\5\
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    \5\ Both the CHX and the CSE have established similar programs. 
See Securities Exchange Act Release Nos. 38237 (Feb. 4, 1997), 62 FR 
6592 (Feb. 12, 1997) (SR-CHX-97-01) and 39395 (Dec. 3, 1997), 62 FR 
65113 (Dec. 10, 1997) (SR-CSE-97-12).
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    Pilot Program. Under the original transaction credit pilot 
program,\6\ Nasdaq calculated two separate pools of revenue from which 
credits can be earned. The first represented 40% of the gross revenues 
received by the NASD from the CTA for providing trade reports in NYSE-
listed securities executed in the Third Market for dissemination by the 
CTA (``Tape A''). The other represented 40% of the gross revenue 
received from the CTA for reporting Amex trades (``Tape B''). Under the 
proposal, the Tape A calculation pool will remain at the same 40% 
level, and the pool of revenue previously generated from gross revenue 
received from the CTA for reporting Amex trades will be discontinued.
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    \6\ See Securities Exchange Act Release No. 41174 (March 16, 
1999), 64 FR 14034 (March 23, 1999) (SR-NASD-99-13). The original 
pilot was effective from October 1, 1998 through June 30, 1999. 
Nasdaq subsequently extended the pilot through December 31, 1999. 
See Securities Exchange Act Release No. 42095 (Nov. 3, 1999), 64 FR 
61680 (Nov. 12, 1999) (SR-NASD-99-59).
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    Eligibility for transaction credits during the pilot's extension 
will be based upon concurrent quarterly trading activity in NYSE-listed 
securities. For example, a Third Market participant that recently 
entered the market for Tape A securities during the first quarter of 
2000 and printed an average of 500 daily trades of Tape A securities 
during the time it is in the market, or that averaged 500 daily Tape A 
prints during the entire quarter, would be eligible to receive 
transaction credits based on its trades during the first 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 would be eligible for transaction credits and thus able to 
receive a pro-rata portion of the 40% revenue calculation pools.\7\ The 
NASD chose 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.
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    \7\ 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.
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    As before, a fully-qualifying NASD member's transaction credit will 
be determined by taking its percentage of total Third Market 
transactions during the applicable calculation period and providing an 
equivalent percentage from the appropriate Tape A calculation pool. 
Thus, for each calendar quarter commencing with the calendar quarter 
that began on January 1, 2000, the NASD will measure a qualified 
member's Tape A trade reports for that calendar and create a credit for 
the member based upon this activity. For example, if 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% calculation 
pool. Unlike the original pilot, however, the transaction credit will 
be available only to NASD members that trade NYSE-listed securities in 
the Third Market in order to focus the competitive thrust of this 
initiative toward the NYSE during the tme the NASD remains the sole 
shareholder of Nasdaq.
    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.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act,\8\ in that the proposal 
is designed to promote just and equitable principles of trade and to 
remove impediments to and perfect the mechanisms of a national market 
system and, in general, to protect investors and the public interest. 
Nasdaq believes the proposed rule change is also consistent with 
Section 15A(b)(5) \9\ 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 that the 
Association operates or controls.
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    \8\ 15 U.S.C. 78o-3(b)(6).
    \9\ 15 U.S.C. 78o-3(b)(5).
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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.

[[Page 21227]]

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

    Nasdaq did not solicit or receive written comments on the proposed 
rule change.

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

    The proposed rule change has become immediately effective pursuant 
to Section 19(b)(3)(A)(ii) of the Act \10\ and Rule 19b-4(f)(2) 
thereunder,\11\ in that it establishes or changes a due, fee or other 
charge imposed by the Association. At any time within 60 days \12\ of 
the filing of such 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 purposes of the Act.\13\
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    \10\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \11\ 17 CFR 240.19b-4(f)(2).
    \12\ Because Amendment No. 1 replaces the original proposal, the 
60 day period will be calculated based on a March 31, 2000 filing 
date.
    \13\ In reviewing this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formationl 15 
U.S.C. 78c(f).
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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. 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 No. SR-NASD-00-10 and 
should be submitted by May 11, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 00-9878 Filed 4-19-00; 8:45 am]
BILLING CODE 8010-01-M