[Federal Register Volume 65, Number 133 (Tuesday, July 11, 2000)]
[Notices]
[Pages 42741-42743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-17423]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43001; File No. SR-NASD-00-41]


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

June 30, 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 June 29, 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.\3\ 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\ The Commission notes that Nasdaq filed a virtually identical 
proposal, SR-NASD-00-29, on May 24, 2000. In SR-NASD-00-29, Nasdaq 
proposed to amend its SelectNet fees in the same manner that it 
proposes to amend these fees in this filing. SR-NASD-00-29 was filed 
under Section 19(b)(3)(A) of the Act and, therefore, was effective 
upon filing. Among other things, Nasdaq proposed in SR-NASD-00-29 
that its reduced SelectNet fees, which were subject to a pilot 
program, continue from the date of the filing, May 24, 2000. The 
pilot program, however, expired on March 31, 2000. When Commission 
staff brought this to the attention of Nasdaq expressed its desire 
to have the reduced fees apply retroactively from April 1 to May 23, 
2000. After consultation with the Commission staff, Nasdaq filed 
this proposal, SR-NASD-00-41, to replace SR-NASD-00-29. Because the 
proposals are virtually identical except for Nasdaq's request in SR-
NASD-00-41 that the reduced fees apply retroactively, the Commission 
has determined not to publish SR-NASD-00-29. Nevertheless, the 
public can receive a copy of it from the NASD or from the 
Commission's public reference room.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq proposes to: (1) Extend the reduced SelectNet fee pilot 
program under NASD Rule 7010(i) from April 1, 2000 until March 31, 
2001, or through the date of implementation of the Nasdaq National 
Market Execution System (``Implementation Date,'' currently expected to 
be July 10, 2000), whichever is sooner; and (2) beginning on the 
Implementation Date, to (a) reduce the fees currently charged under 
NASD Rule 7010(i) for the execution of transactions in SelectNet; (b) 
reduce the fees currently charged under NASD Rule 4770(a) for the 
execution of transactions in the Small Order Execution System for 
Nasdaq SmallCap issues; and (c) establish that the fees charged for the 
execution of transactions in Nasdaq National Market issues in the 
Nasdaq National Market Execution System, will be identical to the fees 
charged for transactions in the Small Order Execution System (``SOES'') 
for Nasdaq SmallCap issues.

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.

1. Purpose
    Nasdaq proposes to again extend its current reduced SelectNet 
fees.\4\ The reasons for Nasdaq's prevailing SelectNet fee structure 
were fully explained in its original fee structure proposal filed with 
the Commission in February of 1998.\5\ Since then, SelectNet usage has 
continued at significantly elevated levels. As such, Nasdaq believes 
that an extension of these reduced fees through the Implementation Date 
is warranted.
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    \4\ Nasdaq represents that this rule supersedes SR-NASD-00-29, 
which Nasdaq submitted on May 24, 2000. According to Nasdaq, SR-
NASD-00-29 proposed to extend the pilot program reducing SelectNet 
fees, but did not explicitly state that the pilot expired on March 
31, 2000, and that the pilot should apply retroactively as of April 
1, 2000. At the request of Commission staff, Nasdaq is submitting 
this filing to clarify these facts.
    \5\ See Securities Exchange Act Release No. 39641 (February 10, 
1998), 63 FR 8241 (February 18, 1998). Nasdaq's current reduced fee 
structure was originally approved for a 90 day period. The last 
extension of this pilot occurred in April of 1999, and the pilot 
expired on March 31, 2000. According to the April 1999 extension, 
the SelectNet fees were supposed ``to revert to their original $2.50 
per-side level on April 1, 2000'' if Nasdaq took no action. See 
Securities Exchange Act Release No. 41314 (April 20, 1999); 64 FR 
22664 (April 27, 1999).
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    Under the proposal, from April 1, 2000 until march 31, 2001, or 
until the Implementation Date, whichever is sooner, SelectNet fees 
would continue to be assessed in the following manner:

[[Page 42742]]

(1) $1.00 will be charged for each of the first 50,000 SelectNet orders 
entered and directed to one particular market participant that is 
subsequently executed in whole or in part, $.70 for the next 50,000 
directed orders executed that same month, and $.20 for each remaining 
directed order executed that same month; (2) no fee will be charged to 
a member who receives and executes a directed SelectNet order; (3) the 
existing $2.50 fee will remain in effect for both sides of executed 
SelectNet orders that result from broadcast messages; and (4) a $0.25 
fee will remain in effect for any member who cancels a SelectNet order. 
Nasdaq will continue to monitor and review SelectNet activity to 
determine if further changes to the SelectNet fee structure are 
appropriate.
    On January 14, 2000, the Commission issued an order approving rule 
changes that: (1) Establish the Nasdaq National Market Execution system 
(``NNMS''), a new platform for the trading of Nasdaq National Market 
(``NNM'') securities; (2) modify the rules governing the use of 
SelectNet for trading NNM issues; and (3) leave unchanged the trading 
of Nasdaq SmallCap securities on the Small Order Execution system 
(``SmallCap SOES'').\6\ Nasdaq currently plans to implement these 
system changes on July 10, 2000.
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    \6\ See Securities Exchange Act Release No. 42344 (January 14, 
2000); 65 FR 3987 (January 25, 2000).
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    The NNMS will be the primary trading platform for Nasdaq NNM 
issues. The NNMS will be based on the SOES architecture that currently 
exists, but will be enhanced in several ways: (1) The maximum order 
entry size will be 9,900 shares for NNM securities; (2) market 
participants (including market makers) will be able to use Nasdaq's 
automated execution systems on a proprietary basis for transactions in 
NNM securities; (3) the time delays between NNM executions against the 
same market maker on ECN participating in the NNMS will be reduced to 5 
seconds; (4) NNMS will include a reserve-size functionality, which will 
be accessible on an automated basis; and (5) eliminating the ``No 
Decrementation'' and preferencing functionality that currently exist in 
SOES.
    SelectNet generally will be used to deliver negotiable orders to 
market makers and ECNs that participate in the NNMS. SelectNet orders 
will no longer be ``liability orders.'' SelectNet will accept entry of 
orders directed to specific market makers in NNM securities only if 
such orders: (1) Seek at least 100 shares more than the displayed 
amount of the quote to which they are directed; and (2) are designated 
as either ``all-or-none'' or ``minimum acceptable quantity'' for at 
least 100 shares more than the quoted size. SelectNet will 
automatically reject preferenced messages not meeting these conditions. 
Recipients of SelectNet orders will then have the option to execute the 
order, initiate electronic negotiation, or let the order expire. Market 
participants will still use SelectNet to deliver liability orders to 
order-entry ECNs and UTP Exchanges.
    It is expected that much of the trading volume in NNM securities 
will migrate from SelectNet to the NNMS, due largely to the elimination 
of the liability aspect of SelectNet. The proposed pricing structure 
reflects this shift by removing from NNMS the $.50 per order fee that 
market participants currently pay for receiving a SOES execution, and 
also in the addition of volume discounts. Thus, market participants 
will pay $.50 per execution for executed orders of under 2000 shares, 
with a discounted price of $.30 for any order after 150,000; $.90 for 
orders over 2000 shares. Nasdaq believes that this will encourage the 
entry of quotes into the Nasdaq system, and thereby increase liquidity 
in the Nasdaq Stock Market.\7\
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    \7\ Nasdaq believes that the fee changes will have a revenue-
neutral effect. Telephone conversation between Jeffrey S. Davis, 
Assistant General Counsel, Nasdaq, and Joseph Corcoran, Attorney, 
Division of Market Regulation, Commission, on June 28, 2000.
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    Beginning on the Implementation Date, SelectNet fees would be 
assessed in the following manner: (1) $.90 will be charged for each 
SelectNet order entered and directed to one particular market 
participant that is subsequently executed in whole or in part; (2) no 
fee will be charged to a member who receives and executes a directed 
SelectNet order; (3) the existing $2.50 fee will remain in effect for 
both sides of executed SelectNet orders that result from broadcast 
messages; (4) market participants will be assessed $.70 per order for 
the first 25,000 orders executed monthly, $.50 per order for the next 
25,000 orders executed monthly, and a $.10 for each remaining liability 
order executed monthly; and (5) a $0.25 fee will remain in effect for 
any member who cancels a SelectNet order.
    Nasdaq proposes to charge the same fees for trades of both Nasdaq 
SmallCap and NNM securities. To accomplish this, Nasdaq proposes to 
reduce the fees charged for trades of SmallCap Securities through SOES. 
Beginning on the Implementation Date, fees for NNMS trades of NNM 
securities and SOES trades of SmallCap securities will be assessed in 
the following manner: (1) A fee of $.50 per order executed for the 
first 150,000 orders executed under 2000 shares monthly; (2) a fee of 
$.30 for all remaining orders executed less than 2000 shares monthly; 
(3) a fee of $.90 per order for all orders over 2000 shares; and (4) no 
fee will be charged to a member who receives an execution in SOES or 
NNMS.
2. Statutory Basis
    For the reason set forth above, Nasdaq believes that the proposed 
rule change is consistent with Section 15A(b)(5) of the Act,\8\ which 
requires that the rules of the NASD 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.
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    \8\ 15 U.S.C. 78o-3(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competiton

    The NASD believes that the proposed rule change will not 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

    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 charge imposed by the Association, it has become effective 
pursuant to Section 19(b)(3)(A)(ii) of the Act \9\ and subparagraph 
(f)(2) of Rule 19b-4 thereunder.\10\ At any time within 60 days of the 
filing of the 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 purposes of 
the Act.
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    \9\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \10\ 17 CFR 240.19b-4(f)(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 
is consistent with the Act. Persons making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission,

[[Page 42743]]

450 Fifth Street, NW., Washington, D.C. 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 File No. SR-NASD-00-41 and should be 
submitted by August 1, 2000.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\11\
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    \11\ 17 CFR 200.30-3a(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-17423 Filed 7-10-00; 8:45 am]
BILLING CODE 8010-01-M