[Federal Register Volume 66, Number 36 (Thursday, February 22, 2001)]
[Notices]
[Pages 11192-11194]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-4355]



[[Page 11192]]

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43957; File No. SR-NASD-01-11]


Self-Regulatory Organizations; Notice and Order Granting 
Accelerated Approval of Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to EWN II Fees for 
Subscribers Who Are Not NASD Members

February 13, 2001.
    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 February 8, 2001, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its subsidiary The Nasdaq 
Stock Market, Inc. (``Nasdaq''), filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule change as 
described in Items I and II 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.
---------------------------------------------------------------------------

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

    Pursuant to section 19(b)(1) of the Act, and Rule 19b-4 thereunder, 
the National Association of Securities Dealers, Inc. (``NASD''), 
through its subsidiary, The Nasdaq Stock Market, Inc. (``Nasdaq'') is 
herewith filing a proposed rule change to increase the fees associated 
with the Enterprise Wide Network II (``EWN II'') for non-members. Below 
is the text of the proposed rule change. Proposed new language is in 
italics; proposed deletion are in brackets.
NASD Rule 7010. System Services
    (a)-(e) No Change.
    (f) 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: [$1,500]$1,875/month per service delivery platform 
(``SDP'') from December 1, 2000 through February 28, 2001
    $2,035/month per SDP beginning March 1, 2001
Display Charge: $525/month per presentation device (``PD'')
Additional Circuit/SDP Charge: [$2,700]$3,075/month from December 1, 
2000 through February 28, 2001, and $3,235/month beginning March 1, 
2001

    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.
* * * * *

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 III below. Nasdaq has prepared summaries, set forth below 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 obtain approval for the fees 
applicable to subscribers to Nasdaq Workstation II (``NWII'') who are 
not NASD members. On December 14, 2000, Nasdaq submitted SR-NASD-00-74 
under Rule 19b-4 to increase the fees for such non-members so that 
Nasdaq could recover costs related to increasing network capacity. The 
rationale for the fee increase is set forth below. Nasdaq also 
submitted rule filings to increase the fees for NASD members.\3\ Nasdaq 
requested accelerated approval of SR-NASD-00-74.
---------------------------------------------------------------------------

    \3\ See SR-NASD-00-73 and SR-NASD-00-79.
---------------------------------------------------------------------------

    On January 4, 2001, the Securities and Exchange Commission 
published in the Federal Register a notice of filing and order granting 
accelerated approval of SR-NASD-00-74 on a temporary basis until 
January 31, 2001.\4\ The comment period on the rule filing closed on 
Janaury 25, 2001, and the Commission received no comments. Nasdaq 
hereby requests that the Commission issue an order granting approval of 
the rule change.
---------------------------------------------------------------------------

    \4\ Securities Exchange Act Release No. 43768 (December 22, 
2000), 66 FR 824 (January 4, 2001.)
---------------------------------------------------------------------------

    The following information provides the background and rationale for 
the fee increase that was described in SR-NASD-00-74. 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. Each SDP 
currently is permitted to support up to eight presentation devices 
(``PD''), or Nasdaq Workstation IIs, 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.
---------------------------------------------------------------------------

    \5\ NWII provides a windows-based environment and several data 
management facilities not previously available in Nasdaq's former 
(pre-1994) workstation service.
---------------------------------------------------------------------------

    Due to the ongoing growth in the Nasdaq market and increases in 
daily share volume after EWN I was installed,\6\ Nasdaq became 
concerned in 1997 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--could only handle one 
and one-half billion shares per day. EWN I was expected to reach 
maximum circuit capacity during the second quarter of 1999.\7\ 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.
---------------------------------------------------------------------------

    \6\ When Nasdaq installed EWN I, Nasdaq's average daily share 
volume (for 1994) was 295 million and projections showed that the 
average daily share volume for 1997 would be 520 million. In 1997, 
however, average daily share volume was 650 million.
    \7\ Similar to any other private network, EWN I was designed to 
have a maximum circuit capacity (i.e., 2,100 circuits).
---------------------------------------------------------------------------

    According to Nasdaq, EWN II is a significant improvement over EWN 
I.

[[Page 11193]]

Among other things, the system is fully scaleable and twice as fast as 
EWN I. The network was originally built with a 128 kilobit (``kb'') 
data stream feed speed scaleable up to T1 speed (1544 kilobits) levels. 
Nasdaq began converting subscribers to EWN II in 1998 and completed the 
conversion in 1999. In conjunction with the conversion, the SEC 
approved fee increases in 1998 relating to EWN II.\8\
---------------------------------------------------------------------------

    \8\ See Securities Exchange Act Rel. Nos. 40434 (September 11, 
1998), 63 FR 49937, and 40716 (December 2, 1998), 63 FR 66619.
---------------------------------------------------------------------------

    Since that time, Nasdaq share volume has continued to increase 
dramatically. The highest average daily share volume for a month in 
2000 was 2.25 billion shares, compared to 1.44 billion in 1999, and 
less than 1 billion in 1998. The highest peak share volume day in 2000 
was 2.88 billion shares, compared to 1.78 billion in 1999, and 1.26 
billion in 1998. The highest actual cumulative share volume for a month 
occurred three times in 2000 at over 40 billion shares, compared to 
over 30 billion in 1999, and almost 20 billion in 1998. In March 2000, 
share volume increased by over 103% compared to March 1999. In April 
2000, the peak share volume increased by over 103% compared to April 
1999.
    To accommodate these increases, Nasdaq expanded the EWN II 
bandwidth from 128 kb to 192 kb in October 2000. The expended bandwidth 
also gives Nasdaq the ability to support new products as they are 
introduced and future trading applications that will be developed. As a 
result of expansion to a 192 kb bandwidth, the fees that WorldCom \9\ 
charges Nasdaq have increased by $375 per month per circuit. Nasdaq 
proposes to pass on these costs to subscribers for the billing period 
covered by December 1, 2000 through February 28, 2001.
---------------------------------------------------------------------------

    \9\ MCI and WorldCom merged in September 1998.
---------------------------------------------------------------------------

    In order to accommodate additional increases in volume expected to 
accompany decimalization, Nasdaq will expand EWN II bandwidth to 256kb, 
and consequently, the fees that WorldCom charges Nasdaq will increase 
by an additional $160 per month per circuit. As of December 2000, 
Nasdaq projects that decimalization in penny increments will 
significantly increase the number of quote updates, such that on high 
volume days, a 192 kb bandwidth would be inadequate to support quote 
traffic. Therefore, Nasdaq proposes to pass on the costs associated 
with the increase to a 256 kb bandwidth effective March 1, 2001.
    Under the proposal, the fee charged to a subscriber for an SDP 
could increase from $1,500 per month for each server to $1,875 per 
month for December 2000 through February 2001, and then to $2,035 per 
month, beginning March 1, 2001. The charge for an additional circuit 
would increase from $2,700 per month to $3,075 per month from December 
2000 through February 2001, and then increase again on March 1, 2001 to 
$3,235 per month.\10\
---------------------------------------------------------------------------

    \10\ As noted above, a T1 circuit supports up to six SDPs, and 
an SDP supports up to eight PDs. A subscriber will be subject to the 
additional circuit charge when the subscriber has not maximized 
capacity on its SDPs by placing eight PDs and/or API servers on an 
SDP; in such case, the NASD/Nasdaq will charge the additional 
circuit charge for those ``underutilized'' SDPs (the difference 
between the number of SDPs a subscriber has and the number of SDPs 
the subcriber would need to support its PDs and/or API servers, 
assuming an eight-to-one ratio). A subscriber also will be subject 
to the additional circuit charge when the subscriber has not 
maximized capacity on its T1 circuits by placing six SDPs on a T1 
circuit. This pricing structure encourages subscribers to maximize 
circuit capacity and is aimed at preventing the premature exhaustion 
of such capacity.
---------------------------------------------------------------------------

    Although NASD Rule 7010(f)(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 those subscribers who are not NASD 
members. As noted above, Nasdaq submitted separate rule filings to 
impose the proposed new fees on NASD members.
1. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A(b)(5) of the Act,\11\ 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. The proposed fees, which will only apply to those who utilize 
NWII service, simply pass on the costs associated with increasing the 
capacity of EWN II to keep pace with volume increases. Ensuring 
adequate capacity is absolutely essential to protecting the integrity 
of the Nasdaq market, maintaining the confidence of the investing 
public, and preparing for decimalization.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

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. 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 at the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
Exchange. All submissions should refer to File No. SR-NASD-01-11 and 
should be submitted by March 15, 2001.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The Commission has reviewed the Nasdaq's proposed rule change and 
finds, for the reasons set forth below, that the proposal is consistent 
with the requirements of section 15A of the Act\12\ and the rules and 
regulations thereunder applicable to a national securities exchange. 
Specifically, the Commission believes the proposal is consistent with 
section 15A(b)(5) of the Act.\13\ Section 15A(b)(5) 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 
association operates or controls. The above fee increases proposed by 
Nasdaq pass on the costs associated with increasing the capacity of EWN 
II to users of the NWII service. The Commission believes that such a 
fee increase, necessitated by recent system volume increases is a 
reasonable means by which Nasdaq

[[Page 11194]]

intends to ensure adequate capacity of its EWN II system.
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78o-3.
    \13\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

    Nasdaq has requested that the Commission approve this proposed rule 
change on an accelerated basis. Nasdaq believes that accelerated 
approval of this proposal is necessary to ensure that the costs 
associated with the expansion of its network are allocated uniformly 
among all NWII subscriber, regardless of whether they are members or 
non-members. The Commission finds good cause for approving the proposed 
rule change (SR-NASD-01-11) prior to the thirtieth day after the date 
of publication of notice thereof in the Federal Register in that non-
members have been on notice since October 2000 that Nasdaq was 
proposing to pass along the additional costs as described above and no 
comments were received by the Commission on SR-NASD-00-74.
    It is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-NASD-01-11) is hereby 
approved on an accelerated basis.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\1\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-4355 Filed 2-21-01; 8:45 am]
BILLING CODE 8010-01-M