[Federal Register Volume 66, Number 191 (Tuesday, October 2, 2001)]
[Notices]
[Pages 50226-50237]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-24576]



[[Page 50226]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44822; File No. S7-24-89]


Joint Industry Plan; Notice of Filing of Amendment No. 12 to the 
Reporting Plan for Nasdaq/National Market Securities Traded on an 
Exchange on an Unlisted or Listed Basis, Submitted by the National 
Association of Securities Dealers, Inc., the Pacific Exchange, Inc. and 
the Boston, Chicago, Philadelphia, and Cincinnati Stock Exchanges

September 20, 2001.

I. Introduction

    Pursuant to Rule 11Aa3-2 \1\ and Rule 11Aa3-1 \2\ under the 
Securities Exchange Act of 1934 (``Act''), notice is hereby given that 
on August 29, 2001, the Cincinnati Stock Exchange Inc. (``CSE'') on 
behalf of itself and the National Association of Securities Dealers, 
Inc. (``NASD''), the Boston Stock Exchange, Inc. (``BSE''), the Chicago 
Stock Exchange, Inc. (``CHX''), the Pacific Exchange, Inc. (``PCX''), 
and the Philadelphia Stock Exchange, Inc. (``PHLX'') (hereinafter 
referred to as ``Participants''),\3\ as members of the operating 
committee (``Operating Committee'' or ``Committee'') \4\ of the Nasdaq/
UTP Plan submitted to the Securities and Exchange Commission (``SEC'' 
or ``Commission'') a proposal to amend the Plan. The proposal 
represents the 12th amendment (``12th Amendment'') made to the Plan and 
reflects several changes unanimously adopted by the Committee. On 
September 18, 2001, the Committee submitted an amendment to the 
proposed 12th Amendment.\5\ The Commission is publishing this notice to 
solicit comments from interested persons on the 12th Amendment.
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    \1\ 17 CFR 240.11Aa3-2.
    \2\ 17 CFR 240.11Aa3-1.
    \3\ The CSE was elected chair of the Operating Committee for the 
Joint Self-Regulatory Organization Plan Governing the Collection, 
Consolidation, and Dissemination of Quotation and Transaction 
Information for Exchange-Listed Nasdaq/National Market System 
Securities and for Nasdaq/National Market System Securities Traded 
on Exchanges on an Unlisted Trading Privileges Basis (``Nasdaq UTP 
Plan'' or ``Plan'') by the Participants.
    \4\ Among other things, the 12th Amendment shall add the 
American Stock Exchange LLC (``Amex'') as a Participant and shall 
remove the Chicago Board Options Exchange (``CBOE'') from the Plan. 
The Committee is made up of all the Participants.
    \5\ See letter from Jeffrey T. Brown, Committee Chairman, CSE, 
to Jonathan G. Katz, Secretary, SEC, dated August 29, 2001. In the 
amendment, the Committee clarified a portion of the description of 
the 12th Amendment but did not change any of the proposed Plan text.
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II. Background

    The Plan governs the collection, consolidation, and dissemination 
of quotation and transaction information for Nasdaq/National Market 
(``Nasdaq/NM'') securities listed on an exchange or traded on an 
exchange pursuant to unlisted trading privileges (``UTP'').\6\ The Plan 
provides for the collection from Plan Participants, and the 
consolidation and dissemination to vendors, subscribers and others, of 
quotation and transaction information in ``eligible securities.'' \7\ 
The Plan contains various provisions concerning its operation, 
including: Implementation of the Plan; Manner of Collecting, 
Processing, Sequencing, Making Available and Disseminating Last Sale 
Information; Reporting Requirements (including hours of operation); 
Standards and Methods of Ensuring Promptness, Accuracy and Completeness 
of Transaction Reports; Terms and Conditions of Access; Description of 
Operation of Facility Contemplated by the Plan; Method and Frequency of 
Processor Evaluation; Written Understandings of Agreements Relating to 
Interpretation of, or Participation in, the Plan; Calculation of the 
Best Bid and Offer (``BBO''); Dispute Resolution; and Method of 
Determination and Imposition, and Amount of Fees and Charges.
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    \6\ Section 12 of the Act generally requires an exchange to 
trade only those securities that the exchange lists, except that 
Section 12(f) of the Act permits UTP under certain circumstances. 
For example, Section 12(f) of the Act, among other things, permits 
exchanges to trade certain securities that are traded over-the-
counter (``OTC/UTP''), but only pursuant to a Commission order or 
rule. For a more complete discussion of the Section 12(f) 
requirement, see November 1995 Extension Order, infra note 9.
    \7\ Currently, the Plan defines ``Eligible Securities'' as any 
Nasdaq/NM security as to which UTP have been granted to a national 
securities exchange pursuant to Section 12(f) of the Act or that is 
listed on a national securities exchange. The Participants propose 
to amend the definition of ``eligible security'' in this amendment 
to include Nasdaq SmallCap securities.
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    The Commission originally approved the Plan on a pilot basis on 
June 26, 1990.\8\ The parties did not begin trading until July 12, 
1993, accordingly, the pilot period commenced on July 12, 1993. The 
Plan has since been in operation on an extended pilot basis.\9\
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    \8\ See Securities Exchange Act Release No. 28146, 55 FR 27917 
(July 6, 1990) (``1990 Plan Approval Order'').
    \9\ See Securities Exchange Act Release Nos. 34371 (July 13, 
1994), 59 FR 37103 (July 20, 1994); 35221 (January 11, 1995), 60 FR 
3886 (January 19, 1995); 36102 (August 14, 1995), 60 FR 43626 
(August 22, 1995); 36226 (September 13, 1995), 60 FR 49029 
(September 21, 1995); 36368 (October 13, 1995), 60 FR 54091 (October 
19, 1995); 36481 (November 13, 1995), 60 FR 58119 (November 24, 
1995) (``November 1995 Extension Order''); 36589 (December 13, 
1995), 60 FR 65696 (December 20, 1995); 36650 (December 28, 1995), 
61 FR 358 (January 4, 1996); 36934 (March 6, 1996), 61 FR 10408 
(March 13, 1996); 36985 (March 18, 1996), 61 FR 12122 (March 25, 
1996); 37689 (September 16, 1996), 61 FR 50058 (September 24, 1996); 
37772 (October 1, 1996), 61 FR 52980 (October 9, 1996); 38457 (March 
31, 1997), 62 FR 16880 (April 8, 1997); 38794 (June 30, 1997) 62 FR 
36586 (July 8, 1997); 39505 (December 31, 1997) 63 FR 1515 (January 
9, 1998); 40151 (July 1, 1998) 63 FR 36979 (July 8, 1998); 40896 
(December 31, 1998), 64 FR 1834 (January 12, 1999); 41392 (May 12, 
1999), 64 FR 27839 (May 21, 1999) (``May 1999 Approval Order''); 
42268 (December 23, 1999), 65 FR 1202 (January 6, 2000); 43005 (June 
30, 2000), 65 FR 42411 (July 10, 2000); 44099 (March 23, 2001), 66 
FR 17457 (March 30, 2001); and 44348 (May 24, 2001), 66 FR 29610 
(May 31, 2001); 44552 (July 13, 2001), 66 FR 37712 (July 19, 2001); 
44694 (August 14, 2001), 66 FR 43598 (August 20, 2001).
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III. Description and Purpose of the Amendment

    The complete text of the Plan, as amended, is attached as Exhibit 
A. The following is a summary of the proposed changes to the Plan 
prepared by the Participants.

A. Rule 11Aa3-2 \10\
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    \10\ 17 CFR 240.11Aa3-2.
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    1. The Participants propose to change the Plan name to the ``Joint 
Self-Regulatory Organization Plan Governing The Collection, 
Consolidation And Dissemination Of Quotation And Transaction 
Information For Nasdaq-Listed Securities Traded On Exchanges On An 
Unlisted Trading Privilege Basis.''
    2. Section I.A. of the Plan provides that a national securities 
exchange in whose market Eligible Securities \11\ become traded, may 
become a Participant,\12\ provided that said organization executes a 
copy of the Plan and pays its share of development costs as specified 
in Section XIV of the Plan. Accordingly, the BSE, previously a Limited 
Participant in the Plan, and the Amex have, consistent with Section 
I.B. of the Plan, executed a copy of the Plan, and have previously 
satisfied their respective shares of the development costs as specified 
in Section XIV of the Plan. The 12th Amendment is proposed to reflect 
both the Amex and the BSE as full Participants of the Plan.
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    \11\ As proposed under the 12th Amendment, the Plan will define 
``Eligible Security'' as ``any Nasdaq National Market or Nasdaq 
SmallCap security, as defined in NASD Rule 4200: (i) as to which 
unlisted trading privileges have been granted to a national 
securities exchange pursuant to Section 12(f) of the Exchange Act or 
which become eligible for such trading pursuant to order of the 
Securities and Exchange Commission; or (ii) which also is listed on 
a national securities exchange.''
    \12\ The Plan defines ``Participant'' as ``a registered national 
securities exchange or national securities association that is a 
signatory to this Plan.''
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    3. The Participants propose to amend the Plan to reflect that the 
status of a

[[Page 50227]]

Limited Participant \13\ is no longer recognized in the Plan and such 
terminology has been omitted where referenced throughout the Plan.
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    \13\ Section III had defined a Limited Participant to mean a 
registered national securities exchange whose participation in the 
Plan is restricted to reporting to the Processor Quotation 
Information and Transaction Reports in NASDAQ/NMS securities listed 
on that exchange Upon Effectiveness of the Plan.
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    4. Section III.B. The Participants propose to amend the definition 
of ``Eligible Security'' to include Nasdaq SmallCap Market 
security.\14\ The Participants propose this amendment in a response to 
the PCX's petition to the Commission to expand the Plan's definition of 
Eligible Security.\15\
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    \14\ NASD Rule 4200 defines Nasdaq SmallCap Market security as 
``any authorized security in The Nasdaq SmallCap Market which (1) 
satisfies all applicable requirements of the Rule 4300 Series other 
than a Nasdaq National Market security; (2) is a right to purchase 
such security; or (3) is a warrant to subscribe to such security.''
    \15\ See letter to Mr. Robert L.D. Colby, Deputy Director, 
Division of Market Regulation, SEC and Mr. Robert E. Aber, Nasdaq 
from Thomas E. Connaghan, PCX, dated October 16, 2000. In its 
October 16, 2000 letter, the PCX requested that the Commission issue 
a directive that would expand the number of Eligible Securities 
traded under the Plan from 1,000 to ``all'' Nasdaq/NM securities. 
Among other reasons, PCX argued that such an expansion would ``help 
improve competition and increase transparency and order interaction 
in the market for those additional securities by increasing the 
number of market centers in which they may be traded.''
    In a subsequent letter to Messrs. Colby and Aber from Mr. 
Connaghan, dated November 20, 2000, the PCX amended its October 16, 
2000 petition with a request to include all Nasdaq SmallCap Market 
Securities in the definition of Eligible Securities for the same 
reasons expressed in the October 16, 2000 letter. PCX also noted 
that an inclusion of the Nasdaq SmallCap stocks could lead to better 
executions in those securities for investors.
    As of the date of this filing, the Commission has not formally 
responded to PCX's petition.
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    The Committee, in agreeing with PCX's position and also in the 
event that the Commission approves Nasdaq's application for 
registration as a national securities exchange, voted to make SmallCap 
securities eligible for trading under the Plan. The Committee believes 
that requirements under the Act notwithstanding, the decision to 
include SmallCap securities within the Plan also eliminates confusion 
to potential users as to which Nasdaq securities are eligible for 
trading pursuant to UTP.
    5. Section IV.D. Operating Committees: Meetings. The Participants 
propose to establish the voting and quorum requirements for Committee 
meetings and the manner in which formal actions may be taken on behalf 
of the Committee.
    6. Section V.E. The Committee proposes to establish a process for 
selecting a new Securities Information Processor (``SIP'') for Nasdaq 
listed securities traded on exchanges on an UTP basis.\16\
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    \16\ The Committee included this section to the Plan pursuant to 
a Commission mandate set forth in the order approving the proposed 
rule change by the NASD relating to the establishment of the Nasdaq 
Order Display Facility and Order Collector Facility and 
modifications of the Nasdaq Trading Platform (``SuperMontage 
Order''). See Securities Exchange Act Release No. 43863 (January 19, 
2001), 66 FR 8020 (January 26, 2001). In the SuperMontage Order, the 
Commission required that the Plan Participants negotiate a revised 
Plan that provides for either a fully viable alternative exclusive 
SIP for all Nasdaq securities, or a fully viable alternative non-
exclusive SIP.
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    7. The Committee proposes to re-title Section VI to ``Functions of 
the Processor.''
    8. Section VI.C.1. Best Bid and Offer. The Participants propose to 
clarify the priority rules. Specifically, the Participants propose that 
if an Exchange Participant or Nasdaq market participant changes its 
quote, it will lose ranking within the price/time priority. However, a 
change to only bid size and/or ask size will not change the time 
priority of the quote.
    The Participants propose that Section VI.C.1. also provide for 
rules governing the carrying over of Participant quotes from one 
trading day to the next, including the use of previous day quotes in 
the calculation of the consolidated BBO.
    Finally, the Participants propose, in Section VI.C.1., to establish 
procedures for the Processor to follow when the BBO results in a locked 
or crossed market and that the Processor shall cease calculation of the 
BBO at 6:30 p.m. Eastern Standard Time (``EST'').
    9. Section VI.C.2 Eligible Securities. The Participants propose to 
include in the Plan a suggestion to the Commission of a ``phase-in'' 
schedule, which was agreed to by all Plan Participants, for the 
addition of Nasdaq securities that will be eligible for trading 
pursuant to UTP by Plan Participants. The purpose of phasing-in the 
number of eligible securities over a period of time, as opposed to 
granting immediate eligibility to all Nasdaq securities, is to minimize 
the threat to available SIP capacity that may arise as Participants 
trade additional Eligible Securities pursuant to UTP. The Committee has 
agreed that the phase-in period will allow the SIP to monitor the 
effects, if any, that the increased quote traffic and trading have upon 
SIP capacity. It should be noted that the phase-in schedule does not 
apply to Nasdaq, Nasdaq market participants acting in that capacity, or 
to any Participant that does not engage in auto-quoting as described 
below.\17\
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    \17\ See proposed Section VI.C.2(a)(v) and proposed Section 
VI.C.2(b).
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    The proposal contemplates that all Eligible Securities will be 
phased-in by the end of the fifth calendar quarter following the phase-
in commencement date of September 30, 2001, or such date established by 
the Commission. However, in no case shall the number of Eligible 
Securities exceed the number of securities the Commission deems 
eligible for trading under the Plan. The Participants propose the 
phase-in schedule to minimize any threats to the SIP's capacity, and as 
such, the proposal provides that Nasdaq, acting as the SIP, can suspend 
the phase-in schedule and delay the expansion of the number of Eligible 
Securities that may be traded under the Plan in the event that system 
capacity and operational concerns arise.
    Specifically, the Committee's primary concern is that members of 
the various Participant exchanges who partake in the practice of auto-
quoting--the practice of tracking by automated means the changes to the 
best bid or best ask quotation and responding by generating another 
quote change to keep that Participant away from the best bid or ask 
quotation, with certain exceptions \18\--will create undue capacity 
strains upon Nasdaq, both as the SIP and as a market Participant.
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    \18\ The limitations on the practice of auto-quoting would not 
apply to situations in which: (a) an update is in response to an 
execution in the security by that auto-quoting Participant; (b) an 
update requires a physical entry; (c) an update reflects the 
receipt, execution, or cancellation of a customer order; or (d) the 
practice of automatically generating quote changes is at a rate less 
than 35% of all price changes to the national best bid or ask 
quotation. See proposed Section VI.C.2.b (i-iv). Also, the 
limitations would not apply to any Participant whose aggregated 
quoting activity in Eligible Securities does not exceed 1% of the 
total quotation traffic across all Nasdaq securities.
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    The Committee, therefore, proposes to establish certain limitations 
upon the practice of auto-quoting to which Participants must adhere. In 
the event that a Participant should exceed the auto-quoting 
limitations, the SIP shall have the ability to initiate proceedings, 
before the entire Committee, which will put the Participant on notice 
of the violation and afford ample time and procedure to rectify the 
situation.\19\
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    \19\ The Participants propose a notice and cure period in which 
a Participant may rectify the situation on its own accord, as well 
as providing for formal proceedings to be held before the Committee 
before any remedial action may be taken against a violating 
Participant. See proposed Section VI.C.2(e).
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    Finally, in Section VI.C.2., the Participants also propose to 
include a provision for the termination of the auto-quoting limitations 
upon the implementation of a new Processor by the Committee, as well as 
a proposed ``grandfather clause'' exempting from the auto-quoting 
limitations and the

[[Page 50228]]

phase-in schedule any Participant for the number of securities in which 
the Participant posted quotes as of May 1, 2001.\20\
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    \20\ See proposed Section VI.C.2(f).
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    10. Section VIII.C. is proposed to be amended to reflect the 
inclusion of the BSE and the Amex into the Plan, as well as reflecting 
the official removal of the CBOE from the Plan.
    11. Section X Regulatory Halts. The Participants propose to amend 
this section to provide procedures that the Processor must follow to 
notify Participants when regulatory halts occur.
    12. Section XI. Hours of Operation. The Participants propose to 
establish reporting procedures for Participants who execute 
transactions in Eligible Securities outside of the normal trading hours 
of 9:30 a.m. EST to 4:01:30 p.m. EST.
    13. Section XIX. Operational Issues. The Participants propose this 
new section to establish Participant responsibilities in the 
collection, validation, and transmission of data to the Processor. In 
addition, Section XIX would establish operational procedures that the 
Processor must follow in the collection of data from Participants; such 
as performing gross validation processing for quotes and last sale 
messages and consolidation and dissemination of trade and quote 
information from each Participant.
    14. In the 12th Amendment to the Plan, the Participants also 
propose to amend Exhibit 1 to the Plan. Currently, Exhibit 1 contains, 
in part, the provisions for distributing revenue generated by the 
dissemination of trade data to participating Vendors. The Participants 
propose to amend Exhibit 1 to delete Sections B and C, which related to 
the making of fixed payments to the CHX (Section B) and the payment to 
all other Exchange Participants of operating income based upon certain 
``minimum-maximum'' payment formulae. The ``minimum-maximum'' 
provisions established a means for distributing revenue, as well as 
reimbursing the original Plan Participants for start-up costs incurred 
in the original formulation of the SIP and the Plan (Section C).
    The amendments to Exhibit 1 include new formulae for determining 
Participants' total trades, total share volume, operating expenses, and 
operating income for the purposes of distribution of gross operating 
revenue to the Participants, as well as a provision for reimbursing the 
Processor in the event that operating expenses exceed operating 
revenues.
    In addition, the amendments to Exhibit 1 include eligibility 
criteria and schedules for determining Participant eligibility for 
receiving distributions of gross operating revenue. Finally, the 
amendments to Exhibit 1 establish procedures and cost allocations for 
retaining an independent auditor for the purpose of auditing the 
Processor's costs or other calculations used in the determination of 
operating expenses, operating revenues, and distribution shares, among 
other calculations.
    15. Within the body of the 12th Amendment, the Participants propose 
numerous ``house-keeping'' corrections, such as changing the term 
``NASDAQ'' to ``Nasdaq'' and ensuring that references to amended 
sections are consistent with the amendments discussed above.

B. Governing or Constituent Documents

    Not applicable.

C. Implementation of Amendment

    The changes proposed in the Amendment are intended to be 
implemented immediately upon approval by the Commission. All 
Participants have executed a copy of the 12th Amendment and there are 
no contingencies that shall delay the effectiveness of the Amendment 
other than the proposed phase-in schedule of Eligible Securities.\21\
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    \21\ See Section D of this filing for an explanation of the 
proposed ``phase-in'' schedule.
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D. Development and Implementation Phase

    As noted supra, Section VI.C.2, Eligible Securities, would 
establish a schedule in which all Nasdaq securities will become 
eligible for trading pursuant to UTP. The proposed phase-in will 
commence by September 30, 2001, or on such date as determined by the 
Commission, with the suggested inclusion of 1,000 Nasdaq securities, in 
addition to the securities currently eligible for trading pursuant to 
UTP. The proposal then would permit Participants to trade an additional 
500 securities at the end of each of the following four calendar 
quarters. At the end of the fifth calendar quarter following September 
30, 2001, all remaining Nasdaq securities shall become eligible for 
trading under the Plan.

E. Analysis of Impact on Competition

    The signatories to the Plan believe that the amendment will impose 
no burden on competition. On the contrary, the Participants believe 
that the proposed Amendment stems much from mandates and 
recommendations made by the Commission and serves to (1) Remove 
provisions that previously served to differentiate Participants from 
each other; (2) provide for the inclusion of all Nasdaq securities in 
the Plan; (3) provide for a unified system of revenue sharing for all 
Participants; and (4) lessen the burden to entry for new Participants 
joining the Plan.
    The proposed Amendment removes all previous distinctions that the 
Plan made between ``Limited Participants'' and ``Participants.'' \22\ 
Under the proposed Amendment, once a party becomes a Participant, it 
immediately shares all rights and obligations equally with all other 
Participants, including the sharing of eligible Plan revenues. The only 
requirement is that the new Participant contribute an equal share of 
the original development costs previously paid by the current 
Participants.\23\
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    \22\ ``Limited Participant'' referred to a registered national 
securities exchange whose participation in the Plan was restricted 
to reporting to the Processor quotation information and transaction 
reports in Nasdaq/NM securities listed on that exchange upon 
effectiveness of the Plan. See Previous Section III(E) of the Plan.
    \23\ See proposed Section XIV.A. of the Plan.
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    The proposed Amendment eliminates the ``minimum'' and ``maximum'' 
limitations on revenue distributions to the Participants and implements 
a program that the Participants believe is consistent with the fair 
competition requirements of Section 11A of the Act.\24\ Section B to 
Exhibit 1 of the Plan previously limited the amount of eligible revenue 
that some Participants were entitled to receive, as well as established 
a minimum amount that Participants would receive. Although the 
``minimum-maximum'' provisions were originally included to provide a 
mechanism to compensate certain original Plan Participants for 
development costs incurred in the implementation of the Plan, the 
Committee believes that a more equitable method than the ``minimum-
maximum'' formula should be employed. Therefore, the Amendment now 
provides for the distribution of Plan revenue pro rata to each 
Participant based on each Participant's respective contribution to 
total Plan revenues.
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    \24\ 15 U.S.C. 78k-1.
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    The proposed Amendment also extends the definition of Eligible 
Security to include Nasdaq SmallCap \25\ securities. In the event the 
Commission approves Nasdaq's registration as a national securities 
exchange, pursuant to the Act, all Nasdaq SmallCap

[[Page 50229]]

securities will be eligible for trading pursuant to UTP. This inclusion 
anticipates compliance with the securities laws and, concurrently, 
gives access to the trading of Nasdaq SmallCap securities to all 
Participants equally.
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    \25\ As defined by NASD Rule 4200.
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F. Written Understandings or Agreements Relating to Interpretation of, 
or Participation in, the Plan

    Not applicable.

G. Approval by Sponsors in Accordance with the Plan

    Under Section XVII, Modifications to Plan, any amendment to the 
Plan requires the unanimous execution of the Plan by each Plan 
Participant. Each Voting Participant has executed a copy of this 
Amendment and copies of such documents will be maintained by the 
Secretary of the Committee.

H. Description of Operation of Facility Contemplated by the Proposed 
Amendment

    Not applicable.

I. Terms and Conditions of Access

    Not applicable.

J. Method of Determination and Imposition, and Amount of, Fees and 
Charges

    The proposed Amendment does not effect a change to the 
determination, imposition, or amount of fees and charges.

K. Method and Frequency of Processor Evaluation

    Not applicable.

L. Dispute Resolution

    Not applicable.

IV. Rule 11Aa3-1 \26\
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    \26\ 17 CFR 240.11Aa3-1.
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A. Nasdaq Securities for Which Transactions Reports Shall Be Required 
by the Plan

    The Plan will govern trading in both Nasdaq/NM securities and, is 
proposed to govern transaction reporting of all Nasdaq SmallCap 
securities.

B. Reporting Requirements With Respect to Transactions in Nasdaq 
Securities for any Broker or Dealer Subject to the Plan

    Not applicable.

C. Manner of Collecting, Processing, Sequencing, Making Available and 
Disseminating Last Sale Information

    Not applicable.

D. Manner of Consolidation

    Not applicable.

E. Standards and Methods Ensuring Promptness, Accuracy and Completeness 
of Transaction Reports

    Not applicable.

F. Rules and Procedures Addressed to Fraudulent or Manipulative 
Dissemination

    Not applicable.

G. Terms of Access to Transaction Reports

    Not applicable.

H. Identification of Marketplace of Execution

    Not applicable.

V. Date of Effectiveness of the Proposed Amendment

    The Commission has determined that the addition of Amex and BSE as 
full Participants under the Plan is technical in nature, and thus has 
become effective upon filing with the Commission.\27\ In addition, the 
Commission has decided, pursuant to Rule 11Aa3-2(c)(4) under the Act to 
put Exhibit 1 to the 12th Amendment, which, among other things, governs 
the calculation and distribution of revenues generated under the Plan, 
into effect summarily upon publication of this notice of amendment in 
the Federal Register on a temporary basis not to exceed 120 days. The 
Commission believes that it is appropriate to put Exhibit 1 to the 12th 
Amendment into effect summarily because it contains more equitable 
formulas for the calculation and allocation of revenues than are 
currently used, which the Commission believes should remove impediments 
to and, perfect the mechanism of, a national market system.
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    \27\ 17 CFR 240.11Aa3-2(c)(3)(iii).
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    The Commission, as described further below, requests comment on the 
remaining provisions of 12th Amendment.

VI. Solicitation of Comments

    In addition to general comments on 12th Amendment, the Commission 
specifically requests comment on whether SmallCap securities should be 
considered Eligible Securities under the Plan. Further, the Commission 
continues to request comment on whether the Commission should expand 
the number of securities considered eligible under the Plan, pursuant 
to Section 12 of the Act,\28\ and if so, by how many.\29\ In addition, 
the Commission requests comment on whether the phase-in proposal is 
appropriate.
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    \28\ 15 U.S.C. 78l.
    \29\ See Securities Exchange Act Release No. 43545 (November 9, 
2000), 65 FR 69581 (November 17, 2000).
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    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal 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 amendment that are filed with the Commission, 
and all written communications relating to the proposal 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. The 12th Amendment is being published as Exhibit A to 
this proposal. Copies of the amendment will also be available for 
inspection and copying at the office of the Secretary of the Committee, 
currently located at the CSE, One Financial Place, 440 South LaSalle 
St., Suite 2600, Chicago, IL 60126. All submissions should refer to 
File No S7-24-89 and be submitted by October 23, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\30\
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    \30\ 17 CFR 200.30-3(a)(27).
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Margaret H. McFarland,
Deputy Secretary.

Exhibit A

Amendment No. 12: Joint Self-Regulatory Organization Plan Governing The 
Collection, Consolidation and Dissemination of Quotation and 
Transaction Information for Nasdaq-Listed Securities Traded on 
Exchanges on an Unlisted Trading Privilege Basis

    The undersigned registered national securities association and 
national securities exchanges (collectively referred to as the 
``Participants''), have jointly developed and hereby enter into this 
Nasdaq Unlisted Trading Privileges Plan (``Nasdaq UTP Plan'' or 
``Plan'').

I. Participants.

    The Participants include the following:

A. Participants

1. American Stock Exchange, Inc., 86 Trinity Place, New York, New 
York 10006
2. Boston Stock Exchange, 100 Franklin Street, Boston, Massachusetts 
02110
3. Chicago Stock Exchange, 440 South LaSalle Street, Chicago, 
Illinois 60605
4. Cincinnati Stock Exchange, 440 South LaSalle Street, 26th Floor, 
Chicago, Illinois 60605

[[Page 50230]]

5. National Association of Securities Dealers, Inc., 1735 K Street, 
NW., Washington, DC 20006
6. Pacific Exchange, Inc., 301 Pine Street, San Francisco, CA 94104
7. Philadelphia Stock Exchange, 1900 Market Street, Philadelphia, 
Pennsylvania 19103

B. Additional Participants

    Any other national securities association or national securities 
exchange, in whose market Eligible Securities become traded, may 
become a Participant, provided that said organization executes a 
copy of this Plan and pays its share of development costs as 
specified in Section XIV.

II. Purpose of Plan

    The purpose of this Plan is to provide for the collection, 
consolidation and dissemination of Quotation Information and 
Transaction Reports in Eligible Securities from the Participants in 
a manner consistent with the Exchange Act.
    It is expressly understood that each Participant shall be 
responsible for the collection of Quotation Information and 
Transaction Reports within its market and that nothing in this Plan 
shall be deemed to govern or apply to the manner in which each 
Participant does so.

III. Definitions

    A. ``Current'' means, with respect to Transaction Reports or 
Quotation Information, such Transaction Reports or Quotation 
Information during the fifteen (15) minute period immediately 
following the initial transmission thereof by the Processor.
    B. ``Eligible Security'' means any Nasdaq National Market or 
Nasdaq SmallCap security, as defined in NASD Rule 4200: (i) As to 
which unlisted trading privileges have been granted to a national 
securities exchange pursuant to Section 12(f) of the Exchange Act or 
which become eligible for such trading pursuant to order of the 
Securities and Exchange Commission; or (ii) which also is listed on 
a national securities exchange.
    C. ``Commission'' and ``SEC'' shall mean the U.S. Securities and 
Exchange Commission.
    D. ``Exchange Act'' means the Securities Exchange Act of 1934.
    E. ``Market'' shall mean (i) when used with respect to Quotation 
Information, the NASD in the case of a Nasdaq market maker or a 
Nasdaq-registered electronic communications network/alternative 
trading system (hereafter collectively referred to as ``Nasdaq 
market participants'') acting in such capacity, or the Participant 
on whose floor or through whose facilities the quotation was 
disseminated; and (ii) when used with respect to Transaction 
Reports, the Participant through whose facilities the transaction 
took place or was reported, or the Participant to whose facilities 
the order was sent for execution.
    F. ``NASD'' means the National Association of Securities Dealers 
Inc.
    G. ``NASD Transaction Reporting System'' means the System 
provided for in the NASD's Transaction Reporting Plan filed with and 
approved by the Commission pursuant to SEC Rule11Aa3-1, governing 
the reporting of transactions in Nasdaq securities.
    H. ``Nasdaq Level 1 Service'' means the service that provides 
Subscribers with the best bid and asked quotations and size in 
Eligible Securities from all Participants.
    I. ``Nasdaq Level 2 Service'' means the Nasdaq service that 
provides Subscribers with query capability with respect to 
quotations and sizes in securities included in the Nasdaq System, 
best bid and asked quotations, and Transaction Reports.
    J. ``Nasdaq Level 3 Service'' means the Nasdaq service that 
provides Nasdaq market participants with input and query capability 
with respect to quotations and sizes in securities included in the 
Nasdaq System, best bid and asked quotations, and Transaction 
Reports.
    K. ``Nasdaq System'' means the automated quotation system 
operated by Nasdaq.
    L. ``Nasdaq Last Sale Information Service'' means the service of 
Nasdaq that provides Vendors and Subscribers with Transaction 
Reports.
    M. ``Nasdaq Security'' or ``Nasdaq-listed Security'' means any 
security listed on the Nasdaq National Market or Nasdaq SmallCap 
Market.
    N. ``News Service'' means a person that receives Transaction 
Reports or Quotation Information provided by the Systems or provided 
by a Vendor, on a Current basis, in connection with such person's 
business of furnishing such information to newspapers, radio and 
television stations and other news media, for publication at least 
fifteen (15) minutes following the time when the information first 
has been published by the Processor.
    O. ``NQDS'' means the Nasdaq Quotation Dissemination Service, a 
data stream of information that provides Vendors and Subscribers 
with quotations and sizes from all Participants and Nasdaq market 
participants.
    P. ``Participant'' means a registered national securities 
exchange or national securities association that is a signatory to 
this Plan.
    Q. ``Plan'' means this Nasdaq UTP Plan, as from time to time 
amended according to its provisions, governing the collection, 
consolidation and dissemination of Quotation Information and 
Transaction Reports in Eligible Securities.
    R. ``Processor'' means the entity selected by the Participants 
to perform the processing functions set forth in the Plan.
    S. ``Quotation Information'' means all bids, offers, quotation 
sizes, the Market and, in the case of Nasdaq, the Nasdaq market 
participant that entered the quotation, withdrawals and other 
information pertaining to quotations in Eligible Securities required 
to be collected and made available to the Processor pursuant to this 
Plan.
    T. ``Regulatory Halt'' means a trade suspension or halt called 
for the purpose of dissemination of material news, as described at 
Section X hereof.
    U. ``Subscriber'' means a person that receives Current Quotation 
Information or Transaction Reports provided by the Processor or 
provided by a Vendor, for its own use or for distribution on a non-
Current basis, other than in connection with its activities as a 
Vendor.
    V. ``Transaction Reports'' means reports required to be 
collected and made available pursuant to this Plan containing the 
stock symbol, price, and size of the transaction executed, the 
Market in which the transaction was executed, and related 
information, including a buy/sell/cross indicator and trade 
modifiers, reflecting completed transactions in Eligible Securities.
    W. ``Upon Effectiveness of the Plan'' means July 12, 1993, the 
date on which the Participants commenced publication of Quotation 
Information and Transaction Reports on Eligible Securities as 
contemplated by this Plan.
    X. ``Vendor'' means a person that receives Current Quotation 
Information or Transaction Reports provided by the Processor or 
provided by a Vendor, in connection with such person's business of 
distributing, publishing, or otherwise furnishing such information 
on a Current basis to Subscribers, News Services or other Vendors.

IV. Administration of Plan

A. Operating Committee: Composition

    The Plan shall be administered by the Participants through an 
operating committee (``Operating Committee''), which shall be 
composed of one representative designated by each Participant. Each 
Participant may designate an alternate representative or 
representatives who shall be authorized to act on behalf of the 
Participant in the absence of the designated representative. Within 
the areas of its responsibilities and authority, decisions made or 
actions taken by the Operating Committee, directly or by duly 
delegated individuals, committees as may be established from time to 
time, or others, shall be binding upon each Participant, without 
prejudice to the rights of any Participant to seek redress from the 
SEC pursuant to Rule 11Aa3-2 under the Exchange Act or in any other 
appropriate forum.

B. Operating Committee: Authority

    The Operating Committee shall be responsible for:
    1. Overseeing the consolidation of Quotation Information and 
Transaction Reports in Eligible Securities from the Participants for 
dissemination to Vendors, Subscribers, News Services and others in 
accordance with the provisions of the Plan;
    2. Periodically evaluating the Processor;
    3. Setting the level of fees to be paid by Vendors, Subscribers, 
News Services or others for services relating to Quotation 
Information or Transaction Reports in Eligible Securities, and 
taking action in respect thereto in accordance with the provisions 
of the Plan;
    4. Determining matters involving the interpretation of the 
provisions of the Plan;
    5. Determining matters relating to the Plan's provisions for 
cost allocation and revenue-sharing; and
    6. Carrying out such other specific responsibilities as provided 
under the Plan.

[[Page 50231]]

C. Operating Committee: Voting

    Each Participant shall have one vote on all matters considered 
by the Operating Committee.
    1. With respect to:
    a. amendments to the Plan;
    b. amendments to contracts between the Processor and Vendors, 
Subscribers, News Services and others receiving Quotation 
Information and Transaction Reports in Eligible Securities;
    c. replacement of the Processor, except for termination for 
cause, which shall be governed by Section V(B) hereof;
    d. reductions in existing fees relating to Quotation Information 
and Transaction Reports in Eligible Securities; and
    e. except as provided under Section IV(C)(3) hereof, requests 
for system changes submitted after the expiration of 12 months from 
the beginning of the Plan's operation; and
    f. all other matters not specifically addressed by the Plan, the 
affirmative and unanimous vote of all Participants entitled to vote 
shall be necessary to constitute the action of the Operating 
Committee.
    2. With respect to the establishment of new fees or increases in 
existing fees relating to Quotation Information and Transaction 
Reports in Eligible Securities, the affirmative vote of two-thirds 
of the Participants entitled to vote shall be necessary to 
constitute the action of the Operating Committee.
    3. With respect to requests for system changes reasonably 
related to the function of the Processor as defined under the Plan 
and submitted after the expiration of 12 months from the beginning 
of the Plan's operation, the affirmative vote of a majority of the 
Participants entitled to vote shall be necessary to constitute the 
action of the Operating Committee. All other requests for system 
changes shall be governed by Section IV(C)(1)(e) hereof. It is 
expressly agreed and understood that no system changes shall be made 
during the first 12 months after the beginning of the Plan's 
operation.
    4. With respect to:
    a. interpretive matters and decisions of the Operating Committee 
arising under, or specifically required to be taken by, the 
provisions of the Plan as written;
    b. interpretive matters arising under Exchange Act Rules 11Aa3-1 
and 11Acl-1; and
    c. denials of access (other than for breach of contract, which 
shall be handled by the Processor),
    The affirmative vote of a majority of the Participants entitled 
to vote shall be necessary to constitute the action of the Operating 
Committee.
    5. It is expressly agreed and understood that the Operating 
Committee shall have no authority in any respect over the collection 
and dissemination of quotation or transaction information in 
Eligible Securities from and to Nasdaq market participants within, 
or to, the Nasdaq marketplace, e.g., the fees to be charged 
therefore or the format in which displays shall be made. Nor shall 
the Operating Committee have any authority over the collection and 
dissemination of quotation or transaction information in Eligible 
Securities in any other Participant's marketplace.

D. Operating Committee: Meetings

    Regular meetings of the Operating Committee may be attended by 
each Participant's designated representative and/or its alternate 
representative(s), and may be attended by one or more other 
representatives of the parties. Meetings shall be held at such times 
and locations as shall from time to time be determined by the 
Operating Committee.
    Quorum: Any action requiring a vote only can be taken at a 
meeting in which a quorum of all Participants is present. For 
actions requiring a simple majority vote of all Participants, a 
quorum of greater than 50% of all Participants entitled to vote must 
be present at the meeting before such a vote may be taken. For 
actions requiring a 2/3rd majority vote of all Participants, a 
quorum of at least 2/3rd of all Participants entitled to vote must 
be present at the meeting before such a vote may be taken. For 
actions requiring a unanimous vote of all Participants, a quorum of 
all Participants entitled to vote must be present at the meeting 
before such a vote may be taken.
    A Participant is considered present at a meeting only if a 
Participant's designated representative or alternate 
representative(s) is either in physical attendance at the meeting or 
is participating by conference telephone, or other acceptable 
electronic means.
    Any action sought to be resolved at a meeting must be sent to 
each Participant entitled to vote on such matter at least one week 
prior to the meeting via electronic mail, regular U.S. or private 
mail, or facsimile transmission.
    Any action may be taken without a meeting if a consent in 
writing, setting forth the action so taken, is sent to and signed by 
all Participant representatives entitled to vote with respect to the 
subject matter thereof. All the approvals evidencing the consent 
shall be delivered to the Chairman of the Operating Committee to be 
filed in the Operating Committee records. The action taken shall be 
effective when the minimum number of Participants entitled to vote 
have approved the action, unless the consent specifies a different 
effective date.
    The Chairman of the Operating Committee shall be elected 
annually by and from among the Participants by a majority vote of 
all Participants entitled to vote. The Chairman shall designate a 
person to act as Secretary to record the minutes of each meeting. 
The location of meetings shall be rotated among the locations of the 
principal offices of the Participants, or such other locations as 
may from time to time be determined by the Operating Committee. 
Meetings may be held by conference telephone and action may be taken 
without a meeting if the representatives of all Participants 
entitled to vote consent thereto in writing or other means the 
Operating Committee deems acceptable.

V. Selection and Evaluation of the Processor

A. Generally

    Subject to the provisions of paragraph (V)(B) hereof, Nasdaq 
shall be the Processor under the Plan and shall function as such for 
an initial term of five (5) years, such term Commencing Upon the 
Effectiveness of the Plan. The Processor's performance of its 
functions under the Plan shall be subject to review by the Operating 
Committee during the fifth year of the initial five (5) year term 
and periodically (at least every two years, or from time to time 
upon the request of any two Participants but not more frequently 
than once each year) thereafter. Based on this review, the Operating 
Committee may choose to make a recommendation to the Participants 
with respect to the continuing operation of the Processor. The 
Operating Committee shall notify the SEC of any recommendations the 
Operating Committee shall make pursuant to the Operating Committee's 
review of the Processor and shall supply the Commission with a copy 
of any reports that may be prepared in connection therewith.

B. Termination of the Processor for Cause

    If the Operating Committee determines that the Processor has 
failed to perform its functions in a reasonably acceptable manner in 
accordance with the provisions of the Plan or that its reimbursable 
expenses have become excessive and are not justified on a cost 
basis, the Processor may be terminated at such time as may be 
determined by a majority vote of the Operating Committee.

C. Factors To Be Considered in Termination for Cause

    Among the factors to be considered in evaluating whether the 
Processor has performed its functions in a reasonably acceptable 
manner in accordance with the provisions of the Plan shall be the 
reasonableness of its response to requests from Participants for 
technological changes or enhancements pursuant to Section IV(C)(3) 
hereof. The reasonableness of the Processor's response to such 
requests shall be evaluated by the Operating Committee in terms of 
the cost to the Processor of purchasing the same service from a 
third party and integrating such service into the Processor's 
existing systems and operations as well as the extent to which the 
requested change would adversely impact the then current technical 
(as opposed to business or competitive) operations of the Processor.

D. Processor's Right to Appeal Termination for Cause

    The Processor shall have the right to appeal to the SEC a 
determination of the Operating Committee terminating the Processor 
for cause and no action shall become final until the SEC has ruled 
on the matter and all legal appeals of right therefrom have been 
exhausted.

E. Process for Selecting New Processor

    At any time following effectiveness of the Plan, but no later 
than upon the termination of the Processor, whether for cause 
pursuant to Section IV(C)(1)(c) or V(B) of the Plan or upon the 
Processor's resignation, the Operating Committee shall establish 
procedures for selecting a new Processor (the ``Selection 
Procedures''). The Operating Committee, as part of the process of 
establishing Selection Procedures, may solicit and consider the 
timely comment of any entity affected by the operation of this Plan. 
The Selection Procedures shall be established by a two-thirds 
majority vote of

[[Page 50232]]

the Plan Participants, and shall set forth, at a minimum:
    1. The entity that will:
    (a) Draft the Operating Committee's request for proposal for 
bids on a new processor;
    (b) Assist the Operating Committee in evaluating bids for the 
new processor; and
    (c) Otherwise provide assistance and guidance to the Operating 
Committee in the selection process.
    2. The minimum technical and operational requirements to be 
fulfilled by the Processor;
    3. The criteria to be considered in selecting the Processor; and
    4. The entities (other than Plan Participants) that are eligible 
to comment on the selection of the Processor.
    Nothing in this provision shall be interpreted as limiting 
Participants' rights under Section IV or Section V of the Plan or 
other Commission order.

VI. Functions of the Processor

A. Generally

    The Processor shall collect from the Participants, and 
consolidate and disseminate to Vendors, Subscribers and News 
Services, Quotation Information and Transaction Reports in Eligible 
Securities in a manner designed to assure the prompt, accurate and 
reliable collection, processing and dissemination of information 
with respect to all Eligible Securities in a fair and non-
discriminatory manner. The Processor shall commence operations upon 
the Processor's notification to the Participants that it is ready 
and able to commence such operations.

B. Collection and Consolidation of Information

    The Processor shall be capable of receiving Quotation 
Information and Transaction Reports in Eligible Securities from 
Participants by computer-to-computer interface, and from Nasdaq 
market participants by Nasdaq-approved devices, and shall 
consolidate and disseminate such information to Vendors, Subscribers 
and News Services.

C. Dissemination of Information

    The Processor shall disseminate consolidated Quotation 
Information and Transaction Reports in Eligible Securities to 
authorized Vendors, Subscribers and News Services in a fair and non-
discriminatory manner. The Processor shall specifically be permitted 
to enter into agreements with Vendors, Subscribers and News Services 
for the dissemination of quotation or transaction information on 
Eligible Securities to foreign (non-U.S.) marketplaces or in foreign 
countries.
    The Processor shall, in such instance, disseminate consolidated 
quotation or transaction information on Eligible Securities from all 
Participants.
    Nothing herein shall be construed so as to prohibit or restrict 
in any way the right of any Participant to distribute quotation, 
transaction or other information with respect to Eligible Securities 
quoted on or traded in its marketplace to a marketplace outside the 
United States solely for the purpose of supporting an intermarket 
linkage, or to distribute information within its own marketplace 
concerning Eligible Securities in accordance with its own format. If 
a Participant requests, the Processor shall make information about 
Eligible Securities in the Participant's marketplace available to a 
foreign marketplace on behalf of the requesting Participant, in 
which event the cost shall be borne by that Participant.
    Nothing herein shall be construed to affect in any way the 
existing agreements between the NASD and the London Stock Exchange 
(now the International Stock Exchange of the United Kingdom and the 
Republic of Ireland) entered into on April 22, 1986, and between the 
Singapore Stock Exchange and the NASD executed on June 26, 1987, or 
the right to amend, modify, or change these agreements in such a 
manner as is mutually agreed to by them, or to enter into other 
agreements mutually agreeable to them; provided that such agreements 
shall not permit the International or Singapore Exchanges to enter 
into any agreement with a Vendor not affiliated with any such 
Exchange to redistribute information with respect to Eligible 
Securities to persons not otherwise receiving such information 
pursuant to the agreement with such Exchange, except on terms and 
conditions approved by the Processor.
    1. Best Bid and Offer
    The Processor shall disseminate on Level 1 a consolidated best 
bid and asked quotation with size based upon Quotation Information 
for Eligible Securities received from Participants and Nasdaq market 
participants. The Market responsible for each side of the best bid 
and asked quotation making up the consolidated quotation shall be 
identified by an appropriate symbol. If the quotations of more than 
one Participant are the same, the earliest measured by the time 
reported shall be deemed to be the best. The consolidated size shall 
be the size of the Participant that is at the best. If a Nasdaq 
market participant is at the best, the consolidated size for NASD 
shall be the largest size among those Nasdaq participants whose 
quotations are earlier in time than the first Participant at that 
price. If an Exchange or individual Nasdaq market participant 
changes its quote (i.e. bid quote and/or ask quote), it will lose 
its ranking within the price/time priority. A change to only bid 
size and/or ask size will not change the time priority of an 
Exchange's or Nasdaq market participant's quote. The Processor will 
carry over Participant quotes from the previous day to alleviate the 
need for each Participant to re-enter a quote when there is no 
change from its previous day's quote. The Processor shall also 
retain the quotations of all Participants (Exchange Participants and 
Nasdaq market participants) from the previous day. These previous 
day quotes shall be used in the calculation of the consolidated best 
bid/best offer until an updated quote is received by the Processor. 
If the best bid/best offer results in a locked or crossed quotation, 
the Processor shall forward that locked or crossed quote on the 
appropriate output lines (i.e. a crossed quote of bid 12, ask 11\7/
8\ shall be disseminated). The Processor shall normally cease the 
calculation of the best bid/best offer after 6:30 p.m., Eastern 
Time.
    2. Eligible Securities
    a. Number of Eligible Securities--If the Commission by order 
expands the number of Eligible Securities beyond 1,000, the number 
of Eligible Securities that Participants may trade shall be phased 
in (added) according to the schedule set out below:
    (i) at the end of the first calendar quarter following the 
Commission's order expanding the number of Eligible Securities 
beyond 1,000 but in no case before September 30, 2001, Participants 
may commence trading 500 additional securities;
    (ii) at the end of each of the four calendar quarters following 
the date established under provision VI.C(2)(a)(i) of the Plan, 
Participants may commence trading an additional 500 securities, and 
at the end of the fifth calendar quarter following the date 
established under provision VI.C(2)(a)(i) of the Plan, Participants 
shall be permitted to trade all Eligible Securities.
    (iii) in no case shall the number of Eligible Securities exceed 
the number of securities that the Commission deems are eligible for 
trading pursuant to this Plan.
    (iv) after each of the aforementioned phase in periods (i.e., 
calendar quarters), the Processor shall evaluate its performance to 
determine whether it is prudent, in light of system capacity and any 
other operational factors, to continue to add additional securities 
pursuant to the phase in schedule. If the Processor determines, in 
light of system capacity and any other operational factors, that it 
is not prudent to continue to expand the number of Eligible 
Securities, the Processor upon notice to the Participants 
immediately may suspend the phase-in schedule and delay the 
expansion of the number of Eligible Securities that may be traded 
under the Plan. The Processor shall commence adding securities 
pursuant to a revised phase-in schedule, when the Processor 
determines it is prudent to do so, in light of system capacity and 
any other operational factors.
    (v) This provision shall not apply to The Nasdaq Stock Market, 
Inc., or Nasdaq market participants acting in such capacity, nor 
shall it apply to any Participant that does not engage in auto-
quoting, as described in paragraph VI.C.(2)(b) below.
    b. Limitation on Auto-Quoting--Except as provided in sub-
paragraph VI.C(2)(c) of this Plan, Participants shall be prohibited 
from the practice of ``auto-quoting.'' ``Auto-quoting'' means the 
practice of tracking, by automated means, the changes to the best 
bid or best ask quotation and responding by generating another quote 
change to keep that Participant away from the best bid or ask 
quotation, but for purposes of this Plan, shall not include:
    (i) An update that is in response to an execution in the 
security by that Participant;
    (ii) An update that requires a physical entry;
    (iii) An update that is to reflect the receipt, execution, or 
cancellation of a customer limit order; or
    (iv) The practice of automatically generating quote changes at a 
rate of less than 35% of all price changes to the national best bid 
or ask quotation. The Processor shall calculate this rate using 
quoting activity during the preceding calendar month.

[[Page 50233]]

    c. Applicability of Auto-Quoting Limitation--The Limitation on 
Auto-Quoting contained in subparagraph VI.C(2)(b) of this Plan shall 
only apply if the Processor deems it necessary to maintain adequate 
capacity for the normal and efficient operation of the Processor and 
the Processor provides at least 30 calendar days notice to the 
Participants and the basis thereof of such determination. The 
Processor shall lift the limitation on auto-quoting when the 
Processor determines it is prudent to do so, in light of system 
capacity and any other operational factors. Additionally, the 
Limitation on Auto-Quoting set forth in subparagraph VI.C(2)(b) of 
this Plan will not apply to a Participant whose aggregated quoting 
activity in eligible Nasdaq securities does not exceed 1% of the 
total quotation traffic across all Nasdaq securities by all Nasdaq 
market participants and Exchange Participants. The Processor shall 
calculate this rate using quoting activity during the preceding 
calendar month.
    d. Obligations of Participants Regarding Capacity--Each 
Participant shall exercise due diligence to promote quotation 
generation practices that mitigate quotation traffic so as to ensure 
prudential excess capacity within the Processor. The Operating 
Committee shall periodically review the performance of Participants 
and take such action as necessary to maintain prudential excess 
capacity.
    e. Procedures for Ensuring Acceptable Quote Generation 
Practices--The following procedures shall apply if, in accordance 
with Section VI.C.2(c) of the Plan, the Processor determines that a 
capacity concern exists.
    (i) On a monthly basis, each Participant shall provide the 
Processor with a good faith estimate of the Participant's previous 
month's daily average number of quote updates to permit the 
Processor to determine compliance with the auto-quoting limitation 
referenced in Section VI.C.2.(b) of the Plan.
    (ii) If the Processor determines, from the Participant's data or 
otherwise, that the Participant has not complied with the 
limitations of Section VI.C.2.(b), the Processor shall give the 
Participant written notice of such condition. The Participant shall 
have 30 calendar days after receipt of the written notice to remedy 
the condition.
    (iii) If, after the aforementioned 30-day period has expired, 
the condition has not been remedied to the reasonable satisfaction 
of the Processor, then the Processor shall submit to the Operating 
Committee a written request for relief together with supporting 
documentation evidencing the alleged condition (i.e., failure to 
comply with the limitations of Section VI.C.2.(b)) and quantifying 
the impact of the violation on overall capacity of the Processor. 
The Processor's request for relief shall be limited to such remedial 
action (including but not limited to the termination of service to 
the subject Participant) as is necessary to modify the subject 
Participant's quote generation practices on a prospective basis, for 
such period as is necessary to resolve the condition that gave rise 
to the Processor's request for relief. The Participant shall have 15 
calendar days to respond in writing to the Processor's request for 
relief.
    (iv) The Operating Committee, following written notice to the 
Participant and the Processor, shall conduct a hearing within five 
(5) business days after expiration of the 15-day response period to 
determine whether to grant or deny the Processor's claim for 
remedial action. At the hearing, the Operating Committee may 
consider, among other information, the request of the Processor, the 
response (if any) of the Participant and any other evidence (written 
or oral) that is presented at the hearing. At the conclusion of the 
hearing, the Operating Committee shall grant or deny the Processor's 
request. An affirmative vote of two-thirds of the Operating 
Committee members entitled to vote (excluding the subject 
Participant) shall be required for any decision of the Operating 
Committee. The decision of the Operating Committee shall be final 
and therefore reviewable by the Commission; provided, however, that 
any decision of the Operating Committee shall not become effective 
until five business days after the date of the decision.
    f. Limitation on Applicability of Rule--The phase-in schedule 
contained in of VI.C(2)(a) and the Limitation on Auto-Quoting 
contained in VI.C(2)(c) shall not apply :
    (i) to any Participant upon the designation and the operation of 
a new Processor; and
    (ii) to a Participant for the number of securities that the 
Participant quoted as of May 1, 2001; provided, however the 
exemption contained herein shall expire a year from the end-date of 
the phase-in schedule contained in VI.C(2)(a).
    3. Full Quotation Data Stream
    The Processor shall disseminate on NQDS a data stream of all 
Quotation Information regarding Eligible Securities received from 
Participants. Each quotation shall be designated with a symbol 
identifying the Participant or Nasdaq market participant from which 
the quotation emanates.
    4. Transaction Reports
    The Processor shall disseminate on the Nasdaq Last Sale 
Information Service a data stream of all Transaction Reports in 
Eligible Securities received from Participants. Each transaction 
report shall be designated with a symbol identifying the Participant 
in whose Market the transaction took place.

D. Immediate Hard-Copy Confirmations

    At the expense of any requesting Participant(s), the Processor 
will provide Participants with the ability to obtain immediate hard-
copy confirmations of transactions in Eligible Securities.

E. Closing Reports

    At the conclusion of each trading day, the Processor shall 
disseminate a ``closing price'' for each Eligible Security. Such 
``closing price'' shall be the price of the last Transaction Report 
in such security received prior to dissemination. The Processor 
shall also tabulate and disseminate at the conclusion of each 
trading day the aggregate volume reflected by all Transaction 
Reports in Eligible Securities reported by the Participants.

F. Statistics

    The Processor shall maintain quarterly, semi-annual and annual 
transaction and volume statistical counts. The Processor shall, at 
cost to the user Participant(s), make such statistics available in a 
form agreed upon by the Operating Committee, such as a secure 
website.

VII. Administrative Functions of the Processor

    Subject to the general direction of the Operating Committee, the 
Processor shall be responsible for carrying out all administrative 
functions necessary to the operation and maintenance of the 
consolidated information collection and dissemination system 
provided for in this Plan, including, but not limited to, record 
keeping, billing, contract administration, and the preparation of 
financial reports.

VIII. Transmission of Information to Processor by Participants

A. Quotation Information

    Each Participant shall, during the time it is open for trading 
be responsible promptly to collect and transmit to the Processor 
accurate Quotation information in Eligible Securities through any 
means prescribed herein.
    Quotation Information shall include:
    1. Identification of the Eligible Security, using the Nasdaq 
Symbol;
    2. The price bid and offered, together with size;
    3. The Nasdaq market participant or Participant from which the 
quotation emanates;
    4. Identification of quotations that are not firm; and
    5. Through appropriate codes and messages, withdrawals and 
similar matters.

B. Transaction Reports

    Each Participant shall, during the time it is open for trading, 
be responsible promptly to collect and transmit to the Processor 
Transaction Reports in Eligible Securities executed in its Market by 
means prescribed herein. With respect to orders sent by a 
Participant Market to another Participant Market for execution, each 
Participant shall adopt procedures governing the reporting of 
transactions in Eligible Securities specifying that the transaction 
will be reported by the Participant whose member sold the security.
    Transaction Reports shall include:
    1. Identification of the Eligible Security, using the Nasdaq 
Symbol;
    2. The number of shares in the transaction;
    3. The price at which the shares were purchased or sold;
    4. The buy/sell/cross indicator;
    5. The Market of execution; and,
    6. Through appropriate codes and messages, late or out-of-
sequence trades, corrections and similar matters.
    All such Transaction Reports shall be transmitted to the 
Processor within 90 seconds after the time of execution of the 
transaction. Transaction Reports transmitted beyond the 90-second 
period shall be designated as ``late'' by the appropriate code or 
message. If a shared computer-to-computer interface line is used, 
each transaction report shall include an appropriate exchange 
identifier that is acceptable for processing by the Processor.
    The following types of transactions are not required to be 
reported to the Processor pursuant to the Plan:

[[Page 50234]]

    1. Transactions that are part of a primary distribution by an 
issuer or of a registered secondary distribution or of an 
unregistered secondary distribution;
    2. Transactions made in reliance on Section 4(2) of the 
Securities Act of 1933;
    3. Transactions in which the buyer and the seller have agreed to 
trade at a price unrelated to the Current Market for the security, 
e.g., to enable the seller to make a gift;
    4. Odd-lot transactions;
    5. The acquisition of securities by a broker-dealer as principal 
in anticipation of making an immediate exchange distribution or 
exchange offering on an exchange;
    6. Purchases of securities pursuant to a tender offer; and
    7. Purchases or sales of securities effected upon the exercise 
of an option pursuant to the terms thereof or the exercise of any 
other right to acquire securities at a pre-established consideration 
unrelated to the Current Market.

C. Symbols for Market Identification for Quotation Information and 
Transaction Reports

    The following symbols shall be used to denote the Participant 
marketplaces:

Code and Participant
    A:  American Stock Exchange
    B:  Boston Stock Exchange
    C:  Cincinnati Stock Exchange
    M:  Chicago Stock Exchange
    Q:  NASD
    P:  Pacific Exchange
    X:  Philadelphia Stock Exchange

    D. Whenever a Participant determines that a level of trading 
activity or other unusual market conditions prevent it from 
collecting and transmitting Quotation Information or Transaction 
Reports to the Processor, or where a trading halt or suspension in 
an Eligible Security is in effect in its Market, the Participant 
shall promptly notify the Processor of such condition or event and 
shall resume collecting and transmitting Quotation Information and 
Transaction Reports to it as soon as the condition or event is 
terminated. In the event of a system malfunction resulting in the 
inability of a Participant or its members to transmit Quotation 
Information or Transaction Reports to the Processor, the Participant 
shall promptly notify the Processor of such event or condition. Upon 
receiving such notification, the Processor shall take appropriate 
action, including either closing the quotation or purging the system 
of the affected quotations.

IX. Market Access

    A. Each Participant shall permit each Nasdaq market participant, 
acting in its capacity as such, direct telephone access to the 
specialist, trading post, and supervisory center in each Eligible 
Security in which such Nasdaq market participant is registered as a 
market maker or electronic communications network/alternative 
trading system with Nasdaq. Such access shall include appropriate 
procedures or requirements by each Participant or employee to assure 
the timely response to communications received through telephonic 
access. No Participant shall permit the imposition of any access or 
execution fee, or any other fee or charge, with respect to 
transactions in Eligible Securities effected with Nasdaq market 
participants which are communicated to the floor by telephone 
pursuant to the provisions of this Plan. A Participant shall be free 
to charge for other types of access to its floor or facilities.
    B. The NASD shall assure that each Participant, and its members 
shall have direct telephone access to the trading desk of each 
Nasdaq market participant in each Eligible Security in which the 
Participant displays quotations, and to the Nasdaq Supervisory 
Center. Such access shall include appropriate procedures or 
requirements to assure the timely response of each Nasdaq market 
participant to communications received through telephone access. 
Neither the NASD nor any Nasdaq market participant shall impose any 
access or execution fee, or any other fee or charge, with respect to 
transactions in Eligible Securities effected with a member of a 
Participant which are communicated by telephone pursuant to the 
provisions of this Plan.

X. Regulatory Halts

    A. Whenever, in the exercise of its regulatory functions, the 
Primary Market for an Eligible Security determines that a Regulatory 
Halt is appropriate, all other Participants shall also halt or 
suspend trading in that security until notification that the halt or 
suspension is no longer in effect. The Primary Market shall 
immediately notify the Processor of such Regulatory Halt as well as 
notice of the lifting of a Regulatory Halt. The Processor, in turn, 
shall disseminate to Participants notice of the Regulatory Halt (as 
well as notice of the lifting of a regulatory halt) through the 
Level 1 data vendor feed. This notice shall serve as official notice 
of a regulatory halt for purposes of the Plan only, and shall not 
substitute or otherwise supplant notice that a Participant may 
recognize or require under its own rules. Nothing in this provision 
shall be read so as to supplant or be inconsistent with a 
Participant's own rules on trade halts, which rules apply to the 
Participant's own members. The Processor will reject any quotation 
information or transaction reports received from any Participant on 
an Eligible Security that has a Regulatory Halt in effect.
    B. Whenever the Primary Market determines that an adequate 
publication or dissemination of information has occurred so as to 
permit the termination of the Regulatory Halt then in effect, the 
Primary Market shall promptly notify the Processor and each of the 
other Participants that conducts trading in such security. Except in 
extraordinary circumstances, adequate publication or dissemination 
shall be presumed by the Primary Market to have occurred upon the 
expiration of one hour after initial publication in a national news 
dissemination service of the information that gave rise to the 
Regulatory Halt.
    C. Except in the case of a Regulatory Halt, the Processor shall 
not cease the dissemination of quotation or transaction information 
regarding any Eligible Security. In particular, it shall not cease 
dissemination of such information because of a delayed opening, 
imbalance of orders or other market-related problems involving such 
security.
    D. For purposes of this Section X, ``Primary Market'' for an 
Eligible Security means Nasdaq; provided, however, that if for any 
12-month period the number of reported transactions and the reported 
share volume in an Eligible Security in any other Participant's 
Market exceeds 50% of the aggregate reported transactions and 
reported share volume of all Participants in such security, then 
that Participant's Market shall be the Primary Market for such 
Eligible Security.

XI. Hours of Operation

    A. Quotation Information may be entered by Participants as to 
all Eligible Securities in which they make a market between 9:30 
a.m. and 4:00 p.m. Eastern Time (``ET'') on all days the Processor 
is in operation. Transaction Reports shall be entered between 9:30 
a.m. and 4:01:30 p.m. ET by Participants as to all Eligible 
Securities in which they execute transactions between 9:30 a.m. and 
4 p.m. ET on all days the Processor is in operation.
    B. Participants that execute transactions in Eligible Securities 
outside the hours of 9:30 a.m. ET and 4:00 p.m., ET, shall be 
reported as follows:
    (i) transactions in Eligible Securities executed between 8 a.m. 
and 9:29:59 a.m. ET and between 4:01:30 and 6:30 p.m. ET, shall be 
designated as ``.T'' trades to denote their execution outside normal 
market hours;
    (ii) transactions in Eligible Securities executed after 6:30 
p.m. and before 12 a.m. (midnight) shall be reported to the 
Processor as ``.T'' trades between the hours of 8 a.m. and 6:30 p.m. 
ET on the next business day on an ``as/of'' basis;
    (iii) transactions in Eligible Securities executed between 12:00 
a.m. (midnight) and 8 a.m. ET shall be transmitted to the Processor 
between 8 a.m. and 9:30 a.m. ET, on trade date, shall be designated 
as ``.T'' trades to denote their execution outside normal market 
hours, and shall be accompanied by the time of execution;
    (iv) transactions reported pursuant to this provision of the 
Plan shall be included in the calculation of total trade volume for 
purposes of determining net distributable operating revenue, but 
shall not be included in the calculation of the daily high, low, or 
last sale.
    C. Late trades shall be reported in accordance with the rules of 
the Participant in whose Market the transaction occurred.
    D. The Processor shall collect, process and disseminate 
Quotation Information in Eligible Securities at other times between 
8 a.m. and 9:30 a.m. ET, and after 4 p.m. ET, when any Participant 
or Nasdaq market participant is open for trading, until 6:30 p.m. ET 
(the ``Additional Period''); provided, however, that the best bid 
and offer quotation will not be disseminated before 9:30 a.m. or 
after 6:30 p.m. ET. Participants that enter Quotation Information or 
Transaction Reports to the Processor during the Additional Period 
shall do so for all Eligible Securities in which they enter 
quotations.
    E. The NASD shall have the right to modify its hours of 
operation upon notification to

[[Page 50235]]

other Participants and approval by the SEC, in which event the hours 
of operation of the Processor shall be changed to conform to the 
hours of operation of the NASD.

XII. Undertaking by All Participants

    The filing with and approval by the Commission of this Plan 
shall obligate each Participant to enforce compliance by its members 
with the provisions thereof. In all other respects not inconsistent 
herewith, the rules of each Participant shall apply to the actions 
of its members in effecting, reporting, honoring and settling 
transactions executed through its facilities, and the entry, 
maintenance and firmness of quotations to ensure that such occurs in 
a manner consistent with just and equitable principles of trade.

XIII. Undertaking by NASD

    The NASD shall maintain a database of consolidated quotation, 
last sale and clearing data in Eligible Securities as part of its 
normal surveillance function with respect to the Nasdaq Market. Such 
information as is maintained and appropriate for the foregoing 
purposes will be made available to Participants upon request for 
investigatory and surveillance purposes. It is anticipated that a 
formalized procedure will be developed for the monitoring of 
information and sharing of surveillance information analogous to 
those procedures applicable to the Intermarket Surveillance Group 
for listed securities. Pending such agreement, the Participants 
shall cooperate to the fullest extent possible to facilitate joint 
utilization of available information for market surveillance and 
regulatory purposes.
    The NASD shall also make available to the Participants, upon 
request, nonproprietary information pertaining to Eligible 
Securities on a cost basis.

XIV. Financial Matters

A. Development Costs

    Any Participant becoming a signatory to this Plan after June 26, 
1990, shall, as a condition to becoming a Participant, pay to the 
other Plan Participants a proportionate share of the aggregate 
development costs previously paid by Plan Participants to the 
Processor, which aggregate development costs totaled $439,530, with 
the result that each Participant's share of all development costs is 
the same.
    Each Participant shall bear the cost of implementation of any 
technical enhancements to the Nasdaq system made at its request and 
solely for its use, subject to reapportionment should any other 
Participant subsequently make use of the enhancement, or the 
development thereof.

B. Cost Allocation and Revenue Sharing

    The provisions governing cost allocation and revenue sharing 
among the Participants are set forth in Exhibit 1 to the Plan.

C. Maintenance of Financial Records

    The Processor shall maintain records of revenues generated and 
development and operating expenditures incurred in connection with 
the Plan. In addition, the Processor shall provide the Participants 
with: (a) A statement of financial and operational condition on a 
quarterly basis; and (b) an audited statement of financial and 
operational condition on an annual basis.

XV. Indemnification

    Each Participant agrees, severally and not jointly, to indemnify 
and hold harmless each other Participant, Nasdaq, and each of its 
directors, officers, employees and agents (including the Operating 
Committee and its employees and agents) from and against any and all 
loss, liability, claim, damage and expense whatsoever incurred or 
threatened against such persons as a result of any Transaction 
Reports, Quotation Information or other information reported to the 
Processor by such Participant and disseminated by the Processor to 
Vendors. This indemnity agreement shall be in addition to any 
liability that the indemnifying Participant may otherwise have.
    Promptly after receipt by an indemnified Participant of notice 
of the commencement of any action, such indemnified Participant 
will, if a claim in respect thereof is to be made against an 
indemnifying Participant, notify the indemnifying Participant in 
writing of the commencement thereof; but the omission to so notify 
the indemnifying Participant will not relieve the indemnifying 
Participant from any liability which it may have to any indemnified 
Participant. In case any such action is brought against any 
indemnified Participant and it promptly notifies an indemnifying 
Participant of the commencement thereof, the indemnifying 
Participant will be entitled to participate in, and, to the extent 
that it may wish, jointly with any other indemnifying Participant 
similarly notified, to assume and control the defense thereof with 
counsel chosen by it. After notice from the indemnifying Participant 
of its election to assume the defense thereof, the indemnifying 
Participant will not be liable to such indemnified Participant for 
any legal or other expenses subsequently incurred by such 
indemnified Participant in connection with the defense thereof but 
the indemnified Participant may, at its own expense, participate in 
such defense by counsel chosen by it without, however, impairing the 
indemnifying Participant's control of the defense. The indemnifying 
Participant may negotiate a compromise or settlement of any such 
action, provided that such compromise or settlement does not require 
a contribution by the indemnified Participant.

XVI. Withdrawal

    Any Participant may withdraw from the Plan at any time on not 
less than 30 days prior written notice to each of the other 
Participants. Any Participant withdrawing from the Plan shall remain 
liable for, and shall pay upon demand, any fees for equipment or 
services being provided to such Participant pursuant to the contract 
executed by it or an agreement or schedule of fees covering such 
then in effect.
    A withdrawing Participant shall also remain liable for its 
proportionate share, without any right of recovery, of 
administrative and operating expenses, including start-up costs and 
other sums for which it may be responsible pursuant to Section XIV 
hereof. Except as aforesaid, a withdrawing Participant shall have no 
further obligation under the Plan or to any of the other 
Participants with respect to the period following the effectiveness 
of its withdrawal.

XVII. Modifications to Plan

    The Plan may be modified from time to time when authorized by 
the agreement of all of the Participants, subject to the approval of 
the SEC.

XVIII. Applicability of Securities Exchange Act of 1934

    The rights and obligations of the Participants and of Vendors, 
News Services, Subscribers and other persons contracting with the 
NASD or its subsidiaries (including Nasdaq) in respect of the 
matters covered by the Plan shall at all times be subject to any 
applicable provisions of the Act, as amended, and any rules and 
regulations promulgated thereunder.

XIX. Operational Issues

    A. Each Exchange Participant shall be responsible for collecting 
and validating quotes and last sale reports within their own system 
prior to transmitting this data to the Processor.
    B. Each Exchange Participant may utilize a dedicated Participant 
line into the Processor to transmit trade and quote information in 
Eligible Securities to the Processor. The Processor shall accept 
from Exchange Participants input for only those issues that are 
deemed Eligible Securities.
    C. The Processor shall consolidate trade and quote information 
from each Participant and disseminate this information on the Nasdaq 
existing vendor lines.
    D. The Processor shall perform gross validation processing for 
quotes and last sale messages in addition to the collection and 
dissemination functions, as follows:
    1. Basic Message Validation
    (a) The Processor may validate format for each type of message, 
and reject non-conforming messages.
    (b) Input must be for an Eligible Security.
    2. Logging Function--The Processor shall return all Participant 
input messages that do not pass the validation checks (described 
above) to the inputting Participant, on the entering Participant 
line, with an appropriate reject notation. For all accepted 
Participant input messages (i.e., those that pass the validation 
check), the information shall be retained in the Processor system.
    3. Price Checks--Once the quotes and trades are accepted and 
disseminated by the Processor, the Processor shall perform gross 
price checks to ensure that:
    (a) Participant quotes are within the established range of the 
current market; and
    (b) Participant last sale reports are within the established 
range of the current market.

XX. Headings

    The section and other headings contained in this Plan are for 
reference purposes only and shall not be deemed to be a part of this 
Plan or to affect the meaning or interpretation of any provisions of 
this Plan.

[[Page 50236]]

XXI. Counterparts

    This Plan may be executed by the Participants in any number of 
counterparts, no one of which need contain the signature of all 
Participants. As many such counterparts as shall together contain 
all such signatures shall constitute one and the same instrument.
    In Witness Whereof, this Plan has been executed as of the __ day 
of __, 200__, by each of the Signatories hereto.

AMERICAN STOCK EXCHANGE, INC.
BY:--------------------------------------------------------------------
BOSTON STOCK EXCHANGE, INC.
BY:--------------------------------------------------------------------
CINCINNATI STOCK EXCHANGE, INC.
BY:--------------------------------------------------------------------
PACIFIC EXCHANGE, INC.
BY:--------------------------------------------------------------------
CHICAGO STOCK EXCHANGE, INC.
BY:--------------------------------------------------------------------
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.
BY:--------------------------------------------------------------------
PHILADELPHIA STOCK EXCHANGE, INC.
BY:--------------------------------------------------------------------

Exhibit 1

    1. Each Participant eligible to receive revenue under the Plan 
will receive an annual payment for each calendar year to be 
determined by multiplying (i) that Participant's percentage of total 
volume in Nasdaq securities reported to the Processor and 
disseminated to Vendors for that calendar year by (ii) the total 
distributable net operating income (as defined below) for that 
calendar year provided, however, that for the implementation year 
(as defined in Paragraph 4 below), a Participant's payment shall be 
multiplied by the number of months during the implementation year 
the interface was in operation divided by twelve. In the event that 
total distributable net operating income is negative, each 
Participant eligible to receive revenue under the Plan will receive 
an annual bill for each calendar year to be determined according to 
the same formula (described in this paragraph) for determining 
annual payments to eligible Participants.
    2. A Participant's percentage of total volume in Nasdaq 
securities will be calculated by taking the average of (i) the 
Participant's percentage of total trades in Nasdaq securities 
reported to the Processor and disseminated to Vendors for the year 
and (ii) the Participant's percentage of total share volume in 
Nasdaq securities reported to the Processor and disseminated to 
Vendors for the year (trade/volume average). For any given year, a 
Participant's percentage of total trades shall be calculated by 
dividing the total number of trades that that Participant reports to 
the Processor as the selling party for that year by the total number 
of trades in Nasdaq securities reported to the Processor and 
disseminated to Vendors for the year. A Participant's total share 
volume shall be calculated by multiplying the total number of trades 
in Nasdaq securities in that year that that Participant reports to 
the Processor as the selling party multiplied by the number of 
shares for each such trade. Unless otherwise stated in this 
agreement, a year shall run from January 1 to December 31.
    3. For purposes of this Exhibit 1, net distributable operating 
income for any particular calendar year shall be calculated by 
adding all revenues from Level 1, Level 2 (non-market maker revenues 
only), Nasdaq Last Sale Information Service, and NQDS, including 
revenues from the dissemination of information among Eligible 
Securities to foreign marketplaces (collectively, ``the Data 
Feeds''), and subtracting from such revenues the costs incurred by 
the Processor, set forth below, in collecting, consolidating, 
validating, and disseminating the Data Feeds. These costs include, 
but are not limited to, the following:
    a. The Processor costs directly attributable to creating NQDS, 
including:
    1. proportional cost of collecting Participant quotes into the 
Processor's quote engine;
    2. cost of processing quotes and creating NQDS messages within 
the Processor's quote engine;
    3. cost of the Processor's communication management subsystem 
that distributes NQDS to the market data vendor network for further 
distribution.
    b. The costs directly attributable to creating the Level 1 Data 
Feed, including:
    1. cost of calculating the national best bid and offer price 
within the Processor's quote engine;
    2. cost of creating the Level 1 Data Feed message within the 
Processor's quote engine;
    3. cost of the Processor's communication management subsystem 
that distributes the Level 1 Data Feed to the market data vendors' 
networks for further distribution.
    c. The costs directly attributable to creating the Nasdaq Last 
Sale Information Service Data Feed, including:
    1. cost of determining the appropriate last sale price and 
volume amount within the Processor's trade engine;
    2. cost of utilizing the Processor's trade engine to distribute 
the Nasdaq Last Sale Information Service for distribution to the 
market data vendors.
    d. The additional costs that are shared across all Data Feeds, 
including:
    1. Telecommunication Operations costs of supporting the 
Participant lines into the Processor's facilities;
    2. Telecommunications Operations costs of supporting the 
external market data vendor network;
    3. Data Products account management and auditing function with 
the market data vendors;
    4. Market Operations costs to support symbol maintenance, and 
other data integrity issues;
    5. costs associated with surveillance activities to validate 
data on a real-time basis and to ensure a high level of integrity of 
Data Feeds, provided however that costs associated with monitoring 
for trade halts in Eligible Securities shall not be included herein;
    6. overhead costs, including management support of the 
Processor, Human Resources, Finance, Legal, and Administrative 
Services.
    e. Processor costs excluded from the calculation of net 
distributable operating income include trade execution costs for 
transactions executed using a Nasdaq service and trade report 
collection costs reported through a Nasdaq service, as such services 
are market functions for which Participants electing to use such 
services pay market rate.
    f. For the purposes of this provision, the following definitions 
shall apply:
    1. ``quote engine'' shall mean the Nasdaq's UNISYS system that 
is operated by Nasdaq to collect quotation information for Eligible 
Securities;
    2. ``trade engine'' shall mean the Nasdaq Tandem system that is 
operated by Nasdaq for the purpose of collecting last sale 
information in Eligible Securities.
    4. At the time a Participant implements a computer-to-computer-
interface or other Processor-approved electronic interface with the 
Processor, the Participant will become eligible to receive revenue 
for the year in which the interface is implemented (implementation 
year).
    5. From the date a Participant is eligible to receive revenue 
(implementation date) until December 31 of the implementation year, 
Nasdaq shall pay the Participant a pro rata amount of its payment or 
bill the Participant for a pro rata amount of its losses for the 
implementation year (as calculated in Paragraph 1 above). This 
calculation and resultant payment (or bill) will be made (or due) 
within ninety (90) days after the twelfth month following the 
implementation date.
    For the calendar year subsequent to the implementation year, and 
continuing thereafter, the calculation of the Participant's annual 
payment or loss will be performed and the payment made or bill 
delivered by March 31 of the following year. Estimated quarterly 
payments or billings shall be made to each eligible Participant 
within 45 days following the end of each calendar quarter in which 
the Participant is eligible to receive revenue, provided that the 
total of such estimated payments or billings shall be reconciled at 
the end of each calendar year and, if necessary, adjusted by March 
31st of the following year. Interest shall be included in quarterly 
payments and in adjusted payments made on March 31st of the 
following year. Such interest shall accrue monthly during the period 
in which revenue was earned and not yet paid and will be based on 
the 90-day Treasury bill rate in effect at the end of the quarter in 
which the payment is made. Interest shall not accrue during the 
period of up to 45 days between the end of each calendar quarter and 
the date on which an estimated quarterly payment or billing is made.
    In conjunction with calculating estimated quarterly and 
reconciled annual payments under this Exhibit 1, the Processor shall 
submit to the Participants an itemized statement setting forth the 
basis upon which net operating income was calculated, including an 
itemized statement of the Processor costs set forth in Paragraph 3 
of this Exhibit. Such Processor costs shall be reconciled annually 
based solely on the Processor's audited annual financial 
information. By majority vote of the Operating Committee, the 
Processor shall engage an independent auditor to audit the 
Processor's costs or other calculation(s), the cost of which audit 
shall be shared equally by all Participants. The Processor agrees to

[[Page 50237]]

cooperate fully in providing the information necessary to complete 
such audit.

[FR Doc. 01-24576 Filed 10-1-01; 8:45 am]
BILLING CODE 8010-01-P