[Federal Register Volume 66, Number 196 (Wednesday, October 10, 2001)]
[Notices]
[Pages 51703-51707]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-25379]


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

SECURITIES AND EXCHANGE COMMISSION

(Release No. 34-44898; File No. SR-NASD-2001-64)


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by the National Association of Securities Dealers, Inc. 
Adjusting the Fees Charged to Non-NASD Members for Use of the Nasdaq 
National Market Execution System and the SelectNet Service

October 2, 2001
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 28, 2001, the National Association of Securities Dealers, 
Inc. (``NASD'') through its subsidiary, the Nasdaq Stock Market, Inc. 
(``Nasdaq'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by Nasdaq. On October 
2, 2001, Nasdaq filed Amendment No. 1 with the Commission.\3\ The 
Commission is

[[Page 51704]]

publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from John M. Yetter, Assistant General Counsel, 
Office of General Counsel, Nasdaq, to Katherine A. England, 
Assistant Director, Division of Market Regulation (``Division''), 
Commission (October 2, 2001) (``Amendment No. 1''). The fees 
currently in effect for SelectNet, the Nasdaq National Market 
Execution System (``NNMS'' and ``SuperSOES''), and the Small Order 
Execution System (``SOES'') were established by SR-NASD-2001-31 and 
SR-NASD-00-41, but these fees were not fully reflected in the text 
of NASD Rules. See Securities Exchange Act Release No. 44321 (May 
18, 2001), 66 FR 28767 (May 24, 2001) (SR-NASD-2001-31); Securities 
Exchange Act Release No. 43001 (June 30, 2000), 65 FR 42741 (July 
11, 2000) (SR-NASD-00-41). Amendment No. 1 is a technical amendment 
that adds Exhibit A to the proposed rule change. Exhibit A sets 
forth NASD rule language as modified by SR-NASD-2001-31 and SR-NASD-
00-41. Amendment No. 1 also amends the text of SR-NASD-2001-64 to 
describe the changes being made to the rule text as amended by the 
prior filings.
---------------------------------------------------------------------------

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

    Nasdaq is proposing to adjust the fees charged to non-NASD members 
for uses of the NNMS and SelectNet by: (1) Replacing the per order 
execution charge for the execution of transactions in SuperSOES with a 
per share charge; (2) adding a fee for the entry of orders in the NNMS 
and SelectNet; (3) modifying the fees for order executions in 
SelectNet; and (4) clarifying the distinction between fees charged for 
execution of liability orders and non-liability orders in SelectNet.\4\ 
Nasdaq would charge these fees to national securities exchanges trading 
Nasdaq-listed securities pursuant to grants of unlisted trading 
privileges (``UTP Exchanges''), which are not NASD members.\5\
---------------------------------------------------------------------------

    \4\ See note 11 infra.
    \5\ Nasdaq has filed a separate proposal to impose these same 
fees on NASD members. See Securities Exchange Act Release No. 44899 
(October 2, 2001) (SR-NASD-2001-63).
---------------------------------------------------------------------------

    The fees currently in effect for SelectNet, the NNMS, and the SOES 
were established through prior rule filings.\6\ They were not, however, 
fully reflected in the text of NASD Rules, and the rules that currently 
reference such fees are not consolidated in one location in the NASD 
Rules. Nasdaq proposes to adjust the fees for SelectNet, the NNMS and 
the SOES and consolidate the rules governing these fees into NASD Rule 
7010(i). The rule language set forth below has been marked to show the 
proposed changes to the NASD Rules (as amended by the prior filings). 
Proposed new language is in italics; proposed deletions are in 
brackets.
---------------------------------------------------------------------------

    \6\ See supra note 3.
---------------------------------------------------------------------------

* * * * *
[4714. Fees Applicable to NNMS]
    [(a) A fee for orders executed through NNMS shall be assessed as 
follows:]

[0.50 per order execution for the first 150,000 orders under 2,000 
shares executed monthly (entering party only)]
[0.30 per order execution for all remaining orders under 2,000 shares 
executed monthly (entering party only)]
[0.90 per order execution for all executed orders of 2,000 shares or 
more (entering party only)]

    [(b) For each order entered by an NNMS Order Entry Firm or an NNMS 
Market Maker that is canceled, the NNMS Order Entry Firm or NNMS Market 
Maker that cancels such order shall be assessed a fee of $0.25.]
* * * * *
[4757. Fees Applicable to SOES]
    [(a) A fee for orders executed through SOES shall be assessed as 
follows:]

[$0.50 per order execution for the first 150,000 orders executed 
monthly (entering party only)]
[$0.30 per order execution for all remaining orders executed monthly 
(entering party only)]

    [(b) For each order entered by a SOES Order Entry Firm or a SOES 
Market Maker that is cancelled, the SOES Order Entry Firm or SOES 
Market Maker that cancels such order shall be assessed a fee of $0.25.]
* * * * *
7010. System Services
    (a)-(h) No change.
(i) Transaction Execution Services
(1) SelectNet Service
    The following charges shall apply to the use of SelectNet:

Transaction Charge for Execution         $2.50/side
 Resulting from Broadcast Message.
Order Entry Charge.....................  $0.10 per order entry (entering
                                          party only)
Directed Non-Liability Order Entry       $0.90 per order execution
 Charge.                                  (entering party only)
Directed Liability Order Execution       [$0.70] $0.90 per order
 Charge.                                  execution for the first 25,000
                                          orders executed monthly
                                          (entering only)
                                         [$0.50] $0.60 per order
                                          execution for the next 25,000
                                          orders executed monthly
                                          (entering only)
                                         $0.10 per order execution for
                                          [all remaining] the next
                                          200,000 orders executed
                                          monthly (entering party only)
                                         $0.00 per orders execution for
                                          all remaining orders executed
                                          monthly
Cancellation Fee.......................  $.25/per order cancelled
                                          (canceling party only)
 


[[Page 51705]]

    [For a pilot period commencing April 1, 1999, and lasting until the 
sooner of March 31, 2002 or the date of implementation of the Nasdaq 
National Market Execution System, an NASD member who enters a directed 
SelectNet order that is subsequently executed in whole or in part will 
have its monthly Directed Order Charge assessed as follows:]

[$1.00 per order for the first 50,000 directed orders executed that 
month
$0.70 per order for the next 50,000 directed orders executed that same 
month
$0.20 per order for all remaining directed orders executed that same 
month]

    [Executions resulting from broadcast messages will continue to be 
assessed at a $2.50 per side rate.]

(2) Nasdaq National Market Execution System (SuperSOES)

    The following charges shall apply to the use of the Nasdaq 
National:


Market Execution System:
    Order Entry Charge.................  $0.10 per order entry (entering
                                          party only)
    Per Share Charge...................  $0.001 per share executed for
                                          all fully or partially
                                          executed orders (entering
                                          party only)
    Cancellation.......................  $0.25 per order canceled
                                          (canceling party only)
 

(3) Small Order Execution System (SOES)

    The following charges shall apply to the use of the Small Order 
Execution System:


Order Execution Charge.................  $0.50 per order execution for
                                          the first 150,000 orders
                                          executed monthly (entering
                                          party only) $0.30 per order
                                          execution for all remaining
                                          orders executed monthly
                                          (entering party only)
Cancellation Fee.......................  $0.25 per order cancelled
                                          (canceling party only)
 

* * * * *

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

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    On January 14, 2000, the Commission issued an order approving a 
rule change that: (1) established the NNMS, a new platform for the 
trading of Nasdaq National Market (``NNM'') securities; (2) modified 
the rules governing the use of SelectNet for trading NNM issues; and 
(3) left unchanged trading of Nasdaq SmallCap securities on SOES.\7\ 
Nasdaq began implementing these system changes on July 9, 2001 and 
completed implementation on July 30, 2001. Through these changes, the 
NNMS has become the primary trading platform for NNM securities, and 
SelectNet is intended to be used primarily for the transmittal and 
execution of ``non-liability'' orders, as well as the transmittal and 
execution of ``liability'' orders to market participants that do not 
participate in the automatic execution functionality of the NNMS.
---------------------------------------------------------------------------

    \7\ Securities Exchange Act Release No. 42344 (January 14, 
2000), 65 FR 16 (January 25, 2000) (SR-NASD-99-11).
---------------------------------------------------------------------------

    The introduction of the NNMS has had a dramatic effect on market 
efficiency. Market participants can place SuperSOES orders of up to 
999,999 shares, and a single order can be used to access multiple 
quotes automatically. In contrast, in the pre-SuperSOES environment, a 
market participant had to enter a separate SelectNet order for each 
quote that it wanted to access. Thus, the introduction of the NNMS has 
significantly reduced the number of orders required for the trading of 
a given volume of shares.
    Nasdaq believes, however, that while these changes redound to the 
benefit of all market participants, they are incompatible with its 
current fee structure for the NNMS, which is based on the number of 
orders executed. The fee changes implemented by this rule change are 
designed as an interim modification to begin the process of aligning 
the charges to market participants for using the NNMS and SelectNet 
more closely with the costs of providing these services and the 
benefits that they provide to market participants. Nasdaq plans to 
implement additional modifications to the fee structures for the NNMS 
in the near future.
    First, Nasdaq proposes to replace the current order execution 
charge in the NNMS, which is based on the number of orders executed per 
month, with a $0.001 per share charge for execution of orders through 
the NNMS. Thus, for example, a transaction of 1,000 shares would be 
assessed a per share charge of $1.00. Nasdaq believes that a per share 
charge is more appropriate than a per order execution charge, in light 
of the enhanced efficiency of the NNMS. In addition, Nasdaq believes 
that by providing access to the liquidity needed

[[Page 51706]]

to fill larger orders, the NNMS provides market participants with a 
higher-value service. Moreover, larger orders are more likely than 
smaller orders to be filled through multiple executions against market 
participant quotes, thereby imposing more burden on system capacity. 
Calibrating the charge for order executions to their size will 
compensate for this additional burden.
    Second Nasdaq proposes to impose a $0.10 order entry charge on 
orders in both the NNMS and SelectNet. Nasdaq represents that this 
charge reflects the fact that many market participants enter orders 
that have little chance of being filled, especially on days when 
unusual market activity is occurring. For example, traders may enter 
such orders in anticipation of news about a company's earnings or the 
release of government macroeconomics data. The imposition of the charge 
recognizes that these low-probability orders impose burdens on system 
capacity and that market participants derive value from order entry.
    Third, Nasdaq proposes to modify the charges for order execution in 
SelectNet to reflect its transformation, in connection with the 
implementation of the NNMS, into a system that is intended to be used 
primarily for the delivery of negotiable, non-liability orders to 
market makers and electronic communication networks that participate in 
the NNMS.\8\ Nasdaq will charge $0.90 per execution for the first 
25,000 liability orders executed in a month, $0.60 per execution for 
the next 25,000 liability orders executed, $0.10 per execution for the 
next 200,000 liability orders executed, and will assess no order-
execution charge for the remaining liability orders executed in a 
month. In addition, Nasdaq will charge a fee of $0.90 per execution for 
all non-liability orders executed.
---------------------------------------------------------------------------

    \8\ Under current rules, SelectNet may still be used for 
liability orders by (i) UTP Exchanges that choose not to participate 
in the automatic execution functionality of the NNMS, and (ii) other 
market participants directing orders to market participants that 
choose not to participate in the automatic execution functionality 
of the NNMS.
---------------------------------------------------------------------------

    Nasdaq believes that the proposed rule change restores SelectNet 
charges to levels similar to those in effect prior to the 
implementation of the NNMS, with some adjustment to compensate for the 
imposition of the order-entry fee described above. The proposed rule 
change also clarifies the distinction between fees charged for 
execution of liability orders and non-liability orders in SelectNet, 
which was not clearly delineated in the prior rule filing establishing 
current SelectNet fees.\9\ The distinction between order-execution 
charges for liability and non-liability orders reflects the fact that 
the NNMS is available to market participants that use SelectNet for 
entry of non-liability orders but is not used for conducting the types 
of trades that may be executed as liability orders on SelectNet.
---------------------------------------------------------------------------

    \9\ See SR-NASD-2001-31 at note 3.
---------------------------------------------------------------------------

2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
Section 15A(b)(5) of the Act, which requires that the rules of the NASD 
provide for the equitable allocation of reasonable dues, fees and other 
charges among members and issuers and other persons using any facility 
or system which the NASD operates or controls, and Section 15A(b)(6) of 
the Act, which requires rules that are not designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. Nasdaq 
represents that the fees are designed to align the charges to market 
participants for using the NNMS and SelectNet more closely with the 
costs of providing these services and the benefits that they provide to 
market participants, resulting in an equitable allocation of charges 
based on system usage. Nasdaq believes that the fees are reasonable, 
since it estimates that overall fees for the NNMS, SelectNet, and SOES 
under the rule change will be slightly lower than overall fees for 
SelectNet and SOES prior to the introduction of the NNMS.

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

    Nasdaq does not believe that the proposed rule change will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

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

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the NASD consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 20549-0609. Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying at the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the NASD. All submissions should refer to File No. 
SR-NASD-2001-64 and should be submitted by October 31, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
Margaret H. McFarland,
Deputy Secretary.
---------------------------------------------------------------------------

    \10\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Exhibit A

    This Exhibit shows the text of the NASD Rules, marked to reflect 
the substance of changes made by SR-NASD-00-41 and SR-NASD-2001-31, 
which described certain rule changes but did not reflect them in 
amendments to rule text. Deletions effected by these prior rule filings 
are in brackets, and new language added by these prior rule filings is 
underlined.
* * * * *
4714. Fees Applicable to NNMS
    (a) A fee for orders executed through NNMS shall be assessed[, to 
be allocated] as follows: [the NNMS Market Maker executing the order 
shall be assessed $0.50 per transaction and the NNMS Order Entry Firm 
or NNMS Market Maker entering the order shall be assessed $0.50 per 
order.]

$0.50 per order execution for the first 150,000 orders under 2,000 
shares executed monthly (entering party only)

[[Page 51707]]

$0.30 per order execution for all remaining orders under 2,000 shares 
executed monthly (entering party only)
$0.90 per order execution for all executed orders of 2,000 shares or 
more (entering party only)

    (b) For each order entered by an NNMS Order Entry Firm or an NNMS 
Market Maker that is canceled, the NNMS Order Entry Firm or NNMS Market 
Maker that cancels such order shall be assessed a fee of $0.25.
* * * * *
4757. Fees Applicable to SOES
    (a) A fee for orders executed through SOES shall be assessed[, to 
be allocated] as follows: [the SOES Market Maker executing the order 
shall be assessed $0.50 per transaction and the SOES Order Entry Firm 
or SOES Market Maker entering the order shall be assessed $0.50 per 
order.]

$0.50 per order execution for the first 150,000 orders executed monthly 
(entering party only)
$0.30 per order execution for all remaining orders executed monthly 
(entering party only)

    (b) For each order entered by a SOES Order Entry Firm or a SOES 
Market Maker that is canceled, the SOES Order Entry Firm or SOES Market 
Maker that cancels such order shall be assessed a fee of $0.25.
* * * * *
7010. System Services
    (a)-(h) No change.
(i) SelectNet Service
    The following charges shall apply to the use of SelectNet:

    \11\ In SR-NASD-01-31, Nasdaq proposed a fee of $.90 to be 
charged for each SelectNet order entered and directed to one 
particular market participant that is subsequently executed in whole 
or in part. Nasdaq, however, represents that it has never charged 
the fee; the fee therefore does not appear in the rule text above. 
Telephone conversation between John M. Yetter, Assistant General 
Counsel, Nasdaq, and Susie Cho, Special Counsel, Division, 
Commission (October 2, 2001).


Transaction Charge for Execution         $2.50/side
 Resulting from Broadcast Message.
Directed Order Charge \11\.............  [$1.00 (per execution, entering
                                          party only)]
                                         $0.70 per order execution for
                                          the first 25,000 orders
                                          executed monthly (entering
                                          party only)
                                         $0.50 per order execution for
                                          the next 25,000 orders
                                          executed monthly (entering
                                          party only)
                                         $0.10 per order execution for
                                          all remaining orders executed
                                          monthly (entering party only)
Cancellation Fee.......................  $.25/ per order cancelled
                                          (cancelling party only)
 

    For a pilot period commencing April 1, 1999, and lasting until 
[March 31, 2001] the sooner of March 31, 2002 or the date of 
implementation of the Nasdaq National Market Execution System, an NASD 
member who enters a directed SelectNet order that is subsequently 
executed in whole or in part will have its monthly Directed Order 
Charge assessed as follows:
$1.00 per order for the first 50,000 directed orders executed that 
month
$0.70 per order for the next 50,000 directed orders executed that same 
month
$0.20 per order for all remaining directed orders executed that same 
month

    Executions resulting from broadcast messages will continue to be 
assessed at a $2.50 per side rate.

[FR Doc. 01-25379 Filed 10-9-01; 8:45 am]
BILLING CODE 8010-01-M