[Federal Register Volume 67, Number 13 (Friday, January 18, 2002)]
[Notices]
[Pages 2712-2714]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-1299]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45270; File No. SR-NASD-99-12]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Granting Approval of Proposed Rule Change 
Establishing a Pilot Program To Establish Fees for a Volume and Issue 
Data Package Known as Post Data

January 11, 2002.

I. Introduction

    On February 18, 1999, the National Association of Securities 
Dealers, Inc. (``NASD''), through its subsidiary, the Nasdaq Stock 
Market, Inc. (``Nasdaq''), filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') pursuant to Section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change to amend NASD Rule 7010, System 
Services, to establish a fee for a Volume and Issue Data Package 
(``Post Data'') provided through the Nasdaq Trader.com Web site. The 
proposal would establish one fee to be paid by subscribers, and another 
fee to be paid by market data vendors.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Post Data would provide three separate reports in a single package, 
consisting of (1) Daily share volume reports for each Nasdaq security; 
(2) daily issue data containing a summary of the previous day's 
activity for each Nasdaq issue; and (3) monthly summaries of trading 
volume statistics for the top 50 market participants broken down by 
industry sector, security, and type of trading (such as block or 
total). The proposed rule change will be implemented for a one-year 
pilot period.
    On March 24, 1999, Nasdaq amended the proposal, which amendment 
replaced and superseded the original proposal.\3\ Notice of the 
proposed rule change, as modified by Amendment No. 1, appeared in the 
Federal Register on April 9, 1999.\4\ The Commission received three 
comment letters on the proposed rule change.\5\
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    \3\ Nasdaq's initial proposal was to provide T+1 daily share 
volume reports in each Nasdaq security to market data vendors, NASD 
members, and non-NASD member Qualified Institutional Buyers 
(``QIBs'') as defined in Rule 144A under the Securities Act of 1933. 
17 CFR 230.144A. In Amendment No. 1, Nasdaq revised the proposal to 
include daily issue summaries of the previous day's activity for 
every Nasdaq issue, and monthly summaries of trading volume 
statistics for the top 50 market participants broken down by 
industry sector, security, and type of trade.
    \4\ Securities Exchange Act Release No. 41244 (April 1, 1999), 
64 FR 17429.
    \5\ See April 30, 1999 letter from Matthew W. Johnson, Managing 
Director, Lehman Brothers Inc., to Margaret H. McFarland, Deputy 
Secretary, SEC (``Lehman Letter''); April 12, 1999 letter from 
Stephen K. Lynner, President, AutEx Group (``AutEX''), to Jonathan 
G. Katz, Secretary, SEC; and June 23, 1999 letter from Stephen K. 
Lynner, President, AutEx, to Katherine England, Assistant Director, 
Division of Market Regulation (``Division''), SEC.
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    Nasdaq also amended the proposal on May 30, 2001,\6\ and again on 
July 10, 2001.\7\ Because Amendment Nos. 2 and

[[Page 2713]]

3 proposed different fees than those proposed in the original filing 
and Amendment No. 1, notice of the proposed rule change, as amended 
since it original publication, appeared in the Federal Register on July 
20, 2001.\8\ As amended, the proposal would establish a fee of $70 per 
month for subscribers for each entitled user receiving the Nasdaq 
Volume and Issue Data Package, and $35 per month for each end user 
receiving the information through market data vendors. The Commission 
received six comment letters on the proposal,\9\ one of which was 
retracted. This order approves the proposed rule change, as amended.
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    \6\ See May 29, 2001 letter from Edward S. Knight, Executive 
Vice President and General Counsel, Nasdaq. to Katherine A. England, 
Assistant Director, Division, SEC, and attachments (``Amendment No. 
2''). Amendment No. 2 completely replaced and superseded Amendment 
No. 1, and proposed new fees for Post Data, as well as minor 
adjustments to the original proposal.
    \7\ See July 9, 2001 letter form Edward S. Knight, Executive 
Vice President and General Counsel, Nasdaq, to Belinda Blaine, 
Associate Director, Division, SEC (``Amendment No. 3''). In 
Amendment No. 3, Nasdaq clarified that: (1) Amendment No. 2, as 
further amended by Amendment No. 3, replaces and supersedes the 
original proposal and Amendment No. 1; (2) the proposal is filed by 
the NASD, acting through its subsidiary, Nasdaq; (3) the footnote 
that defines a ``qualified institutional buyer'' should be included 
in the proposed rule language of NASD Rule 7010(p); and (4) 
modifications to Post Data during the pilot period will be limited 
to minor enhancements to the content of the package and will be made 
in accordance with Section 19(b) of the Act and Rule 19b-4 
thereunder. 15 U.S.C. 78s(b) and 17 CFR 240.19b-4. Amendment No. 3 
also provided further explanation of the basis for the proposed 
fees.
    \8\ Securities Exchange Act Release No. 44558 (July 16, 2001), 
66 FR 38049.
    \9\ See July 31, 2001 letter from Dennis A. Green, Senior Vice 
President, Nasdaq Trading, Legg Mason, Inc. (via e-mail) (``Legg 
Mason letter''); August 2, 2001 letter from Matt Johnson, Head of 
U.S. Cash Trading, Lehman Brothers (via e-mail) (``Lehman Brothers 
letter''); August 9, 2001 letter from Stephen K. Lynner, President, 
Thomson Financial Sales and Trading Group to Jonathan G. Katz, 
Secretary, SEC (``Thomson Financial letter''); August 9, 2001 letter 
from Lene Jensen, Regional Manager, Global Data Acquisition, Thomson 
Financial (via e-mail); August 16, 2001 letter from Lene Jensen, 
Regional Manager, Global Data Acquisition, Thomson Financial (via e-
mail, retracting comments filed in August 9, 2001 letter); August 
16, 2001 letter from Mary McDermott-Holland, Chairman, Nasdaq 
Institutional Traders Council, Franklin Portfolio Associates to 
Jonathan G. Katz, Secretary, SEC (``NITC letter''); and August 15, 
2001 letter from James P. Ryan, Vice President and Senior Counsel, 
Fund Business Management Group, Capital Research and Management 
Company, to Jonathan G. Katz, Secretary, SEC (``Capital Research 
letter'').
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II. Summary of Comments

    Four commenters asked the Commission to approve the proposal.\10\ 
These commenters generally expressed support for the proposal because 
they believe Post Data will be a valuable tool that will allow them to 
trade more effectively.\11\ By providing immediate and reliable trading 
data, these commenters believe Post Data will allow them to make 
better-informed decisions.\12\ Two commenters also suggested that the 
proposal might reduce costs.\13\ Three of commenters that supported the 
proposal emphasized the value in having verified information available 
to market participants.\14\
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    \10\ Legg Mason letter; Lehman Brothers letter; Capital Research 
letter; and NITC letter.
    \11\ Capital Research letter.
    \12\ NITC letter; and Capital Research letter.
    \13\ NITC letter; and Legg Mason letter.
    \14\ NITC letter as 1 (``Post Data represents a tremendous step 
forward in providing accurate and vital trading information to 
market participants.''); Capital Research letter (``By providing 
verified trading information to market participants, Post Data will 
allow us to make more informed broker selection decisions.''); and 
Lehman Brothers letter (``The fact that this trade data will be 
confirmed by ACT reporting will allow customers to have an accurate 
portrayal of their volume data.'').
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    One commenter asked the Commission not to approve the proposal in 
its current form. This commenter believes the Commission should 
establish safeguards to ensure that preexisting commercial trade 
reporting services are not driven out of the market due to ``a business 
advantage conferred on Nasdaq by virtue of its status as a 
regulator.''\15\ The commenter suggests that Nasdaq's pricing strategy 
for Post Data should be scrutinized to ensure that Nasdaq does not 
subsidize Post Data with revenue Nasdaq derives from performing 
regulatory functions such as trade reporting fees.\16\
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    \15\ Thomson Financial letter at 4.
    \16\ Id.
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    The commenter also asserts that because Nasdaq pays nothing to 
collect the data used in Post Data, and in fact is paid to collect this 
data by virtue of the NASDA's status as a self-regulatory organization, 
Nasdaq should only be able to recover from vendors the costs incurred 
from passing the data on the vendors.\17\
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    \17\ Thomson Financial letter at 5, citing NASD v. SEC, 801 F.2d 
1415 (D.C. Cir. 1986).
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    The commenter further argues that, while proposal states that 
Nasdaq will make future enhancements to Post Data available to data 
vendors for redistribution, the proposal is ambiguous as to whether 
Nasdaq will charge vendors for the enhancements. The commenter believes 
that charging only the customers who received the enhancements through 
a private vendor would impose an impermissible burden on 
competition.\18\
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    \18\ Id. at 6.
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    The commenter also requests that Nasdaq affirmatively state that 
Nasdaq will not impose restrictions on a private vendor's right to 
redistribute trade data to the vendor's customers, whomever those 
customers might be.\19\ This issue arises from Nasdaq's proposal to 
make Post Data available to NASD members, QIBs, and the retail 
customers of participating market data vendors, without defining 
``retail customers.'' Nasdaq discusses elsewhere in the proposal the 
need to restrict access to this data to entities that are likely to 
have proper staff and resources to comply with security mandates and 
are unlikely to use the data improperly. Because these two statements 
in conjunction with each other create an ambiguity for the commenters, 
the commenter asks the Commission to require Nasdaq to disclose whether 
or not Nasdaq will impose limitations on vendor redistribution of Post 
Data's content, and if so, to describe the limitations.
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    \19\ Id. at 7-8
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Nasdaq's Response to the Comments.

    Nasdaq filed its response to comments with the Commission on 
September 27, 2001.\20\ In Nasdaq's Response letter, Nasdaq asserts 
that Post Data does not impose an unfair burden on competition. Nasdaq 
maintains that no regulatory fees will be used to subsidize Post Data. 
As Nasdaq stated in the proposal, the projected costs of development, 
enhancement, maintenance, operation, and marketing of Post Data, as 
well as overhead costs allocable to Post Data, should be covered by the 
fees assessed to market data vendors. The fees Nasdaq will assess to 
retail customers should cover costs associated with maintenance and 
administration of the Nasdaq web security infrastructure used to grant 
and validate access to Post Data.\21\ Because vendors with established 
data networks will be able to obtain the data directly from Nasdaq, 
vendors will not incur the cost associated with the Web site. Nasdaq 
believes vendors therefore will be able to use the price differential 
to provide a superior product or complete with the price of Nasdaq's 
product.\22\
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    \20\ See undated letter from Edward S. Knight, Executive Vice 
President and General Counsel, Nasdaq, to Belinda Blaine, Associate 
Director, Division, SEC (``Nasdaq Response letter'').
    \21\ Nasdaq Response letter at 2.
    \22\ Nasdaq Response letter at 3.
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    While one commenter \23\ cited NASD v. SEC \24\ in support of its 
position that Nasdaq is precluded from charging the fees it has 
proposed for Post Data, Nasdaq distinguishes the facts and 
circumstances of the present proposal from that in NASD v. SEC. Nasdaq 
notes that its proposal would establish two separate fees (one for 
market data vendors, and one for Nasdaq's direct subscribers), and the 
fees are designed to be allocated equitably among product users without 
subsidy from other Nasdaq revenue streams.\25\ Unlike the direct 
subscribers in NASD v. SEC, Nasdaq asserts taht market data vendors 
will pay only for the costs of Post Data attributable to wholesale 
purchasers. Nasdaq will not require market data vendors to pay for web 
security costs associated with providing Post Data to Nasdaq's direct 
subscribers.\26\
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    \23\ See Thomson Financial letter at 5.
    \24\ 801 F.2d 1415 (D.C. Cir. 1986).
    \25\ Nasdaq Response letter at 3.
    \26\ Id.
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    Product Enhancements. In Nasdaq's Response letter, Nasdaq clarifies 
that it will make product enhancements

[[Page 2714]]

available to all Post Data users, whether the users are Nasdaq 
customers or customers of a participating market data vendor. If Nasdaq 
offers a free product enhancement during the pilot program, Nasdaq will 
make the enhancement available to all direct and indirect users at no 
cost, and provide notice to vendors to allow vendors an opportunity to 
implement programming changes if necessary.\27\
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    \27\ Nasdaq Response letter at 4.
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    Retail Customers. Nasdaq states unequivocally that it will not 
limit the ability of private data vendors to redistribute the product 
to their respective customers. To that end, Nasdaq clarifies that it 
defines a ``retail'' user as a direct or indirect user--in other words, 
any user who receives the data, be it from a market data vendor or from 
Nasdaq.\28\
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    \28\ Id.
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III. Discussion

    After careful review, the Commission finds the proposed rule 
change, as amended, is consistent with the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\29\ In particular, the Commission finds that the proposed 
rule change is consistent with Sections 15A(b)(5) and (6) of the 
Act.\30\
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    \29\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \30\ 15 U.S.C. 78o-3(b)(5) and (6).
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    Section 15A(b)(5) \31\ requires the equitable allocation of 
reasonable dues, fees and other charges among members and issuers and 
other persons using any facility or system that a national securities 
association operates or controls. Section 15A(b)(6) \32\ requires that 
the rules of a national securities association be designed to foster 
cooperation and coordination with persons engaged in facilitating 
transactions in securities, and are not designed to permit unfair 
discrimination between customers, issuers, brokers or dealers. The 
Commission finds that the proposal is consistent with both of these 
Sections of the Act. Specifically, the Commission has reviewed the 
comment letters and Nasdaq's response to the comment letters. Nasdaq 
has stated it will make the Post Data product available to retail 
subscribers for $70 per month, and to market data vendors for $35 per 
month for each end user receiving the information through the data 
vendor. The Commission finds that the fees that Nasdaq proposes to 
charge for both the retail and the wholesale distribution of Post Data 
are equitably allocated among members and nonmembers. The differential 
between the retail and wholesale fees potentially will allow market 
data vendors the opportunity to sell the data on a retail basis at 
prices higher than $35 but lower than $70, and remain competitive with 
Nasdaq's retail price of $70. In addition, Nasdaq has clarified that 
the wholesale fee does not include the costs associated with the 
maintenance and security of the retail web-based product.
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    \31\ 15 U.S.C. 780-3(b)(5).
    \32\ 15 U.S.C. 78o-3(b)(6).
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    Furthermore, the Commission believes the information contained in 
Post Data may help to foster cooperation and coordination with persons 
engaged in facilitating transactions in securities, by providing 
consistent, reliable, and verified market data to market participants 
who choose to subscribe to the service or purchase the information from 
market data vendors. The Commission believes that investors will 
benefit by the timely dissemination of this reliable market data.\33\ 
The Commission further finds that the proposal places no undue burden 
on competition, and in fact, may foster competition, as market data 
vendors obtain verified data from Post Data, provide enhancements to 
the data, and in turn, sell the enhanced data to retail customers.\34\ 
Finally, the Commission is satisfied that Nasdaq has fully and properly 
addressed the questions raised by the commenter regarding product 
enhancements and the ability of vendors to redistribute the data to 
their respective customers.
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    \33\ In this regard, the Commission notes Nasdaq's 
representation that Nasdaq generally will provide the Post Data 
information to vendors approximately five minutes before it posts 
the information on the Web site for direct end-users. This time 
differential enables the vendor to capture and post the data on its 
own terminals before Nasdaq's release time.
    \34\ The Commission notes that this proposal relates to enhanced 
data that is not integral to the ability of a broker-dealer or 
customer to trade. Cf. NASD v. SEC, footnote 17, supra.
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    The Commission notes that Post Data will be provided on a one-year 
pilot basis. The Commission expects that Nasdaq will evaluate the fees 
it has established for Post Data, and provide the Commission with a 
report of its findings before the expiration of, or extension of, the 
one-year pilot program.
    While minor modifications to Post Data are anticipated, should 
Nasdaq wish to modify the contents of Post Data in any substantive way, 
Nasdaq must do so pursuant to Section 19(b) \35\ and Rule 19b-4 \36\ 
thereunder.
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    \35\ 15 U.S.C. 78s.
    \36\ 17 CFR 240.19b-4.
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\37\ that the proposed rule change (SR-NASD-99-12), as amended, be 
and hereby is approved on a pilot basis through January 10, 2003.
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    \37\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-1299 Filed 1-17-02; 8:45 am]
BILLING CODE 8010-01-M