[Federal Register Volume 67, Number 22 (Friday, February 1, 2002)]
[Notices]
[Pages 5019-5022]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-2486]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45342; File No. SR-NASD-2001-96]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Institute a Quotation Update Charge and Introduce a 
Mechanism for Sharing Market Data Revenue with NASD Members

January 28, 2002.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on December 
27, 2001, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its subsidiary, The Nasdaq Stock 
Market, Inc. (``Nasdaq''), filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by Nasdaq. 
On January 18, 2002, Nasdaq filed Amendment No. 1 to the proposed rule 
change.\1\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ See Letter from John M. Yetter, Assistant General Counsel, 
Nasdaq, to Katherine A. England, Assistant Director, Division of 
Market Regulation (``Division''), Commission (January 15, 2002) 
(``Amendment No. 1''). In Amendment No. 1, Nasdaq provided further 
explanation as to its reasons for charging a quotation update fee.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    This is a proposed rule change, on a pilot basis, to: (1) Institute 
a quotation update charge and (2) introduce a mechanism for sharing 
market data revenue with NASD members. Pursuant to section 
19(b)(3)(A)(ii) of the Act \2\ and Rule 19b-4(f)(2) thereunder,\3\ 
Nasdaq has designated this proposal as one establishing or changing a 
due, fee, or other charge imposed by a self-regulatory organization, 
and therefore the proposed rule change is effective upon filing as 
applied to NASD members. The proposed rule change will become operative 
on a pilot basis, commencing on February 1, 2002 and ending on October 
31, 2002. During the pilot period, Nasdaq will assess the effect of the 
rule change on market participants and Nasdaq and may file additional 
changes to the level or

[[Page 5020]]

structure of its fees. The text of the proposed rule change is set 
forth below. Proposed new language is italicized; proposed deletions 
are in brackets.
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    \2\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \3\ 17 CFR 240.19b-4(f)(2).
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* * * * *

7010. System Services

(a)(1) Nasdaq Level 1 Service
    The charge to be paid by the subscriber for each terminal receiving 
Nasdaq Level 1 Service is $20 per month. This Service includes the 
following data:
    [(1)] (A) Inside bid/ask quotations calculated for securities 
listed in The Nasdaq Stock Market and securities quoted in the OTC 
Bulletin Board (OTCBB) service;
    [(2)] (B) The individual quotations or indications of interest of 
broker/dealers utilizing the OTCBB service; and
    [(3)] (C) Last sale information on securities classified as 
designated securities in the Rule 4630, 4640, and 4650 Series and 
securities classified as over-the-counter equity securities in the Rule 
6600 Series.

(2) Market Data Revenue Sharing

    (A) For a pilot period commencing on February 1, 2002 and lasting 
until October 31, 2002, NASD members shall receive a market data 
revenue sharing credit. The total credit shall be calculated in 
accordance with the following formula:

Credit = (0.60)  x  (Eligible Revenue)  x  (Member's Volume Percentage)

    (B) Definitions. The following definitions shall apply to this 
Rule:
    (i) ``Eligible Revenue'' shall mean:
    a. The portion of the net distributable revenues that Nasdaq, 
through the NASD, is eligible to receive under the Nasdaq UTP Plan, 
that is attributed to the Nasdaq Level 1 Service for Eligible 
Securities, minus
    b. The portion of the fee charged to Nasdaq by NASD Regulation, 
Inc. for regulatory services allocated to the Nasdaq Level 1 Service 
for Eligible Securities.
    (ii) ``Eligible Securities'' shall mean all Nasdaq National Market 
securities and any other security that meets the definition of 
``Eligible Security'' in the Nasdaq UTP Plan.
    (iii) ``Member's Volume Percentage'' shall mean the average of:
    a. the percentage derived from dividing the total number of trades 
in Eligible Securities conducted on non-Nasdaq transaction systems that 
the member reports in accordance with NASD trade reporting rules to the 
Automated Confirmation Transaction Service (``ACT'') by the total 
number of trades in Eligible Securities reported to ACT by NASD 
members, and
    b. the percentage derived from dividing the total number of shares 
represented by trades in Eligible Securities conducted on non-Nasdaq 
transaction systems that the member reports in accordance with NASD 
trade reporting rules to ACT by the total number of shares represented 
by all trades in Eligible Securities reported to ACT by NASD members.
    (iv) ``Nasdaq UTP Plan'' shall mean the Joint Self-Regulatory 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
    (b)-(h) No change.
(i) Transaction Execution Services
    (1)-(4) No change.

(5) Quotation Updates

    (A) Except as provided in subparagraph (B), for a pilot period 
commencing on February 1, 2002 and lasting until October 31, 2002, a 
fee of $0.01 per quotation update will be charged to NASD members that 
post quotations in the Nasdaq quotation montage. A ``quotation update'' 
includes any change to the price or size of a displayed quotation or 
reserve size.
    (B) A quotation update fee will not be charged for a change in the 
displayed quotation or reserve size that is performed automatically by 
the Nasdaq National Market Execution System (``NNMS'') when an 
execution against the quotation occurs (other than a change performed 
by the ``Autoquote Refresh'' functionality of the NNMS, for which a fee 
will be assessed).
    (j)-(q) No change.
* * * * *

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 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 below in Sections A, B, 
and C, 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

    On September 28, 2001, Nasdaq filed two proposed rule changes to 
make modifications to the pricing structure for the Nasdaq National 
Market Execution System (the ``NNMS'' or ``SuperSOES'') and the 
SelectNet service.\4\ These changes were 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. On October 4, 2001, Nasdaq filed two additional 
proposed rule changes to increase the per share charge for use of the 
NNMS from $0.001 to $0.002 and introduce a liquidity provider rebate 
for NASD members.\5\ On October 9, 2001, Nasdaq filed a proposed rule 
change--SR-NASD-2001-71--to introduce a mechanism for sharing market 
data revenue with NASD members, make modifications to the fees for use 
of the NNMS and the liquidity provider rebate to calibrate the level of 
fees and rebates to the contributions that types of market participants 
make to the support of the Nasdaq market, and introduce a quotation 
update charge.\6\ On November 29, 2001, Nasdaq withdrew SR-NASD-2001-71 
prior to the date scheduled for its implementation, December 1, 2001, 
to allow Nasdaq to make adjustments to the mechanism for market data 
revenue sharing and the quotation update

[[Page 5021]]

charge, and to provide interested persons with a greater opportunity to 
comment on aspects of the prior filing that assessed different levels 
of fees on different classes of NASD members. In this filing, Nasdaq is 
reintroducing the quotation update charge and a modified mechanism for 
market data revenue sharing.
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    \4\ See Securities Exchange Act Release No. 44899 (Oct. 2, 
2001), 66 FR 51707 (Oct. 10, 2001) (SR-NASD-2001-63) and Securities 
Exchange Act Release No. 44898 (Oct. 2, 2001), 66 FR 51703 (Oct. 10, 
2001) (SR-NASD-2001-64). SR-NASD-2001-63 applied the new fees to 
NASD members, effective upon filing, and was implemented on October 
1, 2001. SR-NASD-2001-64 would apply the new fees to national 
securities exchanges that trade Nasdaq-listed securities pursuant to 
grants of unlisted trading privileges (``UTP Exchanges'') following 
Commission approval.
    \5\ See Securities Exchange Act Release No. 44910 (Oct. 5, 
2001), 66 FR 52167 (Oct. 12, 2001) (SR-NASD-2001-67) and Securities 
Exchange Act Release No. 44914 (Oct. 9, 2001), 66 FR 52649 (Oct. 16, 
2001) (SR-NASD-2001-68). SR-NASD-2001-67 applied these pilot changes 
to NASD members, effective upon filing, for a pilot period from 
November 1, 2001 through October 31, 2002. SR-NASD-2001-68 would 
apply the increase in the per share charge to UTP Exchanges 
following Commission approval.
    \6\ See Securities Exchange Act Release No. 44918 (Oct. 10, 
2001), 66 FR 52814 (Oct. 17, 2001) (SR-NASD-2001-71) (withdrawn Nov. 
29, 2001). Also on October 9, 2001, Nasdaq filed a proposed rule 
change to increase the per share charge payable by UTP Exchanges 
that use the NNMS to $0.003. See Securities Exchange Act Release No. 
44931 (Oct. 12, 2001), 66 FR 53276 (Oct. 19, 2001) (SR-NASD-2001-
72).
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Quotation Update Fee
    Nasdaq is instituting a quotation update fee that is applicable to 
NASD members, in recognition of the fact that the ability to post 
quotes in the Nasdaq quotation montage provides market participants 
with the valuable opportunity to advertise the liquidity that they 
offer. Nasdaq believes that the absence of any charges for quotation 
updates has encouraged market participants to quote inefficiently, 
imposing unnecessary burdens on Nasdaq system capacity. Moreover, to 
the extent that quotations are accessed through non-Nasdaq systems, the 
firms that post the quotations are currently free riding on the 
quotation infrastructure provided by Nasdaq. Accordingly, Nasdaq will 
charge NASD members $0.01 for each quotation update.\7\ A ``quotation 
update'' includes any change to the price or size of a displayed 
quotation or reserve size. However, a quotation update fee will not be 
charged for a change in the displayed quotation or reserve size that is 
performed automatically by the NNMS when an execution against the 
quotation occurs (other than a change performed by the ``Autoquote 
Refresh'' functionality of the NNMS, for which a fee will be assessed).
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    \7\ A quotation update charge will not be imposed on UTP 
Exchanges at this time, because such a charge is not currently 
authorized by 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 (the ``Nasdaq UTP 
Plan'' or the ``Plan''), which governs the posting of quotes by UTP 
Exchanges.
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    Nasdaq believes that these limitations on the applicability of the 
quotation update fee enhance one of the primary purposes of the fee, 
which is to discourage inefficient quoting. According to Nasdaq, an 
execution against a member's quotation indicates that the member is 
quoting efficiently, because the member is providing the liquidity that 
results in order executions. Accordingly, although the resulting 
quotation changes do impose system burdens, Nasdaq believes that the 
imposition of a quote update charge in such circumstances is not 
warranted at this time. A charge is imposed, however, for quotation 
changes made by the Autoquote Refresh functionality of the NNMS, which 
restores an NNMS market maker's quotation price and size in accordance 
with parameters established by the market maker whenever its displayed 
quotation size and reserve size have been decremented to zero. Nasdaq 
believes that a charge for quotation updates performed by this 
functionality is appropriate because it provides a valuable service 
that assists market makers in meeting their obligation continuously to 
maintain a two-sided quotation.
Market Data Revenue Sharing
    Nasdaq proposes to share with NASD members a portion of the market 
data revenue that it receives, through the NASD, under the Nasdaq UTP 
Plan. Under the Plan, a Plan participant receives a share of market 
data revenues distributed by the Plan's securities information 
processor (``SIP''), based on reported trades attributable to such 
participant under the Plan.\8\ Nasdaq represents that its proposal is 
similar to the transaction credit already in effect to share 
Consolidated Tape Association revenue with NASD members that trade 
exchange-listed stocks through Nasdaq's Intermarket Trading System \9\ 
and similar revenue sharing programs established by UTP Exchanges.\10\
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    \8\ At present, Nasdaq serves as the Plan's SIP, and the NASD is 
the Plan participant that submits trade reports received from NASD 
members through ACT. Accordingly, the NASD receives market data 
revenue under the Plan but distributes it to Nasdaq, as the entity 
that operates markets on the NASD's behalf. Plan participants are 
currently seeking proposals in order to select a new entity to serve 
as the Plan's SIP. Moreover, in light of Nasdaq's application for 
registration as a national securities exchange, Plan participants 
are discussing an amendment to the Plan that would make Nasdaq a 
Plan participant, eligible to receive a direct distribution of 
market data revenue based on the trades attributable to it under the 
Plan.
    \9\ See NASD Rule 7010(c)(2).
    \10\ See, e.g., Securities Exchange Act Release No. 45148 (Dec. 
11, 2001), 66 FR 65514 (Dec. 19, 2001) (SR-CSE-2001-05) and 
Securities Exchange Act Release No. 41238 (Mar. 31, 1999), 64 FR 
17204 (Apr. 8, 1999) (SR-CSE-99-03). Securities Exchange Act Release 
No. 40591 (Oct. 22, 1998), 63 FR 58078 (Oct. 29, 1998) (SR-BSE-98-
9); Securities Exchange Act Release No. 38237 (Feb. 4, 1997), 62 FR 
6592 (Feb. 12, 1997) (SR-CHX-97-01).
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    A member's credit will be 60% of the product of Eligible Revenue 
and the Member's Volume Percentage. Eligible Revenue is defined as (i) 
the portion of the net distributable revenues that Nasdaq, through the 
NASD, is eligible to receive under the Nasdaq UTP Plan, that is 
attributed to the Nasdaq Level 1 Service for NNM securities or other 
securities covered by the Nasdaq UTP Plan (``Eligible Securities''), 
minus (ii) the portion of the fee charged to Nasdaq by NASD Regulation, 
Inc. (``NASDR'') for regulatory services allocated to the Nasdaq Level 
1 Service for Eligible Securities. The Member's Volume Percentage is 
defined as the average of (i) the percentage derived from dividing the 
total number of trades in Eligible Securities conducted on non-Nasdaq 
transaction systems that the member reports in accordance with NASD 
trade reporting rules to ACT by the total number of trades in Eligible 
Securities reported to ACT by NASD members, and (ii) the percentage 
derived from dividing the total number of shares represented by trades 
in Eligible Securities conducted on non-Nasdaq transaction systems that 
the member reports in accordance with NASD trade reporting rules to ACT 
by the total number of shares represented by all trades in Eligible 
Securities reported to ACT by NASD members. In other words, the credit 
is 60% of the net Level 1 revenue attributable to the member's reports 
of non-Nasdaq transaction system trades in Eligible Securities, with 
the pool of sharable revenue being comprised of Level 1 revenues 
distributable to Nasdaq under the UTP Plan minus an allocated portion 
of the NASDR regulation fee, and the member's non-Nasdaq transaction 
system trade report activity being measured by total number of trades 
and share volume.
    The formula focuses on the reporting of non-Nasdaq system trades, 
such as internalized trades, because Nasdaq expects that members will 
have increasingly greater options to report such trades to UTP 
Exchanges in the future. In order to continue to provide an attractive 
environment for the reporting of these trades, Nasdaq believes that it 
is appropriate to share a portion of the data revenue associated with 
these trades with members that report them to Nasdaq.
    Nasdaq believes that the proposed rule change is consistent with 
the Act, including section 15A(b)(5) of the Act,\11\ which requires 
that the rules of the NASD provide for the equitable allocation of 
reasonable fees, dues, 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,\12\ which requires rules 
that are not designed to permit unfair discrimination between 
customers, issuers, brokers or dealers. Nasdaq believes that the 
quotation update fee and the market data revenue sharing credit are 
allocated in an equitable fashion, based upon a

[[Page 5022]]

member's quotation update activity and non-Nasdaq system trade 
reporting activity, respectively.
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    \11\ 15 U.S.C. 78o-3(b)(5).
    \12\ 15 U.S.C. 78o-3(b)(6).
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    Moreover, Nasdaq believes that the level of fees charged to market 
participants under the proposal is reasonable. Nasdaq anticipates that 
overall fees for the NNMS, SelectNet, and SOES, net of the market data 
revenue sharing credit, will be comparable to overall fees for the 
NNMS, SelectNet, and SOES under the pricing changes implemented by 
Nasdaq on October 1 and November 1, 2001. Such fees are, in turn, 
estimated to 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 believes that the proposed rule change will not result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    Written comments were neither solicited nor received on the 
proposed rule change contained in this filing. The Commission, however, 
had received a number of comment letters that referenced SR-NASD-2001-
71, a proposed rule change instituting a quotation update fee and 
market data revenue sharing plan. Nasdaq withdrew SR-NASD-2001-71 prior 
to its implementation date. Nasdaq believes that for the most part, the 
comment letters did not focus on the quotation update fee or on the 
aspects of market data revenue sharing that are reflected in the 
proposed rule change contained in this filing. Moreover, Nasdaq 
believes that comments received on SR-NASD-2001-71 are inapposite 
because the proposed rule change contained in this filing are 
sufficiently dissimilar from the rule change proposed in SR-NASD-2001-
71.

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

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A)(ii) of the Act \13\ and subparagraph (f) of Rule 19b-4,\14\ 
thereunder because it establishes or changes a due, fee or other charge 
imposed by the self-regulatory organization. At any time within 60 days 
of the filing of the proposed rule change, the Commission may summarily 
abrogate the rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \13\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \14\ 17 CFR 240.19b-4(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
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, NW, Washington, 
DC 20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of the filing 
will also be available for inspection and copying at the principal 
office of the NASD. All submissions should refer to file number SR-
NASD-2001-96 and should be submitted by February 22, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-2486 Filed 1-31-02; 8:45 am]
BILLING CODE 8010-01-P