[Federal Register Volume 67, Number 26 (Thursday, February 7, 2002)]
[Notices]
[Pages 5867-5868]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-2962]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45379; File Nos. SR-NASD-2001-64 and SR-NASD-2001-68]


Self Regulatory Organizations; Order Granting Approval of 
Proposed Rule Changes by the National Association of Securities 
Dealers, Inc., To Adjust the Fees Charged to NASD Non-Members for the 
Use of the Nasdaq National Market Execution System and the SelectNet 
Service

January 31, 2002.

I. Introduction

    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'') 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 adjust the fees charged to 
NASD non-members for the use of the Nasdaq National Market Execution 
System (``NNMS'' or ``SuperSOES'') and the SelectNet Service.\3\ On 
October 4, 2001, Nasdaq filed a second proposed rule change to increase 
the per share charge for use of SuperSOES on a pilot basis.\4\ The 
Commission received three comment letters on the proposals.\5\ This 
order approves the proposed rule changes.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 44898 (October 2, 
2001), 66 FR 51703 (October 10, 2001) (File No. SR-NASD-2001-64). 
See also Securities Exchange Act Release No. 44899 (October 2, 2001) 
(File No. SR-NASD-2001-63, which applied the new fees to NASD 
members, effective upon filing, and was implemented on October 1, 
2001).
    \4\ See Securities Exchange Act Release No. 44914 (October 9, 
2001), 66 FR 52649 (October 16, 2001) (File No. SR-NASD-2001-68). 
See also Securities Exchange Act Release No. 44910 (October 5, 2001) 
(File No. SR-NASD-2001-67, which applied these pilot changes to NASD 
members, effective upon filing, for a pilot period from November 1, 
2001 through October 31, 2002).
    \5\ See Letter from Meyer S. Frucher, Chairman and Chief 
Executive Officer, Philadelphia Stock Exchange, Inc. (``Phlx'') to 
Jonathan G. Katz, Secretary, Commission, dated October 31, 2001 
(``Phlx Letter); Letter from Michael T. Dorsey, Senior Vice 
President, General Counsel and Secretary, Knight Trading Group, Inc. 
to Jonathan G. Katz, Secretary, Commission, dated November 2, 2001 
(``Knight Letter''); and Letter from Michael Bird, Chairman, Trading 
Issues Committee, Security Traders Association, to Jonathan G. Katz, 
Secretary, Commission, dated November 6, 2001 (``STA Letter'').
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II. Description of the Proposals

A. SR-NASD-2001-64

    In SR-NASD-2001-64, Nasdaq proposes to adjust the fees for 
SelectNet and the NNMS for NASD non-members and consolidate the rules 
governing these fees into NASD Rule 7010(i).\6\ 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. Second, Nasdaq 
proposes to impose a $0.10 order entry charge on orders in both the 
NNMS and SelectNet.
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    \6\ SR-NASD-2001-63 applied the same fees to NASD members, 
effective upon filing, and was implemented on October 1, 2001.
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    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.\7\ 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.
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    \7\ Under current rules, SelectNet may still be used for 
liability orders by (i) national securities exchanges trading 
Nasdaq-listed securities pursuant to grants of unlisted trading 
privileges (``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. 
The NASD filed a proposed rule change to prohibit UTP Exchanges that 
do not participate in the NNMS from using SelectNet. See Securities 
Exchange Act Release No. 45319 (January 18, 2002), 67 FR 3923 
(January 28, 2002).
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B. SR-NASD-2001-68

    In this filing, Nasdaq proposes to increase the per share charge 
for orders entered and executed in the NNMS from $0.001 per share to 
$0.002 per share, in keeping with Nasdaq's ongoing efforts to

[[Page 5868]]

align charges with costs and benefits.\8\ Nasdaq will implement this 
proposed rule change on the first day of the month immediately 
following Commission approval; it will remain in effect, on a pilot 
basis, until October 31, 2002.
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    \8\ SR-NASD-2001-67 applied these same changes to NASD members, 
effective upon filing, for a pilot period from November 1, 2001 
through October 31, 2002.
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III. Summary of Comments

    The Commission received three comment letters on the proposals. One 
commenter expressed general support for Nasdaq's new pricing system but 
did not specifically address the proposals contained in SR-NASD-2001-64 
and SR-NASD-2001-68.\9\ Another commenter, writing in support of the 
proposed rule changes, believed that a per share approach with 
SuperSOES is appropriate, because it seems to be the general method of 
calculating fees by Nasdaq's competitors and members.\10\ The commenter 
also noted that the new fee structure would allow Nasdaq to become more 
competitive with other trading venues.\11\
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    \9\ See STA Letter.
    \10\ See Knight Letter, p. 2.
    \11\ See Knight Letter, p. 4.
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    The third commenter objected on the basis that allowing Nasdaq to 
charge national securities exchanges for execution and entry of orders, 
while also requiring national securities exchanges to pay as part of 
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 (``Plan'')\12\ in effect amounts to 
dual charges for the same service.\13\ The commenter believed that 
Nasdaq's pricing policy thus might not promote a level playing 
field.\14\
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    \12\ The Plan governs the collection, consolidation, and 
dissemination of quotation and transaction information for Nasdaq/NM 
securities listed on an exchange or traded on an exchange pursuant 
to unlisted trading privileges (``UTP''). 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.'' The Plan also 
contains various provisions concerning its operation and sets out 
the responsibilities of the participants with respect to each other 
and the Plan processor.
    \12\ See Phlx Letter, p. 1.
    \14\ Id.
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Nasdaq's Response to the Comments

    Nasdaq filed its response to comments with the Commission on 
January 15, 2002.\15\ In the Nasdaq Letter, Nasdaq responds that 
charges of duplicative fees ``reflect a misunderstanding of the nature 
of the fees to be established by [SR-NASD-2001-64 and SR-NASD-2001-68] 
and therefore do not articulate a reasoned basis for challenging those 
fees.''\16\ Nasdaq believes that the Plan does not guarantee access to 
Nasdaq market participants through Nasdaq proprietary trading systems. 
Nevertheless, Nasdaq notes that it has, via NASD rule, allowed UTP 
Exchanges to use two of its proprietary systems, SuperSOES and 
SelectNet. Nasdaq stated that the UTP Filings merely change the fees to 
be paid by UTP Exchanges that elect to use these systems. Specifically, 
the UTP Filings would specify order entry and order execution charges 
for the use of SelectNet and the NNMS by UTP Exchanges, including a per 
share charge for orders executed through the NNMS.
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    \15\ See Letter from John Yetter, Assistant General Counsel, 
Nasdaq, to Belinda Blaine, Associate Director, Division of Market 
Regulation (``Division''), Commission, dated January 15, 2002 
(``Nasdaq Letter''). The Nasdaq Letter responds to comments on SR-
NASD-2001-64, SR-NASD-2001-68, and SR-NASD-2001-72 and amends SR-
NASD-2001-72. Nasdaq filed SR-NASD-2001-72 on October 9, 2001. See 
Securities Exchange Act Release No. 44931 (October 12, 2001), 66 FR 
53276 (October 19, 2001). Under the proposal, the per share charge 
for orders executed in the NNMS by non-members would increase to 
$0.003 per share and will remain at $0.002 per share for NASD 
Members. The Commission has not yet acted on SR-NASD-2001-72.
    \16\ Nasdaq Letter, pp. 2-3.
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    At this time, only two UTP Exchanges--the Chicago Stock Exchange 
and the Boston Stock Exchange--participate in the NNMS and SelectNet. 
According to Nasdaq, other UTP Exchanges that commence trading of 
Nasdaq securities can, if they choose, avoid paying any of the fees to 
be established by the UTP Filings by using the telephone linkages 
guaranteed by the Plan, as the Cincinnati Stock Exchange currently 
does. Alternatively, if they elect to use Nasdaq execution systems, 
Nasdaq believes that they must pay the fees associated with those 
systems.
    Nasdaq also represented that the costs incurred by Nasdaq in 
developing and maintaining the NNMS and SelectNet are not, and never 
have been, covered by the Plan.\17\ According to Nasdaq, those costs 
are not deducted from the data revenues distributed to Plan 
participants, nor were they included in the initial development costs 
shared among Plan participants.\18\
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    \17\ Nasdaq Letter, p. 3.
    \18\ Nasdaq Letter, pp. 3-4.
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IV. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities association, 
and, in particular, the requirements of section 15A of the Act.\19\ 
Specifically, the Commission finds that the proposal is consistent with 
section 15A(b)(5) of the Act,\20\ which requires that the rules of a 
national securities association 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.
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    \19\ 15 U.S.C. 78o-3(b). In approving the proposed rule change, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \20\ 15 U.S.C. 78o-3(b)(5).
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    The Commission believes that Nasdaq may adjust the fees charged to 
NASD non-members for the use of SuperSOES and the SelectNet Service to 
align those fees with the fees charged to members.\21\ If UTP Exchanges 
trade Nasdaq securities on Nasdaq SuperSOES and SelectNet, Nasdaq may 
charge fees for usage as long as those fees are reasonable and 
equitably allocated.\22\ The Commission notes that Nasdaq is currently 
working on upgrades to the UTP lines in order to meets its obligations 
as the exclusive securities information processor under the OTC/UTP 
Plan.
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    \21\ See supra note 3 (SR-NASD-2001-3) and note 4 (SR-NASD-2001-
67).
    \22\ For example, the NYSE charges NYSE non-members certain fees 
to access its Super Designated Order Turnaround System (SuperDOT), 
the NYSE's electronic order routing system.
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V. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\23\ that the proposed rule changes (SR-NASD-2001-64 and SR-NASD-
2001-68) be and hereby are approved on a pilot basis through October 
31, 2002.
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    \23\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-2962 Filed 2-6-02; 8:45 am]
BILLING CODE 8010-01-P