[Federal Register Volume 67, Number 130 (Monday, July 8, 2002)]
[Notices]
[Pages 45164-45166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16986]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46153; File No. SR-NASD-2002-68]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 by the 
National Association of Securities Dealers, Inc. to Modify Execution 
Fees for Nasdaq's Intermarket Trading System and Computer Assisted 
Execution System, and to Extend the Transaction Credit Pilot Program 
for InterMarket Trades

July 1, 2002.
    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 June 13, 2002, 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 June 21, 2002, Nasdaq amended the proposal.\3\ Nasdaq filed the 
proposal pursuant to Section 19(b)(3)(A)(ii) of the Act,\4\ and Rule 
19b-4(f)(2) thereunder \5\ as one establishing or changing a due, fee, 
or other charge imposed by the self-regulatory organization, which 
renders the proposal effective upon filing with the Commission. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See June 21, 2002 letter from John M. Yetter, Assistant 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division of Market Regulation, Commission (``Amendment No. 
1''). In Amendment No. 1, Nasdaq made technical, non-substantive 
changes to the proposed rule change.
    \4\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \5\ 17 CFR 240.19b-4(f)(2).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes (i) to modify the execution fees for Nasdaq 
InterMarket trades executed through the Intermarket Trading System 
(``ITS'') and Nasdaq's Computer Assisted Execution System (``CAES''); 
and (ii) to modify and extend the transaction credit pilot program for 
InterMarket trades (``Program''). Nasdaq will implement the rule change 
on July 1, 2002. The text of the proposed rule change is below. 
Proposed new language is in italics; proposed deletions are in 
brackets.
7010. System Services
    (a)-(b) No change.
    (c) (1) No change.
    (2) Exchange-Listed Securities Transaction Credit[.]
    For a pilot period, qualified NASD members that trade securities 
listed on the NYSE and Amex in over-the-counter transactions reported 
by the NASD to the Consolidated Tape Association may receive from the 
NASD transaction credits based on the number of trades so reported. To 
qualify for the credit with respect to Tape A reports, an NASD member 
must account for 500 or more average daily Tape A reports of over-the-
counter transactions as reported to the Consolidated Tape during the 
concurrent calendar quarter. To qualify for the credit with respect to 
Tape B reports, an NASD member must account for 500 or more average 
daily Tape B reports of over-the-counter transactions as reported to 
the Consolidated Tape during the concurrent calendar quarter. If an 
NASD member is so qualified to earn credits based either on its Tape A 
activity, or its Tape B activity, or both, that member may earn credits 
from one or both pools maintained by the NASD, each pool representing 
40% of the revenue paid by the Consolidated Tape Association to the 
NASD for each of Tape A and Tape B transactions. A qualified NASD 
member may earn credits from the pools according to the member's pro 
rata share of the NASD's over-the-counter trade reports in each of Tape 
A and Tape B for each calendar quarter starting with July 1, 2000 for 
Tape A reports (April 1, 2000 for Tape B reports) and ending with the 
calendar quarter starting on [April] October 1, 2002. Effective as of 
July 1, 2002, for purposes of calculating the credit for trades 
executed through ITS or CAES, trade reports will be credited to the 
member that sells in response to a buy order or that buys in response 
to a sell order.
    (d) Computer Assisted Execution Service.
    The charges to be paid by members receiving the Computer Assisted 
Execution Service (CAES) shall consist of a fixed service charge and a 
per share transaction charge plus equipment-related charges.
    (1) Service Charges.
    $100 per month for each market maker terminal receiving CAES.
    (2) Transaction Charges.
    (A) As of [January 1, 1998, $0.50 per execution] July 1, 2002, 
$0.003 per share executed shall be paid by an order entry firm or CAES 
market maker that enters

[[Page 45165]]

an order into CAES that is executed in whole or in part, and $0.002 per 
share executed shall be credited to the CAES market maker that executes 
such an order.[*]
    (B) As of [November 1, 1997, $1.00 per commitment] July 1, 2002, 
$0.002 per share executed shall be paid by any member that sends a 
commitment through the ITS/CAES linkage to buy or sell a listed 
security that is executed in whole or in part, and $0.001 per share 
executed shall be credited to a member that executes such an order.[**]
    [*As of September 1, 2000, a CAES market maker that receives and 
executes a CAES order or any part of a CAES order will not be required 
to pay a CAES transaction charge.]
    [**As of September 1, 2000, a member that receives a commitment 
through the ITS/CAES linkage to buy or sell a security that is executed 
in whole or in part will not be required to pay a CAES transaction 
charge.]
    (e)--(r) 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 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
    Nasdaq's InterMarket is a quotation, communication, and execution 
system that allows NASD members to trade stocks listed on the New York 
Stock Exchange (``NYSE'') and the American Stock Exchange 
(``Amex'').\6\ The InterMarket competes with regional exchanges like 
the Chicago Stock Exchange (``CHX'') and the Cincinnati Stock Exchange 
(``CSE'') for retail order flow in stocks listed on the NYSE and the 
Amex. The InterMarket comprises CAES, a system that facilitates the 
execution of trades in listed securities between NASD members that 
participate in the InterMarket, and ITS, a system that permits trades 
between NASD members and specialists on the floors of national 
securities exchanges that trade listed securities.\7\
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    \6\ Nasdaq's InterMarket formerly was referred to as Nasdaq's 
Third Market. See Securities Exchange Act Release No. 42907 (June 7, 
2000), 65 FR 37445 (June 14, 2000) (SR-NASD-2000-32).
    \7\ See CAES/ITS User Guide, p.5, at 
www.intermarket.nasdaqtrader.com.
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    Nasdaq proposes to modify the InterMarket fee structure to 
encourage market participants to provide additional liquidity to 
support executions through the InterMarket and thereby enhance its 
competitiveness. Specifically, Nasdaq will replace the current CAES 
execution fee of $0.50 with a per share execution fee of $0.003, and 
will credit $0.002 per share to a member whenever it provides the 
liquidity to support an execution through CAES (i.e. sells in response 
to a buy order or buys in response to a sell order). Similarly, the 
current ITS execution fee of $1.00 will be replaced with a per share 
execution fee of $0.002, and a member that provides liquidity to 
support an ITS execution will receive a credit of $0.001 per share. 
This fee structure is similar to the structure that has been in place 
for Nasdaq's SuperSOES system since November 2001 and that will be used 
for Nasdaq's SuperMontage system which Nasdaq hopes to launch in the 
third quarter of 2002.\8\
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    \8\ See Securities Exchange Act Release Nos. 44910 (October 5, 
2001), 66 FR 52167 (October 12, 2001) (SR-NASD-2001-67); and 45906 
(May 10, 2002), 67 FR 34965 (May 16, 2002) (SR-NASD-2002-44).
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    Nasdaq also proposes to modify the Program that began in 1999.\9\ 
Under the Program, Nasdaq shares a portion of the tape revenues that it 
receives (through the NASD) from the Consolidated Tape Association 
(``CTA''), by providing a transaction credit to members who exceed 
certain levels of OTC trading activity in NYSE and Amex listed 
securities. The Program helps InterMarket market makers and investors 
lower costs associated with trading listed securities. The Program is 
also an important tool for Nasdaq to compete against other exchanges 
(particularly CSE and CHX) that offer similar programs \10\ and thereby 
maintain market share in listed securities.
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    \9\ See Securities Exchange Act Release No. 41174 (March 16, 
1999), 64 FR 14034 (March 23, 1999) (SR-NASD-99-13). The Commission 
issued notice of subsequent extensions of the Program. See 
Securities Exchange Act Release Nos. 42095 (November 3, 1999), 64 FR 
61680 (November 12, 1999) (SR-NASD-99-59); 42672 (April 12, 2000), 
65 FR 21225 (April 20, 2000) (SR-NASD-2000-10); 42907 (June 7, 
2000), 65 FR 37445 (June 14, 2000) (SR-NASD-2000-32); 43831 (January 
10, 2001), 66 FR 4882 (January 18, 2001) (SR-NASD-2000-72); 44098 
(March 23, 2000), 66 FR 17462 (March 30, 2001) (SR-NASD-2001-15); 
44734 (August 22, 2001), 66 FR 4537 (August 26, 2001) (SR-NASD-2001-
42); and 45273 (January 14, 2002); 67 FR 2716 (January 18, 2002) 
(SR-NASD-2001-92).
    \10\ See Securities Exchange Act Release Nos 38237 (February 4, 
1997), 62 FR 6592 (February 12, 1997)(SR-CHX-97-01) and 39395 
(December 3, 1997), 62 FR 65113 (December 10, 1997)(SR-CSE-97-12).
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    Under the Program, Nasdaq calculates two separate pools of revenue 
from which credits can be earned: one representing 40% of the gross 
revenues received from the CTA for providing trade reports in NYSE-
listed securities executed in the InterMarket for dissemination by the 
CTA (``Tape A''), the other representing 40% of the gross revenue 
received from the CTA for reporting Amex trades (``Tape B''). 
Eligibility for transaction credits is based on concurrent quarterly 
trading activity. Hitherto, trade reports of ITS and CAES transactions, 
which are reported to Nasdaq automatically, have been attributed to the 
sell side of the trade.\11\ As an added encouragement for members to 
provide liquidity for executions through ITS and CAES, however, Nasdaq 
is modifying the Program to attribute ITS and CAES trades to a member 
that provides liquidity (i.e., that sells in response to an order to 
buy or that buys in response to an order to sell). As is currently the 
case, members will be required to maintain an average daily level of 
attributable trades during a quarter to be eligible for a credit.
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    \11\ Non-Nasdaq system trades that are reported to Nasdaq are 
attributed to the member identified in the trade report as the 
executing party, which is either the reporting party or a ``give-
up'' on whose behalf the trade is reported. The crediting of non-
Nasdaq system trades remains unchanged.
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    Nasdaq is also extending the Program, which is scheduled to expire 
on June 30, 2002. Because the Program has helped Nasdaq maintain market 
share in listed securities, Nasdaq proposes to extend the Program 
through December 31, 2002.
2. Statutory Basis
    Nasdaq believes the proposed rule change is consistent with the 
Act, including Section 15A(b)(5) of the Act,\12\ 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,\13\ which requires rules 
that are not designed to permit unfair discrimination between 
customers, issuers, brokers or dealers.
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    \12\ 15 U.S.C. 78o-3(b)(5).
    \13\ 15 U.S.C. 78o-3(b)(6).

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[[Page 45166]]

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.

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

    The proposed rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act \14\ and subparagraph (f)(2) of Rule 19b-4 
thereunder,\15\ because the proposal establishes or changes a due, fee, 
or other charge. At any time within 60 days of the filing of the 
proposed rule change, the Commission may summarily abrogate such 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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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(3).
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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 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 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 such filing will also be available for 
inspection and copying at the principal office of the Association. All 
submissions should refer to file number SR-NASD-2002-68 and should be 
submitted by July 29, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-16986 Filed 7-5-02; 8:45 am]
BILLING CODE 8010-01-P