[Federal Register Volume 67, Number 162 (Wednesday, August 21, 2002)]
[Notices]
[Pages 54245-54246]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-21319]



[[Page 54245]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46357; File No. SR-NASD-2002-111]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. to Amend 
Nasdaq's Transaction Credit Pilot Program for Exchange-Listed 
Securities to Eliminate Volume Eligibility Thresholds

August 15, 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 August 9, 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'' or ``SEC'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by Nasdaq. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq proposes to amend NASD Rule 7010(c)(2) to modify Nasdaq's 
transaction credit pilot program for exchange-listed securities. Nasdaq 
will implement the proposed rule change on a retroactive basis, as of 
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] An NASD 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] An 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 October 1, 
2002.
    (d)-(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'').\3\ 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. InterMarket comprises the Computer Assisted Execution System 
(``CAES''), a system that facilitates the execution of trades in listed 
securities between NASD members that participate in InterMarket, and 
the Intermarket Trading System (``ITS''), a national market plan system 
that permits trades between NASD members and specialists on the floors 
of national securities exchanges that trade listed securities.\4\
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    \3\ 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).
    \4\ See CAES/ITS User Guide, www.intermarket.nasdaqtrader.com at 
p.5.
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    Nasdaq is proposing to modify the InterMarket Transaction Credit 
Pilot Program (the ``Program'') that it began in 1999.\5\ Under the 
Program, Nasdaq shares a portion of the tape revenues that it receives 
(through the NASD) from the Consolidated Tape Association (the 
``CTA''), by providing a transaction credit to members who engage in 
OTC trading activity in NYSE and Amex securities. The Program helps 
InterMarket market makers and investors lower costs associated with 
trading listed securities. The Program is also a tool for Nasdaq to 
compete against other exchanges (particularly CSE and CHX) that offer 
similar programs.\6\
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    \5\ See Securities Exchange Act Release No. 41174 (Mar. 16, 
1999), 64 FR 14034 (Mar. 23, 1999) (SR-NASD-99-13). The SEC issued 
notice of subsequent extensions of the Program. See Securities 
Exchange Act Release Nos. 42095 (Nov. 3, 1999), 64 FR 61680 (Nov. 
12, 1999) (SR-NASD-99-59); 42672 (Apr. 12, 2000), 65 FR 21225 (Apr. 
20, 2000) (SR-NASD-2000-10); 42907 (June 7, 2000), 65 FR 37445 (June 
14, 2000) (SR-NASD-2000-32); 43831 (Jan. 10, 2001), 66 FR 4882 (Jan. 
18, 2001) (SR-NASD-2000-72); 44098 (Mar. 23, 2000), 66 FR 17462 
(Mar. 30, 2001) (SR-NASD-01-15); 44734 (Aug. 22, 2001), 66 FR 4537 
(Aug. 26, 2001) (SR-NASD-2001-42); 45273 (Jan. 14, 2002), 67 FR 2716 
(Jan. 18, 2002) (SR-NASD-2001-92); and 46232 (July 19, 2002), 67 FR 
48691 (July 25, 2002) (SR-NASD-2002-94).
    \6\ See Securities Exchange Act Release No. 38237 (Feb. 4, 
1997), 62 FR 6592 (Feb. 12, 1997) (SR-CHX-97-01) and Securities 
Exchange Act Release No. 39395 (Dec. 3, 1997), 62 FR 65113 (Dec. 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.
    Nasdaq is proposing to eliminate the requirement that a member 
print an average of 500 daily trades of Tape A securities during a 
quarter to qualify for Tape A sharing, as well as the comparable volume 
threshold for Tape B securities. Nasdaq originally included these 
thresholds in the Program because it believed that a member should

[[Page 54246]]

demonstrate a clear commitment to operating in the InterMarket by 
achieving the threshold levels of trading before being eligible for 
tape sharing. Nasdaq has now concluded that the thresholds should be 
eliminated, however, for a number of reasons. First, the advent of 
riskless principal trade reporting,\7\ which often eliminates the need 
to report one part of a two-part transaction, has reduced the number of 
trades reported for a given level of transaction activity and thereby 
made the 500-trade threshold more difficult for certain participants to 
meet. Second, the tape sharing programs of Nasdaq's competitors, such 
as CSE and CHX, do not have similar threshold requirements. For these 
reasons, Nasdaq believes that the thresholds should be eliminated, so 
that the tape sharing program will be available to all members that 
participate in InterMarket, regardless of their level of activity.
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    \7\ Securities Exchange Act Release No. 41606 (July 8, 1999); 64 
FR 38226 (July 15, 1999) (SR-NASD-98-08) (approving riskless 
principal trade reporting for InterMarket); Securities Exchange Act 
Release No. 43469 (Oct. 20, 2000), 65 FR 64468 (Oct. 27, 2000) (SR-
NASD-2000-60) (delaying implementation of riskless principal 
reporting rules until February 1, 2001).
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the Act, including section 15A(b)(5) of the Act,\8\ 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. The elimination of the volume threshold requirement for 
transaction credits will increase the number of market participants 
eligible for transaction credits, thereby lowering the cost of 
InterMarket transactions.
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    \8\ 15 U.S.C. 78o-3(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    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 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 
NASD. All submissions should refer to file number SR-NASD-2002-111 and 
should be submitted by September 11, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-21319 Filed 8-20-02; 8:45 am]
BILLING CODE 8010-01-P