[Federal Register Volume 67, Number 209 (Tuesday, October 29, 2002)]
[Notices]
[Pages 66031-66033]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-27487]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46712; File No. SR-NASD-2002-149]


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

October 23, 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 October 18, 2002, 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'') 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.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to amend NASD Rule 7010 to codify on a permanent 
basis Nasdaq's InterMarket \3\ Transaction Credit Pilot Program 
(``Program''), and to raise the percentage of revenue available for 
distribution under the Program from 40% to 50%. The text of the 
proposed rule change is below. Proposed additions are in italics; 
proposed deletions are in brackets.\4\
---------------------------------------------------------------------------

    \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-00-32).
    \4\ The text is marked to show changes from the language of the 
rule as proposed to be amended by SR-NASD-2002-115, and assumes that 
the Commission will approve SR-NASD-2002-115 before approving this 
proposal. If the Commission determines that SR-NASD-2002-115 should 
not be approved, Nasdaq will submit an amendment to this filing to 
reflect the disposition of SR-NASD-2002-115.

---------------------------------------------------------------------------

[[Page 66032]]

7010. System Services
    (a)--(b) No change.
    (c)(1) No change.
    (2) Exchange-Listed Securities Transaction Credit.
    [For a pilot period,] NASD members that trade securities listed on 
the NYSE (``Tape A'') and Amex (``Tape B'') in over-the-counter 
transactions may receive from the NASD transaction credits based on the 
number of transactions attributed to them. A transaction is attributed 
to a member if (i) the transaction is executed through CAES or ITS and 
the member acts as liquidity provider (i.e., the member sells in 
response to a buy order or buys in response to a sell order) or (ii) 
the transaction is not executed through CAES or ITS and the member is 
identified as the executing party in a trade report submitted to the 
NASD that the NASD submits to the Consolidated Tape Association. An 
NASD member may earn credits from one or both pools maintained by the 
NASD, each pool representing [4]50% of the revenue paid by the 
Consolidated Tape Association to the NASD for each of Tape A and Tape B 
transactions. An NASD member may earn credits from the pools according 
to the member's pro rata share of all over-the-counter transactions 
attributed to NASD members in each of Tape A and Tape B for each 
calendar quarter[, 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 
venue that allows NASD members to quote and trade stocks listed on the 
New York Stock Exchange (``NYSE'') and the American Stock Exchange 
(``Amex''). The InterMarket competes with regional exchanges like the 
Chicago Stock Exchange (``CHX''), the Boston Stock Exchange (``BSE''), 
and the Cincinnati Stock Exchange (``CSE''), for retail order flow in 
stocks listed on the NYSE and the Amex. Through the InterMarket, Nasdaq 
operates the Computer Assisted Execution System (``CAES''), a system 
that facilitates the execution of trades in listed securities between 
NASD members that participate in the 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.\5\
---------------------------------------------------------------------------

    \5\ See CAES/ITS User Guide, p.5, at 
www.intermarket.nasdaqtrader.com.
---------------------------------------------------------------------------

    Nasdaq proposes to modify the Program. 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 engage in over-the-counter trading 
activity in CTA-eligible securities. The Program helps InterMarket 
market makers and investors lower costs associated with trading listed 
securities. The Program also enables Nasdaq to compete against other 
exchanges that offer similar programs, including CHX, CSE, and BSE.\6\
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release Nos. 38237 (February 4, 
1997), 62 FR 6592 (February 12, 1997)(SR-CHX-97-01); 39395 (December 
3, 1997), 62 FR 65113 (December 10, 1997)(SR-CSE-97-12); 49469 
(September 13, 2002), 67 FR 59084 (September 19, 2002)(SR-BSE-2002-
10).
---------------------------------------------------------------------------

    Under the current 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.\7\ Under the current Program, trade reports of ITS and CAES 
transactions, which are reported to Nasdaq automatically, have been 
attributed to the sell side of the trade,\8\ although Nasdaq has filed 
a proposed rule change to allocate trades to the party that provides 
liquidity in a given transaction.\9\
---------------------------------------------------------------------------

    \7\ The Commission recently approved an amendment to the Program 
that made all members eligible to receive the transaction credit. 
See Securities Exchange Act Release No. 46549 (September 25, 2002), 
67 FR 61705 (October 1, 2002)(SR-NASD-2002-111). Prior to that, a 
member had to print an average of 500 daily trades of Tape A 
securities during a quarter to qualify for Tape A sharing, and an 
average of 500 daily trades of Tape B securities during a quarter to 
qualify for Tape B sharing.
    \8\ Non-ITS/CAES 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-
ITS/CAES trades remains unchanged.
    \9\ On August 16, 2002, Nasdaq filed SR-NASD-2002-115 to modify 
the current 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). Nasdaq has 
incorporated that proposal in the permanent Program because it 
believes that encouraging InterMarket participants to provide 
liquidity will increase the efficiency of InterMarket transactions 
and enhance the competitiveness of InterMarket vis-[agrave]-vis the 
exchanges with which it competes.
---------------------------------------------------------------------------

    Nasdaq believes that it is important to establish the transaction 
credit program as a permanent part of the InterMarket. The Program has 
been in place for three years, and has proved to be successful. The 
InterMarket has emerged as a viable competitive option to trading on 
the primary market and, along with other exchanges that trade CTA-
eligible securities, has helped to reduce the cost of trading those 
issues. The Program has been a critical aspect of the InterMarket's 
ability to compete effectively with other exchanges.
    To maintain that competitiveness, Nasdaq believes it is necessary 
to raise the percentage of revenue available for distribution under the 
Program from 40% to 50%. Currently, the CSE and CHX both distribute 50% 
of revenue under the formulae contained in their programs, and the BSE 
has filed a proposal with the Commission to distribute 50% of revenue 
as well.\10\
---------------------------------------------------------------------------

    \10\ See Securities Exchange Act Release No. 49469 (September 
13, 2002), 67 FR 59084 (September 19, 2002)(SR-BSE-2002-10).
---------------------------------------------------------------------------

2. Statutory Basis
    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 dues, fees and other charges among members and issuers and 
other persons using any facility or system which the NASD operates or 
controls. Nasdaq believes the proposed rule change will lower the cost 
of conducting business through the InterMarket for members that provide 
liquidity through ITS or CAES. Nasdaq also believes that encouraging 
members to provide liquidity will enhance the efficiency of the 
InterMarket, and will benefit investors whose trades are routed to the 
InterMarket by increasing

[[Page 66033]]

the likelihood that they will be promptly executed.
---------------------------------------------------------------------------

    \11\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

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

    On July 2, 2002, the Commission issued an Order abrogating certain 
proposed rule changes relating to market data revenue sharing 
programs.\12\ In that Order, the Commission expressed concern that the 
subject proposed rule changes raised ``serious questions as to whether 
they are consistent with the Act and with the protection of 
investors.'' Specifically, the Commission questioned the effect of 
market data rebates on the accuracy of market data, and on the 
regulatory functions of self-regulatory organizations.
---------------------------------------------------------------------------

    \12\ Securities Exchange Act Release No. 46159 (July 2, 2002), 
67 FR 45775 (July 10, 2002)(File Nos. SR-NASD-2002-61, SR-NASD-2002-
68, SR-CSE-2002-06, and SR-PCX-2002-37) (Order of Summary 
Abrogation).
---------------------------------------------------------------------------

    The Commission now solicits comment on this proposed rule change, 
and in general, on (1) market data fees; (2) the collection of market 
data fees; (3) the distribution of market data rebates; (4) the effect 
of market data revenue sharing programs on the accuracy of market data; 
and (5) the impact of market data revenue sharing programs on the 
regulatory functions of self-regulatory organizations.
    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-2002-149 and 
should be submitted by November 19, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
---------------------------------------------------------------------------

    \13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-27487 Filed 10-28-02; 8:45 am]
BILLING CODE 8010-01-P