[Federal Register Volume 67, Number 223 (Tuesday, November 19, 2002)]
[Notices]
[Pages 69780-69782]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-29242]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46806; File No. SR-NASD-2002-115]


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 Allocate Credits To Liquidity Providers

November 8, 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 19, 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 modify Nasdaq's 
transaction credit pilot program for exchange-listed securities. Nasdaq 
will implement the proposed rule change as soon as practicable 
following Commission approval. The text of the proposed rule change is 
below. Proposed additions are in italics; proposed deletions are in 
brackets.\3\
---------------------------------------------------------------------------

    \3\ The text is marked to show changes from the language of the 
rule as proposed to be amended by SR-NASD-2002-111, and assumes that 
the Commission will approve SR-NASD-2002-111 before approving SR-
NASD-2002-115. If the Commission determines that SR-NASD-2002-111 
should not be approved, Nasdaq will submit an amendment to SR-NASD-
2002-115 to reflect the disposition of SR-NASD-2002-111.
---------------------------------------------------------------------------

    7010. System Services

[[Page 69781]]

    (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 [reported by the NASD to the Consolidated Tape 
Association] may receive from the NASD transaction credits based on the 
number of [trades so reported] 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 40% 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 [the NASD's] all 
over-the-counter [trade reports] 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 
system that allows NASD members to trade stocks listed on the New York 
Stock Exchange (``NYSE'') and the American Stock Exchange 
(``Amex'').\4\ 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 system plan 
that permits trades between NASD members and specialists on the floors 
of national securities exchanges that trade listed securities.\5\
---------------------------------------------------------------------------

    \4\ 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).
    \5\ See CAES/ITS User Guide, p. 5, at 
www.intermarket.nasdaqtrader.com.
---------------------------------------------------------------------------

    Nasdaq is proposing to modify the InterMarket Transaction Credit 
Pilot Program (the ``Program'') that it began in 1999.\6\ 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.\7\
---------------------------------------------------------------------------

    \6\ 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-00-10); 42907 (June 7, 2000), 65 FR 37445 (June 
14, 2000) (SR-NASD-00-32); 43831 (Jan. 10, 2001), 66 FR 4882 (Jan. 
18, 2001) (SR-NASD-00-72); 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).
    \7\ 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).
---------------------------------------------------------------------------

    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.\8\
---------------------------------------------------------------------------

    \8\ Under the current Program, a member must print an average of 
500 daily trades of Tape A securities during a quarter to qualify 
for Tape A sharing and must print an average of 500 daily trades of 
Tape B securities during a quarter to qualify for Tape B sharing. 
Nasdaq has filed a separate proposed rule change to seek Commission 
approval for the elimination of these thresholds, effective 
retroactively as of July 1, 2002. SR-NASD-2002-111 (Aug. 9, 2002).
---------------------------------------------------------------------------

    Hitherto, trade reports of ITS and CAES transactions, which are 
reported to Nasdaq automatically, have been attributed to the sell side 
of the trade.\9\ 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). Nasdaq believes that by 
encouraging the provision of liquidity by InterMarket participants, the 
proposed rule change will increase the efficiency of InterMarket 
transactions and enhance the competitiveness of InterMarket vis-a-vis 
the exchanges with which it competes.
---------------------------------------------------------------------------

    \9\ 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.
---------------------------------------------------------------------------

    It should be noted that the NASD receives revenue from the CTA for 
ITS transactions in which an NASD member is the selling party, and 
under the Program as currently in effect, Nasdaq shares a portion of 
the revenue with members that are selling parties. By contrast, under 
the proposed rule change, Nasdaq would share 40% of the revenue it 
receives from the CTA with NASD members that provide liquidity in a 
transaction. As a result, in instances where an NASD member executes a 
sell order that it receives through the ITS, Nasdaq will provide a 
transaction credit to the NASD member even though NASD receives no 
revenue from the CTA with respect to the transaction. Similarly, in 
instances where an NASD member sends a sell order to an exchange 
through the ITS, Nasdaq would not provide a transaction credit to the 
NASD member even though NASD does receive revenue from the CTA with 
respect to the transaction. The total pool of revenue shared with NASD 
members (40% of Tape A revenue and 40% of Tape B revenue) will not 
change, however. Moreover, since there is no requirement that Nasdaq 
share any

[[Page 69782]]

of its tape revenue, Nasdaq does not believe that there is any 
requirement that a plan for sharing tape revenue with NASD members must 
use the same formula as the plan under which NASD receives the revenue. 
Indeed, by providing transaction credits to liquidity providers, Nasdaq 
hopes to encourage members to commit capital to transactions through 
InterMarket and/or to allow customer orders to interact with orders 
that they receive through InterMarket. Accordingly, Nasdaq believes 
that the proposed rule change will foster the provision of additional 
liquidity through InterMarket, thereby enhancing its efficiency by 
increasing the likelihood that InterMarket orders will be promptly 
executed. By contrast, the current program grants credits solely on the 
basis of whether a member happens to be selling in a particular 
transaction.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the Act, including section 15A(b)(5) of the Act,\10\ 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 proposed rule change will lower the cost of conducting 
business through InterMarket for members that provide liquidity through 
ITS or CAES. Nasdaq believes that encouraging members to provide 
liquidity will enhance the efficiency of InterMarket and benefit 
investors whose trades are routed to InterMarket by increasing the 
likelihood that they will be promptly executed.
---------------------------------------------------------------------------

    \10\ 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

    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-2002-115 and 
should be submitted by December 10, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-29242 Filed 11-18-02; 8:45 am]
BILLING CODE 8010-01-P