[Federal Register Volume 67, Number 247 (Tuesday, December 24, 2002)]
[Notices]
[Pages 78551-78554]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-32321]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47012; File No. SR-NASD-2002-269]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by National Association of 
Securities Dealers, Inc. To Modify Maximum Execution Fees and Credits 
for SuperMontage Transactions in Low-Priced Securities

December 26, 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 November 22, 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. Nasdaq has 
designated this proposal as one establishing or changing a due, fee or 
other charge imposed by the self-regulatory organization under section 
19(b)(3)(a)(ii) of the Act \3\ and Rule 19b-

[[Page 78552]]

4(f)(2) thereunder,\4\ which renders the rule effective upon Commission 
receipt of this filing. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \4\ 17 CFR 240.19-4(F)(2).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to modify the caps on the SuperMontage order 
execution charges and liquidity provider credits applicable to Non-
Directed and Preferenced Orders for securities that are priced at $1.00 
or less per share. Nasdaq will implement the rule change on December 1, 
2002. Because the transition from the SuperSOES, SOES, and SelectNet 
environment to SuperMontage will still be in progress at that time, 
Nasdaq will continue to charge its filed prices for SuperSOES, SOES, 
SelectNet, and quotation updates for stocks that have not transitioned, 
while charging the SuperMontage prices established through SR-NASD-
2002-44,\5\ SR-NASD-2002-91,\6\ SR-NASD-2002-135,\7\ SR-NASD-2002-
151,\8\ and SR-NASD-2002-169 for stocks that have transitioned.
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    \5\ Securities Exchange Act Release No. 45906 (May 10, 2002), 67 
FR 34965 (May 16, 2002) (SR-NASD-2002-44). SR-NASD-2002-44 
established a fee scheduled for members' use of SuperMontage.
    \6\ Securities Exchange Act Release No. 46343 (August 13, 2002), 
67 FR 53822 (August 19, 2002) (SR-NASD-2002-91). SR-NASD-2002-91 
provides that the fees for the use of SuperMontage by a national 
securities exchange trading Nasdaq securities on an unlisted trading 
privileges basis (a ``UTP Exchange'') may be established by means of 
an agreement between Nasdaq and the UTP Exchange.
    \7\ Securities Exchange Act Release No. 46648 (October 11, 
2002), 67 FR 64439 (October 18, 2002) (SR-NASD-2002-135). SR-NASD-
2002-135 established the maximum execution fees and credits for 
transactions in low-priced securities that are being modified by SR-
NASD-2002-169.
    \8\ Securities Exchange Act Release No. 46917 (November 26, 
2002), 67 FR 72254 (December 4, 2002) (SR-NASD-2002-151). SR-NASD-
2002-151 increased the fees and credits applicable to execution of 
non-directed, directed, and preferenced orders.
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    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *

Rule 7010. System Services

    (a)-(h) No change.
(i) Nasdaq National Market Execution System (SuperMontage)
    The following charges shall apply to the use of the Nasdaq National 
Market Execution System (commonly known as SuperMontage) by members:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Order Entry:
    Non-Directed orders (excluding       No charge.
     Preferenced Orders).
  Preferenced Orders:
        Preferenced Orders that access   No charge.
         a Quote/Order of the member
         that entered the Preferenced
         Order).
        Other Preferenced Orders.......  $0.02 per order entry.
    Directed Orders....................  $0.10 per order entry.
Order Execution:
    Non-Directed or Preferenced Order
     that accesses the Quote/Order of a
     market participant that does not
     charge an access fee to market
     participants accessing its Quotes/
     Orders through the NNMS:
        Charge to member entering order  $0.003 per share executed (but
                                          no more than [$75] $120 per
                                          trade for trades in securities
                                          executed at $1.00 or less per
                                          share).
        Credit to member providing       $0.002 per share executed (but
         liquidity.                       no more than [$50] $80 per
                                          trade for trades in securities
                                          executed at $1.00 or less per
                                          share).
    Non-Directed or Preferenced Order    $0.001 per share executed (but
     that accesses the Quote/Order of a   no more than [$25] $40 per
     market participant that charges an   trade for trades in securities
     access fee to market participants    executed at $1.00 or less per
     accessing its Quotes/Orders          share).
     through the NNMS.
    Directed Order.....................  $0.003 per share executed.
    Non-Directed or Preferenced Order    No charge.
     entered by a member that accesses
     a Quote/Order of such member.
Order Cancellation:
    Non-Directed Orders (excluding       $0.01 per order cancelled.
     Preferenced Orders).
    Preferenced Orders.................  $0.01 per order cancelled.
    Directed Orders....................  $0.10 per order cancelled.
Entry and Maintenance of Quotes/Orders
 by Nasdaq Quoting market Participants:
    Initial entry of Quote/Order.......  No charge.
    Change of Quote/Order due to order   No charge.
     execution through Super Montage.
    Cancel/replace of Quote/Order to     No charge.
     increase size.
    Cancel/replace of Quote/Order to     $0.01.
     change price.
    Cancel/replace of Quote/Order to     $0.01.
     decrease size manually.
    Cancellation of Quote/Order........  $0.01.
    Cancellation of Quote/Order due to   $0.0075.
     order purge or timeout.
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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.

[[Page 78553]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Earlier this year, Nasdaq filed proposed rule changes to control 
trading costs for low-priced securities traded through its SuperSOES 
and SuperMontage transaction execution systems.\9\ These proposed rule 
changes were filed in response to market activity that caused the 
prices of many Nasdaq securities to fluctuate, and in some cases lose 
significant value. As the price of a security declines, market 
participants generally need to purchase or sell an increasing number of 
total shares to participate actively in the market for the issue. This 
increase in the size of individual transactions, when combined with an 
unlimited per share fee and credit structure, had the potential to 
raise execution costs to market participants and result in 
disproportionate credits to liquidity providers. Accordingly, Nasdaq 
established caps on the order execution fees and liquidity provider 
credits for Non-Directed and Preferenced Orders that execute at prices 
of $1.00 or less.
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    \9\ Securities Exchange Act Release No. 46648 (October 11, 
2002), 67 FR 64439 (October 18, 2002) (SR-NASD-2002-135) 
(SuperMontage); Securities Exchange Act Release No. 46456 (September 
3, 2002), 67 FR 57470 (September 10, 2002) (SR-NASD-2002-106) 
(SuperSOES). SR-NASD-2002-135 and SR-NASD-2002-106 were effective 
upon filing. Nasdaq has also filed with the Commission a proposed 
rule change to apply the fee and rebate limits established by SR-
NASD-2002-106 retroactively, as of July 1, 2002. See SR-NASD-2002-
107 (August 5, 2002).
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    Under the original fee schedule for SuperMontage, as established by 
SR-NASD-2002-44,\10\ a member that entered a Non-Directed or 
Preferenced Order paid $0.002 per share executed for an order executed 
against the Quote/Order of a market participant that does not charge an 
access fee, and the liquidity provider received a $0.001 credit. 
Members paid $0.001 per share for an order executed against the Quote/
Order of a market participant that charges an access fee, with the 
liquidity provider receiving no credit. Under SR-NASD-2002-135,\11\ for 
trades in securities priced at $1.00 or less, these fees were capped 
$75 if the order executed against the Quote/Order of a market 
participant that did not charge an access fee, and $37.50 if the order 
executed against the Quote/Order of a market participant that charged 
an access fee. Similarly, the maximum credit to a liquidity provider 
for a transaction in a low-priced security was $37.50. Thus, the caps 
applied to the execution of orders for more than 37,500 shares.\12\ To 
the extent that an executed order contained more shares, the excess 
shares were free.
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    \10\ See note 5, supra.
    \11\ See note 7, supra.
    \12\ 37,500 shares x $0.002 = $75.00.
    37,500 shares x $0.001 = $37.50.
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    In SR-NASD-2002-151,\13\ Nasdaq increased the order execution 
charges and credits applicable to Non-Directed and Preferenced Orders: 
$0.003 for orders that access the Quote/Order of a market participant 
that does not charge an access fee, with a $0.002 credit to the 
liquidity provider.\14\ The fee change, which was effective November 1, 
2002, was not intended to change the per share revenue that Nasdaq 
receives from transactions, however, because the execution fee increase 
is offset by the increase in the credit. Nasdaq's revenue remains 
$0.001 per share for all trades that are not subject to the caps.
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    \13\ See note 8, supra.
    \14\ The fee to access the Quote/Order of a market participant 
that charges an access fee remained $0.001.
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    The fee change has had an indirect and adverse effect on Nasdaq's 
revenues, however, because the fee caps were not adjusted to the extent 
necessary to avoid allowing a higher number of shares to trade without 
charge. Specifically, the caps currently apply to the execution of low-
priced orders with more than 25,000 (rather than 37,500) shares.\15\
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    \15\ 25,000 shares x $0.003 = $75.
    25,000 shares x $0.002 = $50.
    25,000 shares x $0.001 = $25.
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    Nasdaq introduced the caps because of a concern that the cost of 
transactions in low-priced stocks could become unreasonably high, and 
recognized that the caps would result in some lost revenue. It has 
concluded, however, that the current level of the caps must be 
increased to reflect the higher fees and credits instituted under SR-
NASD-2002-151.\16\ Without this change, Nasdaq will be allowing a far 
greater number of shares to trade without charge (i.e., because they 
are part of a trade for more than 25,000 shares) than it had originally 
intended when it introduced the fee caps at the 37,500 share level.
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    \16\ See note 8, supra.
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    Accordingly, Nasdaq is proposing to increase the cap to $120 for 
orders that access the Quote/Order of a market participant that does 
not charge an access fee, $40 for orders that access the Quote/Order of 
a fee-charging market participant, and $80 for the liquidity provider 
credit. These caps reflect a 40,000 share level, above which additional 
shares are free (slightly higher than the original 37,500 share 
level).\17\
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    \17\ 40,000 shares x $0.003 = $120.
    40,000 shares x $0.002 = $80.
    40,000 shares x $0.001 = $40.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\18\ in general, and with 
section 15A(b)(5) of the Act,\19\ in particular, in that it provides 
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.
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    \18\ 15 U.S.C. 78o-3.
    \19\ 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

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A)(ii) of the Act \20\ and Rule 19b-4(f)(2) thereunder, 
because it establishes or changes a due, fee, or charge imposed by the 
self-regulatory organization.\21\ At any time within 60 days of the 
filing of such 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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    \20\ 15 U.S.C. 78s(b)(3)(a)(ii).
    \21\ 17 CFR 240.19b-4(f)(2).
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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 proposed rule 
change is consistent with the Act. Persons making written submissons 
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

[[Page 78554]]

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-2002-169 and 
should be submitted by January 14, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\22\
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    \22\ 27 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-32321 Filed 12-23-02; 8:45 am]
BILLING CODE 8010-01-M