[Federal Register Volume 68, Number 72 (Tuesday, April 15, 2003)]
[Notices]
[Pages 18315-18316]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-9108]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47635; File No. SR-NASD-2003-63]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the National Association of Securities Dealers, Inc. To Modify the 
Transaction Credit Program for Exchange-Listed Securities

April 4, 2003.
    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 March 31, 2003, the National Association of Securities Dealers, Inc. 
(``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by Nasdaq. 
On April 3, 2003, Nasdaq submitted Amendment No. 1 to the proposed rule 
change.\3\ The NASD filed the proposed rule change pursuant to section 
19(b)(3)(A)(ii) of the Act \4\ and Rule 19b-4(f)(2) thereunder,\5\ 
which renders the proposed rule change effective upon filing with the 
Commission.\6\ 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 letter from Jeffrey S. Davis, Associate General Counsel, 
Nasdaq, to Katherine A. England, Assistant Director, Division of 
Market Regulation, Commission dated April 2, 2003 (``Amendment No. 
1). In Amendment No. 1, Nasdaq made technical corrections to the 
proposed rule change.
    \4\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \5\ 17 CFR 240.196-19b-4(f)(2).
    \6\ For purposes of determining the effective date of the filing 
and calculating the 60-day abrogation date, the Commission considers 
the period to commence on April 3, 2003, the date Nasdaq filed 
Amendment No. 1.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is filing with the Commission a proposed rule change to NASD 
Rule 7010(c)(2). The proposed rule change responds to the decision of 
the Consolidated Tape Association to change the way participants in the 
CT/CQ Plans are charged for the capacity expense attributable to each 
participant. Nasdaq proposes to amend NASD Rule 7010(c) in order to 
maintain the same distribution of transaction credits that exists today 
for InterMarket trading. Nasdaq will make the rule change effective 
upon the distribution of revenue for the first quarter of 2003.\7\
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    \7\ Nasdaq expects that the Consolidated Tape Association will 
distribute revenue in the first week of May 2003.
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    The text of the proposed rule change, as amended, is below. 
Proposed new language is italicized.
* * * * *

7010. System Services

    (a)-(b) No change.
    (c) (1) No change.
(2) Exchange-Listed Securities Transaction Credit
    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 50% of the revenue paid by the Consolidated Tape 
Association to the NASD for each of Tape A and Tape B transactions 
after deducting the amount that the NASD pays to the Consolidated Tape 
Association for capacity usage. 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.
    (d)-(s) 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.

[[Page 18316]]

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, Inc. (``NYSE'') and the American Stock 
Exchange LLC (``Amex''). The InterMarket competes with regional 
exchanges like the Chicago Stock Exchange, Inc., the Boston Stock 
Exchange, Inc., and the Cincinnati Stock Exchange, Inc. 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 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.\8\
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    \8\ See CAES/ITS User Guide, p. 5, at 
www.intermarket.nasdaqtrader.com.
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    Nasdaq proposes to modify the InterMarket Transaction Credit 
Program (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 (``OTC'') trading 
activity in CTA-eligible securities. Nasdaq calculates two separate 
pools of revenue from which credits can be earned: one representing 50% 
of the revenues received from the CTA for providing trade reports in 
NYSE-listed securities executed in the InterMarket for dissemination by 
the CTA, the other representing 50% of the revenue received from the 
CTA for reporting Amex trades.
    On November 22, 2002, the CTA met and unanimously approved a 
modification to its capacity planning and payment process. As a result 
of this modification, Nasdaq and other CTA participants will incur CTA 
expenses based on predicted capacity rather than on an ex-post basis. 
Further, participants will be billed this cost directly as opposed to 
CTA deducting all operating costs from the Consolidated Tape (``CT'') 
and Consolidated Quotation (``CQ'') revenues collected. This is a 
change from the prior CTA practice of deducting operational system 
costs directly from the CT and CQ gross income available for 
distribution prior to the disbursement of transaction credits to plan 
participants.
    Nasdaq proposes to amend its transaction credit formula in order to 
adjust to this CTA billing change. Specifically, prior to Nasdaq 
distributing 50% of data revenues it receives from CTA, Nasdaq will 
deduct the capacity expense allocated to Nasdaq by the CTA. Nasdaq will 
allocate this capacity expense to Tape A and Tape B according to each 
tape's percentage of total trades executed on Nasdaq.\9\ Deducting the 
capacity expense prior to distributing tape revenue effectively 
preserves the current arrangements, whereby Nasdaq and its InterMarket 
members share these capacity costs.
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    \9\ For example, if Nasdaq incurs $100,000 in capacity expenses, 
and its members execute 700 transactions in Tape A securities and 
300 transactions in Tape B securities, Nasdaq will allocate $70,000 
of capacity expense to Tape A and $30,000 to Tape B.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, 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. Nasdaq represents that the proposed rule 
change, as amended, will maintain the current cost of conducting 
business through InterMarket for members that provide liquidity through 
ITS or CAES. Nasdaq believes that continuing to encourage 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.
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    \10\ 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, as amended, 
will 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 forgoing rule change has become effective on April 3, 2003, 
upon filing of Amendment No. 1 to the proposed rule change pursuant to 
section 19(b)(3)(A)(ii) of the Act \11\ and subparagraph (f)(2) of Rule 
19b-4 thereunder \12\ in that it establishes or changes a due, fee, or 
other charge imposed by the Nasdaq. At any time within 60 days of the 
filing of a rule change pursuant to section 19(b)(3)(A) of the Act, the 
Commission may summarily abrogate the rule change, as amended, 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.\13\
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    \11\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \12\ 17 CFR 240.19b-4(f)(2).
    \13\ For purposes of determining the effective date of the 
filing and calculating the 60-day abrogation date, the Commission 
considers the period to commence on April 3, 2003, the date Nasdaq 
filed Amendment No. 1.
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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, as amended, 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, as 
amended, 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 at 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 the File No. SR-NASD-2003-63 and should be 
submitted by May 6, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-9108 Filed 4-14-03; 8:45 am]
BILLING CODE 8010-01-P