[Federal Register Volume 68, Number 249 (Tuesday, December 30, 2003)]
[Notices]
[Pages 75301-75304]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-32038]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48972; File No. SR-NASD-2003-185]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by National Association of 
Securities Dealers, Inc. to Modify SuperMontage Pricing

December 22, 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 December 11, 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 
(``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.
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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 the 
Substance of the Proposed Rule Change

    Nasdaq proposes to modify the pricing for Nasdaq's SuperMontage 
system. Pursuant to Section 19(b)(3)(A) of the Act,\3\ and Rule 19b-
4(f)(6) thereunder,\4\ Nasdaq has designated the proposed rule change 
as non-controversial and requests that the Commission waive the 30-day 
pre-operative requirement contained in SEC

[[Page 75302]]

Rule 19b-4(f)(6)(iii).\5\ If the Commission grants such waiver, Nasdaq 
will implement the proposed rule change on January 1, 2004.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.
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    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
    \5\ 17 CFR 240.19b-4(f)(6)(iii). Nasdaq provided written notice 
of its intent to file the proposed rule change, along a with a brief 
description and the text of the proposed rule change, on November 
26, 2003.
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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 a     No charge
     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 $120 per trade
                                          for trades in securities
                                          executed at $1.00 or less per
                                          share)]
        Average daily shares of
         liquidity provided through the
         NNMS by the member during the
         month:
            400,000 or less............  $0.003 per share executed (but
                                          no more than $120 per trade
                                          for trades in securities
                                          executed at $1.00 or less per
                                          share)
            400,001 to 5,000,000.......  $0.0027 per share executed (but
                                          no more than $108 per trade
                                          for trades in securities
                                          executed at $1.00 or less per
                                          share)
            5,000,001 or more..........  $0.0025 per share executed (but
                                          no more than $100 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 $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 $40 per trade for
     market participant that charges an   trades in securities executed
     access fee to market participants    at $1.00 or less per share)]
     accessing its Quotes/Orders
     through the NNMS
    Charge to member entering order:
        Average daily shares of
         liquidity provided through the
         NNMS by the member during the
         month:
            400,000 or less............  $0.001 per share executed (but
                                          no more than $40 per trade for
                                          trades in securities executed
                                          at $1.00 or less per share)
            400,001 or more............  $0.001 per share executed (but
                                          no more than $40 per trade for
                                          trades in securities executed
                                          at $1.00 or less per share,
                                          and no more than $10,000 per
                                          month)
Directed Order.........................  $0.003 per share executed
Non-Directed or Preferenced Order        No charge
 entered by a member that accesses its
 own Quote/Order submitted under the
 same or a different market participant
 identifier of the member.
 
           Order Cancellation
 
Non-Directed and Preferenced Orders....  No charge
Directed Orders........................  $0.10 per order cancelled
 

    (j)-(u) 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 proposes to implement reduced pricing for execution of Non-
Directed and Preferenced Orders in the Nasdaq National Market Execution 
System (``NNMS'' or ``SuperMontage''). Nasdaq's current fee schedule 
for SuperMontage features: (i) A $0.003 per share charge for the 
execution (in full or in part) of a 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 SuperMontage, (ii) a $0.001 per share charge for the execution 
(in full or in part) of a Non-Directed or Preferenced Order that 
accesses the Quote/Order of a market participant that charges an access 
fee, and (iii) a $0.002 per share credit to a member that provides the 
liquidity for an execution and does not charge an access fee.\6\
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    \6\ Transactions in a security priced under $1.00 (``low-priced 
trades'') are subject to a fee and credit cap applicable to trades 
in excess of 40,000 shares.
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    Nasdaq states that as part of an ongoing effort to reduce the costs

[[Page 75303]]

incurred by market participants to use Nasdaq services, it proposes to 
reduce order execution fees for members that provide liquidity through 
the NNMS. These fees would be reduced in a manner that would make the 
per share fee charged to a member to access liquidity during a 
particular month depend on the extent to which such member provided 
liquidity through the NNMS during that month (regardless of whether 
such member charges an access fee). Liquidity provision would be 
measured by adding the number of shares executed through transactions 
in which the member's Quote/Order was accessed by another market 
participant.\7\ Thus, during a month in which a member provided a daily 
average of more than 5,000,000 shares of liquidity through the NNMS, 
the member would pay $0.0025 per share executed in trades in which the 
member accessed liquidity provided by a market participant that does 
not charge an access fee (i.e., in which the member's Non-Directed or 
Preferenced Orders accessed the Quotes/Orders of other market 
participants).\8\ During a month in which a member provided a daily 
average of 400,001 to 5,000,000 shares of liquidity, the member would 
pay $0.0027 per share executed in trades in which the member accessed 
liquidity provided by a market participant that does not charge an 
access fee.\9\ Finally, in a month in which a member provided a daily 
average of 400,000 or fewer trades, the member would pay the current 
fee of $0.003 per share executed.\10\
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    \7\ If a particular corporate entity has multiple market 
participant identifiers (``MPIDs'') associated with the Central 
Registration Depository (``CRD'') number under which it conducts 
business, Nasdaq will aggregate shares of liquidity provided through 
all of its MPIDs. However, Nasdaq will not aggregate one corporate 
entity's trade reports with those associated with MPIDs assigned to 
subsidiaries or other affiliates with a different CRD number.
    \8\ As is true today, a low-priced trade would be subject to a 
fee cap applicable to trades in excess of 40,000 shares. 
Accordingly, when the fee that the member pays is $0.0025, the 
maximum per transaction charge for a low-priced trade would be $100.
    \9\ When the fee that the member pays is $0.0027, the maximum 
per transaction charge for a low-priced trade would be $108.
    \10\ When the fee that the member pays is $0.003, the maximum 
per transaction charge for a low-priced trade would be $120.
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    Similarly, the fee paid by a member to access the Quote/Order of a 
market participant that charges an access fee would depend upon the 
shares of liquidity provided by the member during the month. During a 
month in which a member provided a daily average of more than 400,000 
shares of liquidity, the member would pay $0.001 per share executed for 
trades in which the member accessed liquidity provided by a market 
participant that charges an access fee;\11\ however, the member's total 
monthly charge would be capped at $10,000. During a month in which a 
member provided a daily average of 400,000 shares of liquidity or less, 
the member would also pay the current fee of $0.001 per share, but no 
monthly cap would be applicable.\12\
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    \11\ The maximum per transaction charge for a low-priced trade 
would be $40.
    \12\ The maximum per transaction charge for a low-priced trade 
would be $40.
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    Nasdaq states that although the proposal will result in members 
paying fees to access liquidity that vary depending on the extent to 
which they provide liquidity, Nasdaq strongly believes that the 
proposal is consistent with the Act and with Commission precedent. 
Nasdaq believes that the extent to which members provide liquidity 
through SuperMontage is the single most important factor in determining 
whether SuperMontage provides an attractive destination, and in turn, 
whether SuperMontage will generate sufficient revenues to cover the 
costs of operating and regulating a market. Nasdaq believes a member 
that offers significant liquidity at prices that establish, or that are 
near, the national best bid/best offer, makes SuperMontage a more 
attractive destination for market participants seeking to access 
liquidity. While many liquidity destinations have used increases in 
liquidity provider rebates to attract liquidity, Nasdaq believes that 
higher liquidity rebates are creating distortions in market structure 
that lead to increased instances of locked and crossed markets. 
Although Nasdaq's proposed pricing schedule must, for competitive 
reasons, continue to provide payments for liquidity providers, Nasdaq 
believes that it is more appropriate to recognize the value of 
liquidity provision through discounts on the fee for accessing 
liquidity.
    The costs of operating SuperMontage and regulating the Nasdaq 
market are overwhelming fixed, rather than variable, costs. As 
SuperMontage's volume increases (i.e., as more and more liquidity is 
provided through SuperMontage), Nasdaq's costs, on a per share basis, 
decrease. Accordingly, Nasdaq believes that it is appropriate and 
equitable to allocate these costs in a manner that takes account of the 
lower per share costs associated with higher volumes of liquidity 
provision. Put another way, lower volumes would translate into higher 
per share costs for market participants; higher volumes reduce per 
share costs, and Nasdaq believes that the benefits of these reduced 
costs can and should be made available to those market participants 
that make the higher volumes possible in the first place. Moreover, 
there are economies of scope associated with higher volumes of 
liquidity provision, because trades executed through SuperMontage also 
have market data revenue and (in some cases) Automated Confirmation 
Transaction (``ACT'') fees associated with them.
    Nasdaq notes that on several occasions in the past, the Commission 
has approved or allowed the immediate effectiveness of SRO proposals to 
establish tiered pricing in which the price that different members pay 
for a service varies, depending on a related variable. For example, 
Rule 11.10(c) of the NSX (formerly the Cincinnati Stock Exchange) 
provides that the fee a member pays for agency limit orders depends 
upon the percentage of public agency market order shares executed 
during a trading month. Similarly, according to Nasdaq, the New York 
Stock Exchange's Price List \13\ reflects a display device charge for 
professional subscribers to market data feeds that varies on a per 
device (rather than a marginal) basis, depending on the number of 
devices. Thus, a subscriber with few devices pays high fees for each of 
its devices, while a subscriber with more devices pays lower fees for 
each of its devices. Nasdaq believes that such pricing structures, like 
the pricing proposed herein, are entirely appropriate, provided they 
base the price that a particular member pays upon cost and/or revenue 
factors associated with providing services to that member.
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    \13\ See www.nyse.com/pdfs/2003pricelist2.pdf.
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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,\14\ in general, and with 
Section 15A(b)(5) of the Act,\15\ 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. The proposed rule change 
bases the fees applicable to accessing liquidity through SuperMontage 
on the extent to which a member provides liquidity, thereby taking 
account of the lower per share costs and the economies of scope 
associated with higher volumes of liquidity provision.
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    \14\ 15 U.S.C. 78o-3.
    \15\ 15 U.S.C. 78o-3(b)(5).

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[[Page 75304]]

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

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to section 19(b)(3)(A) \16\ of the Act and 
Rule 19b-4(f)(6) thereunder.\17\ At any time within 60 days of the 
filing of the 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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    \16\ 15 U.S.C. 78s(b)(3)(A).
    \17\ 17 CFR 240.19b-4(f)(6).
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    Nasdaq has requested that the Commission waive the 30-day operative 
delay. The Commission finds waiving the 30-day operative delay is 
consistent with the protection of investors and the public 
interest.\18\ Acceleration of the operative date will allow the 
proposed price reduction to take effect as quickly as possible and at 
the beginning of a calendar month, January 1, 2004. Implementation of 
the pricing change at the beginning of a calendar month will assist 
Nasdaq in automating the preparation of members' bills for January 
2004, since the same pricing schedule would be in effect for each day 
of the month. It will also assist members' understanding of the bills 
that they receive for that month.
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    \18\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
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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 submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Comments should be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-NASD-2003-185. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your comments more efficiently, comments should be sent in hard 
copy or by e-mail but not by both methods. 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 No. SR-NASD-2003-185 and should be 
submitted by January 20, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).


Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-32038 Filed 12-29-03; 8:45 am]
BILLING CODE 8010-01-P