[Federal Register Volume 70, Number 31 (Wednesday, February 16, 2005)]
[Notices]
[Pages 7988-7990]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-636]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51170; File No. SR-NASD-2005-002]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change and Amendment No. 1 Thereto To Establish Fees for 
Connectivity to the Nasdaq Market Center

February 9, 2005.
    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 January 7, 2005, 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. On January 28, 
2005, Nasdaq filed Amendment No. 1 to the proposed rule change.\3\ 
Pursuant to Section 19(b)(3)(A) of the Act \4\ and Rule 19b-4(f)(1), 
(2), and (5) thereunder,\5\ Nasdaq has designated this proposal in part 
as constituting a stated policy, practice, or interpretation with 
respect to the meaning, administration, or enforcement of an existing 
rule, in part as establishing or changing a due, fee, or other charge, 
and in part as a proposal effecting a change in an existing order-entry 
or trading system of a self-regulatory organization, which renders the 
proposed rule change effective immediately upon 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\ In Amendment No. 1, Nasdaq added representations with 
respect to monitoring usage traffic on dedicated and non-dedicated 
FIX servers and steps it would take to provide a high level of 
support across all other FIX servers, and replaced the text of the 
original filing in its entirety.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(1), (2), and (5).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to amend NASD Rule 7010 to establish fees for new 
options for connecting to the Nasdaq Market Center and is filing a 
related Member Alert and Head Trader Alert. Nasdaq will implement the 
proposed rule change immediately.
    The text of the proposed rule change, and the texts of the related 
Member Alert and Head Trader Alert, that were attached as exhibits to 
the proposal, are available on the NASD's Web site (http://www.nasd.com), at the NASD's Office of the Secretary, and at the 
Commission's Public Reference Room.

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 Information Exchange
    Nasdaq offers market participants and other Nasdaq subscribers a 
choice of messaging protocols for communicating with Nasdaq systems, 
with the goal of allowing firms to select the connectivity options that 
best suit their needs. The protocol options currently available to 
firms include the Financial Information Exchange (``FIX'') protocol, 
the computer-to-computer interface (``CTCI'') protocol, and an 
application programming interface (``API'') protocol that requires the 
use of a Service Delivery Platform (``SDP''), a hardware unit located 
at the subscriber's premises. Although the SDP/API protocol has offered 
distinct advantages in terms of functional support for quoting market 
participants and other firms with high volumes of message traffic, the 
need for firms to install and maintain one or more SDPs has resulted in 
comparatively higher communications and infrastructure costs for firms 
using SDP/API. As a result, Nasdaq has developed the Nasdaq Information 
Exchange or ``QIX,'' a new proprietary protocol that does not require 
use of an SDP. Nasdaq believes that QIX will offer the benefits of the 
current API protocol but at a significantly reduced cost to its users.
    The QIX protocol is being made available for use in production 
immediately. During a period of approximately ten months thereafter, 
Nasdaq will work with users of the SDP/API protocol to transition them 
to QIX, FIX, and/or CTCI. Nasdaq intends to sunset the SDP/API protocol 
and connectivity by the end of October 2005 (or such later date as 
Nasdaq may announce to market participants); all users of that protocol 
will be required to transition by that time. The sunset of SDP/API will 
not affect the operation of any of the rules governing trading through 
the Nasdaq Market Center (e.g., the 4700 Series of the NASD Rules).
    In contrast to the SDP/API protocol, which requires market 
participants to use, and pay Nasdaq for the use of, a 
telecommunications network supplied by MCI pursuant to an agreement 
with Nasdaq, QIX will offer market participants choice in the 
establishment of connections to Nasdaq. As is currently the case for 
FIX, market participants may use a range of third-party communications 
providers, may establish connections to service bureaus that in turn 
connect to Nasdaq, or may take advantage of additional modes of 
telecommunications that may become available to the financial sector in 
the future. As a result, member firms will benefit from the forces of 
competition, choice, and innovation when selecting telecommunications 
services for the purpose of connecting to Nasdaq's facilities through 
QIX and FIX, rather than receiving connectivity as a vertically 
integrated component of Nasdaq's facilities.

[[Page 7989]]

    Nasdaq will assess a basic charge of $1,000 for each pair of 
``ports'' that uses QIX.\6\ A port is a discrete right of access to 
Nasdaq's trading facility using the QIX protocol. Ports, which are 
analogous to a ``logon'' in the SDP/API environment, are provided in 
pairs to increase throughput performance by separating unsolicited 
message streams from quote/order entry and response streams. The number 
of port pairs that a particular firm will require will depend on the 
volume of its message traffic. The direct connection for electronic 
communications networks (``ECNs'') that Nasdaq recently established \7\ 
will continue to be available, at the same charge of $1,000 per port 
pair per month. Upon the sunset of the SDP/API protocol, ECNs will no 
longer be able to connect to Nasdaq using an SDP, so the use of a 
direct connection will become mandatory for ECNs quoting in Nasdaq. 
Subscribers will also be able to receive a single port that is used 
solely to receive unsolicited messages (such as drop copy execution 
reports) at a cost of $750 per month.\8\
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    \6\ A subscriber that seeks to track its proprietary quotes 
separately from customer orders that are reflected in its quotes 
will have the option of receiving a third proprietary quote 
information port for that purpose at no additional charge. The 
Commission notes that in a subsequent filing (NASD-2005-016), Nasdaq 
proposed to revise the QIX fees. The fee for a QIX port pair 
(including an ECN direct connection port pair) would be increased 
from $1,000 to $1,200 per month, and the fee for an unsolicited 
message port would be increased from $750 to $1,000 per month. See 
Securities Exchange Act Release No. 51171 (February 9, 2005).
    \7\ See Securities Exchange Act Release No. 50647 (November 8, 
2004), 69 FR 65667 (November 15, 2004) (SR-NASD-2004-158).
    \8\ Because Nasdaq's charges are assessed against the Nasdaq 
market participant rather than telecommunications providers or 
service bureaus that act as intermediaries, the fees established by 
this proposed rule change apply only to NASD members.
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    QIX, unlike the SDP/API, will not support the risk management 
function of Nasdaq's trade reporting service, but this function will 
continue to be available through the Nasdaq Workstation. In addition, 
QIX will not provide a market data feed, so firms that currently use 
the SDP/API for market data will need to subscribe separately to the 
appropriate market data feeds. Nevertheless, Nasdaq expects that the 
overall cost of QIX to support a given level of usage will be 
significantly lower than the cost of SDP/API to support an equivalent 
level. Nasdaq also expects that the effort required by firms to 
transition from SDP/API to QIX will be quite manageable by firms, given 
the similarities between the two protocols. To assist in the 
transition, SDP/API and CTCI users will be provided with the ability to 
segregate unused bandwidth on T1 circuits supporting these existing 
connections to establish temporary QIX and/or FIX connections while 
firms await installation of such new circuits as may be required to 
support their planned QIX and/or FIX usage. In addition, pursuant to 
NASD Rule 7050(d)(3), subscribers that are transitioning from SDP/API 
to QIX or FIX will be permitted to use the Nasdaq Testing Facility to 
test QIX or FIX functionality free of charge for a 90-calendar day 
period. Nasdaq has been providing notice to all market participants 
that will be affected by the sunset of SDP/API through direct contacts 
and through widely disseminated written notices, including Nasdaq Head 
Trader Alert (2004-105), which was disseminated in July 2004,\9\ and 
Nasdaq Head Trader Alert (2005-009) and an NASD Member Alert, which are 
being disseminated in conjunction with this filing.\10\ To further 
ensure the availability of this information, Nasdaq is filing the NASD 
Member Alert and the new Head Trader Alert as Exhibits to this proposed 
rule change.
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    \9\ See http://www.nasdaqtrader.com/dynamic/newsindex/headtraderalerts_2004.stm.
    \10\ See http://www.nasdaqtrader.com/dynamic/newsindex/headtraderalerts_2005.stm and http://www.nasd.com/web/idcplg?IdcService=SS_GET_PAGE&nodeId=1193&ssSourceNodeId=546. The Head 
Trader Alerts and Member Alert also describe Nasdaq's plans to 
replace the current Nasdaq Workstation II with a new Nasdaq 
Workstation by October 2005. Nasdaq will submit a separate proposed 
rule change to establish fees for the new Nasdaq Workstation.
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FIX Servers
    In response to requests from market participants, Nasdaq is also 
offering users of the FIX protocol the option of using FIX through a 
dedicated server (also known as a ``FIX engine''). Currently, Nasdaq's 
FIX servers are not dedicated to a specific firm, but rather a single 
FIX server may carry message traffic from multiple firms. Nasdaq 
carefully monitors usage to ensure that capacity is adequate to handle 
message traffic. Nevertheless, in response to the request of several 
firms, Nasdaq is proposing to provide the option of a dedicated server 
at a cost of $1,000 per server per month to reflect Nasdaq's additional 
costs of providing this service. Nasdaq represents that it will 
carefully monitor message traffic on all dedicated and non-dedicated 
servers to ensure that dedicated servers will not provide firms that 
receive them with any advantage over other market participants in terms 
of the speed with which messages are transmitted to and from the Nasdaq 
Market Center. Specifically, Nasdaq represents that it will install 
additional non-dedicated servers whenever necessary to provide a high 
level of support across all FIX servers.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\11\ in general, and Section 
15A(b)(5) \12\ of the Act, 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. Nasdaq believes the proposed rule 
change would provide market participants with a choice of several cost-
effective methods to connect to Nasdaq's facilities, including QIX, a 
new API protocol that will offer substantial cost savings in comparison 
with the current SDP/API protocol. Nasdaq represents that fees for 
access services are equitably allocated based on the level of message 
traffic between Nasdaq and each firm.
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    \11\ 15 U.S.C. 78o-3.
    \12\ 15 U.S.C. 78o-3(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) of the Act \13\ and subparagraphs (f)(1), (2), and (5) of 
Rule 19b-4 thereunder, because it constitutes a stated policy, 
practice, or interpretation with respect to the meaning, 
administration, or enforcement of an existing rule, establishes or 
changes a due, fee, or other charge, and effects a change in an 
existing order-entry or trading system.\14\ 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

[[Page 7990]]

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.\15\
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    \13\ 15 U.S.C. 78s(b)(3)(A).
    \14\ 17 CFR 240.19b-4(f)(1), (2), and (5).
    \15\ See 15 U.S.C. 78s(b)(3)(C). For purposes of calculation the 
60-day abrogation period, the Commission considers the period to 
commence on January 28, 2005, 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. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2005-002 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2005-002. 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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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 Section, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing also will be 
available for inspection and copying at the principal office of the 
NASD. All comments received will be posted without change; the 
Commission does not edit personal identifying information from 
submissions. You should submit only information that you wish to make 
available publicly. All submissions should refer to File Number SR-
NASD-2005-002 and should be submitted on or before March 9, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-636 Filed 2-15-05; 8:45 am]
BILLING CODE 8010-01-P