[Federal Register Volume 71, Number 75 (Wednesday, April 19, 2006)]
[Notices]
[Pages 20149-20151]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-5855]



[[Page 20149]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53644; File No. SR-NASD-2006-048]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change and Amendment 
No. 1 Thereto to Modify Order Delivery Charges for Orders Delivered to 
Nasdaq Market Center Participants

April 13, 2006.
    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 April 7, 2006, 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 April 12, 
2006, Nasdaq filed Amendment No. 1 to the proposed rule change.\3\ 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\ In Amendment No. 1, Nasdaq made non-substantive technical 
changes to clarify its Statement on Burden on Competition and to 
conform certain language of the proposed rule text to the current 
NASD Rule 7010.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to modify the imposition of fees for orders 
delivered to Nasdaq Market Center participants that elect to have 
orders delivered to their Quotes/Orders through the Nasdaq Market 
Center. Nasdaq plans to implement the proposed rule change, as amended, 
immediately upon approval by the Commission, if the Commission grants 
approval. The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in [brackets].
* * * * *

7010. System Services

    (a)--(h) No Change
    (i) Nasdaq Market Center, Brut, and Inet Order Execution and 
Routing
    (1) The following charges shall apply to the use of the order 
execution and routing services of the Nasdaq Market Center, Brut, and 
Inet (the ``Nasdaq Facilities'') by members for all Nasdaq-listed 
securities subject to the Nasdaq UTP Plan and for Exchange-Traded Funds 
that are not listed on Nasdaq. The term ``Exchange-Traded Funds'' shall 
mean Portfolio Depository Receipts, Index Fund Shares, and Trust Issued 
Receipts as such terms are defined in Rule 4420(i), (j), and (l), 
respectively.

                             Order Execution
------------------------------------------------------------------------
 
------------------------------------------------------------------------
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 Nasdaq Facilities:
Charge to member entering order:
    Members with an average daily        $0.0028 per share executed (or,
     volume through the Nasdaq            in the case of executions
     Facilities in all securities         against Quotes/Orders at less
     during the month of (i) more than    than $1.00 per share, 0.1% of
     30 million shares of liquidity       the total transaction cost).
     provided, and (ii) more than 50
     million shares of liquidity
     accessed and/or routed.
Other members..........................  $0.0030 per share executed (or,
                                          in the case of executions
                                          against Quotes/Orders at less
                                          than $1.00 per share, 0.1% of
                                          the total transaction cost).
Credit to member providing liquidity:
Members with an average daily volume     $0.0025 per share executed (or
 through the Nasdaq Facilities in all     $0, in the case of executions
 securities during the month of more      against Quotes/Orders at less
 than 30 million shares of liquidity      than $1.00 per share).
 provided.
Other members..........................  $0.0020 per share executed (or
                                          $0, in the case of executions
                                          against Quotes/Orders at less
                                          than $1.00 per share).
Order that [accesses ]is delivered to
 the Quote/Order of a market
 participant [that charges an access
 fee to market participants accessing
 its Quotes/ Orders] through the Nasdaq
 Facilities:
Charge to member [entering]receiving
 order:
All members [Members with an average     $0.001 per share executed [(but
 daily volume through the Nasdaq          no more than $10,000 per
 Facilities in all securities during      month)]
 the month of more than 500,000 shares
 of liquidity provided].
[Other members.........................  $0.001 per share executed]
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* * * * *
    The text of the proposed rule change, as amended, is also available 
on Nasdaq's Internet Web site (http://www.nasdaq.com), at Nasdaq's 
principal office, 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 proposes to change the way fees are imposed for orders 
delivered to the Quotes/Orders of Nasdaq Market Center participants 
through the Nasdaq Market Center. Currently, Nasdaq

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imposes a $0.001 per share executed delivery fee on Nasdaq Market 
Center users who enter orders that are delivered to other Nasdaq Market 
Center participants that charge an access fee. Nasdaq proposes to 
modify this fee structure so as to impose a $0.001 delivery fee on 
participants that receive orders (order delivery participants) from the 
Nasdaq Market Center and eliminate the $0.001 delivery fee currently 
charged against the user who entered the order.
    Nasdaq's order delivery service is a service provided to 
participants that wish to participate in the Nasdaq Market Center 
liquidity pool and control their execution decision external to Nasdaq 
systems. Order delivery is not a functionality or service that is 
required to be offered to participants, and it involves additional 
direct and indirect costs to operate. Specifically, order delivery 
consumes excess processing and networking capacity and requires unique 
specifications, requirements, and system development. These costs are 
directly related to the firms using order delivery, and the benefits of 
order delivery accrue directly to the firms participating in the system 
as order delivery participants.
    Nasdaq believes that the proposed fee change more fairly and 
accurately aligns fees for order delivery within the Nasdaq Market 
Center by charging the firm that chooses to use order delivery 
functionality rather than the firm that has its order delivered. This 
fee modification better reflects the value of the benefits that accrue 
to order delivery recipients in the system. Furthermore, by no longer 
assessing a charge to the order entering firm, firms accessing 
liquidity within the Nasdaq Market Center can be more certain of their 
cost of using the system.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\4\ in general, and with 
Section 15A(b)(5) of the Act,\5\ 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. In particular, Nasdaq 
believes that the proposed rule change more fairly and accurately 
aligns its fees for delivering orders to Nasdaq Market Center 
participants with the benefits accruing to entities that receive such 
order flow. In addition, to the extent that Nasdaq's proposal correctly 
assigns costs of order delivery to the small number of order delivery 
recipients that benefit from that functionality, the proposal also is a 
tangible benefit to the large number of market participants, including 
public investors, that will no longer be required to subsidize it.
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    \4\ 15 U.S.C. 78o-3.
    \5\ 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 would impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. Assessment of the competitive 
impact of any proposal must begin with a proper understanding of the 
notion of competition among market centers. Such understanding must be 
informed by the Act itself and by the commonly accepted principles of 
U.S. competition law generally (e.g., the Sherman Antitrust Act and the 
Clayton Act), as applied by the courts and by the Antitrust Division of 
the U.S. Department of Justice.
    The objective of assuring competition among markets is cited in 
Section 11A of the Act \6\ alongside, inter alia, the objectives of 
achieving ``economically efficient execution of securities 
transactions'' and of creating ``the opportunity for more efficient and 
effective market operations.'' \7\ Not surprisingly, in antitrust law, 
the notion of competition is also always seen through the prism of 
economic efficiency. The law views competition as a force that 
encourages greater efficiency of operations, lower prices, and better 
service to market participants. Market behavior that promotes 
efficiency, lower fees, and better service is what both the Act and the 
antitrust laws seek to encourage.
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    \6\ 15 U.S.C. 78k-1 et seq.
    \7\ 15 U.S.C. 78k-1(a)(1).
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    As the Commission is aware, Nasdaq operates in the intensely 
competitive global exchange marketplace for listings, financial 
products, and market services. Nasdaq's ability to compete in this 
environment is based on a number of factors including technological 
quality, fairness and market transparency, price of services, quality 
of our markets (including spreads and depth of market), customer 
service, total transaction costs, and speed of our execution services. 
Relying on its array of services and benefits, Nasdaq competes with 
exchanges, Electronic Communication Networks (``ECNs''), and other 
Alternative Trading Systems (``ATSs'') for the privilege of providing 
market and listing services to broker-dealers and issuers. Moreover, 
within Nasdaq's own systems, ECNs and other ATSs compete with market 
makers and agency broker-dealers for retail and institutional order 
flow. It is in both arenas that Nasdaq's current method of imposing 
fees for order delivery services negatively impacts the overall 
competitive environment. First, Nasdaq's current imposition of fees for 
order delivery on parties entering orders into the Nasdaq Market Center 
creates disincentives for order flow providers to send orders to Nasdaq 
for processing and thereby harms Nasdaq's ability to compete with other 
markets operated by self-regulatory organizations--none of which 
provide order delivery, and consequently do not charge for it. For the 
same reasons, the present non-alignment of order delivery costs with 
those market participants that actually benefit from this functionality 
results in an improper subsidization of order delivery ECNs within 
Nasdaq's own system to the detriment of competing market makers and 
agency brokers that compete with those order delivery ECNs for retail 
and institutional order flow.
    These negative competitive impacts are mitigated by Nasdaq's fee 
proposal. By imposing a portion of order delivery costs on firms that 
take advantage of Nasdaq's order delivery functionality, the proposal 
promotes efficiency, transparency, and lower prices, and is therefore 
pro-competitive. This is in contrast to the existing regime where order 
delivery ECNs are able to free-ride on Nasdaq's neutral execution 
algorithms that deliver orders to the ECNs without cost and provide 
them with little incentive to enhance their product or services. 
Nasdaq's proposal would ensure that ECNs more fully support the costs 
of Nasdaq's distribution of their services. In return, the overwhelming 
majority of Nasdaq's users would benefit from lower execution prices 
(and equally important, from the predictability of trade execution 
charges), while ECNs would have increased financial incentives to 
operate more efficiently. Finally, to the extent that the pricing 
change enhances Nasdaq's ability to attract order flow, the overall 
competitive environment among market centers would be enhanced. All 
results, by definition, are pro-competitive.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

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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 self-regulatory organization consents, the Commission will:
    (A) by order approve such proposed rule change, as amended, or
    (B) institute proceedings to determine whether the proposed rule 
change, as amended, 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, 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-2006-048 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NASD-2006-048. 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, 100 F Street, 
NE., Washington, DC 20549. Copies of such filing also will be available 
for inspection and copying at the principal offices of the Exchange. 
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-2006-048 
and should be submitted on or before May 10, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-5855 Filed 4-18-06; 8:45 am]
BILLING CODE 8010-01-P