01-25699. Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Nasdaq National Market Execution System Fees and the Introduction of a ...

October 5, 2001.

Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), 15 U.S.C. 78s(b)(1), notice is hereby given that on October 4, 2001, the National Association of Securities Dealers, Inc. (“NASD” or “Association”), 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, which renders the rule effective upon filing with the Commission.^[1] The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

This is a rule change, on a pilot basis, to: (1) Increase the per share charge for use of the Nasdaq National Market Execution System (“NNMS” or “SuperSOES”); and (2) introduce a liquidity provider rebate. Nasdaq has designated this proposal as one establishing or changing a due, fee, or other charge imposed by a self-regulatory organization, and therefore the proposed rule change is effective upon filing as applied to NASD members. The rule change will become operative on a pilot basis, commencing on November 1, 2001 and ending on October 31, 2002.^[2] During the pilot period, Nasdaq will assess the effect of the rule change on market participants and Nasdaq and may file additional changes to the level or structure of its fees. The text of the proposed rule change is set forth below. Proposed new language is italicized; proposed deletions are in brackets.

* * *

7010. System Services

(a)-(h) No change.

(i) Transaction Execution Services

(1) No change.

(2) Nasdaq National Market Execution System (SuperSOES)

The following charges shall apply to the use of the Nasdaq National Market Execution System:

Order Entry Charge	$0.10 per order entry (entering party only).
Per Share Charge	$0.001 per share executed for all fully or partially executed orders (entering party only).
Cancellation Fee	$0.25 per order cancelled (canceling party only).

For a pilot period commencing on November 1, 2001 and lasting until October 31, 2002, the per share charge will be $0.002 per share executed for all fully or partially executed orders (entering party only).

(3) No change.

(4) Liquidity provider rebate

For a pilot period commencing on November 1, 2001 and lasting until October 31, 2002:

(A) NASD members that do not charge an access fee to market participants accessing their quotations through the Nasdaq National Market Execution System will receive a rebate of $0.001 per share when their quotation is executed against by a Nasdaq National Market Execution System order.

(B) NASD members will receive a rebate of $0.001 per share when they send a Nasdaq National Market Execution System order that executes against the quotation of a market participant that charges an access fee to market participants accessing its quotations through the Nasdaq National Market Execution System.

(j)-(q) 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 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 below in Sections (A), (B), and (C), 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

On January 14, 2000, the Commission issued an order approving a rule change that: (1) Established the NNMS, a new platform for the trading of Nasdaq National Market (“NNM”) securities; (2) modified the rules governing the use of SelectNet for trading NNM issues; and (3) left unchanged trading of Nasdaq SmallCap securities through the Small Order Execution System (“SOES”) and SelectNet.^[3] Nasdaq began implementing these system changes on July 9, 2001 and completed implementation on July 30, 2001. Through these changes, the NNMS has become the primary trading platform for NNM securities, and SelectNet is intended to be used primarily for the transmittal and execution of “non-liability” orders for market makers in NNM securities, as well as the transmittal and execution of “liability” orders to market participants that do not participate in the automatic execution functionality of the NNMS. On September 28, 2001, Nasdaq filed modifications to the pricing structure for SelectNet and the NNMS.^[4] These changes were designed as an interim modification to begin the process of aligning the charges to market participants for using the NNMS and SelectNet more closely with the costs of providing these services and the benefits that they provide to market participants.

In this filing, Nasdaq is increasing the per share charge for use of the NNMS and introducing a liquidity provider rebate. The per share charge for orders entered and executed in the NNMS will increase from $0.001 per share to $0.002 per share, in keeping with Nasdaq's ongoing efforts to align charges with costs and benefits. This increase, however, will be accompanied by the institution of a liquidity provider rebate. The rebate is designed to enhance market efficiency and fairness by offering incentives to market participants that provide liquidity through the NNMS. Nasdaq believes that the rebate will increase the extent to which orders are exposed to the entire market. The rebate is also structured to address competitive disparities between electronic communications networks, which may charge non-subscribers fees for accessing their quotes, and market makers, which generally are prohibited by the Commission from charging access fees. Members that do not charge an access fee will receive a rebate of $0.001 per share when their quotation is executed against by an order sent via the NNMS; in addition, a rebate of $0.001 per share will be paid to members when they send an NNMS order that executes against the quotation of a market participant that charges in access fee. The rebate will be applied to reduce any charges payable by the recipient of the rebate to Nasdaq. Any remaining balance may be paid directly to the member. The rebate will be calculated on a monthly basis.

Nasdaq believes that the proposed rule change is consistent with the Act, including Section 15A(b)(5) of the Act, 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, and Section 15A(b)(6) of the Act, which requires rules that are not designed to permit unfair discrimination between customers, issuers, brokers or dealers. Nasdaq believes that the level of fees charged to market participants under the proposal is reasonable. Nasdaq anticipates that overall fees for the NNMS, SelectNet, and SOES, net of the liquidity provider rebate, will be comparable to overall fees for the NNMS, SelectNet, and SOES under the pricing changes contained in SR-NASD-2001-63 and SR-NASD-2001-64. Such fees are, in turn, estimated to be slightly lower than overall fees for SelectNet and SOES prior to the introduction of the NNMS. Moreover, Nasdaq believes that the structure of the liquidity provider rebate is equitable, because it will help to address competitive disparities between electronic communications networks and market makers stemming from access fees.

B. Self-Regulatory Organization's Statement on Burden on Competition

Nasdaq believes that the proposed rule change will not 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 foregoing rule change has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act and subparagraph (f) of Rule 19b-4, thereunder because it establishes or changes a due, fee or other charge imposed by the self-regulatory organization. At any time within 60 days of the filing of the proposed rule change, the Commission may summarily abrogate the 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.

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. 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 the 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-2001-67 and should be submitted by November 2, 2001.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.^[5]

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  The NASD filed an amendment to the filing on October 5, 2001. The substance of the amendment has been incorporated into this notice. See letter to Katherine A. England, Assistant Director, Commission, from John M. Yetter, Assistant General Counsel, Nasdaq. (October 4, 2001).

2.  Nasdaq also filed a companion rule filing (SR-NASD-2001-68) to apply the per share charge portion of the rule change to national securities exchanges trading Nasdaq-listed securities pursuant to grants of unlisted trading privileges (“UTP Exchanges”), which are not NASD members, and has requested that the Commission grant accelerated approval to the filing. SR-NASD-2001-68 will become effective immediately upon approval by the Commission and will be implemented on the first day of the month immediately following Commission approval.

3.  Securities Exchange Act Release No. 42344 (Jan. 14, 2000), 65 FR 16 (Jan. 25, 2000) (SR-NASD-99-11).

4.  See Securities Exchange Act Release No. 44899 (October 2, 2001) (File No. SR-NASD-2001-63) and Securities Exchange Act Release No. 44898 (October 2, 2001) (File No. SR-NASD-2001-64). SR-NASD-2001-63 applied the new fees to NASD members, effective upon filing, and was implemented on October 1, 2001. SR-NASD-2001-64 will apply the new fees to UTP Exchanges, and will be implemented on the first day of the month immediately following Commission approval.

5.  17 CFR 200.30-3(a)(12).