[Federal Register Volume 64, Number 218 (Friday, November 12, 1999)]
[Notices]
[Pages 61680-61682]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-29602]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42095; File No. SR-NASD-99-59]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the National Association of
Securities Dealers, Inc. Relating to Transaction Credits
November 3, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 \2\ thereunder, notice is hereby given
that on October 13, 1999, the National Association of Securities,
Dealers, Inc. (``NASD'' or ``Association''), through its wholly-owned
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. Nasdaq has designated this proposal
as one constituting the establishment or change of a due, fee or other
charge imposed by the Association under Section 19(b)(3)(A)(ii) \3\ of
the Act which renders the rule effective upon the Commission's receipt
of this filing. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 USC 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 USC 78S(B)(3)(A)(ii).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
Nasdaq is filing a proposed rule change to amend Rule 7010 of the
NASD. Below is the text of the proposed rule change. Proposed new
language is italicized; proposed deletions are in brackets.
* * * * *
7010 System Services
(a)-(b) No Change.
(c).
(1) Consolidated Quotation Service, Existing Paragraph remains the
same.
(2) Listed Securities Transaction Credit. For a pilot period,
qualified NASD members that trade securities listed on the NYSE and
Amex in over-the-counter transactions reported by the NASD to the
Consolidated Tape Association may receive from the NASD transaction
credits based on the number of trades so reported. [To qualify for the
credit with respect to either Tape A reports or Tape B reports, An NASD
member must have accounted for 500 or more average daily Tape A or Tape
B reports of over-the-counter transactions (but not in combination) as
reported to the Consolidated Tape by the NASD over the period of July
1, 1998 to December 31, 1998, and must continue to average either 500
or more daily Tape A or 500 or more daily Tape B reports (but not in
the combination) of over-the-counter transactions reported to the
Consolidated Tape by the NASD during the term of the pilot.] To qualify
for the credit with respect to Tape A reports, an NASD member must
account for 500 or more average daily Tape A reports of over-the-
counter transactions as reported to the Consolidated Tape during the
concurrent calendar quarter. To quality for the credit with respect to
Tape B reports, an NASD must account for 500 or more average daily Tape
B reports of over-the-counter transactions as reported to the
Consolidated Tape during the concurrent calendar quarter. If an NASD
member is so qualified to earn credits based either on its Tape A
activity, or its Tape B activity, or both, that member may earn credits
from one or both pools maintained by the NASD, each pool representing
40% of the revenue paid by the Consolidated Tape Association to the
NASD for each of Tape A and Tape B transactions. A qualified NASD
member may earn credits from such pools according to the member's pro
rata share of the NASD's over-the-counter trade reports in each of Tape
A and Tape B for each calendar quarter starting with [October 1, 1998,
and ending with the calendar quarter starting on April 1, 1999.] July
1, 1999, and ending with the calendar quarter starting on October 1,
1999.\4\
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\4\ Pursuant to a telephone conversation between Thomas P.
Moran, Assistant General Counsel, Office of General Counsel, The
Nasdaq Stock Market, Inc. and Jennifer L. Colihan, Staff Attorney,
Division of Market Regulation, SEC on November 4, 1999, NASD Rule
7010(c)(2) as written in the original filing was deleted. NASD Rule
7010(c)(3) as identified in the original filing was renumbered as
NASD Rule 7010(c)(2).
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* * * * *
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
Nasdaq is proposing to extend, for an additional six months (from
July 1, 1999 through December 31, 1999), its pilot program to provide a
transaction credit \5\ to NASD members who exceed certain levels of
trading activity in exchange-listed securities. The NASD established
its transaction credit pilot to assist in finding ways to lower
investor costs associated with trading listed securities, and to
respond to steps taken by other
[[Page 61681]]
exchanges that compete with Nasdaq for investor order flow in those
issues.
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\5\ The transaction credit can be applied to any and all charges
imposed by NASD or its non-SRO affiliates. Any remaining balance may
be paid directly to the member.
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1. Background
Nasdaq's Third Market is a quotation, communication and execution
system which allows NASD members to trade stocks listed on the New York
Stock Exchange (``NYSE'') and the American Stock Exchange (``AMEX'').
The Third Market competes with regional exchanges like the Chicago
Stock Exchange (``CHX'') and the Cincinnati Stock Exchange (``CSE'')
for retail order flow in stocks listed on the NYSE and AMEX
exchanges.\6\ The NASD collects quotations from broker-dealers that
trade these securities over-the-counter (``OTC'') and provides such
quotations to the Consolidated Quotation System for dissemination.
Additionally, the NASD collects trade reports from these broker-dealers
trading such securities in the OTC market and provides the trade
reports to the Consolidated Tape Association (``CTA/CQA'') for
inclusion in the Consolidated Tape. As a participant in the CTA/CQA,
the NASD earns a share of those organizations' revenue from trades that
it reports in NYSE-listed securities (``Tape A'') and in AMEX-listed
securities (``Tape B''). It is from the NASD's share of these revenues
that Nasdaq created the credit pools for qualified pilot participants.
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\6\ CHX and CSE have established similar programs. See
Securities Exchange Act Release No. 38237 (February 4, 1997), 2 FR
6592 (February 12, 1997); and Securities Exchange Act Release No.
39395 (December 3, 1997), 62 FR 65113 (December 10, 1997). To remain
competitive with these markets, the NASD believes that it must
evaluate programs designed to effectively respond to other markets'
approaches to trading the same securities.
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Nasdaq's original transaction credit pilot and the proposed
extension are intended to lower costs for Third Market Makers, and
their customers, who execute trades in exchange-listed stocks through
NASD members and Nasdaq facilities. The NASD believes that lowering the
cost of trading increases competition among market centers trading
listed securities. Continuation of the pilot will also allow Nasdaq to
continue to evaluate the efficacy of its revenue sharing model and
continue to effectively compete for the retention of Third Market
participants with other regional exchanges who have adopted similar
revenue distribution methodologies.
2. Pilot Program
Under the original pilot proposal, Nasdaq first calculated two
separate pools of revenue from which credits could have been earned.
One pool represents 40% of the gross revenues received from the CTA/CQA
for providing trade reports in NYSE-listed securities executed in the
Third Market for dissemination by CTA/CQA (``Tape A''). The other pool
represents 40% of the gross revenue received from CTA/CQA for reporting
AMEX trades (``Tape B''). These revenue pools will remain at the same
40% level during the pilot's extension.
In response to requests from market participants to expand
eligibility for Tape A and B transaction credits, the NASD has chosen
to change the transaction credit program for these transactions. Unlike
the original pilot, eligibility for transaction credits during the
pilot's extension will not be based on historical trading levels
derived from previous calendar quarter measures of trading activity,
but instead will be expanded to give new participants the potential to
receive transaction credits based on concurrent quarterly trading
activity. For example, a Third Market participant that newly entered
the market for Tape A or Tape B securities during the third quarter of
1999 and printed either an average of 500 daily trades of Tape A
securities, or one who averaged 500 daily Tape B prints during the
third quarter, would be eligible to receive transaction credits based
on its trades during that quarter. As in the original pilot, only those
NASD members who continue to average an appropriate daily execution
level during the term of the pilot's extension will be eligible for
transaction credits and thus, will be able to receive a pro-rata
portion of the 40% revenue pools.\7\ The NASD has chosen to create
these thresholds to permit the NASD to recover appropriate
administrative costs related to NASD members that do not exceed the
threshold and to encourage NASD members to actively trade in these
securities.
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\7\ As explained in Nasdaq's original pilot filing, the
qualification thresholds were selected based on Nasdaq's belief that
such numbers represent clear examples of a member's commitment to
operating in the Third Market and competing for order flow.
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If an NASD member qualifies for a transaction credit, it will be
calculated by taking the members' percentage of total Third Market
Transactions during the applicable calculation period and providing an
equivalent percentage from the appropriate Tape A or B revenue pool.
Thus, for each calendar quarter beginning July 1, 1999, the NASD will
measure a qualified member's trade reports for that calendar quarter in
each of Tape A and B transactions and create a credit for that member
based upon such activity. For example, should a qualifying NASD
member's transactions represent 10% of the NASD's Tape A transactions,
that member would receive a 10% share of the Tape A 40% revenue pool.
It must again be noted that Nasdaq's transaction credit program is
being proposed on a pilot basis only. There can be no guarantee that
transaction credits will be available to qualifying NASD members beyond
the term of the pilot.\8\
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\8\ Nasdaq also reserves the right to terminate the transaction
credit pilot at any time.
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Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) \9\ of the Act in that the proposal
is designed to promote just and equitable principles of trade and to
remove impediments to and perfect the mechanism of a national market
system and, in general, to protect investors and the public interest.
Nasdaq's pilot is also consistent with Section 15A(b)(5) \10\ of the
Act 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 association operates or
controls.
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\9\ 15 USC 78o-3(b)(6).
\10\ USC 78o3(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 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 foregoing rule change has become immediately effective pursuant
to Section 19(b)(3)(A)(ii) \11\ of the Act 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 Association.
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\11\ 15 USC 78s(b)(A)(ii).
\12\ 17 CFR 240.19-b4(f)(2).
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At any time within 60 days of the filing of such 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 purpose of the Act.
[[Page 61682]]
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 such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to the File Number SR-NASD-99-59 and
should be submitted by December 3, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-29602 Filed 11-10-99; 8:45 am]
BILLING CODE 8010-01-M
