[Federal Register Volume 64, Number 87 (Thursday, May 6, 1999)]
[Notices]
[Pages 24430-24435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-11361]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41343; File No. SR-NASD-99-16]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc. and
Amendment No. 1 Thereto Relating to Agency Quotations and Access Fees
April 28, 1999.
On April 15, 1999, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association''), through its
[[Page 24431]]
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.\1\ On April
22, 1999, the NASD amended the filing.\2\ The Commission is publishing
this notice to solicit comments on the proposed rule change, as
amended, from interested persons.
---------------------------------------------------------------------------
\1\ This proposal was filed pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''), 15 U.S.C. 78s(b)(1), and
Rule 19b-4, 17 CFR 240.19b-4, thereunder.
\2\ See letter from Robert E. Aber, Senior Vice President and
General Counsel, Office of the General Counsel, Nasdaq, to Richard
Strasser, Assistant Director, Division of Market Regulation
(``Division''), Commission, dated April 22, 1999 (``Amendment No.
1''). In Amendment No. 1, the NASD made various technical and
clarifying amendments which are reflected in the notice. Also in
Amendment No. 1, the text of proposed NASD Rule 4615 and the
accompanying explanatory text in the filing is amended to clarify
that if the access fee that an ECN or market maker charges is
greater than one minimum quotation increment, the market maker or
ECN must round its bid down (or offer up) to the next minimum
increment that is equal to or greater than the access fee. Finally,
the NASD also explained that the instant proposed rule change is
contingent upon the Commission's approval of its pending Agency
Quote proposal (Exchange Act Release No. 41128 (March 2, 1999), 64
FR 41128 (March 11, 1999) (File No. SR-NASD-99-09)).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
Nasdaq is proposing to: (1) amend certain NASD quotation rules to
remove any arguable prohibitions that could prevent market makers from
charging a fee when their agency quote is accessed; and (2) require
market makers and electronic communications networks (``ECNs'') to
round their quotations to the next minimum quotation increment when the
market maker or ECN charges another market participant a fee in excess
of one-half of one cent to access its quote. Proposed new language is
italicized; proposed deletions are in brackets.
* * * * *
3320. Offers at Stated Prices
No member shall make an offer to buy from or sell to any person any
security at a stated price unless such member is prepared to purchase
or sell, as the case may be, at such price and under such conditions as
are stated at the time of such offer to buy or sell. It shall be
consistent with this rule for a Nasdaq market maker to charge a fee to
a market participant that accesses the market maker's Agency Quote (as
defined in NASD Rule 4613(b)) so long as the market maker meets all
NASD requirements for displaying the Agency Quote.
IM-3320. Firmness of Quotations
Members and persons associated with members in the over-the-counter
market make trading decisions and set prices for customers upon the
basis of telephone and wire quotations as well as quotations in the
National Quotation Bureau sheets. In some instances a dealer's
quotations, purportedly firm, are, in fact, so qualified upon further
inquiry as to constitute ``backing away'' by the quoting dealer.
Further, dealers who place quotations in the sheets have been found to
be unwilling to make firm bids or offers upon inquiry in such a way as
to pose a question as to the validity of the quotations originally
inserted. Such ``backing away'' from quotations disrupts the normal
operation of the over-the-counter market.
Members, of course, change interdealer quotations constantly in the
course of trading, but under normal circumstances where the member is
making a ``firm trading market'' in any security, it is expected at
least to buy or sell a normal unit of trading in the quoted stock at
its then prevailing quotations unless clearly designated as not firm or
firm for less than a normal unit of trading when supplied by the
member. It should be realized, however, that at times contemporaneous
transactions or substantial changes in inventory might well require
dealers to quote a ``subject market'' temporarily.
In order to insure the integrity of quotations, every member has an
obligation to correctly identify the nature of its quotations when they
are supplied to others. In addition, each member furnishing quotations
must insure that it is adequately staffed to respond to inquiries
during the normal business hours of such member.
It shall be deemed conduct inconsistent with high standards of
commercial honor and just and equitable principles of trade if a member
fails to fulfill its obligations as outlined above. It shall not be a
violation of this rule or be deemed conduct inconsistent with high
standards of commercial honor and just and equitable principles of
trade if a Nasdaq market maker charges a fee for accessing its Agency
Quote so long as the market maker meets all NASD requirements for
displaying the Agency Quote.
Rule 4613. Character of Quotations
(a)-(b) No Change.\3\
---------------------------------------------------------------------------
\3\ In pending File No. SR-NASD-99-11, Nasdaq proposed
amendments to NASD Rule 4613(a) which would functionally integrate
Nasdaq's SOES and SelectNet system. See Exchange Act Release No.
41296 (April 15, 1999), 64 FR 19844 (April 22, 1999).
---------------------------------------------------------------------------
(c) Firm Quotations.
A market maker that receives an offer to buy or sell from another
member of the Association shall execute a transaction for at least a
normal unit of trading at its displayed quotations as disseminated in
The Nasdaq Stock Market at the time of receipt of any such offer. If a
market maker displays a quotation for a size greater than a normal unit
of trading, it shall, upon receipt of an offer to buy or sell from
another member of the Association, execute a transaction at least at
the size displayed. It shall be consistent with this rule for a Nasdaq
market maker to charge a fee to a market participant that accesses
through a Nasdaq-provided facility or telephone the market maker's
Agency Quote (as defined in NASD Rule 4613(b)), so long as the market
maker meets all NASD requirements for displaying the Agency Quote;
provided however, a market maker may not charge a UTP Specialist a fee
for accessing its quote when the UTP Specialist accesses the Agency
Quote by telephone from the floor of the UTP exchange. For purposes of
this rule a ``UTP Specialist'' shall mean a broker/dealer registered as
a specialist in Nasdaq securities pursuant to the rules of an exchange
that is a signatory to the Joint Self-Regulatory Organization Plan
Governing the Collection, Consolidation and Dissemination Of Quotation
and Transaction Information For Exchange-Listed Nasdaq/National Market
System Securities Traded On Exchanges On An Unlisted Trading Privilege
Basis (``Nasdaq/NMS/UTP Plan'').
(d)-(e) No Change.\4\
---------------------------------------------------------------------------
\4\ Nasdaq recently filed a proposed rule change, SR-NASD-99-09,
to permit the separate display of customer orders by market makers
in Nasdaq through a market maker agency identification symbol
(``Agency Quote''). Under that proposal, the Agency Quote rule would
be designated as NASD Rule 4613(b). The current NASD Rule 4613(b),
regarding Firm Quotations, would be redesignated as NASD Rule
4613(c), and current NASD rule 4613(c) would be redesignated as NASD
Rule 4613(d). That proposal would also eliminate current NASD Rule
4613(d), regarding Reasonably Competitive Quotations, as the
requirements of this subparagraph were eliminated as of October 13,
1997 by Exchange Act Release No. 39120 (Sept. 23, 1997), 62 FR 51170
(Sept. 30, 1997). See note 2, above. This filing reflects the
proposed redesignations.
---------------------------------------------------------------------------
4615. Quotation Rounding and Other Requirements for Agency Quotations
and ECNs
(a) An electronic communications network (``ECN'') included in
Nasdaq pursuant to Rule 4623 or a Nasdaq market maker that displays an
Agency
[[Page 24432]]
Quote (as defined in NASD Rule 4613) must round its bid down and/or its
offer up by the next minimum quotation increment permitted by Nasdaq's
system (or if the access fee, as described below, is larger than one
minimum quotation increment, the market maker or ECN must round its
bid(offer) down(up) to the next minimum increment that is equal to or
greater than the access fee) if:
(1) the ECN charges non-subscribers that access its quote a fee in
excess of one-half of one cent per share; or
(2) the Nasdaq market maker charges any participant that accesses
the market maker's Agency Quote (as defined in NASD Rule 4613) a fee in
excess of one-half of one cent per share.
(b) Prior to commencing to charge for a fee for accessing its
Agency Quote, a Nasdaq market maker shall inform Nasdaq Market
Operations in writing of the maximum fee it intends to charge any
market participant that accesses its Agency Quote (Initial Notification
Requirement). Additionally, the market maker shall immediately inform
Nasdaq Market Operations in writing of any change in the maximum fee it
charges any market participant (Continuous Notification Requirement).
The Initial Notification and Continuous Notification requirements shall
also apply to ECNs included in Nasdaq.
(c) It shall be deemed conduct inconsistent with high standards of
commercial honor and just and equitable principles of trade if a member
fails to fulfill its obligations as outlined above.
4623. Electronic Communications Networks
(a) No change.
(b) An ECN that seeks to utilize the Nasdaq-provided means to
comply with the ECN display alternative shall:
(1)-(3) No Change.
(4) agree to provide for Nasdaq's dissemination in the quotation
data made available to quotation vendors the prices and sizes of Nasdaq
market maker orders (and other entities, if the ECN so chooses) at the
highest buy price and the lowest sell price for each Nasdaq security
entered in and widely disseminated by the ECN; and prior to entering
such prices and sizes, register with Nasdaq Market Operations as an
ECN; [and]
(5) provide an automated execution or, if the price is no longer
available, an automated rejection of any order routed to the ECN
through the Nasdaq-provided display alternative[.]; and
(6) comply with applicable requirements of NASD Rule 4615.
(c) 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
Nasdaq is proposing to amend NASD Rule 3320 regarding Offers at
Stated Prices and NASD Rule 4613(c) regarding Firm Quotations, which
arguably could be read to prohibit market makers from charging market
participants fees when quotes are accessed. Nasdaq also is proposing to
require market makers and ECNs to round their quotations to the next
minimum quotation increment when: (1) the ECN charges non-subscribers a
fee in excess of one-half of one cent to access its quote; and (2) the
market maker charges another market participant a fee in excess of one-
half of one cent to access its Agency Quote (as defined in NASD rule
4613).\5\
---------------------------------------------------------------------------
\5\ See id.
---------------------------------------------------------------------------
1. Background
Recently, Nasdaq filed with the Commission a proposal to allow
market makers in Nasdaq National Market Securities (``NNM'') to display
a second quotation separate from their proprietary quotation for the
purpose of displaying customer interest (``Agency Quote Proposal'').\6\
As noted in the Agency Quote Proposal filing,\7\ Nasdaq's intended
purpose of the Agency Quote was to give market makers an alternative
method to display agency interests to the market and to return
``control'' over their quotes that market makers argue they lost with
the implementation of the SEC's Order Handling Rules (``OHR'').\8\
Additionally, the Agency Quote Proposal attempts to resolve the
regulatory and administrative difficulties that market makers
experience as a result of being required to display customer orders and
other agency interests as well as market makers' proprietary interests
in a single quote.
---------------------------------------------------------------------------
\6\ Id.
\7\ Id. As noted in the Agency Quote Proposal, market makers
assert that they have ``lost control'' of their quotes because they
must change their proprietary quote to reflect certain limit orders
and must ``advertise competing interests in their quotes.'' The
original text in this footnote has been changed pursuant to a
telephone conversation between John Malitzis, Assistant General
Counsel, Office of the General Counsel, Nasdaq, and Marc McKayle,
Attorney, Division, Commission (April 22, 1999).
\8\ The OHR, comprised of amendments to Rule 11Ac1-1 (``Firm
Quote Rule'') and the adoption of Rule 11 Ac1-4 (``Display Rule''),
were adopted by the Commission on August 28, 1996. See Securities
Exchange Act Release No. 37619A (September 6, 1996), 61 FR 48290
(September 12, 1996) (``OHR Adopting Release'').
---------------------------------------------------------------------------
Also, as noted in the Agency Quote Proposal, many ECNs currently
charge fees to market participants (and ECN subscribers) that execute
against a customer order that is displayed in the ECN. Although market
makers currently may not charge a similar fee when their public quotes
are accessed, market makers have expressed a desire to do so, in
particular since they often are acting as agent by displaying a
customer's interest in their quote. Nasdaq believes that it is
inequitable that ECNs are permitted to charge a fee when their quote is
accessed, but market makers are prohibited from charging a fee in
similar situations when they act as agent.
Nasdaq notes that concerns have been raised about this perceived
inequity. Specifically, Nasdaq suggests that the present environment
encourages market makers to send their customer limit orders to ECNs to
comply with the OHR. Thus, market makers often must give up some of
their business and incur ECN fees to process their customer's limit
orders. Market makers argue that it is unfair that an ECN may charge a
fee when its quote is accessed but they (market makers) are prohibited
from charging a fee when they are representing an agency interest in
their quote. Thus, there are strong incentives for market makers to
register as ECNs to avoid some of the regulatory and other requirements
imposed on market makers, as well as risk to capital that market makers
assume. Additionally, market makers argue that they, like ECNs, should
be able to charge an access fee when they are acting purely as agent.
Similar to ECNs, the access fee charged would compensate market makers
for costs incurred in representing orders in Nasdaq on an agency basis.
In adopting the OHR, the Commission required that ECNs provide
broker-dealers access to market maker orders reflected in the ECN's
public quote that was equivalent to broker-dealer access to the market
maker's own quotes. Currently, the Firm Quote Rules and NASD rules
generally require market makers to trade at their displayed
[[Page 24433]]
quotes, without any additional fees. Nonetheless, the OHR Adopting
Release stated that an ECN could charge ``for access to its system,
similar to the communications and systems charges imposed by various
markets, if not structured to discourage access by non-subscriber
broker-dealers.'' \9\ Subsequently, Commission staff no-action letters
affirmed that individual ECNs could be used by market makers in
compliance with the OHR. In these letters the ECNs represented, as a
condition of receiving the no-action relief, that they would charge
non-subscriber orders fees no greater than the lesser of the fees
charged a substantial number of active broker-dealer subscribers, and
one and one-half cents per share.
---------------------------------------------------------------------------
\9\ Id. at n. 272.
---------------------------------------------------------------------------
Regulation ATS extended the OHRs' equivalent access standard for
alternative trading systems publishing public quotations.\10\ In
Regulation ATS, the Commission acknowledged that a self-regulatory
organization (``SRO'') has the authority to adopt rules limiting
alternative trading systems fees, or requiring display of fees in the
quote, to make alternative trading system quotes that are disseminated
to the public comparable with other quotes in the SRO's market.\11\
---------------------------------------------------------------------------
\10\ See Exchange Act Release No. 40760 (Dec. 8, 1998), 63 FR
70844 (December 22, 1998) (``Regulation ATS Adopting Release'').
\11\ Id.
---------------------------------------------------------------------------
The fees charged by ECNs to non-subscriber broker-dealers accessing
ECN quotes have provoked much controversy. Market makers have argued
that ECNs publishing quotes in Nasdaq should not be allowed to charge
fees to trade with those quotes, on, in fairness, market makers should
be allowed to charge ECNs and others that trade with the market maker's
quotes. Broker-dealers say that while best execution principles compel
them to trade with better-priced displayed ECN quotes to benefit their
customers, these customers are generally unwilling to pay the fee
charged by the ECN in that trade.
The ECNs say that their business model depends on charging both
sides of a transaction an agency commission. They argue that they
should still be able to charge these fees even when the OHR and
Regulation ATS require them to display prices in the public quote.
The Nasdaq rule proposal would address these issues by allowing
market makers, like ECNs, to charge fees to access their agency quotes.
The proposal would, however, require both market makers and ECNs to
round this quote to the next inferior increment if the fee exceeded
half-a-cent per share.\12\
---------------------------------------------------------------------------
\12\ As explained in more detail below, the Commission is
seeking comment not only on the NASD rule filing as currently
proposed, but also on the broader questions raised by ECN and ATS
fees for accessing quotes and possible ways of reconciling these
fees with the existing Nasdaq market.
---------------------------------------------------------------------------
2. Agency Fee Proposal
In light of the foregoing, Nasdaq is proposing to permit market
makers to charge a fee when their Agency Quote is accessed, similar to
that ECNs currently charge non-subscribers. Under this proposal, a
market maker would be permitted to charge a fee but would be required
to round its bid down or its offer up by the applicable minimum
quotation increment in Nasdaq if the maximum fee the market maker
charges any market participant exceeded one-half of the one cent. If
the access fee the market maker charges is greater than a single
minimum increment, then the market maker would have to round its Agency
Quote to the next minimum increment that is equal to or greater than
the access fee.\13\ In effect, the market maker's fee would be included
in the market maker's Agency Quote if the charge exceeded one-half of
one cent. A virtually identical rounding requirement would apply to
ECNs.\14\ Nasdaq believes that when a quote-access fee exceeds a half-
a-cent per share, the net execution price materially differs from the
quoted price, and thus the fee should be rounded to account for such
differential.
---------------------------------------------------------------------------
\13\ Nasdaq notes that the half-a-cent level is equivalent to
the average fee that most ECNs charge their professional customers.
\14\ ECNs currently are not subject to a requirement that they
round their quotes to reflect a fee.
---------------------------------------------------------------------------
For example, a bid of 20 for a market participant that charges a
fee of .006 cents per share would be rounded down to $19\15/16\, while
an offer of 20 with the same charge would be rounded up to 20\1/16\. As
a second example, if a market participant charged a fee of twelve and a
half cents per share (i.e., \1/8\th point) on a $20 buy limit order,
the market participant would have to display that buy limit order at
$19\7/8\ (or \1/8\th down).
There would be no cap on the fee market participants could charge,
nor is Nasdaq mandating that market participants charge the same rate
to all market participants that access the market participant's quote
(i.e., market makers and ECNs may vary access fees for different market
participants).\15\ Nasdaq notes, however, that it believes the Nasdaq
UTP Plan would prohibit a market maker from charging a UTP Specialist
an access fee when the UTP Specialist accesses the market maker's
Agency Quote by telephone.\16\ The proposal, accordingly, prohibits
market makers from charging when a UTP Specialist accesses a market
maker's quote by phone. The UTP Plan does not, however, explicitly
prohibit market makers from charging UTP Specialists a fee when a
market maker's quote is accessed by a means other than the telephone,
such as a Nasdaq order delivery system.
---------------------------------------------------------------------------
\15\ The proposed rule would not prevent market participants
from rebating fees to a customer or customers.
\16\ See Section IX (``Market Access''), Joint Self-Regulatory
Organization Plan Governing the Collection, Consolidation and
Dissemination Of Quotation and Transaction Information For Exchange-
Listed Nasdaq/National Market System Securities Traded On Exchanges
On An Unlisted Trading Privilege Basis (``Nasdaq/NMS/UTP Plan
'').
---------------------------------------------------------------------------
The proposal would require all market makers and ECNs to inform the
NASD of the maximum (or highest) fee the market maker or ECN intends to
charge any single market participant, as well as any changes in
previously established fees. The NASD intends to publish and widely
distribute this fee information through a common facility, such as the
Nasdaqtrader.com Web Site. Nasdaq is sensitive to the concerns that
allowing market makers to charge the proposed fee could result in the
imposition of administrative burdens and other costs on small firms, as
firms would be required to calculate the fees they owe and are owed. To
alleviate these concerns, Nasdaq intends to develop through a common
facility (e.g., the Nasdaqtrader.com Web Site) reports and data that
firms may use to calculate the fees. In addition, to implement the
Agency Quote proposal, Nasdaq is proposing amendments to current NASD
rules (e.g., NASD Rule 3320 regarding Offers at Stated Price and NASD
Rule 4613 regarding Firm Quotations), which arguably could be read to
prohibit market makers from charging market participants fees when
their quotes are accessed.
Nasdaq believes that where a quote is subject to the rounding
requirement, a market participant should make a number of disclosures
to its customer to fulfill its best execution obligations. First, the
market participant should disclose and explain that while rounding will
result in price improvement by the amount rounded, the rounding may
delay the execution of the order because the order will be reflected at
a lower price, in the case of buy orders (or higher price, in the case
of sell orders). Additionally, a market maker must disclose (if
applicable) that when the quote is rounded down (up) the market maker
will collect the access
[[Page 24434]]
fee from the customer, since the accessing market participant has
already paid the fee with the implicit inclusion of the fee in the
quote. (An example of this situation is illustrated below.)
The following is an example of how the proposal would work. Three
market makers and an ECN (MNA, MMB, MMC and ECN1) are at the inside
(i.e., best) price of each displaying in their quotes (Agency Quotes
for the market makers), customer orders to buy 1,000 shares at $30. MMA
charges no access fee, MMB charges a fee of .002 cents per share, MMC
charges a fee of .007 cents per share, and ECN1 charges a fee of .015
cents per share. The following would be displayed in the Nasdaq
montage:
------------------------------------------------------------------------
MMID Bid price Shares
------------------------------------------------------------------------
[email protected] $30 1,000
[email protected] 30 1,000
[email protected] 29\15/16\ 1,000
ECN1#............................................. 29\15/16\ 1,000
------------------------------------------------------------------------
If two 1,000-share market orders to sell were entered into Nasdaq's
Small Order Execution System (``SOES'') (or its successor system),\17\
both orders would be executed automatically and reported to the tape at
1,000 shares at $30; to collect the access fee, MMB would directly bill
the market participant who accessed its quote.
---------------------------------------------------------------------------
\17\ See note 3, above.
---------------------------------------------------------------------------
Next, assume that the best market moves to MMC's price, and a
market order is delivered through SOES to MMC's bid, which represents a
customer buy limit order for $30 that is rounded down to $29\15/16\. In
this case, the Nasdaq system would automatically execute and lock in
the trade at $29\15/16\ (not $30), and report that price to the tape.
The incoming market order would be executed at $29\15/16\, and the
market maker would be required to give the customer buy limit order a
fill of $29\15/16\. As noted above, MMC must disclose to its customer
that, based on the access fee it charges other market participants, it
is required to round the customer's limit order price down, and that
while rounding will result in price improvement of \1/16\th, the
rounding may also delay the execution of the order. Additionally, MMC
must disclose that because the incoming market order is implicitly
paying a fee by selling to MMC's customer for \1/16\th less, MMC will
collect the .007 cents per share from its customer (i.e., MMC deducts
the .007 cents per share from the .0625 cents per share in price
improvement that the customer received).\18\
---------------------------------------------------------------------------
\18\ Since the market maker has already implicitly assessed a
fee on the incoming market order by rounding the limit order price
down \1/16\th, Nasdaq believes that MMC should not charge the
incoming market order an additional access fee; rather, Nasdaq
believes that MMC should collect its .007 cents per share fee from
its customer.
---------------------------------------------------------------------------
* * * * *
This proposal is contingent upon SEC approval of the Agency Quote
Proposal, and would become effective concurrently with Nasdaq's
implementation of the Agency Quote Proposal.\19\ Nasdaq believes that
the proposed rule change is consistent with the provisions of Section
15A(b)(6) \20\ and Section 11A of the Act.\21\ Section 15A(b)(6) \22\
requires that the rules of a registered national securities association
be designed to prevent fraudulent and manipulative acts and practices,
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
Moreover, under Section 15A(b)(6) of the Act,\23\ the rules of a
registered national securities association must not be designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers. In Section 11A(a)(1)(C) of the Act,\24\ Congress found that it
is in the public interest and appropriate for the protection of
investors and the maintenance of fair and orderly markets to assure:
(1) economically efficient execution of securities transactions; (2)
fair competition among brokers and dealers; (3) the availability to
brokers, dealers and investors of information with respect to
quotations and transactions in securities; (4) the practicability of
brokers executing investor's orders in the best market; and (5) an
opportunity for investor's orders to be executed without the
participation of a dealer.
---------------------------------------------------------------------------
\19\ See Amendment No. 1, note 3, above.
\20\ 15 U.S.C. 78o-3(b)(6).
\21\ 15 U.S.C. 78k-1.
\22\ 15 U.S.C. 78o-3(b)(6).
\23\ Id.
\24\ 15 U.S.C. 78k-1(a)(1)(C).
---------------------------------------------------------------------------
Nasdaq believes that by requiring market participants to round
their quotes and in effect display the fee in their quotation when the
fee exceeds a certain level, the proposal will avoid the dissemination
of potentially misleading quotation information. Nasdaq believes that
when quote-access fee exceed a half-a-cent per share, the net execution
price materially differs from the quoted price. To the extent that this
results in a market participant having to pass on the quoted price to
the customer, it may act to deter that market participant from acting
as a market maker. On the other hand, if the market maker passes a fee
on to its customer, this may result in dissatisfaction because the
customer perceives that he or she did not obtain the best price in the
market. In contrast, under Nasdaq's instant proposal, the firm will
receive the quoted price, thus eliminating this concern. Finally, the
proposal would address perceived inequities that currently exist
between market makers and ECN's, as the proposal would allow market
makers to charge a fee when they act as agent, similar to that which
ECNs currently charge to non-subscribers.
Nasdaq notes that in the past the SEC staff has taken the position
that it is inconsistent with the Firm Quote Rule, Rule 11Ac1-1 under
the Act,\25\ for market makers to charge a fee when their quotations
are accessed.\26\ Nasdaq believes that the SEC staff's position was, in
part, premised on the fact that market makers would be charging when
the market maker was acting as ``principal'' and in essence charging a
mark-up customers it ordinarily would not levy such a charge on. Under
the current proposal, market makers would be assessing a fee on
customers (and
[[Page 24435]]
others) that is in essence a commission solely when they are acting in
an agency capacity. Similar to ECNs. While a market maker may not be
able to charge a fee when it is acting in a principal's capacity for
the reasons previously cited by the SEC staff, Nasdaq believes that it
would be consistent with the Exchange Act Firm Quote Rule to permit
market makers to charge a fee when they are acting as agent.
Accordingly, Nasdaq believes that this rule proposal is consistent with
Section 11A of the Act.\27\
---------------------------------------------------------------------------
\25\ See 17 CFR 240.11Ac1-1.
\26\ Specifically, the SEC staff has stated in response to a
request for ``non-action relief '' that the Exchange Act Firm Quote
Rule does not permit a market maker posting a quote impose a fee on
market participants that customarily trade with the market maker at
its quote without a mark-up. See letter from Robert L.D. Colby,
Deputy Director, Division, Commission, to M. Joseph Messina, Vice
President, M.H. Meyerson & Co., Inc., dated June 12, 1998. In
reaching this conclusion, the SEC staff noted that the Firm Quote
Rule provides that each responsible broker or dealer shall be
obligated to execute any order to buy or sell a subject security
presented to it by another broker or dealer or any other person,
such as a retail customer, with whom such responsible broker or
dealer deals, at a price at least as favorable to such buyers or
sellers as the responsible broker's or dealer's published bid or
published offer (exclusive of commission or commission equivalent or
differential customarily charged by such responsible broker or
dealer in connection with execution of any such order) in an amount
up to its published quotation size. Id. The SEC staff has
interpreted the above parenthetical as addressing mark-ups that are
customarily charged to retail customers by brokers. Id. Thus,
according to the SEC staff, the Firm Quote Rule does not permit a
market posting quotations in the public quote to impose a fee, such
as a liquidity or access fee, on market participants that
customarily trade with a market maker at its quote without a mark-
up. Id.
The SEC staff also stated that it interpreted NASD Rule 4613(b)
(``NASD Firm Quote Rule'') as requiring market makers to include in
their posted quote an access fee they may charge. Id. Nasdaq
expresses no opinion as to whether it concurs with the SEC staff's
prior interpretation of NASD Rule 4613, but notes that this filing
would permit market makers to publish quotes without including the
fee in its bid or offer, unless such fee exceeds a half-a-cent, in
which case the fee would implicitly be included in the market
maker's quote.
\27\ 15 U.S.C. 78k-1.
---------------------------------------------------------------------------
(B) Self-Regulatory Organization's Statement to Burden on Competition
Nasdaq does not believes 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
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, or
B. Institute proceedings to determine whether the proposed rule
change 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 is consistent with the Act. The Commission asks for comments in
particular on the following questions:
1. Should market makers be permitted to charge a fee to trade
with limit orders in their agency quote lines? In addition to
charging for agency orders displayed in their agency quote lines,
should market makers be permitted to charge a fee for proprietary
orders displayed in their agency quote lines?
2. Should any fee charged by market makers for orders executed
against their agency quote lines be included in the quoted price?
Should ECN fees be included in an ECN's quote? If ECN fees are
required to be included in the quote, how should the fact that an
ECN may have a range of fees it charges its broker-dealer
subscribers be addressed?
3. Should there be a maximum permissible fee charged by market
makers and ECNs, and if so, what should that fee be? Should market
makers and ECNs be prohibited from charging a fee that is greater
than one trading increment? Would disparate fees create confusion in
the marketplace?
4. Will competition ensure that fees are not used as a barrier
to access?
Persons making written submissions should file six copies thereof
with the Secretary, Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 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 at the principal office of the
NASD.
All submissions should refer to File No. SR-NASD-99-16 and should
be submitted by June 1, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\28\
---------------------------------------------------------------------------
\28\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-11361 Filed 5-5-99; 8:45 am]
BILLING CODE 8010-01-M
