[Federal Register Volume 63, Number 181 (Friday, September 18, 1998)]
[Notices]
[Pages 49937-49939]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-25013]
[[Page 49937]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40434; File No. SR-NASD-98-62]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the National Association of
Securities Dealers, Inc. Relating to Fees for Nasdaq's Workstation II
Service for NASD Members
September 11, 1998.
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 August 20, 1998, as amended on September 10, 1998,\3\ the National
Association of Securities Dealers, Inc. (``NASD'') through is 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. 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\ On September 10, 1998, Nasdaq filed Amendment No. 1 with the
Commission. See Letter from Robert Aber, Senior Vice President and
General Counsel, Nasdaq, to Richard Strasser, Assistant Director,
Division of Market Regulation (``Division''), Commission, dated
September 10, 1998. Amendment No. 1 clarified the circumstances
under which Nasdaq would apply the Additional Circuit/SDP Charge to
subscribers, and clarified the way that Nasdaq would adjust the size
of the deposits required from subscribers who ordered NWII service
in July and August 1998.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
Nasdaq is proposing to amend NASD Rule 7010(h)(2) relating to
Nasdaq Workstation II (``NWII'') and network fees. The proposed rule
change amends the current fee schedule for NWII service for NASD
members. The NASD has filed a parallel proposal to effect the similar
amendments to the NWII fee structure to apply to non-NASD members.\4\
Nasdaq also is eliminating Digital Interface Service fees as Nasdaq no
longer provides this service. Below is the text of the proposed rule
change. Proposed new language is italicized; proposed deletions are in
brackets.
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\4\ See File No. SR-NASD-98-63.
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* * * * *
NASD Rule 7010. System Services
(a)-(g) No Change.
(h) Nasdaq Workstation Service.
(1) No Change.
(2) The following charges shall apply to the receipt of Level 2 or
Level 3 Nasdaq Service via equipment and communications linkages
prescribed for the Nasdaq Workstation II Service:
Service Charge............... [$100] $1,500/month per [server] service
delivery platform (``SDP'').
Display Charge............... [$500] $525/month per presentation device
(``PD'').
Additional Circuit/SDP Charge [$1,150 per] $2,700/month.*
A subscriber that accesses Nasdaq Workstation II Service via an
application programming interface (``API'') shall be assessed the
Service Charge for each of the subscriber's SDPs and shall be assessed
the Display Charge for each of the subscriber's API linkages, including
an NWII substitute or quote-update facility. API subscribers also shall
be subject to the Additional Circuit/SDP Charge.
(3) No Change.
[(j)] Digital Interface Service.
The following charges shall apply to the receipt of Level 3 Nasdaq
service via the Digital Interface Service:
Service Charge......................... $1,300/month
per server.
Display Charge......................... $345/month per
terminal display.
Additional Circuit..................... $500/month.
Equipment Charge....................... $290/month per
server].
(k)-(n) Re-designated as subparagraphs (j)-(m)
* A subscriber shall be subject to the Additional
Circuit/SDP Charge when the subscriber has not maximized capacity on
its SDP(s) by placing eight PDs and/or API servers on an SDP and
obtains an additional SDP(s); in such case, the subscriber shall be
charged the Additional Circuit/SDP Charge (in lieu of the Service
Charge) for each ``underutilized'' SDP(s) (i.e., the difference between
the number of SDPs a subscriber has and the number of SDPs the
subscriber would need to support its PDs and/or API servers, assuming
an eight-to-one ratio). A subscriber also shall be subject to the
Additional Circuit/SDP Charge when the subscriber has not maximized
capacity on its existing T1 circuit(s) by placing six SDPs on a T1
circuit and obtains an additional T1 circuit(s); in such case, the
subscriber shall be charged the Additional Circuit/SDP Charge (in lieu
of the Service Charge) for each ``unutilized'' slot on the existing T1
circuit(s). Regardless of SDP allocation across T1 circuits, a
subscriber will not be subject to the Additional Circuit/SDP Charge if
the subscriber does not exceed the minimum number of T1 circuits needed
to support its SDPs, assuming a six-to-one ratio.
* * * * *
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
The purpose of this filing is to amend the subscriber fees
applicable to NASD members that use the Nasdaq Workstation II
(``NWII''). In 1994, Nasdaq rolled out the NWII service, which provided
many enhancements to the then-existing Nasdaq Workstation service.\5\
As part of the NWII rollout, Nasdaq installed a network, known as the
Enterprise Wide Network (``EWN I''), to deliver NWII functionality. To
access NWII service, each subscriber location has at least one service
delivery platform (``SDP''), or server, that resides on the network and
connects to Nasdaq by a dedicated circuit. The SDP functions as the
subscriber's gateway from the NWII to the enterprise-wide network.\6\
Each SDP currently is permitted to support up to eight presentation
devices (``PD''), or Nasdaq
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Workstation IIs,\7\ although a firm may elect to have fewer than eight
PDs on a single SDP. In addition, a subscriber may obtain NWII service
through an application programming interface (``API''), which
essentially allows a firm to obtain NWII Service using the firm's own
hardware (e.g., personal computer) and software systems to access,
display, interface with, and operate NWII service.\8\
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\5\ NWII provides a widows-based environment and several data
management facilities not previously available in Nasdaq's former
(pre-1994) workstation service.
\6\ Under EWN I, each dedicated circuit supported one SDP. Under
Nasdaq's proposed new network--known as ``EWN II''--each dedicated
circuit (``T1 circuit'') will be capable of supporting up to six
SDPs.
\7\ This also will be true of EWN II.
\8\ API provides an electronic interface between a subscriber's
systems and the NWII system. Through the use of the API, a
subscriber may build its own workstation presentation software to
integrate the NWII service into the subscriber's existing
presentation facilities. The API allows a subscriber to emulate the
NWII presentation software with equivalent functionality, capacity
utilization and through-put capability, in addition to providing
enhanced capability to develop customized internal presentations for
use in support of a subscriber's activities. API also allows a
subscriber to operate a quote-update facility to assist solely in
complying with the SEC's Order Handling Rules. Generally, a
subscriber establishes an API ``linkage'' such as an NWII substitute
or quote-update facility, which in turn connects to an SDP via an
API server.
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Due to the ongoing growth in the Nasdaq market and unprecedented
increases in daily share volume since EWN I was installed, Nasdaq
became concerned that its existing enterprise-wide network capacity was
rapidly approaching maximization. Specifically, the network's
bandwidth--the amount of data that can be transmitted through a given
communications circuit in a fixed amount of time--currently can handle
one and one-half billion shares per day. The 1998 average daily share
volume to date is 750 million, with a high single-day volume of 1.250
billion shares. In addition, on October 28, 1997, Nasdaq experienced
its largest daily share volume ever with 1,354,164,600 shares traded.
In Nasdaq's view, these dramatic increases in average and peak share
volumes clearly mandate the creation of a new network with increased
capacity.
Moreover, based on the average rate of circuit additions for both
new and existing subscribers, EWN I is expected to reach maximum
circuit capacity during the second quarter of 1999.\9\ To respond to
these concerns and to avoid the potential for any disruption to the
Nasdaq market, Nasdaq contracted in late 1997 with MCI Communications
Corporation (``MCI'') to build a new network--EWN II--to accommodate
increased usage and provide increased circuit capacity.
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\9\ Similar to any other private network, EWN I was designed to
have a maximum circuit capacity (i.e., 2,100 circuits). In 1995, the
projected average circuit growth between 1995 and 1999 was estimated
to be seven circuits per month, so that by 1,999 there would be a
total of 1,400 circuits. In 1996, however, there was an average
growth of 35 circuits per month. For 1998, Nasdaq is averaging 10
circuits per month. Nasdaq projects that by 1999, there will be
2,100 circuits, and that Nasdaq will exhaust circuit capacity
without the EWN II upgrade.
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Nasdaq notes that concerns about present and future system capacity
have been repeatedly expressed by the Commission as part of its
releases recommending that self-regulatory organizations voluntarily
establish automation review policies to comprehensively plan, test, and
assess the trading capacity of their systems.\10\ This emphasis on
sufficient trading-system capacity reflects the Commission's
recognition of the significant negative impact system failures can have
on public investors, broker-dealer risk exposure, and market
efficiency. Moreover, Congress has specifically found that ``the
maintenance of stable and orderly markets with maximum capacity for
absorbing trading imbalances without undue price movements'' is a
paramount objective of a national market system.\11\ EWN II is Nasdaq's
response to these mandates.
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\10\ Securities Exchange Act Release No. 27445 (November 16,
1989), 54 FR 48703 (November 24, 1989) (Automation Review Policy);
Securities Exchange Act Release No. 29185 (May 9, 1991), 56 FR 22490
(May 15, 1991) (Second Automation Review Policy).
\11\ See S. Rep. No. 94-75, at 7, reprinted in 1975 U.S.C.C.A.N.
179, 185 (report accompanying bill enacted as Securities Acts
Amendments of 1975) (emphasis added).
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EWN II will be a significant improvement over EWN I. First EWN II
will have a four billion share per day capacity by the year 2001, with
the additional capability to be expanded to a daily eight billion share
capacity. EWN II's design contains certain features that are aimed at
significantly reducing the likelihood of a network failure. These
features are designed to ensure that Nasdaq, and the market
professionals and individual investors who rely on its facilities, are
provided with the most robust and flexible system available, thereby
ensuring the smooth functioning of the public securities markets both
now and in the future.
Nasdaq shortly will begin converting existing subscribers to EWN
II. Specifically, on or about September 1, 1998, Nasdaq will begin
replacing subscribers' existing dedicated circuits to accommodate the
new network. The installation process should be completed by May 1999.
As with previous technology roll-outs (e.g., EWN I and NWII), the EWN
II conversion will be implemented regionally and each firm will be pre-
scheduled for a particular conversion date.\12\
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\12\ See Securities Exchange Act Release No. 35,189 (January 3,
1995), 60 FR 3014 (January 12, 1995) (EWN I rollout). Thus, while
the rollout proceeds, some subscribers will continue to utilize EWN
I and pay the fees for that service, until they are upgraded to EWN
II.
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In light of the increased costs and value-added benefits of EWN II,
Nasdaq is proposing to revise the current NWII fee structure. Under the
proposal, the fee charged to a subscriber for a SDP would change from
$100 per month for each server, to $1,500 per month for each server.
The display charge would change from $500 per month for each PD, to
$525 per month for each PD. The charge associated with an unutilized or
underutilized circuit or SDP would change from $1,150 per month to
$2,700 per month.\13\ Thus, under the new fee
[[Page 49939]]
structure, a firm with one SDP ($1,500) and eight PDs (8 x $525 =
$4,200) would be charged a monthly fee of $5,700, while a firm with one
SDP ($1,500) and two PDs (2 x $525 = $1,050) would be charged a
monthly fee of $2,550.
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\13\ As noted above, a T1 circuit supports up to six SDPs, and
an SDP supports up to eight PDs. A subscriber shall be subject to
the Additional Circuit/SDP Charge when the subscriber has not
maximized capacity on its SDP(s) by placing eight PDs and/or API
servers on an SDP and obtains an additional SDP(s). In such case,
the subscriber shall be charged the Additional Circuit/SDP Charge
(in view of the Service Charge) for each ``underutilized'' SDP(s)
(i.e., the difference between the number of SDPs a subscriber has
and the number of SDPs the subscriber would need to support its PDs
and/or API servers, assuming an eight-to-one ratio). A subscriber
also shall be subject to the Additional Circuit/SDP Charge when the
subscriber has not maximized capacity on its existing T1 circuits by
placing six SDPs on a T1 circuit and obtains an additional T1
circuit(s). In such case, the subscriber shall be charged the
Additional Circuit/SDP Charge for each ``unutilized'' slot on the
existing T1 circuit(s). Regardless of SDP allocation across T1
circuits, a subscriber will not be subject to the Additional
Circuit/SDP Charge if the subscriber does not exceed the minimum
number of T1 circuits needed to support its SDPs, assuming a six-to-
one ratio.
For example, if a subscriber has four SDPs (each with eight PDs)
on an existing T1 circuit, and the subscriber orders a second T1 on
which the Subscriber places one SDP (with eight PDs), the subscriber
would pay on a monthly basis: (1) $1,500 for each of the four fully
utilized SDPs on the first T1 circuit, plus $525 for each of the PDs
on the circuit; (2) 2,700 for each of the two unutilized SDP slots
on the first circuit; and (3) $1,500 for the SDP on the second T1
circuit, plus $525 for each of the PDs on that circuit.
As a second example, if a subscriber has five SDPs, (each with
eight PDs) on an existing T1 circuit, and the subscriber orders a
second T1 circuit on which the subscriber places two SDP (with eight
PDs), the subscriber would pay on a monthly basis 1,500 for each
SDPs on the first and second T1 circuit, plus $525 for each of the
PDs on the SDPs. The firm would not be subject to the Additional
Circuit/SDP Charge because it has seven SDPs and needs two T1
circuits to support this number of SDPs.
As a third example, if a subscriber has on a T1 circuit four
SDPs each with four PDs, the subscriber would pay on a monthly basis
(1) $525 for each of the 16 PDs; and (2) $1,500 for two of the SDPs
and $2,700 for two SDPs because two SDPs are fully utilized while
two SDPs are not. This is, to support the firm's 16 PDs, the firm
only needs two SDPs. Thus there are two ``underutilized'' or
``nonessential'' SDPs, for which the firm must pay the Additional
Circuit/SDP Charge.
This pricing structure encourages subscribers to maximize
circuit capacity and is aimed at preventing the premature exhaustion
of such capacity. Furthermore, Nasdaq notes that under EWN II, each
T1 will be a dual circuit, and that there will be a virtually
seamless switch-over from one circuit to the next if one of the
circuits fails. Thus, it is anticipated that, due to the new
features of EWN II, subscribers will be less likely to order
additional circuits without first optimizing capacity on existing
circuits(s).
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The proposed rule change also clarifies that the fees in NASD Rule
7010(h)(2) likewise apply to NWII service obtained via API.
Specifically, if a subscriber chooses to access NWII through API, the
subscriber would be assessed the service charge for each SDP, the
display charge for each of the subscriber's linkages (e.g., NWII
substitute, quote-update facility), as well as the additional circuit
charge.\14\
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\14\ Since July and August 1998, new subscribers to NWII service
have placed work order for EWN II technology (instead of EWN I
technology). During this period, Nasdaq charged new subscribers the
required security deposit using the EWN I pricing structure, as the
new EWN II pricing structure had not yet been filed (NASD Rule 7070
provides that new subscribers to Nasdaq Workstation service shall be
subject to a deposit in the amount of: estimated telecommunications
provider charges for network infrastructure, connection and testing;
two months circuit charges; and estimated telecommunications
provider disconnect charges.) Nasdaq processed new work orders for
EWN II (instead of EWN I) to avoid these subscribers having to pay
for the installation and subsequent deinstallation of soon-to-be
obsolete EWN I technology, and the installation of EWN II technology
in September 1998 (when the upgrade is set to begin).
With this filing, new subscribers that are members and that have
placed work orders during July and August 1998, will be billed for
the security deposit for an amount equal to the differential under
the EWN I and the EWN II fee structures. Nasdaq believes that this
is a fair approach in that all subscribers should be required to pay
the same fees for the EWN II technology, regardless of the timing of
their order.
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Although NASD Rule 7010(h)(2) generally applies to both members and
non-member subscribers to NWII service, this filing will only effect a
change to the fees charged to NASD members. The NASD has filed a
separate but virtually identical proposed rule change to impose the
proposed new fees on non-member subscribers. Lastly, the proposed rule
filing reserves the fee schedule for ``Digital Interface Service,'' as
Nasdaq no longer offers this service.
Nasdaq believes that the proposed rule change is consistent with
Section 15A(b)(5) of the Act,\15\ which requires that the rules of a
registered securities association provide 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 notes that the proposed fees, which will only apply
to those that utilize NWII service, are reasonable and proportionate to
the projected costs of operating and maintaining EWN II.
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\15\ 15 U.S.C. 78o-3(b)(5).
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Although the proposed fees are higher than those associated with
EWN I, Nasdaq believes that these fees are both reasonable and
necessary. Specifically, Nasdaq notes that EWN II will be faster, more
secure, and provide greater capacity, all of which are essential to
protecting the integrity of the Nasdaq market and maintaining the
confidence of the investing public. In addition, the new fees will more
fairly allocate system costs among Nasdaq market participants.\16\
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\16\ According to Nasdaq, the proposed fee schedule's Service
Charge, like the prior fee schedule, does not pass on all of the
SDP/server costs that MCI charges the NASD. The proposed fee
schedule's Display Charge, like the prior fee schedule, in part
helps the NASD recoup its subsidy of the SDP/server costs, and
permits the NASD to recoup other expenses associated with the
development and the maintenance of NWII. See Conversation between
John Malitzis, Senior Attorney, Nasdaq, and Joshua Kans, Attorney,
Division, Commission, September 10, 1998.
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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
Because the foregoing rule change establishes or changes a due, fee
or other charge on NASD members, it has become effective upon filing
pursuant to Section 19(b)(3)(A)(ii) of the Act \17\ and subparagraph
(e)(2) of Rule 19b-4 thereunder.\18\ At any time within 60 days of the
filing of a rule change pursuant to Section 19(b)(3)(A) of the Act, 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.
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\17\ 15 U.S.C. 78s(b)(3)(A).
\18\ 17 CFR 240.19b-4(e)(2).
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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 is consistent with the Act.\19\ Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington,
D.C. 25049. 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 File No.
SR-NASD-98-62 and should be submitted by October 9, 1998.
\19\ In reviewing the proposed rule change, the Commission has
considered its impact on efficiency, competition and capital
formation. 15 U.S.C. 78c(f).
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For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
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\20\ See 17 CFR 200.30-3(a)(12).
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Maragret H. McFarland,
Deputy Secretary.
[FR Doc. 98-25013 Filed 9-17-98; 8:45 am]
BILLING CODE 8010-01-M
