Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the National Association of Securities Dealers, Inc.

[Federal Register Volume 64, Number 55 (Tuesday, March 23, 1999)]
[Notices]
[Pages 14034-14036]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-6970]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41174; File No. SR-NASD-99-13]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc.

March 16, 1999.
    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 March 4, 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 
establishing or changing a due, fee or other charge imposed by the NASD 
under Section 19(b)(3)(A)(ii) of the Act,\3\ which renders the proposal 
effective upon filing by the Commission. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A)(ii).
---------------------------------------------------------------------------

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

    Nasdaq is filing a proposed rule change to NASD Rule 7010. 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 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 
combination) of over-the-counter transactions as reported to the 
Consolidated Tape by the NASD during the term of the pilot. 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 (as

[[Page 14035]]

the case may be, depending on the qualification standards) 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.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the NASD 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 establish a pilot program to provide a 
transaction credit \4\ to NASD members who exceed certain level of 
trading activity in exchange-listed securities. The NASD has determined 
to establish a program regarding these transaction credits to assist in 
finding ways to lower investor costs associated with trading, and to 
respond to steps taken by other exchanges that complete for investors 
order flow in these securities. The NASD has established the program as 
a limited period pilot program to develop experience with assisting 
NASD members trading in exchange-listed securities and to learn how 
best to lower the cost of trading these securities.
---------------------------------------------------------------------------

    \4\ 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.
---------------------------------------------------------------------------

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.\5\ The 
NASD collects quotations from broker-dealers that trade these 
securities over-the-counter and provides such quotations to the 
Consolidates Quotation System for dissemination. Additionally, the NASD 
collects trade reports from these broker-dealers trading such 
securities in the over-the-counter 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 and 
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 intends to create credit pools for qualified 
members.
---------------------------------------------------------------------------

    \5\ Both CHX and CSE have established similar programs pursuant 
to Section 19(b)(3)(A). See Securities Exchange Act Release No. 
38237 (February 4, 1997), 62 FR 6592 (February 12, 1997) (providing 
a transaction credit for specialists based upon a percentage of the 
CTA tape revenue); Securities Exchange Act Release No. 39395 
(December 3, 1997), 62 FR 65113 (December 10, 1997) (providing a 
transaction credit to members on a pro rate basis, based upon a 
percentage of the quarterly CSE Tape B transaction market share). To 
remain competitive with these markets, the NASD believes that it 
must evaluate programs designed to effectively respond to other 
market's approaches to trading the same securities.
---------------------------------------------------------------------------

    Nasdaq's transaction credit pilot is intended to both lower costs 
for Third Market Makers and for 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. The pilot will also 
allow Nasdaq to evaluate the efficacy of this revenue sharing model and 
more effectively compete for the retention of Third Market participants 
with other regional exchanges who have adopted similar revenue 
distribution methodologies.
Pilot Program
    Under the pilot proposal, Nasdaq will first calculate two separate 
pools of revenue from which credits can be earned--one representing 40% 
of the gross revenues received from the Consolidated Tape Association 
(``CTA'') for providing trade reports in NYSE-listed securities 
executed in the Third Market for dissemination by CTA (``Tape A''), the 
other representing 40% of the gross revenue received from CTA for 
reporting AMEX trades (``Tape B''). To earn a credit from either of 
these pools, an NASD member must have reached a minimum trading level 
in that market segment for the period of July 1, 1998 to December 31, 
1998. The measure that the NASD will use for this pilot period is 500 
average daily executions in Tape A (to qualify for the Tape A pool) or 
500 average daily executions for Tape B (to qualify for this pool).\6\ 
Only those NASD members who both exceeded this 500 average daily 
execution threshold during the July to December 1998 time period and 
continue to average either 500 or more Tape A or 500 or more Tape B 
daily executions during the term of the pilot will be eligible for 
transaction credits. If an NASD member is so qualified, it will become 
part of the pilot's control group, and thus, be eligible to receive a 
pro-rata portion of the 40% revenue calculation during the term of the 
pilot.
---------------------------------------------------------------------------

    \6\ The NASD has chosen to establish the threshold for 
qualification at 500 trades per day because it believes that such 
number represents a clear example of a member's commitment to 
operating in the Third Market and competing for order flow. It also 
is being used as a rough, temporary measure to balance the credit 
program incentives against Nasdaq's costs in operating facilities 
that facilitate Third Market trading. The NASD plans to use the 
pilot period to carefully evaluate the need for a qualification 
threshold and, depending on its experience in the pilot, may change 
or eliminate the threshold at a future date.
---------------------------------------------------------------------------

    A qualifying NASD member's transaction credit under the calculation 
will be determined by taking its percentage of total Third Market 
Transaction during the applicable calculation period and providing an 
equivalent percentage from the appropriate Tape A or B calculation 
pools. Thus, for each calendar quarter, commencing with the calendar 
quarter that started on October 1, 1998, the NASD will measure a 
qualified member's trade reported activity for that calendar quarter in 
each of Tape A and B 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% calculation pool.
    It must 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.\7\
---------------------------------------------------------------------------

    \7\ Nasdaq also reserves the right to terminate the transaction 
credit pilot at any time. The NASD will file a proposed rule change 
to terminate their pilot program.
---------------------------------------------------------------------------

    Nasdaq believes that the proposed rule change is consistent with 
the

[[Page 14036]]

provisions of Section 15A(b)(6) \8\ 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 believes its pilot is also consistent with Section 15A(b)(5) \9\ 
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.
---------------------------------------------------------------------------

    \8\ 15 U.S.C. 78o-3(b)(6).
    \9\ 15 U.S.C. 78o-3(b)(5).
---------------------------------------------------------------------------

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 effective immediately pursuant 
to Section 19(b)(3)(A)(ii) \10\ of the Act and subparagraph (f) of Rule 
19b-4 thereunder \11\ in that it establishes or changes a due, fee or 
other charge.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \11\ 17 CFR 240.19b-4(f).
---------------------------------------------------------------------------

    At any time within 60 days of the filing of such proposed rule 
change pursuant to Section 19(b)(3)(A) of the Act, 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 
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, N.W., Washington, D.C. 20549. 
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 in the caption 
above and should be submitted by April 13, 1999.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-6970 Filed 3-22-99; 8:45 am]
BILLING CODE 8010-01-M