[Federal Register Volume 65, Number 115 (Wednesday, June 14, 2000)]
[Notices]
[Pages 37445-37447]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14930]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42907; File No. SR-NASD-00-32]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to Nasdaq's Transaction Credit Pilot 
Program

June 7, 2000.
    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 June 6, 2000, the National Association of Securities Dealers, Inc. 
(``NASD'' ``Association''), through its wholly owned subsidiary The 
Nasdaq Stock Market, Inc. (``Nasdaq''), filed with the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by Nasdaq. Nasdaq has designated this proposal as one establishing or 
changing a due, fee, or other charge imposed by the Association under 
Section 19(b)(3)(A)(ii) of the Act, \3\ which renders the proposal 
effective upon filing with the Commission. 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\ 15 U.S.C. 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 proposes to amend NASD Rule 7010, System Services, to extend 
Nasdaq's transaction credit pilot program for an additional six months 
for Tape A reports, and reinstate for nine months the pilot for Tape B 
reports. The text of the proposed rule change is below. Proposed new 
language is in italics. Proposed deletions are in brackets.
* * * * *

7010 System Services

(a)-(b) No Change

    (c)
    (1) No Change
    (2) Exchange-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 
transactions credits based on the number of trades so reported. 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 qualify for the credit 
with respect to Tape B reports, an NASD member 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 [the Tape A pool] maintained by the NASD, each [such] 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 the pools [the Tape A 
pool] 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 [January 1, 2000, and ending with the 
calendar quarter starting on April 1, 2000] July 1, 2000 for Tape A 
reports (April 1, 2000 for Tape B reports) and ending with the 
calendar quarter starting on October 1, 2000.
* * * * *

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

1. Purpose
    Nasdaq proposes to extend until December 31, 2000, its pilot 
program to provide a transaction credit \4\ to NASD members that exceed 
certain levels of trading activity in exchange-listed securities. 
Nasdaq proposes to extend by six months the pilot for over-the-counter 
(``OTC'') trades in securities listed on the New York Stock Exchange 
(``NYSE'') (i.e., from July 1, 2000 to December 31, 2000) and re-
institute and extend by nine months the pilot for OTC trades in 
securities listed on the American Stock Exchange (``Amex'') (i.e. from 
April 1, 2000 to December 31, 2000). The NASD established its 
transaction credit pilot to find ways to lower investor costs 
associated with trading listed securities, and to respond to steps 
taken by other exchanges that compete with Nasdaq for investor order 
flow in those issues.
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    \4\ The transaction credit can be applied to any and all changes 
imposed by the NASD or its non-self-regulatory organization 
affiliates. Any remaining balance may be paid directly to the 
member.
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    Nasdaq's Third Market is a quotation, communication, and execution 
system that allows NASD members to trade stocks listed on the NYSE and 
the 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. 
The NASD collects quotations from broker-dealers that trade these 
securities OTC and provides such quotations to the Consolidated 
Quotation System for dissemination.

[[Page 37446]]

Additionally, the NASD collects trade reports from broker-dealers 
trading these securities in the OTC market and provides the trade 
reports to the Consolidated Tape Association (``CTA'') for inclusion in 
the Consolidated Tape. As a participant in the CTA, the NASD earns a 
share of those broker-dealers' 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.
    Nasdaq's original transaction credit pilot program and its 
subsequent extensions,\5\ including this proposal, 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 also will allow Nasdaq to continue to 
evaluate the efficacy of its revenue sharing model and continue to 
effectively complete for the retention of Third Market participants 
with other regional exchanges that have adopted similar revenue 
distribution methodologies.\6\
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    \5\ See Securities Exchange Act Release Nos. 41174 (March 16, 
1999), 64 FR 14034 (March 23, 1999) (SR-NASD-99-13); 42095 (November 
3, 1999), 64 FR 61680 (November 12, 1999) (SR-NASD-99-59); and 42672 
(April 12, 2000), 65 FR 21225 (April 20, 2000) SR-NASD-00-10).
    \6\ Both CHX and CSE have established similar programs. See 
Securities Exchange Act Release Nos. 38237 (February 4, 1997), 62 FR 
6592 (February 12, 1997) (SR-CH-97-01) and 39395 (December 3, 1997), 
62 FR 65113 (December 10, 1997) (SR-CSE-97-12).
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    Under the original transaction credit pilot program, Nasdaq 
calculates two separate pools of revenue from which credits can be 
earned--one representing 40% of the gross revenues received by the NASD 
from the CTA for providing trade reports in NYSE-listed securities 
executed in the Third Market for Dissemination by CTA (``Tape A''), and 
the other representing 40% of the gross revenue received from the CTA 
for reporting Amex trades (``Tape B''). These revenue calculation pools 
will remain at the same 40% level during the pilot's extension.
    Eligibility for transaction credits during the pilot's extension is 
based upon concurrent quarterly trading activity. For example, a Third 
Market participant that enters the market for Tape A or Tape B 
securities during the third quarter of 2000 and prints an average of 
500 daily trades of Tape A or Tape B securities during the time it is 
in the market, or that averages 500 daily Tape A or Tape B prints 
during the entire third quarter, would be eligible to receive 
transaction credits based on its trades during the third 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 become eligible for transaction credits and thus able to 
receive a pro-rata portion of the 40% revenue calculation pools.\7\ The 
NASD chose 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 provide an incentive for NASD members to 
actively trade in these securities.
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    \7\ As explained in SR-NASD-99-13, 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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    As before, a fully qualifying NASD member's transaction credit will 
be determined by taking its percentage of total Third Market 
transactions during the applicable calculation period and providing an 
equivalent percentage from the appropriate Tape A or Tape B calculation 
pool. Thus, for calendar quarter commencing with the calendar quarter 
that begins on July 1, 2000 for Tape A trades (April 1, 2000 for Tape B 
trades), the NASD will measure a qualified member's trade reports for 
that calendar quarter in each of Tape A and Tape B and create a credit 
for that member based upon this 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.
    Nasdaq's transaction credit program is being proposed on a pilot 
basis only. There is no guarantee that transaction credits will be 
available to qualifying NASD members beyond the term of the pilot.
2. Statutory Basis
    Nasdaq believes the proposed rule change is consistent with Section 
15A(b)(6) of the Act \8\ 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 also believes the 
proposal is consistent with Section 15A(b)(5) of the Act \9\ 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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    \8\ 15 U.S.C. 78o-3(b)(6).
    \9\ 15 U.S.C. 78o-3(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 proposed rule change has become effective pursuant to Section 
19(b)(3)(A)(ii) of the Act \10\ and subparagraph (f)(2) of Rule 19b-4 
thereunder,\11\ because it establishes or changes a due, fee, or other 
charge imposed by the Association. At any time within 60 days of the 
filing of the 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 purposes of 
the Act.
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    \10\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \11\ 17 CFR 240.19b-4(f)(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 proposal 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 file number

[[Page 37447]]

SR-NASD-00-32 and should be submitted by July 5, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-14930 Filed 6-13-00; 8:45 am]
BILLING CODE 8010-01-M