[Federal Register Volume 66, Number 3 (Thursday, January 4, 2001)]
[Notices]
[Pages 828-830]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-153]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43770; File No. SR-NASD-00-71]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc., Relating to the Assessment of Fees for 
Automated Confirmation Transaction Service

December 22, 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 December 5, 2000, 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 (``Commission'' or ``SEC'') 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: (1) Reduce the fee charged for Automated Give-
Up (``AGU'') transactions \4\ processed by the Automated Confirmation 
and Transaction Services (``ACT''); and (2) establish a separate fee 
for the correction of transactions already

[[Page 829]]

processed by ACT. The text of the proposed rule change is below. 
Proposed new language is in italics. Proposed deletions are in 
brackets.
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    \4\ The AGU transaction is currently charged the ``Comparison'' 
fee of $0.0144/side. Nasdaq is proposing to carve-out the AGU 
transaction from this existing ``Comparison'' category and to reduce 
to $0.01 the fee that Nasdaq assesses for these transactions. 
Telephone conversation between Jeffrey S. Davis, Assistant General 
Counsel, Nasdaq, and Joseph P. Morra, Special Counsel, SEC, December 
21, 2000.
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* * * * *
Rule 7010. System Services.
    (a) through (f) No Change.
    (g) Automated Confirmation Transaction Service.
    The following charges shall be paid by the participant for use of 
the Automated Confirmation Transaction Service (ACT):
    Transaction Related Charges:

------------------------------------------------------------------------
 
------------------------------------------------------------------------
Comparison.............................  $0.0144/side per 100 shares
                                          (minimum 400 shares; maximum
                                          7,500 shares).
Automated Give-Up......................  $0.01/side per 100 shares
                                          (minimum 400 shares; maximum
                                          7,500 shares).
Late Report--T+N.......................  $0.288/side.
Browse/query...........................  $0.288/query.
Terminal fee...........................  $57.00/month (ACT only
                                          terminals).
CTCI fee...............................  $575.00/month.
Service desk...........................  $57.00/month*.
Trade Reporting........................  $.029/side (applicable only to
                                          reportable transaction not
                                          subject to trade comparison
                                          through ACT).
Risk Management Charges:...............  $0.35/side and $17.50/month per
                                          correspondent firm.
Corrective Transaction Charge:.........  $0.25/Cancel, Error, Inhibit,
                                          Kill, or `No' portion of No/
                                          Was transaction, paid by
                                          reporting side;
                                         $0.25/Break, Decline
                                          transaction, paid by each
                                          party;.
------------------------------------------------------------------------

* * * * *

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 has set forth below a brief description of the ACT system, 
followed by discussion of the fees that Nasdaq proposes to change as 
well as the functionality for which those fees are assessed. The two 
proposed changes are intended to adhere to the principle that system 
users should pay fees based upon the functionality they demand and the 
system usage required by that functionality.
    Background. ACT is an automated trade reporting and reconciliation 
service that speeds the post-execution steps of price and volume 
reporting, comparison, and clearing of pre-negotiated trades completed 
in Nasdaq, OTC Bulletin Board, and other over-the-county securities. 
ACT handles transactions negotiated over the phone or executed through 
any of Nasdaq's automated trading services. It also manages post-
execution procedures for transactions in exchange-listed securities 
that are traded off-board in the Third Market. Participation in Act is 
mandatory for NASD members that are members of a clearing agency 
registered with the SEC, that have a clearing arrangement with such a 
member, or that participate in any of Nasdaq's trading services.
    Nasdaq market particpants--Market Makers and Order Entry firms-- 
have specified obligations for the use of ACT when entering, accepting, 
or correcting trade details into ACT. Market Makers are obligated to 
report trades within 90 seconds of execution and to enter trade details 
of all clearable and internalized transactions through, among other 
means, the ACT Trade Report function of the Nasdaq Workstation II 
(``NWII'') and Computer to Computer Interface (``CTCI''). Order Entry 
firms are required to enter a version of the trade within 20 minutes of 
execution through, among other means, the ACT Trade Report function of 
the NWII and CTCI or to accept the trade within 20 minutes using the 
ACT Trade Scan function.
    ACT accepts three different entries, each accomplishing a different 
objective and each using different levels of system resources: Trade 
Report Only; Clearing Only; and Trade Report and Clearing. The Clearing 
Only and the Trade Report and Clearing transactions are entered for 
trade comparison and clearing. This means that when these transactions 
are entered into ACT they will trigger the system to go through the 
comparison process to find the contra side's matching entry. If the 
contra side's entry is found then the two records are matched and will 
be considered a locked-in trade and can no longer be canceled. If no 
match is found, the transaction remains open and may be canceled by the 
entering firm. Whenever any new open transactions are entered into ACT 
it will search through all existing open transactions to find a match. 
The Trade Report Only transactions is designed solely to meet the 
NASD's trade reporting rule obligation. They do not go through the 
comparison process in ACT, and they may be canceled by a user.
    Automated Give-Up Fee Reduction (``AGU''). In a ``give up'' 
arrangement, a member who reports or accepts a trade in ACT on behalf 
of another member would identify in the ACT screen give-up box the 
member on whose behalf the trade was being reported or accepted. Where 
the executing broker accepts a trade that has been reported by another 
member, the reporting member would have to report the trade with the 
executing broker as the contra side and identify the prime brokerage 
customer as the contra side give-up. The executing broker may then 
accept the trade as presented. This would avoid a second trade report 
and ensure that the prime brokerage customer is identified to the NASD.
    The ACT Give-Up Automatic Lock-in function allows an introducing 
broker to enter and lock-in a trade when it is responsible for both 
sides of the trade. This occurs when two of its ``Give-Ups'' trade with 
each other or the introducing broker trades with one of its own Give-Up 
firms. In the non-automated Give-Up, the introducing broker submits a 
market-maker entry for one side and either accepts the trade or submits 
an order-entry firm entry to match the trade. In the automated system, 
by specifying the Give-Up Lock-In feature, the introducing broker 
avoids the need to accept the trade or submit the order-entry side. In 
other words, the lock-in feature will allow the introducing broker to 
submit just one entry, not two.
    Use of the AGU substantially reduces the use of Nasdaq system 
resources. To process a non-automated give-up transaction, the ACT 
system must route

[[Page 830]]

between six and twelve input and output messages. The use of the AGU 
reduces that number by as much as 50 percent. Based upon this reduction 
in system usage and the increased benefits to market participants, 
Nasdaq proposes to reduce the ``Comparison'' fee associated with AGU 
transactions from $.0144 per 100 share block to $.01 per 100 share 
block for trades of between 400 and 7,500 shares.\5\ This represents a 
substantial savings to market participants and to investors.
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    \5\ The AGU transaction is currently charged the ACT 
``Comparison'' fee because it uses the ACT Comparison functionality. 
See footnote 4, supra.
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    ACT Corrective Transactions Fee. Market participants are required 
to correct trade reports that are inaccurate using one of five ACT 
functions; Cancel, Error, Inhibit, Kill, No/Was, Decline, or Break 
(collectively, ``Corrective Transactions''). Corrective Transactions 
utilize the comparison functionality of ACT, in that the system is 
required to identify a particular trade and perform an operation that 
matches the conduct of the contra parties to the transaction. In fact, 
these transactions consume system capacity and staff resources 
disproportionate to those required for standard reporting transactions, 
and disproportionate to the fee imposed for standard comparison 
functions. Currently, Nasdaq assesses the standard comparison fee to 
such transactions.
    Along with the rapid growth of Nasdaq daily trading volume, the 
number of Corrective Transactions is increasing rapidly, unbalancing 
the proper allocation of system costs to users of system functionality. 
Accordingly, Nasdaq proposes implementing a $0.25 fee charged to the 
reporting party for Cancel, Error, Inhibit, Kill, and the ``No'' 
portion of ``No/Was'' trades, as well as a $0.25 fee per side for Break 
and Decline transactions. The fee is designed to cover a portion of the 
costs of processing Corrective Transactions that have not previously 
been charged to market participants. The proposed fee would discourage 
the unnecessary entry of Corrective Transactions, such as the practice 
of canceling a number of individual trades and re-entering a single 
bunched trade to avoid ACt fees. Nasdaq notes that numerous self-
regulatory organizations already impose comparable fees for corrective 
transactions, such as Nasdaq is proposing here.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A(b)(6) of the Act,\6\ which requires, 
among other things, that the Association's rules be designed 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. 
Nasdaq believes that the proposed rule change is wholly consistent with 
the purposes of the Act in that it will provide a cost effective and 
efficient mechanism to report trades, and therefore facilitates 
clearance and settlement. Additionally, Nasdaq believes the proposed 
rule change will enhance the process by which members engage in the 
comparison and clearing of securities transactions.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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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 was effective upon filing with the 
Commission pursuant to section 19(b)(3)(A)(ii) of the Act \7\ and 
subparagraph (f)(2) of Rule 19b-4 thereunder,\8\ 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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    \7\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \8\ 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 SR-NASD-00-71 and should be 
submitted by January 25, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 01-153 Filed 1-3-01; 8:45 am]
BILLING CODE 8010-01-M