Document ID: SEC-2007-0020-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NASDAQ Stock Market LLC
Posted Date: 2007-01-05T05:00Z

[Federal Register: January 5, 2007 (Volume 72, Number 3)]
[Notices]               
[Page 600-603]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05ja07-69]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55007; File No. SR-NASDAQ-2006-053]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Assess Previously-Approved 
Fees to Former INET Data Recipients

December 22, 2006.
    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 7, 2006, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange''), 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 substantially 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is proposing to, beginning February 1, 2007, assess the 
Commission-approved fee for its TotalView data entitlement to former 
INET subscribers and market data vendors that previously received only 
the INET ITCH 1.0 and/or INET ITCH 2.0 data feeds which were free of 
charge and are now receiving TotalView data from the Nasdaq Market 
Center execution system which is fee-liable.

    Commission-approved Nasdaq Rule 7023(a) describes TotalView as 
follows:

[[Page 601]]

    The TotalView entitlement allows a subscriber to see all 
individual Nasdaq Market Center participant orders and quotes 
displayed in the system as well as the aggregate size of such orders 
and quotes at each price level in the execution functionality of the 
Nasdaq Market Center, including the NQDS feed and the Brut System 
Book Feed.

    Nasdaq Rule 7023 states that ``for the TotalView entitlement there 
shall be a $70 monthly charge'' and ``a charge of $6 per month per 
controlled device for OpenView.'' As described in detail below, as a 
result of the Commission's July 14, 2006, approval of Nasdaq's new 
Market Center execution system (``NMC Approval Order''),\3\ the INET 
ECN no longer exists for the trading of Nasdaq stocks and, therefore, 
the INET System Book Feed is no longer available for those stocks.\4\
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    \3\ Securities Exchange Act Release No. 54155 (Jul. 14, 2006), 
71 FR 41291 (Jul. 20, 2006) (SR-NASDAQ-2006-001) (``NMC Approval 
Order'').
    \4\ Nasdaq has separately proposed to modify Rule 7023 governing 
the user fees for TotalView and OpenView as well as Rule 7019 
governing the distributor fees for that data. See SR-NASDAQ-2006-048 
and -049.
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    There is no new rule text.

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
Background
    In January of 2001, the Commission approved Nasdaq's proposal to 
unify its two existing execution systems--SelectNet and SOES--into a 
single execution system \5\ originally known as ``SuperMontage'' and 
later re-named the ``Nasdaq Market Center.'' \6\ The order approving 
SuperMontage also approved the dissemination of quote and order data 
emanating from SuperMontage.
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    \5\ Securities Exchange Act Release No. 43863 (Jan. 19, 2001), 
66 FR 8020 (Jan. 26, 2001) (SR-NASD-99-53).
    \6\ Securities Exchange Act Release No. 50074 (Jul. 23, 2004), 
69 FR 45866 (Jul. 30, 2004) (SR-NASD-2004-076).
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    In November of 2002, Nasdaq received Commission approval to 
disseminate a SuperMontage ``depth of book'' product for Nasdaq stocks 
called TotalView.\7\ TotalView originally contained data representing 
all quotes and orders in Nasdaq stocks trading on Nasdaq's SuperMontage 
system. The Commission approved an initial TotalView fee of $150 per 
user per month, and later approved Nasdaq's proposal to reduce the fee 
to $70 per month for professional users and $14 per month for non-
professional users.\8\ The Commission later approved Nasdaq's proposal 
to disseminate an equivalent full depth of book product for NYSE/Amex 
stocks.\9\ That product, called ``OpenView,'' contained all quotes and 
orders for NYSE/Amex-listed stocks in Nasdaq's execution system. The 
Commission-approved fee for OpenView was $6 per user per month.
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    \7\ Securities Exchange Act Release No. 46843 (Nov. 18, 2002), 
67 FR 70471 (Nov. 22, 2002) (SR-NASD-2002-33).
    \8\ Securities Exchange Act Release No. 48581 (Oct. 1, 2003), 68 
FR 57945 (Oct. 7, 2003) (SR-NASD-2003-111).
    \9\ Securities Exchange Act Release No. 49349 (Mar. 2, 2004), 69 
FR 10775 (Mar. 8, 2004) (SR-NASD-2003-149).
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    In September of 2004, Nasdaq completed its acquisition of Brut, 
Inc., a registered broker-dealer operating the Brut electronic 
communications network (``ECN''). Nasdaq operated the Brut ECN side-by-
side with the Nasdaq Market Center. Prior to Nasdaq's acquisition, Brut 
disseminated a depth of book data feed containing order information 
from the Brut execution system--the Brut System Book Feed--free of 
charge to its subscribers and to market data vendors. Following 
Nasdaq's acquisition, Brut continued to disseminate the Brut System 
Book Feed free of charge. In March of 2005, the Commission approved 
Nasdaq's proposal to integrate the Brut System Book Feed into the 
TotalView data entitlement thereby rendering the Brut System Book Feed 
fee-liable at the same $70 and $14 monthly rates as TotalView. Nasdaq 
did not, however, integrate the Brut and Nasdaq Market Center execution 
systems; those two systems continued to operate independently and to 
disseminate separate data from their separate execution systems.
    On December 7, 2005, Nasdaq acquired INET ATS, Inc., a registered 
broker-dealer and member of the NASD, and operator of the INET ATS 
(``INET''), and the Commission approved Nasdaq's proposed rule change 
to establish rules governing the operation of the INET facility.\10\ 
Prior to Nasdaq's acquisition, INET disseminated a depth of book data 
feed containing order information from the INET execution system--the 
INET System Book Feed--free of charge to its subscribers and to market 
data vendors. Following Nasdaq's acquisition, INET continued to 
disseminate the INET System Book Feed free of charge. Unlike Brut, 
Nasdaq did not propose to integrate the INET System Book Feed into the 
TotalView data entitlement. Nasdaq continued to operate INET 
independently and to disseminate the INET System Book Feed free of 
charge to INET subscribers and market data vendors.
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    \10\ Securities Exchange Act Release No. 52902 (Dec. 7, 2005), 
70 FR 73810 (Dec. 13, 2005) (SR-NASD-2005-128).
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    On February 5, 2006, Nasdaq filed a proposal to integrate Nasdaq's 
three execution systems--the Nasdaq Market Center, the Brut ECN, and 
the INET ECN--into a single execution system commonly known as the 
Nasdaq Single Book.\11\ That proposal was designed to establish the 
Single Book as the new Nasdaq Market Center execution system to replace 
the existing Nasdaq Market Center execution system formerly known as 
SuperMontage. Like its predecessor, the new Nasdaq Market Center 
execution system would have three parts: (1) An execution service, (2) 
a trade-reporting service, and (3) a data feed service that ``can be 
used to display with attribution to Participants'' MPIDs all Quotes and 
Displayed Orders on both the bid and offer side of the market for all 
price levels then within the Nasdaq Market Center.'' \12\
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    \11\ Securities Exchange Act Release No. 53583 (Mar. 31, 2006), 
71 FR 19573 (Apr. 14, 2006) (SR-NASDAQ-2006-001) (``Single Book 
Proposal'').
    \12\ Compare new Nasdaq Rule 4751(a) with previous NASD Rule 
4701(a).
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The Elimination of INET and Brut

    On July 14, 2006, following a lengthy and contentious comment 
period, the Commission approved Nasdaq's Single Book Proposal.\13\ As a 
result of that approval order, two of Nasdaq's three execution 
facilities--Brut and INET--ceased to operate and Nasdaq emerged with a 
single, unified execution system, the new Nasdaq Market Center 
execution system. When Brut and INET ceased operating as separate 
execution facilities, they consequentially lost the ability to offer 
separate data feeds. In the Single Book Approval Order, the Commission 
itself noted that the Brut and INET facilities would cease to exist:
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    \13\ See NMC Approval Order, supra note 3.

[[Page 602]]

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    * * * under this proposal Nasdaq would integrate the Brut and 
INET execution systems with the Nasdaq Market Center, utilizing the 
INET platform; only Brut's broker-dealer routing functionality would 
continue upon the unification of the three trading platforms. Thus, 
this proposal could not advantage Nasdaq-affiliated ECNs over other 
ECNs because Nasdaq affiliated ECNs would not exist. In addition, 
the Commission notes that Nasdaq's acquisitions of Brut and INET 
were reviewed and approved by the Commission as positive 
developments in the ever-changing, dynamic market environment.\14\
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    \14\ NMC Approval Order, supra note 3 at 41301.

Thus, the proposal and the Commission order approving it clearly 
contemplated that the Brut and INET facilities were to be eliminated 
along with their corresponding data feeds.
    In fact, the Commission contemplated the elimination of the Brut 
and INET facilities as early as December 2005 when it approved Nasdaq's 
rules for operating INET as a subsidiary, as well as in the 
Commission's order approving Nasdaq's application to operate as a 
national securities exchange:

    In the Commission's approval of Nasdaq's exchange application in 
January 2006, the Commission emphasized that Nasdaq's approval was 
based on a set of rules with price/time priority. In addition, the 
Commission noted in the Exchange Application Order that the two ECNs 
that Nasdaq had recently acquired--Brut and INET--both applied rules 
that required their orders to be executed in price/time priority. As 
discussed above, the Single Book concept of integrating the three 
Nasdaq Facilities was discussed by the Commission in the Exchange 
Application Order and the Commission believed that such an 
integration would be beneficial, though the Commission permitted the 
three Nasdaq Facilities to operate separately for a temporary 
period, until September 30, 2006, because the Brut and INET 
facilities had only been recently acquired by Nasdaq (citations 
omitted).\15\

    \15\ Id. at 41303.
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    To reduce the impact to former Brut and INET users, the new Nasdaq 
Market Center system was designed to provide the same depth of book 
data that the previous system provided, namely all Nasdaq Market Center 
participants' quotes and orders displayed within the system. Like its 
predecessor, the new system will disseminate depth of book data in 
multiple formats using multiple data feeds.\16\ Because the Nasdaq 
Market Center system will provide the same quote and order data in 
multiple formats, all Nasdaq, Brut, and INET users can continue to 
receive depth of book data in the format that they historically use.
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    \16\ Prior to the integration, the Nasdaq Market Center issued 
the following data: TotalView legacy, which contains depth of book 
data for Nasdaq stocks aggregated by price level using the format 
developed by Nasdaq; OrderView, which contains depth of book data 
for Nasdaq stock on an order-by-order basis; NQDS, which contains 
each market participant's best quote in Nasdaq stocks; and OpenView, 
which contains each market participant's best quote in NYSE and Amex 
stocks. Following the integration, the Nasdaq Market Center also 
issues the following feeds: TotalView ITCH, which contains depth of 
book data on an attributed and order-by-order basis for Nasdaq, 
NYSE, and Amex stocks on a single feed using the ITCH format that 
was developed by INET; a separate TotalView ITCH feed containing 
depth of book data on an unattributed and order-by-order basis for 
Nasdaq, NYSE, and Amex stocks; and another separate TotalView ITCH 
feed containing depth of book data aggregated by price level and 
attributed for Nasdaq, NYSE, and Amex stocks.
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Reasonableness of the TotalView Fee

    Nasdaq is required by Section 6(b)(4) of the Act to ``provide for 
the equitable allocation of reasonable dues, fees, and other charges 
among its members and issuers and other persons'' using its facilities, 
and by Section 11A(c)(1)(D) to make market information available on 
terms that are ``not unreasonably discriminatory.'' In light of this 
statutory mandate, Nasdaq is required to assess the same fee to all 
recipients of the same data, in this case TotalView data. Former 
recipients of INET ITCH 1.0 and/or INET ITCH 2.0 data feed that choose 
to receive Nasdaq TotalView data must pay the same fee for that data as 
every other recipient on an equitable and non-discriminatory basis.
    In 2002, the Commission determined that Nasdaq's TotalView fee was 
fair and reasonable and Nasdaq is simply proposing to assess that fee 
to a group of new users. TotalView is a comprehensive source of Nasdaq 
order and quote information, and provides the greatest level of 
transparency into the Nasdaq stock market. Nasdaq states that today, 
TotalView provides 23 times the liquidity displayed and nearly 5 times 
the orders disseminated by the Nasdaq Quotation Dissemination Service 
(``NQDS''). Nasdaq's full depth in NYSE- and Amex-listed stocks 
(OpenView) also provides access to 40% more liquidity than the top-of-
file quotes provided via the Consolidated Quotation System feed from 
the Securities Information Automation Corporation.
    Since the Commission first approved the fee for TotalView, Nasdaq 
has lowered that fee from $150 per month to $70 per month for 
professional users or $14 per month for non-professional users. In 
addition, Nasdaq has augmented the TotalView product many times while 
holding the Commission-approved fees constant. In 2004 and 2005, Nasdaq 
added to TotalView all data from Nasdaq's opening and closing crosses. 
In March of 2005, Nasdaq added to the TotalView entitlement a separate 
data feed disseminating depth of book data in an unprocessed, order-by-
order format. Also in 2005, Nasdaq added a separate data feed 
containing depth of book data from its Brut Facility. By 2006, Nasdaq 
was disseminating via TotalView, depth of book data from the Nasdaq 
Market Center (formerly, SuperMontage) and the Brut Facility using 
multiple formats and multiple data feeds.
    Integrating the Brut, INET and Nasdaq Market Center systems and 
liquidity into a unified whole will further enhance the data available 
via TotalView, again with no fee increase to recipients. This 
integration came at significant cost to Nasdaq, as the Commission is 
aware:

    In addition, Nasdaq endured significant cost in 2005 to acquire 
INET and, through the Single Book Proposal, Nasdaq seeks to use the 
INET platform as the basis for its Integrated System going forward 
in order to provide a faster and more efficient system with greater 
capacity. As competition increases both in the United States and 
globally, and with the Commission's approval of Regulation NMS, 
nearly all national securities exchanges are in the process of 
transforming their systems to better compete. Through implementation 
of its Single Book Proposal, Nasdaq seeks to maximize the advantages 
of the INET trading platform--faster executions and increased 
certainty (citations omitted).\17\

    \17\ NMC Approval Order, supra note 3 at 41302.
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    In assessing its Commission-approved fee for TotalView, Nasdaq is 
seeking to recover on a reasonable, equitable and non-discriminatory 
basis some of the ``significant cost'' it endured to acquire INET.

Application of the Fee

    This proposal seeks to impose the Commission-approved TotalView fee 
to all new TotalView distributors that: (1) distributed INET ITCH 1.0 
and/or INET ITCH 2.0 data feed free of charge, and (2) did not 
previously distribute TotalView data. Prior to completing the 
integration of its execution systems, Nasdaq identified 63 distributors 
that meet this test. Of those, 45 chose to execute TotalView 
distributor agreements indicating their intentions to distribute 
TotalView data at the prevailing TotalView fee schedule and 18 chose 
not to execute such agreements. Therefore, Nasdaq believes this 
proposal will impact 45 TotalView distributors and their customers.
    Distributors that previously received either TotalView only or both 
TotalView and either INET ITCH 1.0 or INET ITCH

[[Page 603]]

2.0 data (or both), would continue to pay TotalView rates at the 
TotalView fee schedule. For those firms this in this category who had 
previously provided only the INET ITCH 1.0 and/or INET ITCH 2.0 data to 
certain customers, and who are able to separately identify these users 
from those users as receiving TotalView data via the INET ITCH 1.0 and/
or INET ITCH 2.0 data feed, these users also would be afforded the same 
period (until February 1, 2007) to begin their TotalView fee liability.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act \18\ in general, and Section 
6(b)(4) of the Act \19\ in particular, in that it provides an equitable 
allocation of reasonable fees among users and recipients of the data, 
and it makes TotalView data available on a non-discriminatory basis to 
similarly situated recipients.
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    \18\ 15 U.S.C. 78f.
    \19\ 15 U.S.C. 78f(b)(4).
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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. As a general matter, the 
Commission has long held the view that ``competition and innovation are 
essential to the health of the securities markets. Indeed, competition 
is one of the hallmarks of the national market system.'' \20\ The 
Commission has also stated ``that the notion of competition is 
inextricably tied with the notion of economic efficiency, and the Act 
seeks to encourage market behavior that promotes such efficiency, lower 
costs, and better service in the interest of investors and the general 
public.'' \21\
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    \20\ Securities Exchange Act Release No. 43863 (Jan. 19, 2001), 
66 FR 8020 (Jan. 26, 2001) (SR-NASD-99-53) at 8049.
    \21\ NMC Approval order, supra note 3 at 41298.
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    The Commission goes on to state its belief ``that the appropriate 
analysis to determine a proposal's competitive impact is to weigh the 
proposal's overall benefits and costs to competition based on the 
particular facts involved, such as examining whether the proposal would 
promote economically efficient execution of securities and fair 
competition between and among exchange markets and other market 
centers, as well as fair competition between the participants of a 
particular market.'' \22\ The current proposal is designed to increase 
transparency and the efficiency of executions by enabling vendors to 
provide additional market data in a cost efficient manner.
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    \22\ Id.
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    There is significant competition for the provision of market data 
to broker-dealers and other market data consumers, as well as 
competition for the orders that generate the data. Nasdaq fully expects 
its competitors to quickly respond to this proposal as they have 
responded to other Nasdaq data products in the past. Moreover, market 
forces have shaped the market data fees that Nasdaq has charged for 
this product in the past and will continue to shape those fees in the 
future. As noted above, the Commission originally approved a fee of 
$150 for TotalView. Nasdaq lowered that fee to $70 and $14 in response 
to the lack of demand by vendors and users. Furthermore, NASDAQ 
introduced both professional and non-professional Enterprise License 
pricing to accommodate firms interest in paying a fixed fee for 
unlimited distribution of TotalView data. Vendors simply will only 
utilize the service unless and until they conclude that it is 
economically beneficial to them and to their users.

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 Nasdaq 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. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASDAQ-2006-053 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NASDAQ-2006-053. 
This file number should be included on the subject line if e-mail is 
used. To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). 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 also will be available for inspection and copying at the 
principal office of Nasdaq. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NASDAQ-2006-053 and should be submitted on or before 
January 26, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E6-22593 Filed 1-4-07; 8:45 am]

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