Document ID: SEC-2006-1488-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-11-20T05:00Z

[Federal Register: November 20, 2006 (Volume 71, Number 223)]
[Notices]               
[Page 67179-67183]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20no06-101]                         

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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54742; File No. SR-NASD-2006-122]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Modify Pricing for NASD Members Using ITS/CAES, Brut, 
and Inet

November 13, 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 November 1, 2006, the National Association of Securities Dealers, 
Inc. (``NASD''), through its 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 substantially prepared by Nasdaq. 
Nasdaq filed the proposed rule change pursuant to Section 
19(b)(3)(A)(ii) of the Act,\3\ and Rule 19b-4(f)(2) thereunder,\4\ 
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.
---------------------------------------------------------------------------

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

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

    Nasdaq proposes to modify the pricing for NASD members using the 
ITS/CAES System and the Brut and Inet facilities (collectively, the 
``Nasdaq Facilities''). Nasdaq states that it will implement this rule 
change on November 1, 2006. As indicated in the rule text, portions of 
the rule change would be in effect on a pilot basis, beginning November 
1, 2006 and continuing through November 30, 2006.

[[Page 67180]]

The text of the proposed rule change is set forth below. Proposed new 
language is in italics; proposed deletions are in [brackets].\5\
---------------------------------------------------------------------------

    \5\ Nasdaq states that changes are marked to the rule text that 
appears in the electronic NASD Manual found at http://www.nasd.com, 

as further amended on an immediately effective basis by File No. SR-
NASD-2006-116. See Securities Exchange Act Release No. 54695 
(November 2, 2006), 71 FR 65862 (November 9, 2006).
---------------------------------------------------------------------------

7010. System Services

    (a)-(h) No change.
    (i) ITS/CAES System, Brut, and Inet Order Execution and Routing
    (1) The following charges shall apply to the use of the order 
execution and routing services of the ITS/CAES System, Brut, and Inet 
(the ``Nasdaq Facilities'') by members for all Exchange-Traded Funds 
that are not listed on The NASDAQ Stock Market LLC. The term 
``Exchange-Traded Funds'' shall mean Portfolio Depository Receipts, 
Index Fund Shares, and Trust Issued Receipts as such terms are defined 
in Rule 4420(i), (j), and (l), respectively, of The NASDAQ Stock Market 
LLC. For purposes of determining a member's volume in all securities 
under Rule 7010(i), the term ``Nasdaq Facilities'' shall also be deemed 
to include the member's volume in Nasdaq-listed securities through the 
facilities of The NASDAQ Stock Market LLC.

                             Order Execution
------------------------------------------------------------------------

------------------------------------------------------------------------
Order that accesses the Quote/Order of
 a market participant that does not
 charge an access fee to market
 participants accessing its Quotes/
 Orders through the Nasdaq Facilities:
Charge to member entering order:
Members with an average daily volume     $0.0028 per share executed (or,
 through the Nasdaq Facilities in all     in the case of executions
 securities during the month of (i)       against Quotes/Orders at less
 more than 30 million shares of           than $1.00 per share, 0.1% of
 liquidity provided, and (ii) more than   the total transaction cost).
 50 million shares of liquidity
 accessed and/or routed; or members
 with an average daily volume through
 the Nasdaq Facilities in all
 securities during the month of (i)
 More than 20 million shares of
 liquidity provided, and (ii) more than
 60 million shares of liquidity
 accessed and/or routed.
Other members..........................  $0.0030 per share executed (or,
                                          in the case of executions
                                          against Quotes/Orders at less
                                          than $1.00 per share, 0.1% of
                                          the total transaction cost).
Credit to member providing liquidity:
Members with an average daily volume     $0.0025 per share executed (or
 through the Nasdaq Facilities in all     $0, in the case of executions
 securities during the month of more      against Quotes/Orders at less
 than 30 million shares of liquidity      than $1.00 per share).
 provided.
Other members..........................  $0.0020 per share executed (or
                                          $0, in the case of executions
                                          against Quotes/Orders at less
                                          than $1.00 per share).
Order that accesses the Quote/Order of
 a market participant that charges an
 access fee to market participants
 accessing its Quotes/Orders through
 the Nasdaq Facilities:
Charge to member entering order:
Members with an average daily volume     $0.001 per share executed (but
 through the Nasdaq Facilities in all     no more than $10,000 per
 securities during the month of more      month).
 than 500,000 shares of liquidity
 provided.
Other members..........................  $0.001 per share executed.
------------------------------------------------------------------------

      Order Routing for Exchange-Traded Funds Not Listed on Nasdaq
------------------------------------------------------------------------

------------------------------------------------------------------------
Order routed to the New York Stock       See [DOT] NYSE fee schedule in
 Exchange (``NYSE'') [through its DOT     Rule 7010(i)(7).
 system].
[Any other order entered by a member     [$0.004 per share executed].
 that is routed outside of the Nasdaq
 Facilities and that does not attempt
 to execute in the Nasdaq Facilities
 prior to routing].
Order routed to the American Stock       $0.003 per share executed
 Exchange (``Amex'') [after attempting    (plus, in the case of orders
 to execute in the Nasdaq Facilities].    charged a fee by the Amex
                                          specialist, $0.01 per share
                                          executed).
[Order routed through the Intermarket    [$0.0028 per share executed].
 Trading System (``ITS'') to NYSE Arca
 after attempting to execute in the
 Nasdaq Facilities].
[Any other order routed through the      [$0.0007 per share executed].
 Intermarket Trading System (``ITS'')
 after attempting to execute in the
 Nasdaq Facilities].
[Any]All other orders [routed after      $0.003 per share executed.
 attempting to execute in the Nasdaq
 Facilities].
------------------------------------------------------------------------

    (2)-(5) No change.
    (6) Except as provided in paragraph (7), the following charges 
shall apply to the use of the order execution and routing services of 
the Nasdaq Facilities by members for securities subject to the 
Consolidated Quotations Service and Consolidated Tape Association plans 
other than Exchange-Traded Funds (``Covered Securities''):

[[Page 67181]]

                             Order Execution
------------------------------------------------------------------------

------------------------------------------------------------------------
Order that accesses the Quote/Order of a
 Nasdaq Facility market participant:
Charge to member entering order:            [$0.0007 per share executed]
On or after December 1, 2006..............  $0.0007 per share executed.
For a pilot period during the month of
 November 2006:
Members with an average daily volume        $0.0007 per share executed.
 through the Nasdaq Facilities in Covered
 Securities during the month of (i) more
 than 100,000 shares of liquidity
 provided, and (ii) more than 100,000
 shares of liquidity accessed and/or
 routed.
Members with an average daily volume        $0.001 per share executed.
 through the Nasdaq Facilities in Covered
 Securities during the month of (i)
 between 50,000 and 100,000 shares of
 liquidity provided, and (ii) between
 50,000 and 100,000 shares of liquidity
 accessed and/or routed.
Other members.............................  $0.0015 per share executed.
Credit to member providing liquidity for a  $0.0007 per share executed.
 Covered Security listed on NYSE and The
 NASDAQ Stock Market LLC:
Credit to a member providing liquidity for
 other Covered Securities:
Members with an average daily volume        $0.0005 per share executed.
 through the Nasdaq Facilities in Covered
 Securities during the month of more than
 5 million shares of liquidity accessed,
 provided, or routed.
Members with an average daily volume        $0.0006 per share executed.
 through the Nasdaq Facilities in Covered
 Securities during the month of 10 million
 or more shares of liquidity provided.
Other members.............................  No credit.
------------------------------------------------------------------------

                              Order Routing
------------------------------------------------------------------------

------------------------------------------------------------------------
Order routed to Amex...................  $[0.003]$0.0028 per share
                                          executed (plus, in the case of
                                          orders charged a fee by the
                                          Amex specialist, $0.01 per
                                          share executed).
Order routed to NYSE...................  See [DOT] NYSE fee schedule in
                                          Rule 7010(i)(7).
[Order routed to NYSE Arca] All other    $0.0028 per share executed.
 orders.
[Order for NYSE-listed Covered Security  [$0.001 per share executed]
 routed to venue other than the NYSE,
 Amex, or NYSE Arca].
[Order for Covered Security listed on    [$0.003 per share executed]
 venue other than the NYSE and routed
 to venue other than Amex, NYSE, or
 NYSE Arca].
[Order routed through the ITS to NYSE    [$0.0028 per share executed]
 Arca].
[Any other order routed through the      [$0.0007 per share executed]
 ITS].
------------------------------------------------------------------------

    (7) The following charges shall apply to the use of the Nasdaq 
Facilities by members for routing to the NYSE [through its DOT system] 
for all securities, including Exchange-Traded Funds:

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

------------------------------------------------------------------------
Order charged a fee by the NYSE          $0.01 per share executed.
 specialist.
Order that attempts to execute in the    $0.0002 per share executed (but
 Nasdaq Facilities prior to routing and   no more than $[60,000] 25,000
 that is not charged a fee by the NYSE    per month).
 specialist or that is routed to NYSE
 via ITS.
Order that does not attempt to execute   $0.0003 per share executed (but
 in the Nasdaq Facilities prior to        no more than $[100,000] 75,000
 routing and that is not charged a fee    per month).
 by the NYSE specialist.
------------------------------------------------------------------------

    (8) No change.
    (j)-(v) No change.
* * * * *

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 is proposing several changes to its price schedule for 
routing and execution of orders in non-Nasdaq exchange-listed 
securities. The changes are in response to fees being imposed by other 
trading venues on orders routed directly through Nasdaq Execution 
Services, LLC (Nasdaq's broker-dealer subsidiary) and through the 
Intermarket Trading System (``ITS''). Several markets, including NYSE 
Arca, the Boston Stock Exchange, the National Stock Exchange, and the 
Chicago Stock Exchange, have announced or begun to impose fees of 
approximately $0.003 per share for orders routed to them.
    These fee changes have created a pricing structure for trading 
securities listed on the New York Stock Exchange (``NYSE'') that is in 
a state of flux, characterized by dramatic differences in fees for 
effectively the same services. For example, the markets listed above 
charge 28 or 30 cents per 100 shares for accessing liquidity, while the 
NYSE charges 2.5 cents per 100 shares (less if the firm's total fees 
reach a $750,000 per month cap), and Nasdaq currently charges 7 cents 
per 100 shares. Furthermore, while several markets rebate approximately 
20 cents per 100 shares for providing liquidity, Nasdaq either provides 
no rebate, or rebates only 5 or 6 cents per 100 shares; the NYSE, by 
contrast, charges 2.5 cents per

[[Page 67182]]

100 shares. Nasdaq believes that the market will find an equilibrium 
pricing structure, because the disparities listed above are unstable 
due to the interconnectivity of the market. In order to transition to a 
more stable fee structure, Nasdaq is proposing several fee changes. 
These changes should be viewed in light of the dramatic disparities in 
pricing listed above.
    For orders in non-Nasdaq-listed exchange-traded funds (``ETFs'') 
routed to venues other than the NYSE, Nasdaq is proposing to eliminate 
current specific fees for orders routed through ITS or that route 
without checking the books of the Nasdaq Facilities, and is instituting 
a flat fee of $0.003 per share executed (plus $0.01 per share in the 
case of orders charged a fee by an American Stock Exchange (``Amex'') 
specialist). Thus, fees would be reduced for orders that do not attempt 
to execute prior to routing, would be increased for orders routed 
through ITS, and would remain unchanged for all other routed ETF 
orders.
    For orders in non-Nasdaq-listed securities other than ETFs that are 
routed to venues other than the NYSE, Nasdaq is proposing to eliminate 
current specific fees that differentiate among orders based on a 
security's listing market and/or the order's destination market and 
instituting a flat fee of $0.0028 per share executed (plus $0.01 per 
share in the case of orders charged a fee by an Amex specialist). As a 
result, fees would remain unchanged for orders routed to NYSE Arca, 
would decrease slightly for orders routed to Amex and for orders in 
non-NYSE-listed securities routed to regional exchanges or ECNs, and 
would increase for orders in NYSE-listed securities routed to regional 
exchanges or ECNs and for orders routed through ITS.
    For orders in all securities routed to the NYSE for execution, 
Nasdaq is proposing to institute a decrease (from $0.0007 to $0.0002 
per share executed) for orders routed through the ITS, and would apply 
to these charges the same monthly fee cap that applies to orders routed 
through NYSE's DOT system after checking the books of the Nasdaq 
Facilities. Moreover, Nasdaq would reduce this monthly cap from $60,000 
to $25,000. Nasdaq is also reducing the monthly fee cap for DOT orders 
that do not check the Nasdaq Facilities' books, from $100,000 to 
$75,000.
    Finally, to encourage firms to utilize Nasdaq in non-Nasdaq-listed 
securities, Nasdaq is proposing to introduce a higher pricing tier of 
$0.0015 per share executed for members to access liquidity when those 
members provide an average of less than 50,000 shares of liquidity per 
day and access and/or route an average of less than 50,000 shares of 
liquidity per day in non-Nasdaq securities through the Nasdaq 
Facilities during the month. In addition, Nasdaq is introducing an 
intermediate pricing tier of $0.001 per share executed for members to 
access liquidity when those members provide an average of between 
50,000 shares and 100,000 shares of liquidity per day and access and/or 
route an average of between 50,000 shares and 100,000 shares of 
liquidity per day.\6\ Because this change is made on a pilot basis, 
Nasdaq states that it will the review affect of the price change and 
determine whether to submit an additional filing regarding these fees 
by December 1, 2006.
---------------------------------------------------------------------------

    \6\ Nasdaq would continue to charge $0.0007 per share executed 
for all other members to access liquidity (i.e., when those members 
provide an average of more than 100,000 shares of liquidity per day 
and access and/or route an average of more than 100,000 shares of 
liquidity per day). Telephone conversation among John Yetter, Senior 
Associate General Counsel, Nasdaq, David Liu, Special Counsel, 
Division of Market Regulation (``Division''), Commission, and 
Theodore Venuti, Attorney, Division, Commission, on November 8, 
2006.
---------------------------------------------------------------------------

    Although the Nasdaq Facilities have enjoyed substantial growth in 
the share of non-Nasdaq-listed stocks that they executed over the past 
year, many members that use the Nasdaq Facilities still do so only on a 
minimal basis. In fact, if the new fees had been in place in September 
2006, a higher rate would have applied to over 84% of the firms trading 
non-Nasdaq securities through the Nasdaq Facilities. By setting the 
thresholds for lower rates at the modest levels of 50,000 and 100,000 
shares per day, Nasdaq hopes to encourage all of these firms to rethink 
their routing and quoting practices, in lieu of reflexively sending 
their orders to just one market. Nasdaq believes that incentives aimed 
at encouraging a modest level of use by a broader number of members 
would further enhance the quality of Nasdaq markets for trading these 
securities.
    Nasdaq believes that the fee would result in overall monthly fees 
and rebates with respect to accessing and providing liquidity through 
Nasdaq that are significantly lower than fees and rebates on other 
venues. For example, a market participant providing no liquidity would 
pay $0.0015 per share accessed and receive no rebate; under pricing 
recently introduced by NYSE Arca, a market participant providing no 
liquidity would pay twice as much--$0.003 per share accessed--and 
receive no rebate.
    Although the absence of liquidity provider credits on the NYSE 
itself makes comparison more difficult, it should be noted that recent 
fee increases by that venue clearly had a disparate impact on Nasdaq 
Execution Services and other market participants that do not charge 
customers high commissions--in the case of Nasdaq Execution Services, 
increasing monthly charges to route orders to the NYSE from an average 
of $3,620 per month during the six months prior to the fee increase to 
$750,000 per month, an increase of 20,600 percent. In addition, Nasdaq 
and others routing orders to the NYSE must often pay unfiled specialist 
charges of $0.01 per share for many orders that they route to the NYSE. 
Nevertheless, the NYSE's filed rate for transactions of $0.00025 per 
share executed, coupled with its new monthly fee cap of $750,000 per 
month, results in dramatically lower average execution fees for large 
participants in its market. For example, a firm with an average daily 
volume of 300 million shares per day during October 2006 would pay an 
average per share charge of $0.000114, less than half the per share 
rate paid by firms not reaching the cap. In contrast to the NYSE's 
steep discount, however, which serves simply to reduce the relative 
fees of its largest customers, Nasdaq's change is designed specifically 
to encourage use of the Nasdaq system that enhances market quality and 
thereby benefits investors choosing to enter orders into Nasdaq.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\7\ in general, and with 
Section 15A(b)(5) of the Act,\8\ in particular, 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 NASD operates or controls. Nasdaq states that the 
proposed rule change would put lower caps on fees to route orders to 
the NYSE, thereby reducing charges to members that make substantial use 
of Nasdaq's routing facilities. Nasdaq states that the proposal also 
imposes more uniform charges for routing to other venues. Finally, 
Nasdaq states that the proposed change introduces a higher fee for 
accessing Nasdaq Facility liquidity in cases where a market 
participant's use of the Nasdaq Facilities does not meet certain 
minimal thresholds. Nasdaq believes that this change is consistent with 
an equitable allocation of fees because lower overall fees are charged

[[Page 67183]]

to market participant that enhance market quality by providing 
liquidity.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78o-3.
    \8\ 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. In particular, Nasdaq does not 
believe that the proposed change to fees to access liquidity in non-
Nasdaq securities through the Nasdaq Facilities would impose a burden 
on competition by other markets that route orders to the Nasdaq 
Facilities for execution. First, as discussed in greater detail above, 
Nasdaq's fees applicable to members accessing substantially more 
liquidity than they provide are one-half of NYSE Arca's, while NYSE 
Arca provides greater rebates to liquidity providers. Thus, to the 
extent that NYSE Arca, for example, routes only marketable orders to 
Nasdaq, it would receive more beneficial pricing than it offers under 
similar circumstances. Second, it should be noted that status as an 
execution venue does not equate to acting solely as a liquidity 
accessor with respect to other markets. Through its Nasdaq Execution 
Services broker-dealer, Nasdaq provides substantial liquidity on the 
floor of the NYSE, because Nasdaq views this as a valuable service that 
can be offered to its members. Thus, if the NYSE had a comparable fee 
structure in place, Nasdaq would easily qualify for a reduced rate when 
accessing liquidity at that venue. Finally, the change is broad in its 
application, in that it currently would apply to over 84% of firms 
trading non-Nasdaq securities through the Nasdaq Facilities, all of 
which are equally eligible to increase their use of the Nasdaq 
Facilities in Nasdaq in order to qualify for more favorable pricing.

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 is subject to Section 19(b)(3)(A)(ii) of 
the Act \9\ and subparagraph (f)(2) of Rule 19b-4 thereunder \10\ 
because it establishes or changes a due, fee, or other charge 
applicable only to a member imposed by the self-regulatory 
organization. Accordingly, the proposal is effective upon Commission 
receipt of the filing. 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.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \10\ 17 CFR 240.19b-4(f)(2).
---------------------------------------------------------------------------

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 No. SR-NASD-2006-122 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-1090.

All submissions should refer to File No. SR-NASD-2006-122. 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 will also be available for inspection and copying at the 
principal office of the NASD. 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 No. SR-NASD-2006-122 and should be submitted on or before December 
11, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
---------------------------------------------------------------------------

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
 [FR Doc. E6-19516 Filed 11-17-06; 8:45 am]

BILLING CODE 8011-01-P