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Notice

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

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Start Preamble April 12, 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 March 6, 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”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by Nasdaq. Nasdaq filed an amendment to the proposed rule change on March 31, 2000,[3] which amendment replaces and supersedes the original proposal. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons.

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

Nasdaq is filing a proposed rule change amending NASD Rule 7010 to extend Nasdaq's transaction credit pilot program for an additional six months for Tape A reports and to discontinue the pilot program for Tape B reports. Below is the text of the proposed rule change. Proposed new language is in italic; 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 transaction 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 (as the case may be, depending on the qualification standards) 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 [such 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 [July 1, 1999, and ending with the calendar quarter starting on October 1, 1999] January 1, 2000, and ending with the calendar quarter starting on April 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.Start Printed Page 21226

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

1. Purpose

Nasdaq is proposing to extend, for an additional six months, its pilot program to provide a transaction credit [4] to NASD members that exceed certain levels of over-the-counter (“OTC”) trading activity in securities listed on the New York Stock Exchange (“NYSE”). In addition, Nasdaq is proposing to discontinue the pilot program for OTC trading in securities listed on the American Stock Exchange (“Amex”). The NASD established its transaction credit pilot program to assist in finding 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.

Background. 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 the 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 the Amex. The NASD collects quotations from broker-dealers that trade these securities OTC and provides such quotations to the Consolidated Quotation System for dissemination. 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 the revenue from trades that it reports on behalf of those broker-dealers in NYSE-listed securities (“Tape A”) and in Amex-listed securities (“Tape B”). Nasdaq created the credit pools for qualified pilot participants from the NASD's share of these revenues.

Nasdaq's transaction credit pilot program is 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 will allow Nasdaq to continue to evaluate the efficacy of its revenue sharing model and continue to effectively compete for the retention of Third Market participants with other regional exchanges that have adopted similar revenue distribution methodologies.[5]

Pilot Program. Under the original transaction credit pilot program,[6] Nasdaq calculated two separate pools of revenue from which credits can be earned. The first represented 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 the CTA (“Tape A”). The other represented 40% of the gross revenue received from the CTA for reporting Amex trades (“Tape B”). Under the proposal, the Tape A calculation pool will remain at the same 40% level, and the pool of revenue previously generated from gross revenue received from the CTA for reporting Amex trades will be discontinued.

Eligibility for transaction credits during the pilot's extension will be based upon concurrent quarterly trading activity in NYSE-listed securities. For example, a Third Market participant that recently entered the market for Tape A securities during the first quarter of 2000 and printed an average of 500 daily trades of Tape A securities during the time it is in the market, or that averaged 500 daily Tape A prints during the entire quarter, would be eligible to receive transaction credits based on its trades during the first 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 would be 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 encourage NASD members to actively trade in these securities.

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 calculation pool. Thus, for each calendar quarter commencing with the calendar quarter that began on January 1, 2000, the NASD will measure a qualified member's Tape A trade reports for that calendar and create a credit for the member based upon this activity. For example, if 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. Unlike the original pilot, however, the transaction credit will be available only to NASD members that trade NYSE-listed securities in the Third Market in order to focus the competitive thrust of this initiative toward the NYSE during the tme the NASD remains the sole shareholder of Nasdaq.

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.

2. Statutory Basis

Nasdaq believes that the proposed rule change is consistent with the provisions of 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 mechanisms of a national market system and, in general, to protect investors and the public interest. Nasdaq believes the proposed rule change 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 that the Association operates or controls.

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.Start Printed Page 21227

C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others

Nasdaq did not solicit or receive written comments on the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action

The proposed rule change has become immediately effective pursuant to Section 19(b)(3)(A)(ii) of the Act [10] and Rule 19b-4(f)(2) thereunder,[11] in that it establishes or changes a due, fee or other charge imposed by the Association. At any time within 60 days [12] of the filing of such 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.[13]

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, 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 the File No. SR-NASD-00-10 and should be submitted by May 11, 2000.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority. [14]

Jonathan G. Katz,

Secretary.

End Signature End Preamble

Footnotes

3.  See Letter to Katherine A. England, Assistant Director, Commission, from Robert E. Aber, Senior Vice President and General Counsel, Nasdaq, dated March 30, 2000 (“Amendment No. 1”). Amendment No. 1 makes certain technical corrections to the proposed rule change.

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4.  The transaction credit can be applied to any and all charges 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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5.  Both the CHX and the CSE have established similar programs. See Securities Exchange Act Release Nos. 38237 (Feb. 4, 1997), 62 FR 6592 (Feb. 12, 1997) (SR-CHX-97-01) and 39395 (Dec. 3, 1997), 62 FR 65113 (Dec. 10, 1997) (SR-CSE-97-12).

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6.  See Securities Exchange Act Release No. 41174 (March 16, 1999), 64 FR 14034 (March 23, 1999) (SR-NASD-99-13). The original pilot was effective from October 1, 1998 through June 30, 1999. Nasdaq subsequently extended the pilot through December 31, 1999. See Securities Exchange Act Release No. 42095 (Nov. 3, 1999), 64 FR 61680 (Nov. 12, 1999) (SR-NASD-99-59).

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7.  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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10.  15 U.S.C. 78s(b)(3)(A)(ii).

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12.  Because Amendment No. 1 replaces the original proposal, the 60 day period will be calculated based on a March 31, 2000 filing date.

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13.  In reviewing this proposal, the Commission has considered its impact on efficiency, competition, and capital formationl 15 U.S.C. 78c(f).

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[FR Doc. 00-9878 Filed 4-19-00; 8:45 am]

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