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Notice

Self-Regulatory Organization; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to SelectNet Fees

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Start Preamble June 30, 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 29, 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.[3] The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.

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

Nasdaq proposes to: (1) Extend the reduced SelectNet fee pilot program under NASD Rule 7010(i) from April 1, 2000 until March 31, 2001, or through the date of implementation of the Nasdaq National Market Execution System (“Implementation Date,” currently expected to be July 10, 2000), whichever is sooner; and (2) beginning on the Implementation Date, to (a) reduce the fees currently charged under NASD Rule 7010(i) for the execution of transactions in SelectNet; (b) reduce the fees currently charged under NASD Rule 4770(a) for the execution of transactions in the Small Order Execution System for Nasdaq SmallCap issues; and (c) establish that the fees charged for the execution of transactions in Nasdaq National Market issues in the Nasdaq National Market Execution System, will be identical to the fees charged for transactions in the Small Order Execution System (“SOES”) for Nasdaq SmallCap issues.

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 again extend its current reduced SelectNet fees.[4] The reasons for Nasdaq's prevailing SelectNet fee structure were fully explained in its original fee structure proposal filed with the Commission in February of 1998.[5] Since then, SelectNet usage has continued at significantly elevated levels. As such, Nasdaq believes that an extension of these reduced fees through the Implementation Date is warranted.

Under the proposal, from April 1, 2000 until march 31, 2001, or until the Implementation Date, whichever is sooner, SelectNet fees would continue to be assessed in the following manner: Start Printed Page 42742(1) $1.00 will be charged for each of the first 50,000 SelectNet orders entered and directed to one particular market participant that is subsequently executed in whole or in part, $.70 for the next 50,000 directed orders executed that same month, and $.20 for each remaining directed order executed that same month; (2) no fee will be charged to a member who receives and executes a directed SelectNet order; (3) the existing $2.50 fee will remain in effect for both sides of executed SelectNet orders that result from broadcast messages; and (4) a $0.25 fee will remain in effect for any member who cancels a SelectNet order. Nasdaq will continue to monitor and review SelectNet activity to determine if further changes to the SelectNet fee structure are appropriate.

On January 14, 2000, the Commission issued an order approving rule changes that: (1) Establish the Nasdaq National Market Execution system (“NNMS”), a new platform for the trading of Nasdaq National Market (“NNM”) securities; (2) modify the rules governing the use of SelectNet for trading NNM issues; and (3) leave unchanged the trading of Nasdaq SmallCap securities on the Small Order Execution system (“SmallCap SOES”).[6] Nasdaq currently plans to implement these system changes on July 10, 2000.

The NNMS will be the primary trading platform for Nasdaq NNM issues. The NNMS will be based on the SOES architecture that currently exists, but will be enhanced in several ways: (1) The maximum order entry size will be 9,900 shares for NNM securities; (2) market participants (including market makers) will be able to use Nasdaq's automated execution systems on a proprietary basis for transactions in NNM securities; (3) the time delays between NNM executions against the same market maker on ECN participating in the NNMS will be reduced to 5 seconds; (4) NNMS will include a reserve-size functionality, which will be accessible on an automated basis; and (5) eliminating the “No Decrementation” and preferencing functionality that currently exist in SOES.

SelectNet generally will be used to deliver negotiable orders to market makers and ECNs that participate in the NNMS. SelectNet orders will no longer be “liability orders.” SelectNet will accept entry of orders directed to specific market makers in NNM securities only if such orders: (1) Seek at least 100 shares more than the displayed amount of the quote to which they are directed; and (2) are designated as either “all-or-none” or “minimum acceptable quantity” for at least 100 shares more than the quoted size. SelectNet will automatically reject preferenced messages not meeting these conditions. Recipients of SelectNet orders will then have the option to execute the order, initiate electronic negotiation, or let the order expire. Market participants will still use SelectNet to deliver liability orders to order-entry ECNs and UTP Exchanges.

It is expected that much of the trading volume in NNM securities will migrate from SelectNet to the NNMS, due largely to the elimination of the liability aspect of SelectNet. The proposed pricing structure reflects this shift by removing from NNMS the $.50 per order fee that market participants currently pay for receiving a SOES execution, and also in the addition of volume discounts. Thus, market participants will pay $.50 per execution for executed orders of under 2000 shares, with a discounted price of $.30 for any order after 150,000; $.90 for orders over 2000 shares. Nasdaq believes that this will encourage the entry of quotes into the Nasdaq system, and thereby increase liquidity in the Nasdaq Stock Market.[7]

Beginning on the Implementation Date, SelectNet fees would be assessed in the following manner: (1) $.90 will be charged for each SelectNet order entered and directed to one particular market participant that is subsequently executed in whole or in part; (2) no fee will be charged to a member who receives and executes a directed SelectNet order; (3) the existing $2.50 fee will remain in effect for both sides of executed SelectNet orders that result from broadcast messages; (4) market participants will be assessed $.70 per order for the first 25,000 orders executed monthly, $.50 per order for the next 25,000 orders executed monthly, and a $.10 for each remaining liability order executed monthly; and (5) a $0.25 fee will remain in effect for any member who cancels a SelectNet order.

Nasdaq proposes to charge the same fees for trades of both Nasdaq SmallCap and NNM securities. To accomplish this, Nasdaq proposes to reduce the fees charged for trades of SmallCap Securities through SOES. Beginning on the Implementation Date, fees for NNMS trades of NNM securities and SOES trades of SmallCap securities will be assessed in the following manner: (1) A fee of $.50 per order executed for the first 150,000 orders executed under 2000 shares monthly; (2) a fee of $.30 for all remaining orders executed less than 2000 shares monthly; (3) a fee of $.90 per order for all orders over 2000 shares; and (4) no fee will be charged to a member who receives an execution in SOES or NNMS.

2. Statutory Basis

For the reason set forth above, Nasdaq believes that the proposed rule change is consistent with Section 15A(b)(5) of the Act,[8] which requires that the rules of the NASD provide 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.

B. Self-Regulatory Organization's Statement on Burden on Competiton

The NASD believes that the proposed rule change will not 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

Comments were neither solicited nor received.

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

Because the foregoing rule change establishes or changes a due, fee, or charge imposed by the Association, it has become effective pursuant to Section 19(b)(3)(A)(ii) of the Act [9] and subparagraph (f)(2) of Rule 19b-4 thereunder.[10] 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.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, Start Printed Page 42743450 Fifth Street, NW., Washington, D.C. 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 No. SR-NASD-00-41 and should be submitted by August 1, 2000.

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[11]

Start Signature

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

3.  The Commission notes that Nasdaq filed a virtually identical proposal, SR-NASD-00-29, on May 24, 2000. In SR-NASD-00-29, Nasdaq proposed to amend its SelectNet fees in the same manner that it proposes to amend these fees in this filing. SR-NASD-00-29 was filed under Section 19(b)(3)(A) of the Act and, therefore, was effective upon filing. Among other things, Nasdaq proposed in SR-NASD-00-29 that its reduced SelectNet fees, which were subject to a pilot program, continue from the date of the filing, May 24, 2000. The pilot program, however, expired on March 31, 2000. When Commission staff brought this to the attention of Nasdaq expressed its desire to have the reduced fees apply retroactively from April 1 to May 23, 2000. After consultation with the Commission staff, Nasdaq filed this proposal, SR-NASD-00-41, to replace SR-NASD-00-29. Because the proposals are virtually identical except for Nasdaq's request in SR-NASD-00-41 that the reduced fees apply retroactively, the Commission has determined not to publish SR-NASD-00-29. Nevertheless, the public can receive a copy of it from the NASD or from the Commission's public reference room.

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4.  Nasdaq represents that this rule supersedes SR-NASD-00-29, which Nasdaq submitted on May 24, 2000. According to Nasdaq, SR-NASD-00-29 proposed to extend the pilot program reducing SelectNet fees, but did not explicitly state that the pilot expired on March 31, 2000, and that the pilot should apply retroactively as of April 1, 2000. At the request of Commission staff, Nasdaq is submitting this filing to clarify these facts.

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5.  See Securities Exchange Act Release No. 39641 (February 10, 1998), 63 FR 8241 (February 18, 1998). Nasdaq's current reduced fee structure was originally approved for a 90 day period. The last extension of this pilot occurred in April of 1999, and the pilot expired on March 31, 2000. According to the April 1999 extension, the SelectNet fees were supposed “to revert to their original $2.50 per-side level on April 1, 2000” if Nasdaq took no action. See Securities Exchange Act Release No. 41314 (April 20, 1999); 64 FR 22664 (April 27, 1999).

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6.  See Securities Exchange Act Release No. 42344 (January 14, 2000); 65 FR 3987 (January 25, 2000).

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7.  Nasdaq believes that the fee changes will have a revenue-neutral effect. Telephone conversation between Jeffrey S. Davis, Assistant General Counsel, Nasdaq, and Joseph Corcoran, Attorney, Division of Market Regulation, Commission, on June 28, 2000.

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9.  15 U.S.C. 78s(b)(3)(A)(ii).

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[FR Doc. 00-17423 Filed 7-10-00; 8:45 am]

BILLING CODE 8010-01-M