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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 Fees Applicable to the NASD Alternative Display Facility

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Start Preamble February 10, 2003.

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 January 30, 2003, the National Association of Securities Dealers, Inc. (“NASD”) filed with the Securities and Exchange Commission (“SEC” or “Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by the NASD. NASD has designated the proposed rule change as one that establishes or changes a due, fee or other charge imposed by NASD pursuant to Start Printed Page 7636paragraph (f)(2) of Rule 19b-4 under the Act,[3] which renders the proposal effective upon receipt of this filing by the Commission. 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

NASD is proposing to amend the NASD Rule 7000A Series to designate transaction and quotation related fees applicable to activities in the NASD's Alternative Display Facility (“ADF”). The text of the proposed rule change is set forth below. Proposed new language is in italics; proposed deletions are in brackets.

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7000A. Charges for ADF Services and Equipment

7010A. System Services

(a) Trade Reporting and Comparison [and Reporting] Service

The following charges shall be paid by ADF participants for use of the Trade Reporting and Comparison [and Reporting] Service (TRACS):

Transaction Related Charges:

Comparison $0.014/side per 100 shares (minimum 400 shares; maximum 7,500 shares)

Automated Give-Up $0.029/side (if the associated publicly disseminated trade is not reported to the media through the ADF)

Qualified Special Representative $0.029/side (if the associated publicly disseminated trade is not reported to the media through the ADF)

Late Report—T+N $0.30/side unless the trade is executed outside normal ADF operating hours of 8:00 a.m. to 6:30 p.m. and the member's average publicly disseminated trades reported to the media through the ADF per day during the billing period is 150,000 or greater

[Browse/query $0.28/query*]

[Trade Reporting $.029/side (applicable only to reportable transaction not subject to trade comparison through TRACS) **]

Corrective Transaction Charge $0.25/ Break, Decline, Reversal transaction, paid by each party

(b) Quotation Updates

The following quotation update charges will apply based on the average daily number of publicly disseminated trades reported to the media through the ADF during the billing period. [A member will be charged $0.01 per quotation update in the ADF quotation montage on those quotation updates that exceed three times the number of transactions reported to the ADF by the member.] A “quotation update” includes any change to the price or size of a displayed quotation. [This charge will be determined on a monthly basis.]

Average trades reported through the ADF per dayQuotation update chargeQuotes update provided at no charge
Less than 1$.02 per quotation updateNone.
Between 1 and 100,000$.01 per quotation update5 quotation updates per trade.
Between 100,001 and 150,000$.01 per 10 quotation update10 quotation updates per trade.
Greater than 150,000No ChargeN/A

[(c) Volume Discounts on Transaction and Quotation Fees

During the initial six months of operation of the ADF, except as provided in paragraph (d) below, transaction fees incurred pursuant to paragraph (a) above, except the browse/query fee, and quotation update fees incurred pursuant to paragraph (b) above will be discounted on the following incremental basis:]

Trades per monthChargeable quotation updates per monthDiscount
Up to 2,000Up to 8,0000%
2,001 to 4,0008,001 to 15,00010%
4,001 to 6,00015,001 to 25,00025%
6,001 to 8,00025,001 to 35,00035%
8,001 or greater35,001 or greater50%]

[(d) Limited Period Without Transaction and Quotation Charges]

[During the initial six months of operation of the ADF, members will not be charged for transaction fees incurred pursuant to paragraph (a) above and the quotation fees incurred pursuant to paragraph (b) above for up to a three-month period. The three-month “no transaction” fee period begins on the first day on which a member has incurred charges under paragraph (a) or paragraph (b) above, and will continue until the earlier of three months or the end of the six-month period.]

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7040A. Installation, Removal, Relocation or Maintenance

ADF subscribers shall pay a minimum charge of $5,000 for installation costs associated with connecting to the ADF. Upon installation, removal, relocation or maintenance of terminal and related equipment, or combination thereof, the subscriber shall pay charges incurred by NASD or its subsidiaries above the $5,000 minimum, on behalf of the subscriber for the work being performed by the maintenance organization retained by NASD or its subsidiaries. Upon payment of $5,000 under this provision, members will receive a credit of up to $5,000 to be used toward [their trade reporting and comparison] charges imposed under Rule 7010A(a) and (b).

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Start Printed Page 7637

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

In its filing with the Commission, the NASD 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. The NASD 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

On July 24, 2002, the Commission approved SR-NASD-2002-97,[4] which authorizes NASD to operate the ADF on a pilot basis for nine months, pending the anticipated approval of SR-NASD-2001-90,[5] which proposes to operate the ADF on a permanent basis. As described in detail in SR-NASD-2001-90, the ADF is a quotation collection, trade comparison, and trade reporting facility developed by NASD in accordance with the Commission's SuperMontage Approval Order [6] and in conjunction with Nasdaq's anticipated registration as a national securities exchange.[7]

For the duration of the pilot period, ADF will provide ADF market participants (market makers and ECNs) the ability to post quotations in Nasdaq securities and will provide all members that participate in the ADF the ability to view quotations and report transactions in Nasdaq securities to the Exclusive Securities Information Processor (“SIP”) for Nasdaq-listed issues for consolidation and dissemination of data to vendors and ADF market participants. The facility also will provide for trade comparison through the Trade Reporting and Comparison Service (“TRACS”). This mechanism operates similarly to the trade reporting functions of Nasdaq's Automated Confirmation Transactions Service (“ACT”).[8]

In SR-NASD-2002-97, NASD proposed the Rule 7000A Series, which provides the fee structure applicable to quotation and transaction-related activities through the ADF. Pursuant to that fee structure, NASD has not been charging ADF participants for transaction and quotation update fees (Rules 7010A(a) and (b), respectively) for a period of up to three months during the initial six months of operation of the ADF (from July 29, 2002 to January 29, 2003). Also during the first six-months of the ADF's operation, but subsequent to the three-month “no charge” period, ADF participants are eligible for certain volume discounts to make the overall cost of trade reporting and quoting through the ADF more attractive to higher volume users.

Given that the six-month “no charge/volume discount” fee structure is scheduled to end on January 29, 2003, NASD staff has been reviewing the ADF fee structure and now is proposing a new fee structure to commence on February 17, 2003. Specifically, NASD is proposing to eliminate trade reporting fees, browse/query and Automated Give-Up (“AGU”)/NSCC Qualified Special Representative (“QSR”) comparison charges (provided that the associated publicly disseminated trade is reported to the media through the ADF). With respect to “as of” trades, NASD is proposing to continue to charge $0.30/side unless the “as of” trade is executed outside normal ADF operating hours of 8:00 a.m. to 6:30 p.m. and the member's daily average of publicly disseminated trades reported to the media through the ADF during the billing period is 150,000 or greater. NASD will continue to charge for corrective transactions. As a result, only the following TRACS-related fees will continue to apply: Comparison Fee of $0.014/side per 100 shares (minimum 400 shares; maximum 7,500 shares); Late Report—T+N fee of $0.30/side under the circumstances noted above; and Corrective Transaction Charge [9] of $0.25, paid by each party. AGU/QSR comparison charges of $0.029/side would apply only if the associated trade is not reported to the ADF.

With respect to quotation activities, quotation update charges [10] would vary depending on the number of publicly disseminated trades reported to the media through the ADF during normal ADF processing hours of 8:00 a.m. to 6:30 p.m. Specifically, quotation update charges would apply based on the average number of publicly disseminated trades reported to the media through the ADF per day during the billing period. If an ADF market participant's average trades reported to the media through the ADF per day during the billing period is less than one, the quotation charge applicable to that ADF market participant would be $.02 per quotation update. Similarly, if an ADF market participant's average trades reported to the media through the ADF per day is between one and 150,000, the quotation charge applicable to that ADF market participant would be $.01 per quotation update. Finally, if an ADF market participant's average trades reported to the media through the ADF per day during the billing period is greater than 150,000, no quotation update charges would apply.

The proposed fee structure also would provide for a certain number of quotation updates at no charge based on the average number of publicly disseminated trades reported to the media through the ADF per day during the billing period. Specifically, if an ADF Market Participant averages between one and 100,000 trades reported through the ADF per day, the market participant would receive five free quotes per trade during that billing period. If a market participant averages between 100,001 and 150,000 trades reported to the media through the ADF per day, it would receive 10 free quotes per trade during that billing period.

By imposing quotation fees based on the number of publicly disseminated trades reported to the media through the ADF, this fee structure will fairly impose costs on those members whose quotation activity creates system capacity demands, and therefore costs that are not covered by the revenue received from trades reported to the media through the ADF.

Members currently are charged a minimum of $5,000 for installation costs associated with connecting to the ADF. The ADF, however, provides market participants with a credit of up to $5,000 toward their trade reporting and comparison charges. Given the revised fee structure, NASD is proposing to amend Rule 7040A to permit the $5,000 credit to be used toward any of the fees imposed under Rule 7010A(a) or (b), including quotation fees.

Finally, for administrative ease, NASD also is proposing to extend the current “no charge” period until February 14, 2003 and have the fee changes described herein commence February 17, 2003. As a result, ADF participants will continue not to be Start Printed Page 7638charged for transaction and quotation update fees under Rules 7010A(a) and (b), respectively until February 17, 2003.

2. Statutory Basis

NASD believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,[11] which requires, among other things, that NASD rules be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. NASD believes that the proposed rule change will provide a cost effective and efficient mechanism to quote and report trades on the ADF. The proposed rule change also is consistent with Section 15A(b)(5) of the Act [12] 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 NASD operates or controls. NASD believes that this fee structure is a reasonable means for the NASD to recover the development costs of the ADF, as well as meet ongoing operating costs.

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

The NASD 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

NASD has designated the proposed rule change as establishing or changing a due, fee, or other charge under section 19(b)(3)(A)(ii) of the Act [13] and Rule 19b-4(f)(2) thereunder,[14] which renders the proposal effective upon receipt of this filing by the Commission. At any time within 60 days of this filing, the Commission may summarily abrogate this proposal 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 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 the 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-2003-09 and should be submitted by March 7, 2003.

Start Signature

For the Commission, by the Division of Market Regulation, pursuant to delegated authority.15

Margaret H. McFarland,

Deputy Secretary.

End Signature End Preamble

Footnotes

[* Each TRACS query incurs the $0.28 fee; however, the first accept or decline processed for a transaction is free, to insure that no more than $0.28 is charged per comparison. Subsequent queries for more data on the same security will also be processed free. Any subsequent query on a different security will incur the $0.28 query charge.]

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[** The trade reporting service charge is applicable to those trades input into TRACS for reporting purposes only, such as NSCC Qualified Special Representative reports and reports of internalized transactions.]

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4.  Securities Exchange Act Release No. 46249 (July 24, 2002), 67 FR 49822 (July 31, 2002).

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5.  Securities Exchange Act Release No. 45991 (May 28, 2002), 67 FR 39476 (June 7, 2002).

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6.  Securities Exchange Act Release No. 43863 (January 19, 2001), 66 FR 8020 (January 26, 2001) (File No. SR-NASD-99-53).

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7.  Securities Exchange Act Release No. 44396 (June 7, 2001), 66 FR 31952 (June 13, 2001) (File No. 10-131).

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8.  TRACS does not perform risk management services that are provided by Nasdaq's ACT.

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9.  NASD also is proposing to add “Reversals” to the types of corrective transactions under Rule 7010A(a). Reversals are trade corrections made T+N.

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10.  A “quotation update” includes any change to the price or size of a displayed quotation.

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13.  15 U.S.C. 78s(b)(3)(A)(ii).

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[FR Doc. 03-3714 Filed 2-13-03; 8:45 am]

BILLING CODE 8010-01-P