# Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change by National Association of Securities Dealers, Inc. To Modify Maximum Execution Fees and Credits for SuperMontage Transactions in Low-Priced Securities
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 22, 2002, 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 prepared by Nasdaq. Nasdaq has designated this proposal as one establishing or changing a due, fee or other charge imposed by the self-regulatory organization under section 19(b)(3)(a)(ii) of the Act [^3] and Rule 19b- 4(f)(2) thereunder, [^4] which renders the rule effective upon Commission receipt of this filing. 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 240.19-4(F)(2).
**I. Self-Regulatory Organization's Statement of the Terms of the Substance of the Proposed Rule Change**
Nasdaq proposes to modify the caps on the SuperMontage order execution charges and liquidity provider credits applicable to Non-Directed and Preferenced Orders for securities that are priced at $1.00 or less per share. Nasdaq will implement the rule change on December 1, 2002. Because the transition from the SuperSOES, SOES, and SelectNet environment to SuperMontage will still be in progress at that time, Nasdaq will continue to charge its filed prices for SuperSOES, SOES, SelectNet, and quotation updates for stocks that have not transitioned, while charging the SuperMontage prices established through SR-NASD-2002-44, [^5] SR-NASD-2002-91, [^6] SR-NASD-2002-135, [^7] SR-NASD-2002-151, [^8] and SR-NASD-2002-169 for stocks that have transitioned.
[^5] Securities Exchange Act Release No. 45906 (May 10, 2002), 67 FR 34965 (May 16, 2002) (SR-NASD-2002-44). SR-NASD-2002-44 established a fee scheduled for members' use of SuperMontage.
[^6] Securities Exchange Act Release No. 46343 (August 13, 2002), 67 FR 53822 (August 19, 2002) (SR-NASD-2002-91). SR-NASD-2002-91 provides that the fees for the use of SuperMontage by a national securities exchange trading Nasdaq securities on an unlisted trading privileges basis (a “UTP Exchange”) may be established by means of an agreement between Nasdaq and the UTP Exchange.
[^7] Securities Exchange Act Release No. 46648 (October 11, 2002), 67 FR 64439 (October 18, 2002) (SR-NASD-2002-135). SR-NASD-2002-135 established the maximum execution fees and credits for transactions in low-priced securities that are being modified by SR-NASD-2002-169.
[^8] Securities Exchange Act Release No. 46917 (November 26, 2002), 67 FR 72254 (December 4, 2002) (SR-NASD-2002-151). SR-NASD-2002-151 increased the fees and credits applicable to execution of non-directed, directed, and preferenced orders.
The text of the proposed rule change is below. Proposed new language is in italics; proposed deletions are in brackets.
**Rule 7010. System Services**
(a)-(h) No change.
**(i) Nasdaq National Market Execution System (SuperMontage)**
The following charges shall apply to the use of the Nasdaq National Market Execution System (commonly known as SuperMontage) by members:
| | |
| --- | --- |
| Order Entry: | |
| Non-Directed orders (excluding Preferenced Orders) | No charge. |
| Preferenced Orders: | |
| Preferenced Orders that access a Quote/Order of the member that entered the Preferenced Order) | No charge. |
| Other Preferenced Orders | $0.02 per order entry. |
| Directed Orders | $0.10 per order entry. |
| Order Execution: | |
| Non-Directed or Preferenced 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 NNMS: | |
| Charge to member entering order | $0.003 per share executed (but no more than [$75]
per trade for trades in securities executed at $1.00 or less per share). |
| Credit to member providing liquidity | $0.002 per share executed (but no more than [$50]
per trade for trades in securities executed at $1.00 or less per share). |
| Non-Directed or Preferenced Order that accesses the Quote/Order of a market participant that charges an access fee to market participants accessing its Quotes/Orders through the NNMS | $0.001 per share executed (but no more than [$25]
per trade for trades in securities executed at $1.00 or less per share). |
| Directed Order | $0.003 per share executed. |
| Non-Directed or Preferenced Order entered by a member that accesses a Quote/Order of such member | No charge. |
| Order Cancellation: | |
| Non-Directed Orders (excluding Preferenced Orders) | $0.01 per order cancelled. |
| Preferenced Orders | $0.01 per order cancelled. |
| Directed Orders | $0.10 per order cancelled. |
| Entry and Maintenance of Quotes/Orders by Nasdaq Quoting market Participants: | |
| Initial entry of Quote/Order | No charge. |
| Change of Quote/Order due to order execution through Super Montage | No charge. |
| Cancel/replace of Quote/Order to increase size | No charge. |
| Cancel/replace of Quote/Order to change price | $0.01. |
| Cancel/replace of Quote/Order to decrease size manually | $0.01. |
| Cancellation of Quote/Order | $0.01. |
| Cancellation of Quote/Order due to order purge or timeout | $0.0075. |
**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**
Earlier this year, Nasdaq filed proposed rule changes to control trading costs for low-priced securities traded through its SuperSOES and SuperMontage transaction execution systems. [^9] These proposed rule changes were filed in response to market activity that caused the prices of many Nasdaq securities to fluctuate, and in some cases lose significant value. As the price of a security declines, market participants generally need to purchase or sell an increasing number of total shares to participate actively in the market for the issue. This increase in the size of individual transactions, when combined with an unlimited per share fee and credit structure, had the potential to raise execution costs to market participants and result in disproportionate credits to liquidity providers. Accordingly, Nasdaq established caps on the order execution fees and liquidity provider credits for Non-Directed and Preferenced Orders that execute at prices of $1.00 or less.
[^9] Securities Exchange Act Release No. 46648 (October 11, 2002), 67 FR 64439 (October 18, 2002) (SR-NASD-2002-135) (SuperMontage); Securities Exchange Act Release No. 46456 (September 3, 2002), 67 FR 57470 (September 10, 2002) (SR-NASD-2002-106) (SuperSOES). SR-NASD-2002-135 and SR-NASD-2002-106 were effective upon filing. Nasdaq has also filed with the Commission a proposed rule change to apply the fee and rebate limits established by SR-NASD-2002-106 retroactively, as of July 1, 2002. *See* SR-NASD-2002-107 (August 5, 2002).
Under the original fee schedule for SuperMontage, as established by SR-NASD-2002-44, [^10] a member that entered a Non-Directed or Preferenced Order paid $0.002 per share executed for an order executed against the Quote/Order of a market participant that does not charge an access fee, and the liquidity provider received a $0.001 credit. Members paid $0.001 per share for an order executed against the Quote/Order of a market participant that charges an access fee, with the liquidity provider receiving no credit. Under SR-NASD-2002-135, [^11] for trades in securities priced at $1.00 or less, these fees were capped $75 if the order executed against the Quote/Order of a market participant that did not charge an access fee, and $37.50 if the order executed against the Quote/Order of a market participant that charged an access fee. Similarly, the maximum credit to a liquidity provider for a transaction in a low-priced security was $37.50. Thus, the caps applied to the execution of orders for more than 37,500 shares. [^12] To the extent that an executed order contained more shares, the excess shares were free.
[^10]*See* note 5, *supra.*
[^11]*See* note 7, *supra.*
[^12] 37,500 shares × $0.002 = $75.00.
37,500 shares × $0.001 = $37.50.
In SR-NASD-2002-151, [^13] Nasdaq increased the order execution charges and credits applicable to Non-Directed and Preferenced Orders: $0.003 for orders that access the Quote/Order of a market participant that does not charge an access fee, with a $0.002 credit to the liquidity provider. [^14] The fee change, which was effective November 1, 2002, was not intended to change the per share revenue that Nasdaq receives from transactions, however, because the execution fee increase is offset by the increase in the credit. Nasdaq's revenue remains $0.001 per share for all trades that are not subject to the caps.
[^13]*See* note 8, *supra.*
[^14] The fee to access the Quote/Order of a market participant that charges an access fee remained $0.001.
The fee change has had an indirect and adverse effect on Nasdaq's revenues, however, because the fee caps were not adjusted to the extent necessary to avoid allowing a higher number of shares to trade without charge. Specifically, the caps currently apply to the execution of low-priced orders with more than 25,000 (rather than 37,500) shares. [^15]
[^15] 25,000 shares × $0.003 = $75.
25,000 shares × $0.002 = $50.
25,000 shares × $0.001 = $25.
Nasdaq introduced the caps because of a concern that the cost of transactions in low-priced stocks could become unreasonably high, and recognized that the caps would result in some lost revenue. It has concluded, however, that the current level of the caps must be increased to reflect the higher fees and credits instituted under SR-NASD-2002-151. [^16] Without this change, Nasdaq will be allowing a far greater number of shares to trade without charge ( *i.e.,* because they are part of a trade for more than 25,000 shares) than it had originally intended when it introduced the fee caps at the 37,500 share level.
[^16]*See* note 8, *supra.*
Accordingly, Nasdaq is proposing to increase the cap to $120 for orders that access the Quote/Order of a market participant that does not charge an access fee, $40 for orders that access the Quote/Order of a fee-charging market participant, and $80 for the liquidity provider credit. These caps reflect a 40,000 share level, above which additional shares are free (slightly higher than the original 37,500 share level). [^17]
[^17] 40,000 shares × $0.003 = $120.
40,000 shares × $0.002 = $80.
40,000 shares × $0.001 = $40.
**2. Statutory Basis**
Nasdaq believes that the proposed rule change is consistent with the provisions of section 15A of the Act, [^18] in general, and with section 15A(b)(5) of the Act, [^19] 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.
[^18] 15 U.S.C. 78 *o* -3.
[^19] 15 U.S.C. 78 *o* -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, as amended.
**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 has become effective pursuant to section 19(b)(3)(A)(ii) of the Act [^20] and Rule 19b-4(f)(2) thereunder, because it establishes or changes a due, fee, or charge imposed by the self-regulatory organization. [^21] At any time within 60 days of the filing of such 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.
[^20] 15 U.S.C. 78s(b)(3)(a)(ii).
[^21] 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. Persons making written submissons 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 file number SR-NASD-2002-169 and should be submitted by January 14, 2003.
For the Commission, by the Division of Market Regulation, pursuant to delegated authority. [^22]
[^22] 27 CFR 200.30-3(a)(12).
Margaret H. McFarland,
Deputy Secretary.