Joint Industry Plan; Solicitation of Comments on Amendment No. 9 to, and Order Granting Request To Extend Effectiveness of, Reporting Plan for Nasdaq/National Market Securities Traded on an Exchange on an Unlisted or Listed Basis, Submitted by the National Association of Securities Dealers, Inc., and the Boston, Chicago, and Philadelphia Stock Exchanges

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-36985; File No. S7-24-89]

Joint Industry Plan; Solicitation of Comments on Amendment No. 9

to, and Order Granting Request To Extend Effectiveness of, Reporting

Plan for Nasdaq/National Market Securities Traded on an Exchange on an

Unlisted or Listed Basis, Submitted by the National Association of

Securities Dealers, Inc., and the Boston, Chicago, and Philadelphia

Stock Exchanges

March 18, 1996.

On March 15, 1996, the National Association of Securities Dealers,

Inc., and the Boston, Chicago, and Philadelphia Stock Exchanges

(collectively, ``Participants'') \1\ submitted to the Commission

proposed Amendment No. 9 to a joint transaction reporting plan

(``Plan'') for Nasdaq/National Market securities traded on an exchange

on an unlisted or listed basis.\2\ Amendment No. 9 would provide for

cost allocation and revenue sharing under the Plan among the

Participants. By letter attached to the filing, the National

Association of Securities Dealers, on behalf of all the Participants,

also requests that the Commission extend the effectiveness of the pilot

approval of the Plan for an additional six months.\3\ This notice and

order solicits comment on proposed Amendment No. 9 to the Plan and on

certain substantive matters identified below, and extends the

effectiveness of the Plan through September 15, 1996.

\1\ The signatories to the Plan, i.e., the National Association

of Securities Dealers, Inc. (``NASD''), the Chicago Stock Exchange,

Inc. (``Chx'') (previously, the Midwest Stock Exchange, Inc.),

Philadelphia Stock Exchange, Inc. (``Phlx''), and the Boston Stock

Exchange, Inc. (``BSE''), are the ``Participants.'' The BSE,

however, joined the Plan as a ``Limited Participant,'' and reports

quotation information and transaction reports only in Nasdaq/

National Market (previously referred to as ``Nasdaq/NMS'')

securities listed on the BSE. Originally, the American Stock

Exchange, Inc., was a Participant to the Plan, but did not trade

securities pursuant to the Plan, and withdrew from participation in

the Plan in August 1994.

\2\ Section 12 of the Act generally requires an exchange to

trade only those securities that the exchange lists, except that

Section 12(f) of the Act permits unlisted trading privileges

(``UTP'') under certain circumstances. For example, Section 12(f),

among other things, permits exchanges to trade certain securities

that are traded over-the-counter (``OTC/UTP''), but only pursuant to

a Commission order or rule. The present order fulfills this Section

12(f) requirement. For a more complete discussion of this Section

12(f) requirement, see November 1995 Extension Order, infra note 5,

at n. 2.

\3\ See letter from Robert E. Aber, Vice President, General

Counsel and Secretary, Nasdaq, to Mr. Jonathan G. Katz, Secretary,

Commission, dated March 15, 1996.

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I. Background

The Commission originally approved the Plan on June 26, 1990.\4\

The Plan governs the collection, consolidation, and dissemination of

quotation and transaction information for Nasdaq/National Market

securities listed on an exchange or traded on an exchange pursuant to

UTP. The Commission has extended the effectiveness of the Plan eight

times since then to allow the Participants to trade pursuant to the

Plan while they finalize their

[[Page 12123]]

negotiations for revenue sharing under the Plan.\5\

\4\ See Securities Exchange Act Release No. 28146 (June 26,

1990), 55 FR 27917 (``1990 Approval Order''). For a detailed

discussion of the history of UTP in OTC securities, and the events

that led to the present plan and pilot program, see 1994 Extension

Order, infra note 5.

\5\ See Securities Exchange Act Release No. 34371 (July 13,

1994), 59 FR 37103 (``1994 Extension Order''). See also Securities

Exchange Act Release No. 35221 (January 11, 1995), 60 FR 3886

(``January 1995 Extension Order''), Securities Exchange Act Release

No. 36102 (August 14, 1995), 60 FR 43626 (``August 1995 Extension

Order''), Securities Exchange Act Release No. 36226 (September 13,

1995), 60 FR 49029 (``September 1995 Extension Order''), Securities

Exchange Act Release No. 36368 (October 13, 1995), 60 FR 54091

(``October 1995 Extension Order''), Securities Exchange Act No.

36481 (November 13, 1995), 60 FR 58119 (``November 1995 Extension

Order''), Securities Exchange Act Release No. 36589 (December 13,

1995), 60 FR 65696 (``December 13, 1995 Extension Order''),

Securities Exchange Act Release No. 36650 (December 28, 1995), 60 FR

358 (``December 28, 1995 Extension Order''), and Securities Exchange

Act Release No. 36934 (March 6, 1996), 61 FR 10408 (``March 6, 1996

Extension Order'').

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As originally approved by the Commission, the Plan required the

Participants to complete their negotiations regarding revenue sharing

during the one-year pilot period. Recently, the Participants concluded

those negotiations, as evidenced by the present filing. The substance

of the agreement, as described by the NASD in its March 15 letter,\6\

is below.

\6\ See supra note 3.

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II. Description of the Proposal

A. Proposed Revenue Sharing Agreement

Under the proposed Revenue Sharing Plan, Exchange Participants will

receive annual payments in quarterly installments out of total net

distributable operating revenue based on their percentage of total

Nasdaq volume,\7\ subject to certain specified minimum and maximum

payments for an initial period of four-and-one-half years (``buy-in

period''). Thereafter, once the ``buy-in'' period elapses with respect

to a particular Exchange Participant, that exchange will receive annual

payments in quarterly installments out of total net distributable

operating revenue proportional to its percentage of total Nasdaq

volume, without regard to any minimum or maximum payment amounts. Plan

Participants would not be eligible to receive revenue under the Plan

until they have established an automated interface with Nasdaq for the

transmission of quotations and transaction information. Once an

Exchange Participant is eligible to receive revenue under the Revenue

Sharing Plan, that Exchange Participant also will be eligible to

receive revenue based on its volume for the preceding twelve-month

period, up to the maximum payment amount discussed below.\8\

\7\ An Exchange Participant's percentage of total Nasdaq volume

will be based on the average of that Exchange's proportion of total

Nasdaq trade volume reported to Nasdaq and disseminated to

securities information vendors, and total Nasdaq share volume

reported to Nasdaq and disseminated to securities information

vendors.

\8\ Because the Chx is the only Exchange Participant that has

implemented and maintained an automated interface with Nasdaq for

the reporting of transaction and quotation information pursuant to

the Plan, the Chx will receive a lump-sum payment of $444,525

payable thirty days after the effective date of the Revenue Sharing

Plan. The Commission notes that this amount is based on the

following payments for previous periods: (1) For the six-month

period ending December 1993, $50,000; (2) for the one-year period

ending December 1994, $100,000; and (3) for the period between

January 1, 1995 and March 5, 1996, $294,525. For the period March 6

to December 31, 1996, the NASD is scheduled to pay the Chx a pro

rata amount of its payment for 1996.

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Specifically, the maximum payment amount for any Exchange

Participant will be an amount based on total net distributable

operating revenue under the Plan for 1995. This maximum payment amount

figure will be calculated and furnished to all Exchange Participants by

the NASD by April 30, 1996. Based on revenue calculations performed by

the NASD in the last quarter of 1995, it is expected that the maximum

payment amount will be somewhere in the range of $820,000 and $880,000,

but this figure could be higher or lower depending on the eventual

revenue for 1995. Over time, this maximum payment amount will be

adjusted upward or downward depending on fluctuations in net operating

revenue relative to revenue in 1995. The minimum payment amount for the

Chx would be $250,000 and likewise would be adjusted upward or downward

depending on fluctuations in net operating revenue relative to revenue

in 1995. The minimum payment for other exchanges becoming eligible to

receive revenue under the Plan would be set relative to the trading

volume of the Exchange Participant with the highest trading volume

among Exchange Participants during the year before the Participant

became eligible to receive revenue under the Plan. The minimum payment

amount to other Exchange Participants also would be adjusted annually

in the same manner as that of the Chx. Accordingly, for a period of

four-and-one-half years, if an Exchange Participant's share of

distributable revenue is less than its minimum payment amount, it would

receive the minimum payment amount; if its share is equal to or greater

than its minimum payment amount but less than its maximum payment

amount, it would receive that share of revenue; and, if its share is

greater than the maximum payment amount, it would receive the maximum

payment amount. The interim plan found in the proposal for the buy-in

period also contains provisions for the pro rata diminution of the

minimum payment amount in the event that an Exchange Participant

becomes eligible or ineligible to receive revenue during a calendar

year. After this initial buy-in period, an Exchange Participant would

receive a relative proportion of net distributable operating revenue

based on its trading volume.\9\

\9\ The Commission notes that the NASD, in its letter attached

to the present proposed amendment to the Plan, states its strong

belief that Participants should address the fact that, absent an

additional amendment to the Plan, Participants would have the right

to receive revenue for late trade reports. The NASD ``believes it is

improper to reward a market center for transmitting stale

transactions that, at best, have questionable, if any, redeeming

economic value to market participants and, at worse, are potentially

disruptive to the marketplace.'' The NASD also notes the numerous

benefits that it believes would be derived from limiting

Participant's revenues to those associated with timely-reported

transactions. Supra note 3.

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B. Extension of the Operation of the Plan and Certain Exemptive Relief

First, the Participants request that the Commission extend the

operation of the Plan for an additional six months. The NASD, in its

letter on behalf of all the Participants, states that the extension of

the Plan will afford the Participants an opportunity collectively and

cooperatively to address two outstanding issues identified by the Plan

Participants and the Commission concerning the operation of the Plan.

Specifically, the NASD states that the Plan Participants intend

cooperatively to address and resolve: (1) Whether the best bid and

offer calculation for the Nasdaq securities subject to the Plan should

be based on a price/time/size algorithm (as currently is the case) or a

price/size/time methodology; and (2) whether there is a need for an

intermarket linkage for routing and executing orders in Nasdaq

securities subject to the Plan and an accompanying trade-through rule.

Second, in conjunction with the Plan, on a temporary basis

scheduled to expire on March 15, 1996, the Commission granted an

exemption from Rule 11Ac1-2 under the Act regarding the calculated best

bid and offer (``BBO''), and granted the BSE an exemption from the

provision of Rule 11Aa3-1 under the Act that requires transaction

reporting plans to include market identifiers for transaction reports

and last sale data.

This order extends the operation of the Plan and the above

exemptive relief through September 15, 1996. The Commission believes it

is appropriate to grant these extensions so that the Participants may

conclude their

[[Page 12124]]

negotiations concerning the above items, and so the Commission will

have sufficient opportunity to review any comments it receives on the

present notice. Finally, as with previous extensions of this pilot

program, this extension will remain in effect only if the Plan

continues in effect through that date pursuant to a Commission

order.\10\ In this regard, the Commission continues to believe that the

above extension of exemptive relief is appropriate through September

15, 1996.

\10\ In the March 6 Extension Order, the Commission extended

these exemptions through March 15, 1996. Pursuant to a request made

by the NASD, this order further extends the effectiveness of the

relevant exemptions through September 15, 1996. See supra, note 3.

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III. Comments on the Operation of the Plan

In the January 1995, August 1995, September 1995, October 1995,

November 1995, December 13, 1995, December 28, 1995, and March 6, 1996

Extension Orders, the Commission solicited, among other things, comment

on: (1) Whether the BBO calculation for the relevant securities should

be based on price and time only (as currently is the case) or if the

calculation should include size of the quoted bid or offer; and (2)

whether there is a need for an intermarket linkage for order routing

and execution and an accompanying trade-through rule. The Commission

continues to solicit comment on these matters.

IV. Solicitation of Comments

Interested persons are invited to submit written data, views and

arguments concerning the foregoing. Persons making written submissions

should file six copies thereof with the Secretary, Securities and

Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.

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. Sec. 552, will be available for inspection and copying at

the Commission's Public Reference Room. All submissions should refer to

File No. S7-24-89 and should be submitted by April 15, 1996.

V. Conclusion

The Commission finds that an extension of temporary approval of the

operation of the Plan through September 15, 1996, is appropriate and in

furtherance of Section 11A of the Act. The Commission finds further

that extension of the exemptive relief through September 15, 1996, as

described above, also is consistent with the Act and the Rules

thereunder. Specifically, the Commission believes that these extensions

should serve to provide the Participants with more time to conclude

their review of the BBO calculation and make appropriate

recommendations concerning the need for an intermarket linkage and/or a

trade-through rule now that the Participants have agreed on revenue

sharing. This, in turn, should further the objectives of the Act in

general, and specifically those set forth in Sections 12(f) and 11A of

the Act and in Rules 11Aa3-1 and 11Aa3-2 thereunder.

It is therefore ordered, pursuant to Sections 12(f) and 11A of the

Act and (c)(2) of Rule 11Aa3-2 thereunder, that the Participants'

request to extend the effectiveness of the Joint Transaction Reporting

Plan for Nasdaq/National Market securities traded on an exchange on an

unlisted or listed basis and certain exemptive relief through September

15, 1996, is approved.

For the Commission, by the Division of Market Regulation,

pursuant to delegated authority, 17 CFR 200.30-3(a)(29).

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 96-7153 Filed 3-22-96; 8:45 am]

BILLING CODE 8010-01-M