Board of Governors' Approval of Service Charges for SelectNet and SOES

EXECUTIVE SUMMARY

The NASD Board of Governors has approved service charges for SelectNet^SM and the Small Order Execution System (SOES). The fees include a $25 monthly emergency market conditions service charge for each Nasdaq Level 2/3 subscriber capable of receiving SelectNet and SOES services and a $4 per side per transaction fee for Select-Net trades. The fees became effective February 1, 1991.

BACKGROUND

The Association is establishing an emergency market conditions fee of $25 per month to be assessed on every Nasdaq Workstation^SM and authorized Digital Interface Service terminal capable of receiving the SelectNet^SM and SOES services. Following the market break of 1987, the NASD implemented the Order Confirmation Transaction service (now renamed "SelectNet") as a screen-based communication system to negotiate transactions and replace telephone contact. SOES was also enhanced to require mandatory participation by market makers and to implement certain size requirements for executions in Nasdaq National Market System securities.

Both SOES and SelectNet operate in the same computer facility, and the NASD has recently enhanced each service. In SOES, a limit-order file with potential for matching orders between the inside quotes has been implemented, and SelectNet has been enhanced to facilitate broadcasting of orders to a wider audience and to permit faster and easier negotiations between participants.

These system changes since 1987 have been implemented in part to offer Nasdaq subscribers alternative avenues for trade executions outside of traditional telephone contact in the event of emergency market conditions. The NASD is establishing a monthly $25 fee for each subscriber to the Nasdaq Workstation and Digital Interface Service that is capable of utilizing the SOES or Select-Net services in order to recover the costs associated with enhancing the systems and of maintaining the excess computer capacity to utilize them in extreme market conditions. The annual revenues to be derived from this emergency systems fee will offset continuing development and operational expenses associated with the systems.

SELECTNET FEES

The NASD is also establishing service charges for the SelectNet screen-based trading service of $4 per side per transaction. Modifications to the service were implemented in November 1990 and, since then, the SelectNet service has been used by members to facilitate screen-based negotiations and to lock in executions for transmission to clearing.

Before the modifications were implemented, the Board had approved a fee based on shares executed in each transaction but, after the system became operational, the NASD polled its members on which rate formula was preferred — share-based versus transaction-based. The membership, including some of the heaviest users of SelectNet, responded favorably to a transaction-based formula. The NASD calculated the transaction charge, therefore, in response to members' feedback, in line with full cost recovery for development and operation of the SOES and SelectNet systems.

The service charge is calculated to recover the costs of developing system modifications and to support continued operation of the systems. Costs include computer operations in the primary site at Trumbull, Connecticut, with full redundancy in the back-up site at Rockville, Maryland; system utilization of the Nasdaq network; software development and leases; market surveillance system development; and personnel expenses associated with supporting the computer facilities and responding to members' operational concerns.

In addition, the NASD will review the fee schedule as experience with SelectNet warrants, and will adjust the fees depending on utilization of the service and costs of future enhancements and operational support.

All the fees took effect February 1, 1991, although they are subject to SEC approval. Questions on the service charges may be directed to Nasdaq Subscriber Services at (301) 948-6162.