NASD Files Cost-Based Price Plan With Sec; Proposes $50.75 Monthly NQDS Charge

In its latest attempt to satisfy regulators' demand for cost-based pricing, the National Association of Securities Dealers has filed with the Securities and Exchange Commission to charge vendors $50.75 a month per terminal to receive all market maker quotes.

Until the NASD introduced its NQDS service in September 1983, the only way to obtain the complete list of bids and offers was through the association's market data subsidiary, NASDAQ Inc. NQDS is the wholesale version of NASDAQ Level 2 service, which includes all market maker quotes.

Although it traditionally provided vendors with Level 1 service -- the best bid and offer in each issue, the NASD did not move to make full price information available to NASDAQ's competitors until directed to do so by the SEC.

Subscribers of vendors receiving NQDS have been paying an interim charge of $8.75 a month per terminal since April 1984. The SEC set the fee at $8.75, the same amount currently paid by Level 1 subscribers until the NASD submitted a price that reflected the cost of providing vendors with all market maker bids and offers.

The NASD has asked the SEC for permission to retroactively apply the new price schedule for NQDS. If the fee is applied retroactively, a subscriber that has been receiving the service since the interim charge was instituted more than four years ago would owe the NASD $2,080 per terminal at the end of this month.

Interested parties will have the opportunity to comment on the NQDS proposal after the filing is published in the Federal Register. An SEC official told TST it was unlikely the proposed rule change would appear in the Federal Register before mid-September.

If at First... The SEC has rejected two previous price schedules for NQDS because they attempted to pass along to competing vendors some of NASDAQ's costs in providing Level 2 service to its customers.

In its latest filing (SR-NASD-88-35), the NASD says the proposed fee meets the SEC's requirement that the price be based solely on the cost of "collecting, validating and preparing NQDS transmission to a vendor."

The NASD says its latest proposal is also consistent with federal securities laws that specify that "exchange members, brokers, and dealers be able to obtain quotation information distributed by any SRO or securities information processor on terms that are not unreasonably discriminatory."

In contrast to the proposed NQDS terminal fee of $50.75, subscribers who receive Level 2 service on a NASDAQ Harris terminal pay $150 a month plus a 2-cent charge each time they query the system to learn the latest price of a security. The NASD says the query charges add an average of $179 a month to the cost of Level 2 service.

NASDAQ also offers Level 2 through its new Distributed Database/PC Workstation, which costs $300 a month. Since the PC-based workstation allows data to be stored locally, NASDAQ does not charge a query fee for this service.

The first NQDS price schedule filed by the NASD in June 1983 included a monthly vendor fee of $3,200 a month to cover the cost of transmitting the data through a computer-to-computer interface and a monthly subscriber fee of $150 a month -- the same amount NASDAQ customers pay for Level 2 service. Instinet Corp., now a Reuters Holdings PLC subsidiary, filed a petition with the SEC complaining the price of NQDS limited access to NASDAQ information.

The SEC did not disagree with the monthly vendor fee, but rejected the $150 monthly subscriber fee because it covered the cost of providing the Level 2/3 query function, which is not included in the NQDS service. A July 1985 proposal for a $79 monthly terminal charge was turned down for similar reasons.

The dispute over the price of NQDS went as high as the U.S. Court of Appeals for the District of Columbia Circuit, which in 1986 affirmed the SEC's decision that the fee be cost-based. The court found that if the $150 monthly fee had been approved by the SEC, Instinet subscribers effectively would have been forced to pay retail rates for a wholesale service.

"In order to cover its costs, Instinet would have had to impose additional charges on top of the $150 per month NQDS subscriber fee," the court of appeals said. "As a result, Instinet's service would have been uncompetitive with NASDAQ Level 2 service." This would have violated federal securities laws that prevent improper prohibition or limitation of access to services, the court noted.

The latest proposed fee of $50.75 was calculated using a complex cost-allocation formula that takes into account the number of terminals receiving NASDAQ Level 2 and NQDS.

According to the NASD's filing, its fiscal 1988 budget calls for 3,755 units to receive Level 2/3, including PC-based workstations, and 3,525 units to receive NQDS. More than 188,000 terminals worldwide carry NASDAQ Level 1 data.

Instinet was the first vendor to carry NQDS, but other companies now display complete market maker quotes. The vendors receiving NQDS are covered by a confidentiality agreement and are not identified in the latest filing. Besides Instinet, Bridge Information Services Corp. and Track Data Corp. deliver NQDS to their subscribers.

In following the SEC's guidelines in calculating a cost-based fee for NQDS, the NASD acknowledges that it has come up with a price that discriminates against the NASDAQ Level 2 subscribers paying $150 a month.

But the NASD is hitting the ball back into the SEC's court. "Any discriminatory impact on end users flowing from approval of the fee appears to fall within the scope of regulatory discretion" granted to the SEC, the NASD says. "By adhering to the commission's directives in computing the proposed NQDS fee, it follows that the NASD must be acting in a manner" consistent with federal securities law, the association says.

Although Instinet led the opposition against previous NQDS price schedules, a Reuters spokesman said management was not ready to comment on the NASD's latest proposal.

Barry Hertz, president of Track Data, says it will "be impossible" for the NASD to retroactively apply the $50.75 NQDS fee. "I don't see how the SEC will allow them to back bill customers," Hertz says. "It's not the subscriber's fault that the NASD has dragged its feet."

Hertz says that $50.75 is too much for the NASD to charge for the full list of market maker bids and offers. "I know they're giving us more data than Level 1 so they have to charge more than $8.75, but $25 would be a better price," he says.