[Federal Register Volume 59, Number 81 (Thursday, April 28, 1994)]
[Unknown Section]
[Page ]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-10093]
[Federal Register: April 28, 1994]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-33938; File No. SR-NASD-94-9]
Self-Regulatory Organizations; Proposed Rule Change by National
Association of Securities Dealers, Inc. Relating to Non-member Access
to SelectNet
April 20, 1994.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on March 31, 1994 the
National Association of Securities Dealers, Inc. (``NASD'' or
``Association'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the
NASD.\2\ The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\15 U.S.C. 78s(b)(1) (1988).
\2\The NASD amended the proposed rule change once subsequent to
its original filing on February 15, 1994. This amendment clarified
the NASD's basis for the rule change and provided a discussion of
and the NASD's response to the objections of a commenter. File No.
SR-NASD-94-9 (Amendment No. 1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NASD is proposing two modifications to the operation of
SelectNet, the system designed to facilitate communication, negotiation
and execution of orders between NASD member firms. The first such
modification will provide real-time access to non-members to view all
``broadcast'' orders in SelectNet immediately as they are entered. The
second modification provides for the transmission of such orders solely
on an anonymous basis through the service.
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
The Nasdaq Stock Market is proposing modifications to the
operations of the SelectNet service that would permit access by non-
members who are subscribers to the Nasdaq Workstation Level 2 service
to view broadcast orders immediately as they are entered into the
service. SelectNet is the service operated by The Nasdaq Stock Market
that permits NASD member firms to enter buy or sell orders in Nasdaq
securities into the system, direct those orders to a single market
maker (preferenced orders) or broadcast the order to all market makers
in the security. Originally implemented in its predecessor form in 1988
as the Order Confirmation Transaction service,\3\ the primary function
of that service was to offer an automated alternative to the telephone
as a method of contacting market makers in times of market stress. To
this end, order entry firms could direct or preference an order to buy
or sell a Nasdaq security to a single market maker in the issue. When
the service was enhanced and renamed SelectNet in 1990,\4\ the
broadcast feature was added to permit a wider dissemination of orders
to all market makers in an issue. In addition, the redesigned system
allowed market makers in a subject security to send a broadcast order
to all member firms that had designated that security in their
SelectNet ``watch file,''\5\ whether the firm was a market maker or
not. In 1992, the service was expanded to add pre-opening and after-
hours sessions,\6\ so that today SelectNet is available for members to
negotiate and execute orders from 9 a.m. until 5:15 p.m. Eastern
Time.\7\
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\3\Securities Exchange Act Release No. 25263 (Jan. 11, 1988), 53
FR 1430 (Jan. 19, 1988).
\4\Securities Exchange Act Release No. 28636 (Nov. 21, 1990), 55
FR 49732 (Nov. 30, 1990).
\5\The SelectNet watch file is established by each member firm
and may contain as many as 300 securities. The member will then
receive any preferenced or broadcast order selected for inclusion in
the watch file.
\6\Securities Exchange Act Release No. 30581 (Apr. 14, 1992), 57
FR 14596 (Apr. 21, 1992).
\7\In 1992, the NASD also proposed expanding SelectNet to
include exchange-listed securities in the service, but this proposal
met with resistance from the exchanges and is still pending
Commission action. Securities Exchange Act Release No. 30961 (July
27, 1992), 57 FR 34158 (Aug. 3, 1992).
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The Nasdaq Stock Market operates SelectNet to provide investors and
members with an automated system to facilitate communication of trading
interest between members, negotiation of orders with the possibility of
price improvement with automated, locked-in executions, and
dissemination of last sale reports to the tape. In addition, SelectNet
retains the original functionality of the service as a replacement for
one-on-one communication between members, especially in times of market
stress. Since its enhancement in December 1990, the service has grown
in popularity with members and traffic has increased significantly--
from an average of 3,000 transactions and 6 million shares daily in the
first half of 1991 to over 11,000 transactions and more than 16 million
shares daily in the last quarter of 1993. As the system's usage has
increased, institutions and other non-members have expressed a desire
to see the orders broadcast within the service. The NASD believes that
it is now appropriate to disclose SelectNet broadcast orders to non-
member Nasdaq Workstation Level 2 subscribers, in order to render the
orders in the system more transparent to investors.
An important facet of the Division of Market Regulation's Market
2000 study was increasing transparency in SelectNet by making SelectNet
orders more visible for investors.\8\ The Division recommended that the
NASD examine how to improve access to information regarding orders
entered into SelectNet, consistent with goals of increased
transparency. Specifically, the Division stated that expanded
dissemination of SelectNet information is essential for providing data
to investors regarding the prices at which investors and dealers are
willing to transact business in a particular security.\9\ Accordingly,
this rule proposal directly responds to one of the Division's key
suggestions designed to improve the transparency of orders broadcast
through the SelectNet service.
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\8\Market 2000: An Examination of Current Equity Market
Developments, Division of Market Regulation, United States
Securities and Exchange Commission, (Jan. 1994).
\9\The Division also recommended that SelectNet orders be
disseminated to the public before the Commission took any action on
the pending proposal to include exchange-listed securities in the
service. The NASD believes this rule filing is a full response to
the Division's request.
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Because of the additional non-member constituencies that will be
able to view all broadcast orders, the NASD is also proposing to modify
its order-entry procedure for SelectNet to ensure that broadcast orders
are entered into and displayed through SelectNet anonymously. This
feature is proposed for two reasons: To preserve incentives for dealers
to continue to make markets that add liquidity to the market and to
avoid conditioning the market in one direction or another by orders
identified with particular market makers or order entry firms. First,
the NASD believes that it is very important to retain incentives for
market makers to participate in the market. Market makers put quotes in
the Nasdaq system as a form of advertisement that they stand ready and
willing to transact business at their quoted prices and sizes. There
are obligations that accrue to those market makers, however, the NASD
and the SEC require market makers to be firm for their quotes and to
participate in order execution systems. Enabling order entry firms to
advertise buy and sell interest freely, with no concomitant market
maker obligations, by attaching their names to SelectNet orders so that
anyone with a Workstation would be able to contact the entity directly
by telephone, would eviscerate the positive attributes of being a
market maker with a quote in the Nasdaq system.
Second, allowing market makers (or order entry firms) to put their
names on broadcast orders might condition or influence the market in a
security by advertising the buying or selling power of the member firm.
For example, if a broker/dealer that is considered a lead market maker
or a major institutional block positioner in a security was interested
in buying shares in the stock, it might broadcast a sell order in
SelectNet, identify its name on the order, and cause the market to
react to the sell interest and the power of the firm's name.
Accordingly, other market makers in the stock might react to the sell
interest by dropping their bids and the lead market maker would be able
to buy stock at a lower price than would otherwise have been the case,
simply because it was advertising its name, or conditioning the market.
Indeed, similar conditioning effects might be caused by an firm, order
entry firm or market maker, by entering orders that are quickly
canceled without actual trading interest by the entry firm.
Accordingly, the NASD proposes that member firms enter all broadcast
orders anonymously.
Although orders must be entered on an anonymous basis, once two
firms are in negotiation over the terms of the broadcast order, the
order entry firm may of course identify itself to the contra side.\10\
The information on SelectNet broadcast orders will be made available to
members and non-member subscribers in the Nasdaq Workstation Level 2
service. This proposal is intended to avoid conditioning the market
with orders that might be canceled at any time without actual trading
interest by the order entry firm.
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\10\Presently, SelectNet provides members the option of
identifying themselves on broadcast orders through their market
maker identification symbol, although this alternative is seldom
used.
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Accordingly, the Nasdaq Stock Market is proposing modifications to
SelectNet to permit non-member, viewing access, to all SelectNet
broadcast orders immediately as the orders are entered into the system;
and to require all broadcast orders to be entered and disseminated on
an anonymous basis.
The NASD believes the proposed rule change is consistent with
sections 15A(b)(6) and 11A(a)(1)(C) of the Act and is a particularly
timely and germane response to the recommendations contained in the
Market 2000 study. Section 15A(b)(6) requires that the rules of a
national securities association be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to and perfect the mechanism of a
free and open market and a national market system and in general to
protect investors and the public interest. Section 11A(a)(1)(C) finds
that it is in the public interest to, among other things, assure the
availability to brokers, dealers, and investors of information with
respect to quotations for and transactions in securities and
economically efficient execution of securities transactions. The
SelectNet service has served as an alternative to the telephone in
times of market stress and as a system to broadcast orders to market
makers for economically efficient negotiations and executions. By
permitting non-members to view those broadcast orders, the NASD is
removing impediments to transparency of market information and is
facilitating transactions for those non-members who will now be able to
see all broadcast orders in the service and timely arrange for the
execution of such orders by a member. Although the orders in SelectNet
do not represent quotations or trades reports, which are customarily
disseminated to the public by Nasdaq, the NASD believes that the
information is valuable to investors and market participants and should
be transparent and disseminated to non-members.
B. Self-Regulatory Organization's Statement on Burden on Competition
The NASD believes that the proposed rule change will not result in
any burden on competition that is not necessary or appropriate in
furtherance of purposed of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The issue of non-member access to SelectNet has been the topic of
careful, in depth discussion of many different committees of the NASD
and its subsidiaries for the past two years. Discussions have fully
aired the concerns of members with permitting disclosure to non-members
of order information in an NASD-operated order negotiation system.
While the constituencies agreed to open up SelectNet to non-members,
differing degrees of non-member access were considered and debated.
Some members recommended allowing non-member access to SelectNet
following a short interval for market makers to interact with orders in
the system. Non-members advocated immediate dissemination of SelectNet
broadcast orders. All concurred that the original functionality of
SelectNet as an alternative to the telephone should be preserved. After
extensive venting of germane issues in numerous committees of members
and non-members, a consensus position was achieved recommending Board
approval of immediate non-member access to SelectNet broadcast orders.
The Board received two comment letters on the proposal, one from the
Investment Company Institute (``ICI'') advocating approval of the
proposal and another from the Security Traders Association (``STA'')
recommending disapproval. The ICI argued that in order for mutual funds
and other institutions to be able to fulfill their fiduciary
obligations it was vital that they be given access to all relevant
market information. The STA took the opposite position and stated that
since SelectNet was developed as a private means for market makers to
communicate with each other and negotiate orders, it was not
appropriate to make these private business communications available to
customers. The STA also argued that the vocal institutional proponents
of access to SelectNet are customers of NASD member firms and that
there must be a separation between members, non-members and their
customers without jeopardizing the customers' entitlement to best
execution. The STA also predicted that non-member access to SelectNet
might result in greater volatility, wider spreads and less liquidity
because non-members may not demonstrate the same ethical standards with
which members are required to abide. The NASD Board considered these
arguments carefully. The SelectNet service retains its capacity for
private communication between members in that the preferencing
functions have not been modified or opened up to non-member access. In
addition, the NASD Board concluded that displaying SelectNet orders to
all investors who subscribe to Nasdaq Level II service would increase
the efficiency of the market and enhance their ability to monitor the
quality of executions they receive. Moreover, the Board concluded that
there is no basis to assume that greater transparency of order
information to investors will result in wider spreads or less
liquidity; indeed, historically the opposite has proven to be the case.
Accordingly, the Board approved non-member access to SelectNet
broadcast orders in the interests of enhanced transparency of order
information and more open market operations.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the NASD consents, the Commission will:
A. By order approve such proposed rule change, or
B. Institute proceedings to determine whether the proposed rule
change should be disapproved.
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. 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 principle office of the
NASD. All submissions should refer to the file number in the caption
above and should be submitted by May 19, 1994.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\17 CFR 200.30-3(a)(12) (1993).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-10093 Filed 4-26-94; 8:45 am]
BILLING CODE 8010-01-M