[Federal Register Volume 59, Number 184 (Friday, September 23, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-23594]


[[Page Unknown]]

[Federal Register: September 23, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34682; File No. SR-NASD-94-50]

 

Self-Regulatory Organizations; Notice of Proposed Rule Change by 
the National Association of Securities Dealers, Inc. Relating To Excess 
Spread Parameters for CQS Securities

September 19, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on September 9, 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. 
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. Sec. 78S(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD is proposing to amend Schedule D to the NASD By-Laws to 
provide that the calculation methodology utilized to determine the 
excess spread parameters for CQS securities shall include quotations 
from national securities exchanges. In addition, in order to avoid 
confusion concerning the application of the excess spread parameters to 
CQS securities, the NASD is proposing to move the excess spread 
parameters for CQS securities, as amended, to Section 2 of Part VI of 
Schedule D to the NASD By-Laws from Section 2 of Part V of Schedule D. 
(Additions are in italics; deletions are bracketed.)
Schedule D
Part Requirements Applicable to Nasdaq Market Makers
Section 2  Character of Quotations
    (a)-(c) No change
    (d) Excess Spreads. A market maker shall not enter quotations in 
Nasdaq [or Consolidated Quotation Service (CQS)] securities that exceed 
the parameters for maximum allowable spreads as approved by the NASD 
Board of Governors and that may be published from time to time by the 
Association. The maximum allowable spreads for Nasdaq securities shall 
be 125 percent of the average of the three (3) narrowest market maker 
spreads in each security (if there are fewer than three (3) market 
makers in a security, the maximum allowable spread will be 125% of the 
average spread); provided however, that the maximum allowable spread 
shall never be less than \1/4\ point.
Part VI  Consolidated Quotations Service (CQS)
Section 2  Obligations of CQS Market Makers
    (a) No change.
    (b) CQS market makers shall be required to input a minimum 
quotation size of 200 or 500 shares in each reported security (as 
established from time to time by the Association) depending on the 
trading characteristics of the security[, and shall be subject to the 
excess spread parameters established for Nasdaq market makers in Part 
V, Schedule D of the NASD By-Laws].
    (c) Excess Spreads. A market maker shall not enter quotations in 
CQS securities that exceed the parameters for maximum allowable spreads 
as approved by the NASD Board of Governors and that may be published 
from time to time by the Association. The maximum allowable spreads for 
CQS securities shall be 125 percent of the average of the three (3) 
narrowest market maker spreads in each security, which average spread 
calculations shall include quotations from national securities 
exchanges (if the number of CQS market makers in a security plus the 
number of national securities exchanges trading that security is less 
than three (3), the maximum allowable spread will be 125 percent of the 
average spread); provided, however, that the maximum allowable spread 
shall never be less than \1/4\ of a point.

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

    Currently, Section 2(d) of Part V of Schedule D to the NASD By-Laws 
provides that registered market makers in CQS securities may not enter 
quotations in CQS securities that exceed the NASD's parameters for 
maximum allowable spreads. The maximum allowable spread presently in 
125 percent of the average of the three narrowest market maker spreads 
in each security, with the limitation that the maximum allowable spread 
can never be less than 1/4 of a point.\2\
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    \2\If there are fewer than three market makers in a security, 
the maximum allowable spread is 125% of the average of all market 
makers' spreads in the security.
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    The calculation of ``average dealer spreads'' in CQS securities, 
however, does not include quotations (i.e., spreads) from national 
securities exchanges trading those securities. Accordingly, in order to 
have the excess spread parameters for CQS securities be more reflective 
of and related to the quotations disseminated by all market centers 
trading CQS securities, the NASD is proposing to include quotations 
from the exchanges into its ``average dealer spread'' calculation. As a 
result, to the extent that the spread reflected in the best bid and 
offer disseminated by an exchange(s) is narrower than any of the three 
narrowest spreads quoted by CQS market makers, the proposed rule change 
may contribute narrower spreads by CQS market makers. Narrower spreads 
by CQS market makers, in turn, will enhance the continuity and quality 
of the markets provided by CQS market makers, to the ultimate benefit 
of investors.
    In addition, in order to avoid confusion concerning the application 
of the excess spread parameters to CQS securities, the NASD is 
proposing to move the excess spread parameters for CQS securities, as 
amended, to Section 2 of Part VI of Schedule D to the NASD By-Laws from 
Section 2 of Part V of Schedule D. Part VI of Schedule D deals with the 
trading of CQS securities on Nasdaq and Part V deals with obligations 
imposed on Nasdaq market makers. By placing the excess spread 
parameters for CQS securities in Part VI of Schedule D instead of Part 
V, market participants will be less likely to overlook the parameters.
    The NASD believes the proposed rule change is consistent with 
Sections 15A(b)(6) and 15A(b)(11) of the Act. Section 15A(b)(6) 
requires among other things, 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 15A(b)(11) requires, among other things, that the rules of a 
national securities association must be designed to produce fair and 
informative quotations. Specifically, by including exchange quotations 
in its calculation methodology for determining maximum allowable 
spreads in CQS securities, the NASD and Nasdaq believe the proposal may 
contribute to narrower spreads in CQS securities, which, in turn, will 
promote the efficiency, continuity, and quality of Nasdaq's market in 
CQS securities.

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 the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    Comments were neither solicited nor received.

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 
Fedeal 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, D.C. 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 principal office of the 
NASD. All submissions should refer to file number SR-NASD-94-50 and 
should be submitted by October 14, 1994.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\3\
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    \3\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-23594 Filed 9-22-94; 8:45am]
BILLING CODE 8010-01-M