[Federal Register Volume 59, Number 241 (Friday, December 16, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30914]


[[Page Unknown]]

[Federal Register: December 16, 1994]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35077; File No. SR-NASD-94-68]

 

Self-Regulatory Organizations; Notice of Proposed Rule Change by 
the National Association of Securities Dealers, Inc. Relating to a 
Three Month Extension of the Interim SOES Rules

December 9, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on December 7, 1994,\2\ 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. 78s(b)(1) (1988).
    \2\The NASD initially filed the proposed rule change on December 
1, 1994. On December 7, 1994, the NASD filed Amendment No. 1 to 
remove the short sale prohibition from its proposal to extend the 
Interim SOES Rules.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    On December 23, 1993, the Commission approved on a one-year pilot 
basis changes to The Nasdaq Stock Market, Inc.'s (``Nasdaq'') Small 
Order Executive System (``SOES'') that: (1) Reduced the maximum size 
order eligible for execution through SOES from 1,000 shares to 500 
shares; (2) reduced the minimum exposure limit for ``unpreferenced'' 
SOES orders from five times the maximum order size to two times the 
maximum order size, and eliminated the exposure limits for 
``preferenced orders''; (3) implemented an automated function for 
updating market maker quotations when the market maker's exposure limit 
has been exhausted; and (4) prohibited short sales through SOES 
(collectively referred to hereinafter as the ``Interim SOES 
Rules'').\3\ Except for the short sale prohibition, the NASD proposes 
to extend, until May 1, 1995, the effectiveness of the Interim SOES 
Rules.
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    \3\See Securities Exchange Act Release No. 33377 (Dec. 23, 
1993), 58 FR 69419 (Dec. 30, 1993) (``Interim SOES Rules Approval 
Order'').
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II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Propoed 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

    On December 23, 1993, the SEC issued an order that approved the 
Interim SOES Rules on a one-year pilot basis effective January 7, 1994. 
In response to two applications requesting a stay of the Interim SOES 
Rules Approval Order, however, the SEC granted a partial stay of the 
effective date of the order until January 25, 1995.\4\ Thus, since the 
Commission approved the Interim SOES Rules for a one-year period and 
this one-year period did not commence until the Commission's order 
approving the rules became effective on January 25, 1994, it is the 
NASD's understanding that the Interim SOES Rules will expire on January 
25, 1995, absent further Commission action.
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    \4\See Securities Exchange Act Release No. 33424 (Jan. 5, 1994).
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    As described in more detail below, because the NASD believes 
implementation of these rule changes has been associated with positive 
developments in the markets for Nasdaq securities and clearly has not 
had any negative effect on market quality, the NASD believes it is 
appropriate and consistent with the maintenance of fair and orderly 
markets and the protection of investors to extend the effectiveness of 
the interim SOES Rules (without the short sale prohibition) until the 
rules governing the operation of The Nasdaq Primary Retail Order View 
and Execution System (``NPROVE'') have been approved by the SEC 
and implemented.\5\
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    \5\See Securities Exchange Act Release No. 34145 (June 1, 1994), 
59 FR 29649 (June 6, 1994) (notice of original filing and Amendment 
No. 1), Securities Exchange Act Release No. 34453 (July 28, 1994), 
59 FR 39808 (Aug. 4, 1994) (notice of Amendment No. 2), and 
Securities Exchange Act Release No. 35024 (Nov. 29, 1994), 59 FR 
62755 (Dec. 6, 1994 (notice of Amendment No. 3).
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    NPROVE is a new Nasdaq system for the execution of small-
sized customer orders that will provide individual investors with 
enhanced limit order protection and important price improvement 
opportunities, while at the same time affording market makers an 
enhanced means to manage the risks associated with market making. The 
NASD anticipates that NPROVE will be ready for implementation 
by May 1, 1995 and is hopeful that the SEC will consider approval of 
NPROVE well prior to that date. Accordingly, assuming the SEC 
approves NPROVE by May 1, 1995, the NASD believes it is 
necessary for the protection of investors and the preservation of the 
quality of the markets for Nasdaq securities to extend the 
effectiveness of the Interim SOES Rules for approximately three months 
until May 1, 1995, so that there will be no lapse between the effective 
date of NPROVE and termination of the Interim SOES Rules. By 
preventing a lapse in the effectiveness of the Interim SOES Rules, the 
NASD believes investors and the marketplace as a whole will continue to 
receive the substantial benefits derived from the Interim SOES Rules.
    The Interim SOES Rules reflect a reasoned approach by the NASD to 
address the adverse effects on market liquidity attributable to active 
intra-day trading activity through SOES, while at the same time not 
compromising the ability of small, retail investors to receive 
immediate executions through SOES. Specifically, the Interim SOES Rules 
are designed to address concerns that concentrated, aggressive use of 
SOES by a growing number of order entry firms has resulted in increased 
volatility in quotations and transaction prices, wider spreads, and the 
loss of liquidity for individual and institutional investor orders. In 
light of the SEC's approval of the NASD's proposed short sale rule in 
June 1994,\6\ however, the NASD believes it is appropriate to permit 
short sales to be entered in SOES. Accordingly, the NASD proposes to 
allow the effectiveness of this particular SOES rule to lapse on 
January 25, 1995.
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    \6\Securities Exchange Act Release No. 34277 (June 29, 1994), 59 
FR 34885 (July 7, 1994).
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    The NASD believes that the same arguments and justifications made 
by the NASD in support of approval of the Interim SOES Rules are just 
as compelling today as they were when the SEC relied on them to approve 
the rules. In sum, the NASD continues to believe that concentrated 
bursts of SOES activity by active order-entry firms contribute to 
increased short-term volatility, wider spreads, and less market 
liquidity on Nasdaq and that the Interim SOES Rules are an effective 
means to minimize these adverse market impacts.
    The NASD also notes that the SEC made specific findings in the 
Interim SOES Rules Approval Order that the interim rules were 
consistent with the Act. In particular, the SEC stated in its approval 
order that:

    a. Because the benefits for market quality of restricting SOES 
usage outweigh any potential decrease in pricing efficiency, the 
Commission concludes that the net effect of the proposal is to 
remove impediments to the mechanism of a free and open market and a 
national market system, and to protect investors and the public 
interest, and that the proposed rule changes are designed to produce 
accurate quotations, consistent with Sections 15A(b)(6) and 
15A(b)(11) of the Act. In addition, the Commission concludes that 
the benefits of the proposal in terms of preserving market quality 
and preserving the operational efficiencies of SOES for the 
processing of small size retail orders outweigh any potential burden 
on competition or costs to customers or broker-dealers affected 
adversely by the proposal. Thus, the Commission concludes that the 
proposal is consistent with Section 15A(b)(9) of the Act in that it 
does not impose a burden on competition which is not necessary or 
appropriate in furtherance of the purposes of the Act.\7\
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    \7\Interim SOES Rules Approval Order, supra note 1, 58 FR at 
69423 (footnotes omitted).
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    b. The Commission also concludes that the proposal advances the 
objectives of Section 11A of the Act. Section 11A provides that it 
is in the public interest and appropriate for the protection of 
investors and the maintenance of fair and orderly markets to assure 
economically efficient execution of securities transactions, fair 
competition among market participants, and the practicality of 
brokers executing orders in the best market. The Commission 
concludes that the proposal furthers these objectives by preserving 
the operational efficiencies of SOES for the processing of small 
orders from retail investors.\8\
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    \8\Id. (footnotes omitted).
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    c. The Commission believes that it is appropriate to restrict 
trading practices through SOES that impose excessive risks and costs 
on market makers and jeopardize market quality, and which do not 
provide significant contributions to liquidity or pricing 
efficiency. * * * The Commission believes that it is more important 
to ensure that investors seeking to establish or liquidate an 
inventory position have ready access to a liquid Nasdaq market and 
SOES than to protect the ability of customers to use SOES for intra-
day trading strategies.\9\
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    \9\Id. at 69424-25 (footnotes omitted).
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    d. The Commission believes that there are increased costs 
associated with active intra-day trading activity through SOES that 
undermine Nasdaq market quality * * * . Active intra-day trading 
activity through SOES can also contribute to instability in the 
market.\10\
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    \10\Id. (footnotes omitted).
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    e. In addition, these waves of executions can make it difficult 
to maintain orderly markets. Given the increased volatility 
associated with these waves of intra-day trading activity, market 
makers are subject to increased risks that concentrated waves of 
orders will cause the market to move away. As a result, individual 
market makers may be unwilling to narrow the current spread and 
commit additional capital to the market by raising the bid or 
lowering the offer. When market makers commit less capital and quote 
less competitive markets, prices can be expected to deteriorate more 
rapidly. Accordingly, the Commission believes that it is appropriate 
for the NASD to take measured steps to redress the economic 
incentives for frequent intra-day trading inherent in SOES to 
prevent SOES activity from having a negative effect on market prices 
and volatility.\11\
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    \11\Id. at 69425-26 (footnotes omitted).
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    f. The Commission does not believe that intra-day trading 
strategies through SOES contribute significantly to market 
efficiency in the sense of causing prices to reflect information 
more accurately.\12\
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    \12\Id.
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    g. The Commission has evaluated each of the proposed 
modifications to SOES, and concludes that each of the modifications 
reduces the adverse effects of active trading through SOES and 
better enables market makers to manage risk while maintaining 
continuous participation in SOES. In addition, the Commission does 
not believe that any of the modifications will have a significant 
negative effect on market quality. To the extent that any of the 
modifications may result in a potential loss of liquidity for small 
investor orders, the Commission believes that these reductions are 
marginal and are outweighed by the benefits of preserving market 
maker participation in SOES and increasing the quality of executions 
for public and institutional orders as a result of the 
modifications.\13\
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    \13\Id.
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    h. The Commission * * * has determined that the instant 
modifications to SOES further the objectives of investor protection 
and fair and orderly markets, and that these goals, on balance, 
outweigh any marginal effects on liquidity for small retail orders, 
and any anticompetitive effects on order entry firms and their 
customers. The Commission concludes that the ability of active 
traders to place trades through a system designed for retail 
investors can impair market efficiency and jeopardize the level of 
market making capital devoted to Nasdaq issues. The Commission 
believes that the rule change is an appropriate response to active 
trading through SOES, and that the modifications will reduce the 
effects of concentrated intra-day DOES activity on the market.\14\
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    \14\Id. at 69429.

    The NASD believes these significant statutory findings by the SEC 
regarding the Interim SOES Rules and the SEC's assessment of the likely 
benefits to the marketplace that would result from the rules have been 
confirmed and substantiated by an econometric study conducted by the 
NASD's Economic Research Department on the effectiveness of the Interim 
SOES Rules.\15\ When the SEC approved the Interim SOES Rules, it stated 
that ``[a]ny further action the NASD seeks with respect to SOES--
extension of these modifications upon expiration, or introduction of 
other changes--will require independent consideration under Section 19 
of the Act.''\16\ In addition, the SEC stated that, should the NASD 
desire to extend these SOES changes or modify SOES, the Commission 
would expect ``the NASD to monitor the quality of its markets and 
assess the effects of these changes on market quality for Nasdaq 
securities.'' Also, if feasible, the SEC instructed the NASD to provide 
a quantitative and statistical assessment of the effects of the SOES 
changes on market quality; or, if an assessment is not feasible, the 
SEC stated that the NASD should provide a reasoned explanation 
supporting that determination.
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    \15\Securities Exchange Act Release No. 35080 (Dec. 9, 1994) 
(Commission notice of a letter from Gene Finn, Vice President & 
Chief Economist, NASD, to Katherine England, Assistant Director, 
National Market System & OTC Regulation, SEC, dated October 24, 
1994, submitted in connection with the NASD's NPROVE filing, 
File No. SR-NASD-94-13).
    \16\Interim SOES Rules Approval Order, supra note 1, 59 FR at 
69429. Amendment No. 4 to the NASD's filing for the Interim SOES 
Rules also states that the NASD ``understand[s] that because of 
substantial negative comment on the modifications, the SEC may wish 
to review the impact of the changes after they have been in effect 
for a reasonable time frame. The NASD believes that a one-year pilot 
will provide a reasonable period to observe the operation of the 
modifications and confirm the absence of adverse impact on SOES 
averred in the comments. The experience during the pilot period will 
also permit the NASD to better evaluate the prudence of requesting 
permanent approval of these interim changes. For these reasons, the 
NASD hereby requests that the SEC approve the proposal for a one-
year pilot.'' See letter from Robert E. Aber, Vice President & 
General Counsel, Nasdaq, to Selwyn Notelovitz, Branch Chief, SEC, 
dated November 29, 1993.
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    In sum, the NASD's study found that:

     Since the SOES changes went into effect in January 
1994, the statistical evidence indicated that when average daily 
volume, stock price, and stock price volatility are held constant 
through regression techniques, quoted percentage spreads in Nasdaq 
securities experienced a decline in the immediate period following 
implementation of the changes and have continued to decline since 
then. The statistical evidence also showed that the narrowing of 
quoted percentage spreads became more pronounced and robust the 
longer the Interim SOES Rules were in effect. In particular, quoted 
spreads in cents per share for the 500 largest Nasdaq National 
Market securities experienced a sharp decline from April 28 to May 
12 and from June 23 to July 18 (footnote omitted);
     With the exception of a brief, market-wide period of 
volatility experienced by stocks traded on Nasdaq, the New York 
Stock Exchange, and the American Stock Exchange during the Spring, 
the volatility of Nasdaq securities appears to be unchanged in the 
period following implementation of the changes; and
     A smaller percentage of Nasdaq stocks experienced 
extreme relative price volatility after implementation of the rules 
and that these modifications, in turn, suggest a reduction in 
relative volatilities since the rules were put into effect.

    The NASD also believes that its study of the effectiveness of the 
Interim SOES Rules lends credence to another NASD study that was 
submitted to the SEC in support of approval of the Interim SOES 
Rules.\17\ In the May 1993 SOES Study, the NASD found that concentrated 
waves of orders entered into SOES by active order-entry firms resulted 
in discernible degradation to the quality of the Nasdaq market. 
Specifically, the study found, among other things, that: (1) Bursts of 
orders entered into SOES by active order entry firms frequently result 
in a decline in the bid price and a widening of the bid-ask spread; (2) 
that there is a significant positive relationship between increases in 
spreads and volume attributable to active order-entry firms as it 
related to total SOES volume per security; and (3) activity by active 
order-entry firms resulted in higher price volatility and less 
liquidity--higher price changes are associated with high active trading 
firm volume, even after controlling for normal price fluctuations. 
Given the positive market effects associated with the Interim SOES 
Rules, the NASD believes the findings of the May 1993 SOES Study as 
well as the economic assumptions, principles, and hypotheses underlying 
the study should not be dismissed by the Commission as ``inconclusive'' 
and that more weight should be given to the study.
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    \17\See NASD Department of Economic Research: Impact of SOES 
Active Trading Firms on Nasdaq Market Quality (May 12, 1993) (``May 
1993 SOES Study''). See also Securities Exchange Act Release No. 
32313 (May 17, 1993), 58 FR 29647 (publication of the study for 
comment).
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    Therefore, in light of all the above-cited statutory findings made 
by the SEC when it approved the Interim SOES Rules, coupled with the 
NASD's findings that the interim rules have been associated with 
positive market developments in terms of lower spreads on Nasdaq and 
less stocks with extreme relative price volatility, the NASD believes 
it would be consistent with the Act for the Commission to extend the 
Interim SOES Rules for a brief three month period so that the interim 
rules can continue on an uninterrupted basis until May 1, 1995, the 
anticipated implementation date for NPROVE. In sum, the NASD 
believes its study affirms the validity and correctness of the SEC's 
prior statutory findings made in connection with the approval of the 
interim rules. Moreover, even if the Commission is unwilling to find 
positive significance in the NASD's statistical analyses, at the very 
least, these studies indicate that the market has not been harmed by 
implementation of the Interim SOES Rules. As a result, the Commission's 
rationale for the approval of the Interim SOES Rules for one year is 
equally compelling, if not more compelling given the apparent positive 
effects of the rules, to justify approval of the NASD's proposal to 
extend the rules for approximately three months. To do otherwise would 
require the SEC to refute its prior findings that the Interim SOES 
Rules are consistent with the Act. Given the absence of any evidence of 
unanticipated harm associated with implementation of the interim rules, 
the NASD believes the Commission would have no factual basis to justify 
such a refutation.
    Moreover, even if the Commission concludes that the Interim SOES 
Rules have had no impact on market quality, the NASD believes the 
Commission's approval of New York Stock Exchange (``NYSE'') Rule 80A on 
a permanent basis illustrates that the Commission would still have a 
sufficient basis to approve an extension of the Interim SOES Rules for 
a brief three month period.\18\ When NYSE Rule 80A was proposed, the 
Commission received considerable adverse comment to the effect that 
there was no causal relationship between index arbitrage and market 
volatility and that activation of the rule during turbulent market 
conditions could have disastrous effects on related options and futures 
markets and actually exacerbate market volatility. Despite these 
comments, the Commission approved the proposal on a one-year pilot 
basis noting that ``the NYSE proposal represents a modest step, 
proposed on a pilot basis, to attempt to address the issue of market 
volatility.''\19\ After the one-year pilot, the NYSE prepared a report 
that, in the SEC's words, found that ``the standard measures of NYSE 
market quality appear largely unaffected by Rule 80A.'' Specifically, 
the NYSE Report indicated that: (1) Quotes on the NYSE did not widen 
after the 50 DJIA point trigger was reached; and (2) the imposition of 
Rule 80A did not have any negative effect on price continuity and depth 
in the market.\20\ In addition, in approving Rule 80A on a permanent 
basis, the SEC noted that the rule ``represents a modest but useful 
step by the NYSE to attempt to address the issue of market 
volatility,''\21\ that the rule ``has not been disruptive to the 
marketplace,''\22\ and that there was a ``lack of evidence of any 
harmful effects of Rule 80A.''\23\ In sum, the SEC discussion of the 
statutory basis for approval of NYSE Rule 80A focused in large part on 
the fact that Rule 80A did not have any adverse impacts on market 
quality on the NYSE and that, as a result, the NYSE should be given the 
latitude to take reasonable steps to address excessive volatility in 
its marketplace. Accordingly, the NASD believes the SEC should afford 
the NASD the same regulatory flexibility that it afforded the NYSE to 
implement rules reasonably designed to enhance the quality of Nasdaq 
and minimize the effects of potentially disruptive trading practices.
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    \18\Rule 80A provides that when the Dow Jones Industrial Average 
declines or advances by 50 points or more, all index arbitrage 
orders to sell or buy must be executed in a market stabilizing 
manner.
    \19\See Securities Exchange Act Release No. 28282 (July 30, 
1990), 55 FR 31468, 31472 (Order approving File Nos. SR-NYSE-90-5 
and SR-NYSE-90-11).
    \20\See Securities Exchange Act Release No. 29854 (October 24, 
1994), 56 FR 55963 (October 30, 1994) (order approving file SR-NYSE-
91-21) (``Rule 80A Approval Order'').
    \21\Id. 56 FR at 55967.
    \22\Id.
    \23\Id. 56 FR at 55967-68.
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    The NASD believes that the proposed rule change is consistent with 
Sections 15A(b)(6), 15A(b)(9), 15A(b)(11) and 11A(a)(1)(C) of the Act. 
Among other things, 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. Specifically, the NASD is 
proposing to retain the Interim SOES Rules for three months because of 
concerns that concentrated, aggressive use of SOES by a growing number 
of order entry firms has resulted in increased volatility in quotations 
and transaction prices, wider spreads, and the loss of liquidity for 
individual and institutional investor orders, all to the detriment of 
public investors and the public interest. The NASD believes the Interim 
SOES Rules have operated to rectify this situation while continuing to 
provide an effective opportunity for the prompt, reliable execution of 
small orders received from the investing public. With respect to the 
proposal to remove the short sale prohibition from SOES, by expanding 
the spectrum of retail orders that will be eligible to receive 
automatic executions through SOES, the NASD believes the proposal may 
enhance investor protection. Nonetheless, the NASD is very concerned 
that re-allowing the entry of short sales into SOES may contribute to 
destabilizing short term trading through SOES that could have adverse 
corollary effects throughout Nasdaq.\24\ Accordingly, in order to 
protect investors and the public interest, the NASD believes the 
Interim SOES Rules should be extended until May 1, 1995, so that small 
investors' orders will continue to receive the fair and efficient 
executions that SOES was designed to provide.
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    \24\The NASD will, therefore, review the volume and impact of 
short sales effected through SOES on an on-going basis to determine 
whether it is appropriate in the interests of maintaining fair and 
orderly markets to continue to allow short-sales through SOES.
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    Section 15A(b)(9) provides that the rules of the Association may 
not impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act. The Interim SOES Rules apply 
across the board and do not target any particular user or participant. 
For instance, all SOES orders must be for 500 shares or less, according 
to the tier size requirements, all dealers may set their exposure 
limits at two times the tier size, and all dealers may elect to utilize 
the automated quote update feature. Accordingly, the NASD believes that 
these rule changes are not anti-competitive, as they are uniform in 
application and they seek to preserve the ability of SOES to provide 
fair and efficient automated executions for small investor orders, 
while preserving market maker participation in SOES and market 
liquidity.
    Section 15A(b)(11) empowers the NASD to adopt rules governing the 
form and content of quotations relating to securities in the Nasdaq 
market. Such rules must be designed to produce fair and informative 
quotations, prevent fictitious and misleading quotations, and promote 
orderly procedures for collecting and distributing quotations. The NASD 
is seeking to continue the effectiveness of the Interim SOES Rules so 
that SOES activity may not result in misleading quotations in the 
Nasdaq market. Market makers place quotes in the Nasdaq system and 
these quotes comprise the inside market and define the execution 
parameters of SOES. When volatility in the SOES environment causes 
market makers to widen spreads or to change quotes in anticipation of 
waves of SOES orders, quotes in the Nasdaq market become more volatile 
and may be misleading to the investing public. Accordingly, absent 
continuation of the Interm SOES Rules, the quotations published by 
Nasdaq may not reflect the true market in a security and, as a result, 
there may be short-term volatility and loss of liquidity in Nasdaq 
securities, to the detriment of the investing public. Further, the 
continuation of the automated refresh feature will ensure that a market 
maker's quotation is updated after an exposure limit is exhausted. 
Uninterrupted use of this function will maintain continuous quotations 
in Nasdaq as market makers exhausting their exposure limits in SOES 
will not be subject to a ``closed quote'' condition or an unexcused 
withdrawal from the market. Finally, the NASD notes that despite the 
reduction in the maximum order size for SOES, market makers are still 
obligated to adhere to minimum display size requirements for quotations 
in Nasdaq National Market securities and Nasdaq SmallCap securities.
    Finally, the NASD believes that the proposed rule change is 
consistent with significant national market system objectives contained 
in Section 11A(a)(1)(C) of the Act. This provision states it is in the 
public interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure, among other things, 
(i) economically efficient execution of securities transactions; (ii) 
fair competition among brokers and dealers; and (iii) the practicality 
of brokers executing investor orders in the best market. Specifically, 
the Interim SOES Rules advance each of these objectives by preserving 
the operational efficiencies of SOES for the processing of small 
investors' orders, by maintaining current levels of market maker 
participation through reduced financial exposure from unpreferenced 
orders exceeding 500 shares, and by reducing price volatility and the 
widening of market makers' spreads in response to the practices of 
order entry firms active in SOES. With respect to the proposal to 
remove the short sale prohibition from SOES, by expanding the spectrum 
of retail orders that will be eligible to receive automatic executions 
through SOES, the NASD believes the proposal may enhance investor 
protection. Nonetheless, the NASD is very concerned that re-allowing 
the entry of short sales into SOES may contribute to destabilizing 
short term trading through SOES that could have adverse corollary 
effects throughout Nasdaq.\25\
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    \25\As indicated above, the NASD will review the volume and 
impact of short sales effected through SOES on an on-going basis.
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    In addition, for the same reasons provided by the SEC when it 
approved the Interim SOES Rules that are cited above in the text 
accompanying footnotes four through eleven, the NASD believes that the 
proposed rule change is consistent with Sections 15A(b)(6), 15A(b)(9), 
15A(b)(11), and 11A(a)(1)(C) of the Act.

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 of 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 
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 consent, 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, N.W., 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 the file number SR-NASD-94-68 and 
should be submitted by January 6, 1995.


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\26\
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    \26\17 CFR 200. 30-3(a)(12)(1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-30914 Filed 12-15-94; 8:45 am]
BILLING CODE 8010-01-M