[Federal Register Volume 61, Number 69 (Tuesday, April 9, 1996)]
[Notices]
[Pages 15855-15856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-8710]



-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37062; File No. SR-NASD-96-11]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Amendments to the Primary Market Maker Standards

April 2, 1996.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 
27, 1996, 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.

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD is proposing to amend the Primary Market Maker (``PMM'') 
Standards rule by deleting a provision of the rule that allows a market 
maker to become a PMM in an issue by registering in the stock and 
refraining from quoting the issue for five days.1 Below is the 
text of the proposed rule change. Proposed deletions are in brackets.

    \1\ NASD Manual, Rules of Fair Practice, Art. III, Sec. 49 (CCH) 
para. 2200I.
---------------------------------------------------------------------------

Article III

Rules of Fair Practice

* * * * *

Primary Nasdaq Market Maker Standards

Sec. 49.
* * * * *
    (g) In registration situations:
    (1) To register and immediately become a Primary Nasdaq Market 
Maker in a Nasdaq National Market security, a member must be a 
Primary Nasdaq Market Maker in 80% of the securities in which it has 
registered. If the market maker is not a Primary Nasdaq Market Maker 
in 80% of its stocks, it may qualify as a Primary Nasdaq Market 
Maker in that stock if[:
    (i) the market maker registers in the stock but does not enter 
quotes for five days; or
    (ii)] the market maker registers in the stock as a regular 
Nasdaq market maker and satisfies the qualification criteria for the 
next review period.
* * * * *

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

    On June 29, 1994, the SEC approved the NASD's short-sale rule 
applicable to short sales in Nasdaq National Market (``NNM'') 
securities.\2\ The rule, which has been approved by the Commission on a 
pilot basis through August 3, 1996,\3\ prohibits member firms from 
effecting short sales \4\ at or below the current inside bid as 
disseminated by the Nasdaq system whenever that bid is lower than the 
previous inside bid.\5\

    \2\ See Securities Exchange Act Release No. 34277 (June 29, 
1994), 59 FR 34885 (July 7, 1994) (approving, inter alia, Article 
III, Section 48 to the NASD Rules of Fair Practice).
    \3\ See Securities Exchange Act Release No. 36532 (Nov. 30, 
1995), 60 FR 62519 (Dec. 6, 1995).
    \4\ A short sale is a sale of a security which the seller does 
not own or any sale which is consummated by the delivery of a 
security borrowed by, or for the account of, the seller. To 
determine whether a sale is a short sale members must adhere to the 
definition of a ``short sale'' contained in SEC Rule 3b-3, which 
rule is incorporated into Nasdaq's short sale rule by Article III, 
Section 48(l)(1) of the NASD Rules of Fair Practice.
    \5\ Nasdaq calculates the inside bid and the best bid from all 
market makers in the security (including bids on behalf of exchanges 
trading Nasdaq securities on an unlisted trading privileges basis), 
and disseminates symbols to denote whether the current inside bid is 
an ``up bid'' or a ``down bid.'' Specifically, an ``up bid'' is 
denoted by a green ``up'' arrow symbol and a ``down bid'' is denoted 
by a red ``down'' arrow. Accordingly, absent an exemption from the 
rule, a member can not effect a short sale at or below the inside 
bid in a security in its proprietary account or an account of a 
customer if there is a red arrow next to the security's symbol on 
the screen. In order to effect a ``legal'' short sale on a down bid, 
the short sale must be executed at a price at least a \1/16\th of a 
point above the current inside bid. Conversely, if the security's 
symbol has a green ``up'' arrow next to it, members can effect short 
sales in the security without any restrictions. The rule is in 
effect during normal domestic market hours (9:30 a.m. to 4:00 p.m., 
Eastern Time).
---------------------------------------------------------------------------

    In order to ensure that market maker activities that provide 
liquidity and continuity to the market are not adversely constrained 
when the short sale rule is invoked, the rule provides an exemption to 
``qualified'' Nasdaq market makers.\6\ Even if a market maker is able 
to avail itself of the qualified market maker exemption, it can utilize 
the exemption from the short sale rule only for transactions that are 
made in connection with bona fide market making activity. If a market 
maker does not satisfy the requirements for a qualified market maker, 
it can remain a market maker in the Nasdaq system; however, it can not 
take advantage of the exemption from the rule.

    \6\ Article III, Section 48(c)(1).
---------------------------------------------------------------------------

    From February 1, 1996 to August 3, 1996, a ``qualified'' Nasdaq 
market maker is defined to be a market maker that satisfies the 
criteria for a PMM found in Section 49 of the NASD Rules of Fair 
Practice.\7\ To qualify as a PMM, market makers must satisfy at least 
two of the following four criteria: (1) the market maker must be at the 
best bid or best offer as shown on the Nasdaq system no less than 35 
percent of the time; (2) the market maker must maintain a spread no 
greater than 102 percent of the average dealer spread; (3) no more than 
50 percent of the market maker's quotation updates may occur without 
being accompanied by a trade execution of at least one unit of trading; 
or (4) the market maker executes 1\1/2\ times its ``proportionate'' 
volume in the stock.\8\ If a market maker is a PMM, a ``P'' indicator 
is displayed next to its market maker identification to denote that it 
is a PMM.

    \7\ Before the PMM standards went into effect, a ``qualified 
market maker'' was defined to be a market maker that had entered 
quotations in the relevant security on an uninterrupted basis for 
the preceding 20 business days, the so-called ``20-day test.''
    \8\ For example, if there are 10 market makers in a stock, each 
dealer's proportionate share volume would be 10 percent; therefore, 
1\1/2\ times proportionate share volume would mean 15 percent of 
overall volume.
---------------------------------------------------------------------------

    The review period for satisfaction of the PMM performance standards 
is one calendar month. If a PMM has not satisfied the threshold 
standards after a particular review period, the PMM designation will be 
removed commencing on the next business day

[[Page 15856]]
following notice of failure to comply with the standards. Market makers 
may requalify for designation as a Primary Market Maker by satisfying 
the threshold standards for the next review period.
    If a market maker is a PMM in 80 percent or more of the securities 
in which it has registered, it may immediately become a PMM (i.e., a 
qualified market maker) in an NNM security by registering and entering 
quotations in that issue. If the market maker is not a PMM in at least 
80 percent of its stocks, it may qualify as a PMM in that stock if the 
market maker registers in the stock but does not enter quotes for five 
days (the ``five-day quotation delay rule'') or the market maker 
registers in the stock as a regular Nasdaq market maker and satisfies 
the qualification criteria for the next review period. The PMM rule 
also has provisions applicable to initial public offerings, secondary 
offerings, and merger and acquisition situations.\9\

    \9\ See Section 49(g)(2) and (3) of the NASD Rules of Fair 
Practice.
---------------------------------------------------------------------------

    As discussed above, the ``five-day quotation delay'' rule permits a 
market maker to become a PMM by registering in a stock and refraining 
from entering quotes in the issue for five days. If the market maker 
commences quoting the issue on the sixth day, it is a PMM in that stock 
until the next PMM review. Thereafter, to retain the PMM designation, 
the market maker must meet the PMM standards for the next review 
period. This provision of the PMM standards was originally put into the 
rule to ensure that market makers were not registering in a stock to 
take advantage of momentary short-selling opportunities.
    The NASD is concerned, however, that the ``five-day quotation delay 
rule'' could be utilized in a manner that undermines the PMM exemption 
and diminishes the effectiveness of the NASD's short-sale rule. 
Specifically, the NASD is concerned that the rule could be used to 
circumvent the application of the PMM standards \10\ and/or inflate the 
percentage of stocks in which they are a PMM above the 80 percent 
level, thereby entitling them to be a PMM for all initial public 
offerings and issues that they register in during the next month. 
Accordingly, in light of these unintended consequences of the rule, the 
NASD is proposing to delete the provision from the PMM Rule. In sum, 
because the ``five-day quotation delay rule'' allows a market maker to 
become a PMM for reasons wholly unrelated to the quality with which it 
makes a market, the NASD believes the provision should be deleted 
because it is consistent with all other qualitative means by which a 
market maker can become a PMM.

    \10\ Specifically, it is conceivable that market making 
affiliates of the same firm could ``swap'' lists of stocks in which 
they make a market and alternatively receive PMM designation without 
ever meeting the quanitative PMM standards.
---------------------------------------------------------------------------

    The NASD believes the proposed rule change is consistent with 
Section 15A(b)(6) of the Act. 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, by amending 
the PMM Rule to provide that market makers will only be exempt from the 
NASD's short-sale rule if they have met certain performance standards, 
the NASD believes its proposal will help to ensure that the market 
maker exemption is not subject to abuse, thereby promoting the 
effectiveness of the NASD's short-sale rule.

(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 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such data if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization 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, 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 SR-NASD-96-11 and should be 
submitted by April 30, 1996.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\

    \11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-8710 Filed 4-8-96; 8:45 am]
BILLING CODE 8010-01-M