[Federal Register Volume 61, Number 136 (Monday, July 15, 1996)]
[Notices]
[Pages 36947-36949]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-17930]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37412; File No. SR-NASD-96-26]
Self-Regulatory Organizations; Notice of Proposed Rule Change by
the National Association of Securities Dealers, Inc. Relating to the
Obligations of CQS Market Makers To Have Available Quotation Services
That Provide Quotation Information for CQS Securities
July 9, 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 June 21,
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
The NASD proposes to amend NASD Rule 6630, formerly Section 2 of
Part VI of Schedule D to the NASD By-Laws, to require NASD members
registered with The Nasdaq Stock Market, Inc. (``Nasdaq'') as
Consolidated Quotation Service \1\ (``CQS Service'' or ``CQS'') market
makers to have available in close proximity to the Nasdaq terminals at
which they make markets in CQS securities a quotation service that
disseminates the bid prices and offer prices then being furnished by or
on behalf of all exchanges and CQS market makers in the CQS issues for
which they are registered. (Additions are in italic; deletions are
bracketed.)
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\1\ CQS is Nasdaq's service that provide subscribers with
quotation, last sale, and volume information for securities listed
on the New York and American Stock Exchanges. With respect to
quotations, the Service provides a non-dynamically-updated montage
of quotations from all exchanges and NASD members registered as CQS
market makers in a particular issue.
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NASD Rule 6330 Obligations of CQS Market Makers
(a)-(c). No change.
(d) A CQS market maker shall be obligated to have available in
close proximity to the Nasdaq terminal at which it makes a market in a
CQS security a quotation service that disseminates the bid price and
offer price then being furnished by or on behalf of all exchanges and
CQS market makers trading and quoting that CQS security.
* * * * *
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 NASD is proposing to amend NASD Rule 6330,\2\ the NASD's rule
governing CQS market maker obligations, to provide that a CQS market
maker must have available, in close proximity to the Nasdaq terminal at
which it makes a market in a CQS security, a quotation service that
disseminates the bid price and offer
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price then being furnished by or on behalf of all exchanges and CQS
market makers trading and quoting that CQS security.\3\ As discussed in
more detail below, this proposed rule change is necessitated by a
planned modification to CQS by Nasdaq that will substantially augment
Nasdaq's computer processing capacity. Specifically, Nasdaq is planning
to modify CQS so that quotation montages for exchange-listed securities
will consist only of CQS market makers' quotations.
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\2\ NASD Rule 6330 was formerly Section 2 of Part VI of Schedule
D to the NASD By-Laws prior to the revision of the NASD Manual.
\3\ An NASD member cannot enter quotes into CQS unless it is
registered with Nasdaq as a CQS market maker. CQS market makers are
obligated under NASD rules to quote continuous, firm, two-sided
markets with a minimum size of 500 shares. The minimum quotation
size for an individual CQS Security may be lowered, under unique
circumstances, from 500 shares to 200 shares by the NASD. All CQS
market makers in Rule 19c-3 securities must also be registered with
Nasdaq as ITS/CAES market makers and CAES market makers. ITS/CAES is
the Nasdaq's link to the Intermarket Trading System (``ITS'') that
enables CQS Market Makers in Rule 19c-3 securities to direct agency
and principal orders to and receive orders from the floors of
participating ITS exchanges. CAES is an automated system operated by
Nasdaq that allows NASD members to direct agency and principal
orders in exchange-listed securities to CAES for automatic execution
against CQS market makers. For non-19c-3 securities, CQS market
makers must be registered as CAES market makers.
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The planned modification to CQS reflects Nasdaq's strategic
decision to enhance its computer processing capacity in an efficient
and cost-effective manner by withdrawing from the business of vending
quotation information in exchange-listed securities. By eliminating
exchange quotations from CQS, Nasdaq will be able to redeploy its
computer processing capacity presently devoted to processing these
quotations toward meeting the demands associated with processing Nasdaq
trading volume greater than one billion shares a day.\4\ Once exchange
quotations have been deleted from CQS, CQS will essentially function as
a means by which CQS market makers can monitor their current quotations
resident in Nasdaq's computers as well as the timeliness with which
their quotation updates are being processed and disseminated by Nasdaq.
Thus, rather than providing quotation information to a broad spectrum
of market participants, CQS will function primarily as a quotation
verification mechanism for CQS market makers.
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\4\ In order to provide exchange quotations through CQS, Nasdaq
receives and processes a feed of quotation and last sale information
from the Securities Information Automation Corporation (``SIAC'').
Thus, at present, Nasdaq computers are not only processing all
quotation updates in Nasdaq-listed securities, but also all
quotation updates in exchange-listed securities. The demands on
Nasdaq system capacity to process exchange quotation updates are
also exacerbated because of the regional exchanges' use of auto-
quoting programs. In fact, at times, the processing of exchange
quotations through CQS can consume approximately 40 percent of
Nasdaq's computer capacity on a given day.
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Under Section 6(a)(i)(A) of the ITS Plan, however, the NASD has
agreed that ``for each ITS/CAES security in which an ITS/CAES Market
Maker is registered as such with the NASD for the purposes of the
Applications [of the ITS Plan], there shall be available at each
location on the premises of such ITS/CAES Market Maker at which ITS/
CAES stations are located a quotation service that disseminates the bid
price and offer price then being furnished by or on behalf of each
other Participant.'' Accordingly, since Nasdaq is planning to eliminate
exchange quotations from CQS quotation montages, the NASD is submitting
this rule proposal to ensure the NASD's ongoing compliance with Section
6(a)(i)(A) of the ITS Plan. In particular, by mandating that all CQS
market makers have available, in close proximity to the Nasdaq
terminals at which they make markets in CQS securities, the same
exchange quotation information that is scheduled to be deleted from CQS
(i.e., exchange quotes in CQS issues), the NASD will be continuing to
satisfy its obligation under section 6(a)(i)(A) of the ITS Plan.\5\
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\5\ Because Nasdaq must adhere to the requirements of the SEC's
Vendor Display Rule, Rule 11Ac1-2 under the Act, which requires,
among other things, that vendors may not exclude quotation
information based on the market center making available such
information, Nasdaq also has submitted a request, pursuant to
paragraph (g) of the Vendor Display Rule, for an exemption from the
Rule to facilitate the planned modification to CQS. See letter from
Robert E. Aber, Vice President & General Counsel, Nasdaq, to Howard
L. Kramer, Associate Director, Division of Market Regulation, SEC,
dated June 21, 1996.
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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 associated 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, because of the increase in Nasdaq's processing
capacity that would result from the deletion of exchange quotations
from CQS, the NASD and Nasdaq believe the planned modification to CQS
is consistent with the protection of investors, the maintenance of fair
and orderly markets, and the preservation of the integrity of the
Nasdaq market. At the same time, the NASD and Nasdaq do not believe
eliminating exchange quotes from CQS will contribute to unfair
competition among ITS Participant Markets or compromise the best
executive of customer orders. Because CQS quotations are not updated
dynamically, market participants rely on other vendor services for
quotation and last-sale information on exchange-listed securities.
These other vendor services provide the same information as CQS in a
dynamic fashion, often with additional analytical features and the
ability to customize the presentation of such information. As a result,
CQS is principally only subscribed to by CQS market makers, and even
then only to monitor their quotes. Thus, the NASD and Nasdaq do not
believe that deleting exchange quotes from CQS will jeopardize the
ability of financial intermediaries to obtain best execution for their
customers' orders or the ability of customers to monitor the quality of
the executions they receive. In addition, because CQS market makers
will be required by the instant rule proposal to display in close
proximity to their Nasdaq terminals montages of all exchange and CQS
market maker quotes in the CQS issues for which they are registered,
the NASD and Nasdaq do not believe any ITS Participant Market will be
adversely affected by the planned modification to CQS. In addition, the
NASD, NASD Regulation, Inc., and Nasdaq do not believe that eliminating
exchange quotations from CQS will compromise the NASD's ability to
surveil trading in the third market. This is because NASDR's Market
Regulation Department already receives market information concerning
exchange-listed securities from securities information vendors.
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
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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, 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 in the caption
above and should be submitted by August 5, 1996.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\6\
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\6\ 17 CFR 200.30-3(a)(12) (1989).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-17930 Filed 7-12-96; 8:45 am]
BILLING CODE 8010-01-M