[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

[[Page 36948]]

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

[[Page 36949]]

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