[Federal Register Volume 61, Number 180 (Monday, September 16, 1996)]
[Notices]
[Pages 48725-48726]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-23636]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-37663; File No. SR-NASD-96-26]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to the Obligations of CQS Market Makers To Have Available Quotion 
Services That Provide Quotation Information for CQS Securities

September 10, 1996.
    On June 21, 1996, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') filed with the Securities and 
Exchange Commission (``Commission'' or ``SEC'') a proposed rule change 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ to amend NASD Rule 6630 to require NASD members 
registered with The Nasdaq Stock Market, Inc. (``Nasdaq'') as 
Consolidated Quotation Service (``CQS Service'' or ``CQS'')\2\ market 
makers\3\ 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 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. The Commission published notice of the 
proposed rule change in the Federal Register on July 15, 1996.\4\ The 
Commission received no comments in response to the notice. The 
Commission has reviewed the proposed rule change, and for the reasons 
discussed below, has determined to approve the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1)
    \2\ Nasdaq's CQS is a service provided by Nasdaq that provides 
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. It should be 
noted that Nasdaq's CQS Service is an internal Nasdaq service that 
is a completely separate system from the Consolidated Quotation 
System in which the eight registered securities exchanges and the 
NASD participate to collect, process and disseminate quotations.
    \3\ A 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. ITS/CAES is the NASD'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.
    \4\ Securities Exchange Act Release No. 37412 (July 9, 1996), 61 
FR 36947.
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I. Description of the Proposed Rule Amendment

    The amendment to NASD Rule 6330,\5\ the NASD's rule governing CQS 
market maker obligations, provides 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 price then being furnished by or on behalf of each 
exchange and each CQS market maker trading and quoting that CQS 
security.
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    \5\ 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.
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    The NASD states that this rule amendment is necessitated by a 
planned modification to Nasdaq's CQS Service that is intended to 
increase Nasdaq computer processing capacity. Specifically, Nasdaq is 
planning to modify the Nasdaq CQS Service so that quotation montages 
for exchange-listed securities will consist only of CQS market makers' 
quotations.\6\ CQS market makers will be required to receive quotation 
information for CQS securities from the exchanges via independent 
vendors. The NASD has stated that the use by market makers of vendor 
services for receipt of CQS market data is the norm because quotations 
on the Nasdaq's CQS Service are not dynamically updated. Furthermore, 
vendor services can provide subscribers with additional analytical 
features.
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    \6\ In order to make possible this modification, the Commission 
today issued a letter exempting Nasdaq from the requirements of the 
Rule 11Ac1-2(c)(2)(iv) under the Exchange Act (the ``Vendor Display 
Rule''), which requires, among other things, that vendors not 
exclude quotation information based on the market center making 
available such information. See Letter from Holly H. Smith, 
Associate Director, SEC, to Robert E. Aber, V.P. and General 
Counsel, Nasdaq (September 10, 1996).
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    Nasdaq has represented to the Commission that, by eliminating 
exchange quotations from Nasdaq's CQS Service, it 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.\7\ Once exchange quotations have been deleted from the Nasdaq CQS 
Service, the service will essentially function as a means by which CQS 
market makers can monitor their current quotations resident in Nasdaq 
as well as the timeliness with which their quotation updates are being 
processed and disseminated by Nasdaq. Thus, rather than providing 
quotation information from all market participants in CQS, the Nasdaq 
CQS Service will function primarily as a quotation verification 
mechanism for CQS market makers.
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    \7\ The NASD states that 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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    Section 6(a)(i)(A) of the ITS Plan states 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.'' As a participant in the ITS, 
the NASD has agreed to this provision of the ITS Plan. Accordingly, 
since Nasdaq is planning to eliminate exchange quotations from the 
Nasdaq CQS Service's quotation montages, the proposed amendment ensures 
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 the Nasdaq CQS Service (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.

II. Discussion

    The Commission must determine whether the proposed rule change is 
consistent with the Act, including Section 15A(b)(6). 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

[[Page 48726]]

open market and a national market system and, in general, to protect 
investors and the public interest. Having considered the merits of the 
proposed rule change, the Commission has determined that it is 
consistent with the requirements of the Act, and is therefore approving 
the proposed rule change.
    The Commission believes it is crucial for Nasdaq to be able to 
process transactions should volume exceed one billion shares a day. The 
NASD has determined that it can free up some Nasdaq capacity 
immediately by deleting certain quotation information from Nasdaq's CQS 
Service. In order for CQS market makers to uphold their market making 
responsibilities in exchange-listed stocks, however, the NASD rule 
requires that CQS market makers have a quotation service disseminating 
quotations from exchanges and CQS market markers in close proximity to 
their Nasdaq terminals. This proximity requirement ensures that CQS 
market makers will be capable of viewing exchange quotations and it 
also appears to satisfy the appropriate provisions of the ITS Plan.
    The NASD has represented that neither it nor its subsidiaries 
believe that eliminating exchange quotations from CQS will compromise 
the NASD's ability to monitor trading in the third market. The NASD has 
stated that the NASDR's Market Regulation Department already receives 
market information concerning exchange-listed securities from 
securities information vendors. The Commission also notes that the NASD 
recently entered into a settlement with the Commission that requires 
the NASD to enhance its systems for market surveillance.\8\
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    \8\ Exchange Act Release No. 37538 at 5 (August 8, 1996).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the Act, 
that the proposed rule change SR-NASD-96-26 be, and hereby is, 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-23636 Filed 9-13-96; 8:45 am]
BILLING CODE 8010-01-M