[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