[Federal Register Volume 62, Number 80 (Friday, April 25, 1997)]
[Notices]
[Pages 20233-20235]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10761]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38531; File No. SR-NASD-97-27]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change by the National Association of Securities Dealers, Inc. To 
Decrease the Minimum Quotation Increment for Certain Securities Listed 
and Traded on the Nasdaq Stock Market to \1/16\th of $1.00

April 21, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 18, 1997, the 
National Association of Securities Dealers, Inc. (``NASD'' or 
``Association'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the self-
regulatory organization. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. Sec. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Nasdaq Stock Market, Inc. (``Nasdaq'') proposes to modify a 
system parameter for its automated quotation system that reduces the 
minimum quotation increment for Nasdaq-listed securities priced equal 
to or greater than $10.00 from \1/8\ of $1.00 to \1/16\ of $1.00.

[[Page 20234]]

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 self-regulatory organization 
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 self-regulatory organization 
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

1. Purpose
    Presently, Nasdaq's automated quotation system is configured so 
that a market maker or electronic communications network (``ECN'') can 
only enter a quote for a particular security in an increment of \1/8\ 
of $1 if the market maker's bid price in that security is equal to or 
greater than $10. If the market maker's bid is less than $10, it may 
enter quotes in increments of \1/32\ of $1. With this rule filing, 
Nasdaq seeks approval of a modification to this system parameter that 
provides that if a market maker's or ECN's bid price for a particular 
Nasdaq security is equal to or greater than $10, such market maker or 
ECN could enter quotations in that security in increments of \1/16\ of 
$1 or larger. As of March 31, 1997, there were 2,714 Nasdaq securities 
(43.2% of all Nasdaq securities) priced equal to or greater than $10. 
These securities represent 90% of the capitalization of the Nasdaq 
market and 68.6% of the share volume in Nasdaq. Nasdaq also notes that 
98.7% of all trades in Nasdaq securities priced equal to or greater 
than $10 occur in increments equal to or greater than \1/16\th and 
98.5% of all share volume in such securities occurs in increments equal 
to or larger than \1/16\th. As a result, with this proposal, only a 
very small percentage of Nasdaq trades will be effected at a price 
increment finer than the minimum quotation increment. Accordingly, 
Nasdaq believes the benefits to investors resulting from the proposal 
will be very profound and significant.
    Specifically, by enabling Nasdaq market makers and investors to 
display their trading interests in Nasdaq securities in increments as 
small as \1/16\ of $1.00, Nasdaq believes the proposal will enhance the 
transparency of the Nasdaq market, provide investors with a greater 
opportunity to receive better execution prices, facilitate greater 
quote competition, promote the price discovery process for Nasdaq 
securities, contribute to narrower spreads, and enhance the capital 
formation process.\2\ Moreover, Nasdaq believes that the proposed rule 
change is wholly consistent with, and in furtherance of, the important 
investor protection goals underlying the Order Execution Rules.\3\
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    \2\ While Nasdaq is proposing to narrow the minimum quotation 
increment to \1/16\ of $1.00 for Nasdaq securities with an inside 
bid price equal to or greater than $10, Nasdaq is taking no position 
at this time as to whether quotations in Nasdaq securities should be 
expressed in decimals. As always, Nasdaq is supportive of any 
regulatory initiative that would promote the protection of 
investors. With respect to decimalization, however, Nasdaq does not 
believe that enough data and analysis exist concerning 
decimalization to enable the NASD and Nasdaq to conclude that 
decimalization will or will not be, on balance, beneficial to 
investors, to issuers, and to the integrity of the Nasdaq market. 
Accordingly, NASD staff has commenced an analysis of the costs and 
benefits that would be involved in a shift to decimalization. In 
addition, in order to be prepared should decimal quoting prove 
beneficial to investors, Nasdaq is presently moving toward the 
technological capability to quote in decimals.
    \3\ On August 28, 1996, the Commission adopted Rule 11Ac1-4, the 
``Limit Order Display Rule,'' and amendments to Rule 11Ac1-1, the 
``ECN Rule,'' to require over-the-counter (``OTC'') market makers 
and exchange specialists to display certain customer limit orders, 
and to publicly disseminate the best prices that the OTC market 
maker or exchange specialist has placed in certain ECNs, or to 
comply indirectly with the ECN Amendment by using an ECN that 
furnishes the best market maker and specialist prices therein to the 
public quotation system (collectively, the ``Order Execution Rules'' 
or the ``Rules''). See Securities Exchange Act Release No. 37619A 
(Sept. 6, 1996), 61 FR 48290 (Sept. 12, 1996).
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    Specifically, whereas today customer limit orders and orders 
entered into ECNs priced in sixteenths are rounded to the nearest 
eighth for public display,\4\ under Nasdaq's proposal, all such orders 
would be publicly displayed at their actual price. By displaying such 
orders at their actual prices, Nasdaq believes the already substantial 
benefits provided by implementation of the Order Execution Rules will 
be commensurately increased. In particular, the NASD's analysis of the 
markets for the first 150 Nasdaq stocks subject to the SEC's Order 
Execution Rules shows that: \5\
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    \4\ In particular, orders to buy (sell) are rounded down (up) to 
the nearest eighth.
    \5\ Statistics concerning the first 150 Nasdaq stocks subject to 
the Order Execution Rules reflect a comparison of the markets for 
these securities for the 20 trading days before January 20, 1997 and 
the 24 trading days after February 24, 1997.
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     Quoted spreads have narrowed 32.3%; \6\ effective spreads 
have narrowed 24.6%; and actual dollar spreads have narrowed 31.8%.\7\
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    \6\ A quoted spread is the difference between the inside bid and 
ask. The individual dollar spreads used to calculate the average for 
a given stock are weighted by the amount of time each spread was in 
effect for the day, i.e., the spread's duration.
    \7\ An effective spread is measured by taking the absolute 
difference between a transaction price and the bid-ask midpoint, 
multiplied by two. Each effective spread is weighted by the share 
volume of the associated transaction. An actual spread is measured 
by taking the transaction price minus the bid-ask midpoint for 
market maker sells, and the bid-ask midpoint minus the transaction 
price for market maker buys. The figure is multiplied by two to 
compare the quoted spread, and the average is volume-weighted.
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     Average dealer spreads have narrowed 3.8%.
     The amount of time the inside spread was equal to an 
eighth increased 104.9%, meaning that quoted spreads in these stocks 
were equal to their narrowest quote increment 47.8% of the time. In 
addition, inside spreads were equal to or less than a quarter 77.1% of 
the time.
     The average number of market makers per stock has 
increased 5.6%, or 1.1 market makers per stock.
     The maximum quoted depth of any single market maker at the 
inside bid or offer has increased 37.2%.
     There has been a noticeable increase in the number of 
quotation updates greater than 1,000 shares. Before implementation of 
the Actual Size Rule, market makers virtually never displayed sizes 
greater than 1,000 shares. Since the Rule has been in effect, 6.3% of 
all market maker quote updates have been for greater than 1,000 shares.
    Nasdaq believes that increasing the transparency of orders priced 
in sixteenths will augment the already substantial benefits to 
investors brought about by the Order Execution Rules. Nasdaq also 
believes it is particularly appropriate to narrow the quotation 
increment for Nasdaq securities priced equal to or above $10 in light 
of the SEC's announcement to accelerate the phase-in of the Order 
Execution Rules.\8\
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    \8\ See Securities Exchange Act Release No. 38490 (Apr. 9, 
1997), 62 FR 18514 (Apr. 16, 1997).
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2. Statutory Basis
    For the reasons noted above, Nasdaq believes the proposed rule 
change is consistent with Sections 11A(a)(1)(C), 15A(b)(6), 15A(b)(9), 
15A(b)(11) and of the Act.\9\ Section 11A(a)(1)(C) provides that it is 
in the public interest to, among other things, ensure the economically 
efficient execution of securities transactions and ensure that 
information with respect to quotations for, and transactions in, 
securities is available to brokers, dealers, and investors.\10\ Section 
15A(b)(6) requires that the rules

[[Page 20235]]

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.\11\ Section 15A(b)(9) 
requires that the rules of the Association not impose any burden on 
competition not necessary or appropriate in furtherance of the purposes 
of the Act.\12\ Section 15A(b)(11) requires the NASD to, among other 
things, formulate rules designed to produce fair and informative 
quotations.\13\ Nasdaq also notes that the proposed rule change is 
consistent with statements made by the Commission in its approval order 
for the Order Execution Rules and by the Commission's Division of 
Market Regulation in its Market 2000 Study.\14\
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    \9\ 15 U.S.C. Secs. 78k-1(a)(1)(C), 78o-3(b)(6), 78o-3(b)(9), 
78o-3(b)(11).
    \10\ 15 U.S.C. Sec. 78k-1(a)(1)(C).
    \11\ 15 U.S.C. Sec. 78o-3(b)(6).
    \12\ 15 U.S.C. Sec. 78o-3(b)(9).
    \13\ 15 U.S.C. Sec. 78o-3(b)(11).
    \14\ See Order Execution Rules Approval Order, supra note 3, at 
61 FR 48315 n.282; SEC, Division of Market Regulation, Market 2000: 
An Examination of Current Equity Market Developments 18 (Jan. 1994).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq believes 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

    The Association has neither solicited nor received written 
comments.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the 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 date 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 the 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, NW., Washington, DC 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. Sec. 552, will be available for inspection and copying at 
the Commission's Public Reference Room, 450 Fifth Street, NW., 
Washington, DC 20549. Also, copies of such filing will be available for 
inspection and copying at the principal office of the NASD. All 
submissions should refer to File No. SR-NASD-97-27 and should be 
submitted by May 16, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 C.F.R. 200.30-3(a)(12).
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Margaret M. McFarland,
Deputy Secretary.
[FR Doc. 97-10761 Filed 4-24-97; 8:45 am]
BILLING CODE 8010-01-M