[Federal Register Volume 62, Number 130 (Tuesday, July 8, 1997)]
[Notices]
[Pages 36586-36587]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-17670]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38793; File No. S7-24-89]


Joint Industry Plan; Solicitation of Comments and Order Approving 
Request to Extend Temporary Effectiveness of Reporting Plan for Nasdaq/
National Market Securities Traded on an Exchange on an Unlisted or 
Listed Basis, Submitted by the National Association of Securities 
Dealers, Inc., and the Boston, Chicago and Philadelphia Stock Exchanges

June 30, 1997.
    On June 30, 1997, the National Association of Securities Dealers, 
Inc., on behalf of itself and the Boston, Chicago, and Philadelphia 
Stock Exchanges (collectively, ``Participants'') \1\ submitted to the 
Commission a proposal \2\ to extend the operation of a joint 
transaction reporting plan (``Plan'') for Nasdaq/National Market 
(``Nasdaq/NM'') securities traded on an exchange on an unlisted or 
listed basis.\3\ The proposal would extend the effectiveness of the 
Plan, as amended by revised Amendment No. 9,\4\ through December 31, 
1997. The Commission also is extending certain exemptive relief as 
discussed below. The June 1997 Extension Request also requests that the 
Commission approve the Plan, as amended, on a permanent basis on or 
before December 31, 1997.\5\ The Commission is approving the proposed 
amendment to the Plan insofar as the proposal requests an extension of 
the effectiveness of the Plan. During the six-month extension of the 
Plan, the Commission will determine whether to approve the proposed 
Plan, as amended, on a permanent basis.
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    \1\ The signatories to the Plan, i.e., the National Association 
of Securities Dealers, Inc. (``NASD''), and the Chicago Stock 
Exchange, Inc. (``Chx'') (previously, the Midwest Stock Exchange, 
Inc.), Philadelphia Stock Exchange, Inc. (``Phlx''), and the Boston 
Stock Exchange, Inc. (``BSE''), are the ``Participants.'' The BSE, 
however, joined the Plan as a ``Limited Participant,'' and reports 
quotation information and transaction reports only in Nasdaq/NM 
(previously referred to as ``Nasdaq/NMS'') securities listed on the 
BSE. Originally, the American Stock Exchange, Inc. (``Amex''), was a 
Participant to the Plan, and withdrew from participation in the Plan 
in August 1994.
    \2\ See letter from Robert E. Aber, Nasdaq, to Jonathan G. Katz, 
Secretary, Commission, dated June 27, 1997 (``June 1997 Extension 
Request''). The June 27, 1997 Extension Request also requests the 
Commission to continue to provide exemptive relief, previously 
granted in connection with the Plan on a temporary basis, from Rules 
11Ac1-2 and 11Aa3-1 under the Securities Exchange Act of 1934 
(``Act''). Id.
    \3\ Section 12 of the Act generally requires an exchange to 
trade only those securities that the exchange lists, except that 
Section 12(f) of the Act permits unlisted trading privileges 
(``UTP'') under certain circumstances. For example, Section 12(f), 
among other things, permits exchanges to trade certain securities 
that are traded over-the-counter (``OTC/UTP''), but only pursuant to 
a Commission order or rule. The present order fulfills this Section 
12(f) requirement. For a more complete discussion of this Section 
12(f) requirement, see November 1995 Extension Order, infra note 9, 
at n. 2.
    \4\ On March 18, 1996, the Commission solicited comment on a 
revenue sharing agreement among the Participants. See March 18, 1996 
Extension Order, infra note 9. Thereafter, the Participants 
submitted certain technical revisions to the revenue sharing 
agreement (``revised Amendment No. 9''). See letter from Robert E. 
Aber, Vice President and General Counsel, Nasdaq, to Jonathan Katz, 
Secretary, SEC, dated September 13, 1996. See also September 16, 
1996 Extension Order, infra note 9 (notice and order recognizing 
receipt of revised Amendment No. 9).
    \5\ The Chx and Phlx also request that, commensurate with 
permanent approval of the Plan, the number of Nasdaq/NM securities 
eligible for trading pursuant to the Plan be expanded to include all 
Nasdaq/NM securities. See June 27, 1997 Extension Request, supra 
note 2. See also letter from Robert E. Aber, Vice President and 
General Counsel, Nasdaq, to Jonathan G. Katz, Secretary, Commission, 
dated March 27, 1997 (``March 1997 Extension Request''). The NASD 
states that, while it recognizes the benefits from such an expansion 
in terms of the promotion of competition and protection of 
investors, it believes a wholesale expansion of Nasdaq/UTP-eligible 
securities to include all Nasdaq/NM securities is inseparable from 
an expansion of Nasdaq's Intermarket Trading System (``ITS'')/
Computer Assisted Execution Service (``CAES'') linkage to include 
all exchange-listed securities. Id.
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I. Background

    The Commission originally approved the Plan on June 26, 1990.\6\ 
The Plan governs the collection, consolidation and dissemination of 
quotation and transaction information for Nasdaq/NM securities listed 
on an exchange or traded on an exchange pursuant to a grant of UTP.\7\ 
The Commission approved trading pursuant to the Plan on a one-year 
pilot basis, with the pilot period to commence when transaction 
reporting pursuant to the Plan commenced. Accordingly, the pilot period 
commenced on July 12, 1993, and was scheduled to expire on July 12, 
1994.\8\ The Plan has since been in operation on a pilot basis.\9\
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    \6\ See Securities Exchange Act Release No. 28146 (June 26, 
1990), 55 FR 27917 (``1990 Plan Approval Order'').
    \7\ See Section 12(f)(2) of the Act, supra note 3.
    \8\ See letter from David T. Rusoff, Foley & Lardner, to Betsy 
Prout, SEC, dated May 9, 1994.
    \9\ See Securities Exchange Act Release No. 34371 (July 13, 
1994), 59 FR 37103 (``July 1994 Extension Order''), Securities 
Exchange Act Release No. 35221, (January 11, 1995), 60 FR 3886 
(``January 1995 Extension Order''), Securities Exchange Act Release 
No. 36102 (August 14, 1995), 60 FR 43626 (``August 1995 Extension 
Order''), Securities Exchange Act Release No. 36226 (September 13, 
1995), 60 FR 49029 (``September 1995 Extension Order''), Securities 
Exchange Act Release No. 36368 (October 13, 1995), 60 FR 54091 
(``October 1995 Extension Order''), Securities Exchange Act Release 
No. 36481 (November 13, 1995), 60 FR 58119 (``November 1995 
Extension Order''), Securities Exchange Act Release No. 36589 
(December 13, 1995), 60 FR 65696 (``December 13, 1995 Extension 
Order''), Securities Exchange Act Release No. 36650 (December 28, 
1995), 61 FR 358 (``December 28, 1995 Extension Order''), Securities 
Exchange Act Release No. 36934 (March 6, 1996), 61 FR 10408 (``March 
6, 1996 Extension Order''), Securities Exchange Act Release No. 
36985 (March 18, 1996), 61 FR 12122 (``March 18, 1996 Extension 
Order''), Securities Exchange Act Release No. 37689 (September 16, 
1996), 61 FR 50058 (``September 16, 1996 Extension Order''), 
Securities Exchange Act Release No. 37772 (October 1, 1996), 61 FR 
52980 (``October 1, 1996 Extension Order''), and Securities Exchange 
Act Release No. 38457 (March 31, 1997), 62 FR 16880 (``March 31, 
1997 Extension Order'').
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II. Description of the Plan

    The Joint Industry Plan provides for the collection from Plan 
Participants, and the consolidation and dissemination to vendors, 
subscribers and others of quotation and transaction information in 
``eligible securities.''\10\ The Plan contains various provisions 
concerning the operation of the Plan, which include: Implementation of 
the Plan; Manner of Collecting, Processing, Sequencing, Making 
Available, and Disseminating Last Sale Information; Reporting 
Requirements (including hours of operation); Standards and Methods of 
Ensuring Promptness, Accuracy, and Completeness of Transaction Reports; 
Terms and Conditions of Access; Description of Operation of Facility 
Contemplated by the Plan; Method and Frequency of Processor Evaluation; 
Written Understandings of Agreements Relating to Interpretation of, or 
Participation in, the Plan; Calculation of the BBO; Dispute Resolution; 
Method of Determination and Imposition, and Amount of, Fees and 
Charges.\11\
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    \10\ The Plan defines ``eligible security'' as any Nasdaq/NM 
security (i) as to which unlisted trading privileges have been 
granted to a national securities exchange pursuant to Section 12(f) 
of the Act, or (ii) which is listed on a national securities 
exchange.
    \11\ The full text of the Plan, as well as a ``Concept Paper'' 
describing the requirements of the Plan, are contained in the 
original filing which is available for inspection and copying in the 
Commission's Public Reference Room.
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III. Exemptive Relief

    In conjunction with the Plan, on a temporary basis scheduled to 
expire on June 30, 1997, the Commission granted an exemption to vendors 
from Rule 11Ac1-2 under the Act regarding the calculation of the Best 
Bid and Offer (``BBO''), and granted the BSE an exemption from the 
provision of Rule 11Aa3-1 under the Act that requires transaction 
reporting plans to include market identifiers for transaction reports 
and last sale data. In the June 1997 Extension Request, the 
Participants request that the Commission grant an extension of the 
exemptive relief described above to vendors until such time as the 
calculation methodology for the BBO is based on a price/size/time

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algorithm. In the June 1997 Extension Request, the Participants also 
request that the Commission grant an extension of the exemptive relief 
described above to the BSE for so long as the BSE is a Limited 
Participant under the Plan.

IV. Summary of Comments

    In response to the Commission's request for comment on the 
aforementioned issues, the Board of Directors of The Nasdaq Stock 
Market, Inc. (``Nasdaq'') approved two recommendations at its meeting 
on March 25, 1997 as set forth below.\12\ These recommendations were 
subsequently ratified by the Board of Governors of the NASD at its 
meeting on April 10, 1997.\13\ With respect to the BBO calculation 
issue, the Nasdaq Board approved a recommendation to modify the 
methodology for calculating the BBO on Nasdaq to prioritize quotes 
based on a price/size/time algorithm instead of the current price/time/
size algorithm, provided that Nasdaq market makers are subject to a 
minimum quote size requirement of 100 shares for at least 1,000 Nasdaq 
securities.\14\ With respect to the intermarket linkage issue, the 
Nasdaq Board approved a recommendation to provide specialists on an 
exchange trading Nasdaq securities on an UTP basis access to Nasdaq's 
Small Order Execution System (``SOES''), or its successor system, to 
the same extent that registered Nasdaq market makers have access to 
SOES, provided that (1) Nasdaq market makers are afforded virtually 
identical access to the automated execution system operated by such UTP 
exchange, and (2) the order execution algorithms of the exchange's 
automated execution system are virtually identical to SOES's or its 
successor system.\15\
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    \12\ See June 1997 Extension Request, supra note 2. See also 
March 1997 Extension Request, supra note 5.
    \13\ See June 1997 Extension Request, supra note 2.
    \14\ See June 1997 Extension Request, supra note 2. See also 
March 1997 Extension Request, supra note 5. In the event that Nasdaq 
develops the technological capability to afford market makers 
simultaneous electronic access to all market maker quotes at the 
same price level, the Nasdaq Board believes that the methodology 
used to determine the quoted size of the Nasdaq market must be 
reconsidered to accommodate reflection of the fully accessible size 
displayed on Nasdaq. Id.
    NASD Rule 4613(a)(1)(C) allows market makers to reduce their 
minimum quotation size from 1000 to 100 shares in the first fifty 
Nasdaq securities subject to the Commission's Limit Order Display 
Rule. See Securities Exchange Act Release No. 38512 (April 15, 
1997), 62 FR 38512 (April 21, 1997). The NASD has proposed that the 
Rule be expanded to apply to 100 additional Nasdaq securities. See 
Securities Exchange Act Release No. 38513 (April 15, 1997), 62 FR 
19369 (April 21, 1997).
    \15\ Id.
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    The Commission continues to solicit comment on (1) whether the BBO 
calculation for securities traded pursuant to the Plan should be based 
on a price/time/size methodology or a price/size/time methodology; (2) 
whether there is a need for an intermarket linkage for order routing 
and execution; and (3) whether there is a need for a trade-through 
rule.\16\
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    \16\ The Commission requests that all comments be submitted no 
later than October 3, 1997 so that the Commission may have adequate 
time to consider all comments prior to December 31, 1997, the date 
by which the Commission intends to determine whether to approve the 
Plan on a permanent basis.
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V. Solicitation of Comment

    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. 552, will be available for inspection and copying at the 
Commission's Public Reference Room. All submissions should refer to 
File No. S7-24-89 and should be submitted by July 29, 1997.

VI. Discussion

    The Commission finds that an extension of temporary approval of the 
operation of the Plan, as amended, through December 31, 1997, is 
appropriate and in furtherance of Section 11A of the Act as it will 
provide the Participants with additional time to make reasonable 
proposals concerning the BBO calculation and whether there is a need 
for an intermarket linkage for order routing and execution and an 
accompanying trade through rule to facilitate the trading of OTC 
securities pursuant to UTP. While the Commission continues to solicit 
comment on these matters, the Commission believes that these matters 
should be addressed directly by the Participants on or before October 
3, 1997 so that the Commission may have ample time to determine whether 
to approve the Plan on a permanent basis by December 31, 1997.
    The Commission further finds that it is appropriate to extend the 
exemptive relief from Rule 11Ac1-2 under the Act until the earlier of 
December 31, 1997 or until such time as the calculation methodology for 
the BBO is based on a price/size/time algorithm pursuant to the 1997 
Extension Request or other mutual agreement among the Participants 
approved by the Commission. The Commission further finds that it is 
appropriate to extend the exemptive relief from Rule 11Aa3-1 under the 
Act, that requires transaction reporting plans to include market 
identifiers for transaction reports and last sale data, to the BSE 
through December 31, 1997. The Commission believes that the extensions 
of the exemptive relief provided to vendors and the BSE, respectively 
are consistent with the Act, the Rules thereunder, and specifically 
with the objectives set forth in Sections 12(f) and 11A of the Act and 
in Rules 11Aa3-1 and 11Aa3-2 thereunder.

VII. Conclusion

    It is therefore ordered, pursuant to Sections 12(f) and 11A of the 
Act and (c)(2) of Rule 11Aa3-2 thereunder, that the Participants' 
request to extend the effectiveness of the Joint Transaction Reporting 
Plan, as amended, for Nasdaq/National Market securities traded on an 
exchange on an unlisted or listed basis through December 31, 1997, and 
certain exemptive relief until such time as the calculation method for 
the BBO is based on a price/size/time algorithm, is approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority, 17 CFR 200.30-3(a)(29).
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-17670 Filed 7-7-97; 8:45 am]
BILLING CODE 8010-01-M