[Federal Register Volume 62, Number 146 (Wednesday, July 30, 1997)]
[Notices]
[Pages 40879-40881]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20047]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38872; File No. SR-NASD-97-26]


Self-Regulatory Organizations; Notice of Amendment to Proposed 
Rule Change by the National Association of Securities Dealers, Inc. 
Relating to an Expansion of the Pilot for the NASD's Rule Permitting 
Market Makers to Display Their Actual Quotation Size

July 24, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''), 15 U.S.C. 78s(b)91), notice is hereby given that on 
July 17, 1997, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') an amendment \1\ to the proposed 
rule change described below. The proposal would allow market makers to 
quote their actual size by reducing the minimum quotation size 
requirement for market makers in certain securities listed on The 
Nasdaq Stock Market (``Nasdaq'') to one normal unit of trading 
(``Actual Size Rule''). The Actual Size Rule presently applies to a 
group of 50 Nasdaq securities on a pilot basis.\2\ The NASD has 
proposed to extend this pilot program to March 27, 1998, and to add an 
additional 100 stocks to the pilot program. The Commission has already 
received comments from many individual investors and other market 
participants on the ongoing pilot. The Commission is publishing this 
notice to solicit comments on the amended proposed rule change from 
interested persons.
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    \1\ See Letter from Robert E. Aber, Vice President and General 
Counsel, The Nasdaq Stock Market, Inc., to Katherine England, 
Assistant Director, Office of Market Supervision, Division of Market 
Regulation, Commission, dated July 17, 1997. The amendment would 
extend the 50 stock pilot from December 31, 1997, to March 27, 1998, 
and expand it to 150 stocks. This amendment corrects a technical 
deficiency in an earlier amendment to expand and extend the 50 stock 
pilot in a similar fashion that was not published for notice and 
comment. See Letter from Robert E. Aber, Vice President and General 
Counsel, The Nasdaq Stock Market, Inc., to Katherine England, 
Assistant Director, Office of Market Supervision, Division of Market 
Regulation, Commission, dated July 10, 1997.
    \2\ The initial approval of the 50 stock pilot program was 
announced in Securities Exchange Act Release No. 38156 (January 10, 
1997), 62 FR 2415 (January 16, 1997). The approval of the extension 
was announced in Securities Exchange Act Release No. 38152 (April 
15, 1997), 62 FR 19373 (April 21, 1997). On July 18, 1997, the 
Commission approved a proposed rule change that extended--but did 
not expand--the 50 stock pilot from July 18, 1997, to December 31, 
1997. Securities Exchange Act Release No. 38851 (July 18, 1997), 62 
FR 39565 (July 23, 1997) (File No. SR-NASD-97-49).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD proposes to amend NASD Rule (a)(1)(C) to allow market 
makers to quote their actual size by reducing the minimum quotation 
size requirement for market makers in certain securities listed on 
Nasdaq to one normal unit of trading. The text of the proposed rule 
change is as follows. (Additions are italicized; deletions are 
bracketed.)
* * * * *

NASD Rule 4613  Character of Quotations

(a) Two-Sided Quotations
    (1) No change.
    (A)-(B) No change.

[[Page 40880]]

    (C) As part of a pilot program implemented by The Nasdaq Stock 
Market, during the period January 20, 1997 through at least [December 
31, 1997] March 27, 1998, a registered market maker in a security 
listed on The Nasdaq Stock Market that became subject to mandatory 
compliance with SEC Rule 11Ac1-4 on [January 20, 1997] or prior to 
February 24, 1997, must display a quotation size for at least one 
normal unit of trading (or a larger multiple thereof) when it is not 
displaying a limit order in compliance with SEC Rule 11Ac1-4, provided, 
however, that a registered market maker may augment its displayed 
quotation size to display limit orders priced at the market maker's 
quotation.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its initial filing with the Commission,\3\ 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.
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    \3\ See Securities Exchange Act Release No. 38513 (April 15, 
1997), 62 FR 19369 (April 21, 1997).
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    On June 3, 1997, the NASD filed with the Commission a report 
containing its economic analysis of the operation of the Actual Size 
Rule for the group of 50 stocks in the pilot, as requested by the 
Commission.\4\ The study examines the effects of the removal of the 
1,000-Share Quote Size Rule on market quality. Several commenters have 
provided their own economic analysis in rebuttal.
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    \4\ A copy of the executive summary of the report is available 
at Nasdaq's World Wide Web site at ``http://www.nasdaq.com''. 
Members of the public may also download a file containing the entire 
report at this site.
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    The NASD's study compares the market quality of pilot stocks with 
the market quality of peer stocks in the next tranche of stocks that 
became subject to the Order Handling Rules, but remained subject to the 
1,000-Share Quote Size Rule. The study: (1) Summarizes the relevant 
academic literature; (2) empirically assesses market quality for both 
groups pre- and post-rule change by examining spread, volatility, 
depth, and liquidity; and (3) examines the use of automatic execution 
systems for the pilot stocks, Nasdaq's Small Order Execution System 
(``SOES''), and some private systems to assess whether investors 
continue to have reasonable access to market maker capital. Copies of 
the report, economic studies, and comment letters are available in the 
Commission's Public Reference room in File No. SR-NASD-97-26.
    The NASD asserts that the evidence analyzed in the study reveals 
that the pilot stocks and non-pilot stocks have experienced virtually 
the same improvements in market quality since implementation of the 
SEC's Order Handling Rules. Specifically, the NASD says that if found 
no statistically significant basis to conclude that the market quality 
of the pilot stocks has been affected as a result of removal of the 
1,000-Share Quote Size Rule. In addition, the NASD found that investors 
in the pilot stocks continue to have substantial and reasonable access 
to market maker capital through both SOES and market makers' 
proprietary automatic execution systems.
    The Commission approved the Actual Size Rule on a pilot basis so 
that the effects of the rule could be assessed. When doing so, the 
Commission stated that it believed that a reduction in the quotation 
size requirement could reduce the risks that market makers must take, 
produce accurate and informative quotations, and encourage market 
makers to maintain competitive prices even in the changing market 
conditions resulting from the Order Execution Rules.
    At the Commission's request, an extension until March 27, 1998, has 
been made to provide the Commission with additional time to evaluate 
the economic studies and review the comments on the NASD's study.
    For the reasons noted above, the NASD believes the proposed rule 
change is consistent with Sections 11A(a)(1)(C), 15A(b)(6), 15A(b)(9), 
and 15A(b)(11) of the Exchange Act. Section 11A(a)(1)(C) provides that 
it is in the public interest to, among other things, assure the 
economically efficient execution of securities transactions and the 
availability to brokers, dealers, and investors of information with 
respect to quotations for and transactions in securities. 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 open market and a national market 
system and in general to protect investors and the public interest. 
Section 15A(b)(9) requires that rules of an Association not impose any 
burden on competition not necessary or appropriate in furtherance of 
the purposes of the Exchange Act. Section 15A(b)(11) requires the NASD 
to, among other things, formulate rules designed to produce fair and 
informative quotations.

A. 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 Exchange Act.

B. 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 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 Jonathan G. Katz, 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 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 file 
number SR-NASD-97-26 and should be submitted by August 20, 1997.


[[Page 40881]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. (17 CFR 200.30-3(a)(12)).
Jonathan G. Katz,
Secretary.
[FR Doc. 97-20047 Filed 7-29-97; 8:45 am]
BILLING CODE 8010-01-M