[Federal Register Volume 63, Number 6 (Friday, January 9, 1998)]
[Notices]
[Pages 1515-1517]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-497]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39505; 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., the Boston Stock Exchange, Inc., the Chicago Stock 
Exchange, Inc. and the Philadelphia Stock Exchange, Inc.

December 31, 1997.

I. Introduction

    On December 30, 1997, the National Association of Securities 
Dealers, Inc. (``NASD''), on behalf of itself and the Boston Stock 
Exchange, Inc. (``BSE''), the Chicago Stock Exchange, Inc. (``CHX''), 
and the Philadelphia Stock Exchange, Inc. (``Phlx'') submitted to the 
Securities and Exchange Commission (``Commission'' or ``SEC'') a 
proposal to extend the operation of a joint transaction reporting plan 
(``Plan'') \1\ for Nasdaq/National Market (``Nasdaq/NM'') (previously 
referred to as Nasdaq/NMS) securities traded on an exchange on an 
unlisted or listed basis.\2\ The proposal would extend the 
effectiveness of the Plan, as amended by Revised Amendment No. 9, as 
defined in footnote 3, through June 30, 1998.\3\ The

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Commission also is extending certain exemptive relief as described 
below. The December 1997 Extension Request also requests that the 
Commission approve the Plan, as amended, on a permanent basis on or 
before June 30, 1998. 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\ See Letter from Robert E. Aber, Vice President and General 
Counsel, Nasdaq, to Jonathan G. Katz, Secretary, Commission, dated 
December 30, 1997 (``December 1997 Extension Request''). The 
December 1997 Extension Request also requests the Commission 
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, as amended 
(``Act''). 15 U.S.C. 78a et seq. The signatories to the Plan are the 
Participants for purposes of this release, however, the BSE joined 
the Plan as a ``limited participant'' and reports quotation 
information and transaction reports only in Nasdaq/NM securities 
listed on the BSE. Originally, the American Stock Exchange, Inc. 
(``Amex'') was a participant but withdrew its participation from the 
Plan in August 1994.
    \2\ 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 the Section 
12(f) requirement, see November 1995 Extension Order, infra note 8.
    \3\ On March 18, 1996, the Commission solicited comment on a 
revenue sharing agreement among the Participants. See March 1996 
Extension Order, infra note 8. 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 G. Katz, 
Secretary, Commission, dated September 13, 1996. See also September 
1996 Extension Order, infra note 8.
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II. Background

    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.\4\ 
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. The Commission originally 
approved the Plan on June 26, 1990.\5\ Accordingly, the pilot period 
commenced on July 12, 1993 and was scheduled to expire on July 12, 
1994.\6\ The Plan has since been in operation on an extended pilot 
basis.\7\
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    \4\ See Section 12(f)(2) of the Act.
    \5\ See Securities Exchange Act Release No. 28146 (June 26, 
1990), 55 FR 27917 (July 6, 1990) (``1990 Plan Approval Order'').
    \6\ See letter from David T. Rusoff, Foley & Lardner, to Betsy 
Prout, Division of Market Regulation (``Division''), SEC, dated May 
9, 1994.
    \7\ See Securities Exchange Act Release No. 34371 (July 13, 
1994), 59 FR 37103 (July 20, 1994); Securities Exchange Act Release 
No. 35221 (January 11, 1995), 60 FR 3886 (January 19, 1995); 
Securities Exchange Act Release No. 36102 (August 14, 1995), 60 FR 
43626 (August 22, 1995); Securities Exchange Act Release No. 36226 
(September 13, 1995), 60 FR 49029 (September 21, 1995); Securities 
Exchange Act Release No. 36368 (October 13, 1995), 60 FR 54091 
(October 19, 1995); Securities Exchange Act Release No. 36481 
(November 13, 1995), 60 FR 58119 (November 24, 1995) (``November 
1995 Extension Order''); Securities Exchange Act Release No. 36589 
(December 13, 1995), 60 65696 (December 20); Securities Exchange Act 
Release No. 36650 (December 28, 1995), 61 FR 358 (January 4, 1996); 
Securities Exchange Act Release No. 36934 (March 6, 1996), 61 FR 
10408 (March 13, 1996); Securities Exchange Act Release No. 36985 
(March 18, 1996), 61 FR 12122 (March 25, 1996 (``March 18, 1996 
Extension Order''); Securities Exchange Act Release No. 37689 
(September 16, 1996), 61 FR 50058 (September 24, 1996) (``September 
1996 Extension order''); Securities Exchange Act Release No. 37772 
(October 1, 1996), 61 FR 52980 (October 9, 1996); Securities 
Exchange Act Release No. 38457 (March, 31 1997), 62 FR 16880 (April 
8, 1997); Securities Exchange Act Release No. 38794 (June 30, 1997) 
62 FR 36586 (July 8, 1997).
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III. Description of the Plan

    The 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.'' \8\ 
The Plan contains various provisions concerning its operation, 
including: 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 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 
Best Bid and Offer (``BBO''); Dispute Resolution; and Method of 
Determination and Imposition, and Amount of, Fees and Charges.\9\
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    \8\ The Plan defines ``eligible security'' as any Nasdaq/NM 
security as to which unlisted trading privileges have been granted 
to a national securities exchange pursuant to Section 12(f) of the 
Act or which is listed on a national securities exchange.
    \9\ 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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IV. Exemptive Relief

    In conjunction with the Plan, on a temporary basis scheduled to 
expire on December 31, 1997, the Commission granted an exemption to 
vendors from Rule 11Ac1-2 under the Act regarding the calculation of 
the BBO \10\ 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. 
As discussed further below in the Summary of Comments, the Participants 
request in the December 1997 Extension Request that the Commission 
grant an extension of the exemptive relief described above to vendors 
until the BBO calculation issue is resolved. Additionally, in the 
December 1997 Extension Request, the Participants also request that the 
Commission grant an extension of the exemptive relief described above 
to the BSE for as long as the BSE is a Limited Participant under the 
Plan.
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    \10\ Rule 11Ac1-2 under the Act requires that the best bid or 
best offer be computed on a price/size/time algorithm in certain 
circumstances. Specifically, Rule 11Ac1-2 under the Act provides 
that ``in the event two or more reporting market centers make 
available identical bids or offers for a reported security, the best 
bid or offer * * * shall be computed by ranking all such identical 
bids or offers * * *  first by size * * * then by time.'' The 
exemption permits vendors to display the BBO for Nasdaq securities 
subject to the Plan on a price/time/size basis.
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V. Summary of Comments

    In the June 1997 Extension Order, the Commission requested comment 
on the following issues: 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; whether there is a need 
for an intermarket linkage for order routing and execution; and whether 
there is a need for a trade through rule. With respect to the BBO 
calculation issue, the Nasdaq Board approved a recommendation to modify 
the methodology for calculating the BBO on Nasdaq in order 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. In furtherance of this goal, on October 
29, 1997, the Commission approved an NASD proposal to extend and expand 
the ``Actual Size Rule'' \11\ to a total of 150 securities from 100 
securities.\12\ In addition, the NASD has submitted a proposed rule 
change to establish an integrated order delivery and execution system 
for directed orders and non-directed orders.\13\
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    \11\ See Securities and Exchange Act Release No. 39285 (October 
29, 1997), 62 FR 59932 (November 5, 1997).
    \12\ See Securities Exchange Release No. 38513 (April 15, 1997), 
62 FR 19369 (April 21, 1997). Under the Actual Size Rule, market 
makers in certain Nasdaq securities are subject to a minimum 
quotation size requirement of 100 shares instead of the applicable 
small order execution system (``SOES'') tier size for that security.
    \13\ SR-NASD-97-93, filed December 19, 1997. Directed orders are 
those that an order-entry firm chooses to send to a specific market 
maker, electronic communications network (``ECN'') or UTP exchange 
for delivery and execution, Non-directed orders are those that are 
not sent to a particular market maker or ECN. In other words, when 
the broker-dealer entering the order does not specify the particular 
market maker, ECN or UTP exchange it wants to access, the order will 
be sent to the next available executing participant quoting at the 
best price displayed in Nasdaq.
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    With respect to the intermarket linkage issue, the Nasdaq Board 
approved a recommendation to provide specialists on an exchange trading 
Nasdaq securities on a UTP basis access to SOES, or its successor 
system, to the same extent that registered Nasdaq market makers have 
access to SOES, provided that: Nasdaq market makers are afforded 
virtually identical access to the automated execution system operated 
by such UTP exchange and the

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order execution algorithms of the exchange's automated execution system 
are virtually identical to SOES or its successor system.
    In addition, in early 1998 the CHX intends to replace its existing 
system and begin using a system commonly known as BRASS, developed by 
Automated Securities Clearance, Limited (``ASC''), in order to access 
securities subject to the Plan. BRASS is a trade support and order 
routing system which offers subscribers, generally broker-dealers, 
software and hardware to enable them to perform various functions. ASC 
grants its subscribers a license to operate the BRASS software through 
a customized computer terminal purchased from ASC or by running the 
BRASS software on their own terminals. In the case of the CHX, ASC has 
specifically customized BRASS to meet the special needs of the CHX. 
Among other things, Nasdaq market makers that already subscribe to 
BRASS will be able to route OTC/UTP orders to specialists on the CHX 
floor through a SelectNet linkage with BRASS workstations on the CHX 
floor. Conversely, CHX specialists will be able to route orders into 
SelectNet through their BRASS workstations.\14\ The Commission notes 
that ASC will be subject to the Commission's inspection and examination 
procedures with regards to the specific customized BRASS system that 
ASC will provide to the CHX because ASC will be operating a facility of 
an exchange.
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    \14\ See December 1997 Extension Request and Letter from George 
T. Simon, Foley & Lardner to Howard L. Kramer, Senior Associate 
Director, Division, SEC, dated December 12, 1997 (``CHX Letter'').
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    With respect to the need for a trade through rule, the NASD 
continues to maintain in the December 1997 Extension Request that it 
would be more appropriate to address this issue once the issue of 
electronic access to Nasdaq market makers' quotes has been resolved. 
The CHX, however, believes that a trade through rule is currently 
necessary.\15\
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    \15\ See CHX Letter id.
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    The Commission continues to solicit comment regarding the BBO 
calculation and the trade through rule and also solicits comment on the 
CHX's use of the BRASS system.

VI. Discussion

    The Commission finds that an extension of temporary approval of the 
operation of the Plan, as amended, through June 30, 1998, is 
appropriate and in furtherance of Section 11A of the Act. The 
Commission believes that such extension will provide the Participants 
with additional time to seek Commission approval of pending proposals 
concerning the BBO calculation \16\ and to begin to make reasonable 
proposals concerning a 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 
March 31, 1998 so that the Commission may have ample time to determine 
whether to approve the Plan on a permanent basis by June 30, 1998.
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    \16\ See e.g., SR-NASD-97-93, supra note 12.
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    The Commission also finds that it is appropriate to extend the 
exemptive relief from Rule 11Ac1-2 under the Act until the earlier of 
June 30, 1998 or until such time as the calculation methodology for the 
BBO is based on a price/size/time algorithm pursuant to a 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 June 30, 1998. 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 and11Aa3-2 
thereunder.

VII. 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, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed plan amendment that are filed 
with the Commission and all written communications relating to the 
proposed plan amendment 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 January 
30, 1998.

VIII. Conclusion

    It is therefore ordered, pursuant to Sections 12(f) and 11A of the 
Act and paragraph (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 
June 30, 1998, and certain exemptive relief until June 30, 1998, is 
approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-497 Filed 1-8-98; 8:45 am]
BILLING CODE 8010-01--M