[Federal Register Volume 63, Number 32 (Wednesday, February 18, 1998)]
[Notices]
[Pages 8242-8244]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-3998]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39637; File No. SR-NASD-98-05]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the National Association of
Securities Dealers, Inc., Relating to Modifications to the Small Order
Execution System
February 10, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on January 28, 1998, the
National Association of Securities Dealers, Inc. (``NASD'' or
``Association'') filed with the Securities and Exchange Commission
(``Commission'') through its wholly owned subsidiary, Nadsaq Stock
Market, Inc. (``Nasdaq''), the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by Nasdaq.
Nasdaq has designated this proposal as one that effects a change in an
existing order-entry or trading system of a self-regulatory
organization under Section 19(b)(3(A) of the Act and Rule 19b-4(e)(5)
thereunder, which renders the rule effective upon the Commission's
receipt of this filing. The Commission is publishing this notice to
solicit comments on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Nasdaq is proposing to amend Rule 4730(b)(10) to address problems
associated with the rejection of orders in the Small Order Execution
System (``SOES'') when there is no market maker at the inside quote.
Below is the text of the proposed rule change. Proposed new language is
in italics; there are no deletions.
4730. Participant Obligations is SOES
(a) No Change.
[[Page 8243]]
(b) Market Makers.
(1)-(9) No Change.
(10) In the event that there are no SOES market makers at the best
bid (offer) disseminated by Nasdaq, market orders to sell (buy) entered
into SOES will be held in queue until executable, or until 90 seconds
has elapsed, after which such orders will be rejected and returned to
their respective order entry firms.
(c) No Change.
* * * * *
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 Nasdaq 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 Nasdaq 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
When the SEC Order Handling Rules were implemented in January of
1997, Nasdaq modified the SOES execution process to reject orders back
to the entering firm when an electronic communications network
(``ECN'') or an unlisted trading privilege (``UTP'') participant was
alone creating the Nasdaq inside quote in a Nasdaq National Market
security.\2\ This was necessary because ECNs were unable, at the time,
to participate in an automatic execution system such as SOES. ECNs
asserted that to do so might expose them to the risk of double
executions, because if an order available through an ECN is also
accessible through SOES, it may be subject to two executions: one from
within the ECN and another from market participants using SOES. This in
turn could cause the ECN to take a principal position, which is
inconsistent with the ECN's role of acting solely as agent on behalf of
its customers.
---------------------------------------------------------------------------
\2\ See Exchange Act Release No. 38156 (January 10, 1997) 62 FR
2415 (January 16, 1997) (order partially approving File No. SR-NASD-
96-43).
---------------------------------------------------------------------------
This has resulted in an unintended consequence, however, which has
caused significant concern. Specifically, an ECN quote that effectively
halts executions in SOES for a security also allows the ECN customer
entering that order to essentially control the inside price and
potentially create an advantage in SOES for this customer (or other
customers using SOES) by jumping ahead of other SOES orders that might
have executed first in that issue if they had not been rejected. This
has become problematic because instances have been observed where the
ECN changes its quote almost immediately, before it can be assessed
through either SelectNet or its own internal system. Once this quote
disappears and a new dealer inside has been established, new SOES
orders enter the system which then execute as the first order against
the first market maker at the new inside price.
Nasdaq plans to implement the following solutions to this potential
problem. When an ECN or UTP participant is alone at the inside in a
Nasdaq National Market security, executable SOES orders that are in
queue or received at that moment will be held for a specified period of
time. This ``hold time,'' initially set at 90 seconds, is the maximum
life of an order. Holding the queued orders for 90 seconds will give
other market makers time to adjust their quotes to create a new inside,
join the ECN at their price, or allow the ECN to move away from the
inside. If one of these conditions is met and the order is still
executable, it will execute. If any of these conditions do not occur,
however, the order will time out, under normal time-out processing, and
be returned to the entering firm at the end of the 90-second maximum
life of the order. Nasdaq SmallCap securities will continue to execute
against the next available SOES market maker at the ECN price.
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) and 15A(b)(11) of the Act \3\ in
that it would facilitate the more orderly and equitable processing of
customer orders entered into SOES, and eliminates the potential for
participants to intentionally or unintentionally create an advantage
among participants who access SOES.
---------------------------------------------------------------------------
\3\ 15 U.S.C. 78o-3(b)(6) and (b)(11).
---------------------------------------------------------------------------
Section 15A(b)(6) requires that the rules of a registered national
securities association are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principals 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; and are not designed to
permit unfair discrimination between customers, issuers, brokers, or
dealers.
Section 15A(b)(1) requires that the rules of a registered national
securities association be designed to produce fair and informative
quotations, prevent fictitious or misleading quotations and to promote
orderly procedures for collecting, distributing, and publishing
quotations.
B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The rule change has become effective pursuant to Section
19(b)(3)(A) of the Act and Rule 19b-4(e)(5) thereunder,\4\ because the
foregoing proposed rule change effects a change in an existing order-
entry or trading system of a self-regulatory organization that:
---------------------------------------------------------------------------
\4\ 17 CFR 240.19b-4(e)(5).
---------------------------------------------------------------------------
(1) does not significantly affect the protection of investors or
the public interest, (2) does not impose any significant burden on
competition, and (3) does not have the effect of limiting the access to
or availability of the order-entry or trading system. In particular,
investors and the public should benefit as the appropriate priority of
SOES orders will be preserved, placing competitors on a more level
playing field and protecting their access to the order-entry system.\5\
Notwithstanding that this rule change is effective immediately upon
filing, Nasdaq will nonetheless delay implementation of the proposed
rule change until at least February 23, 1998, and at least 7 days after
notice of such rule change on the Nasdaq Trader Web Site.\6\ Nasdaq
will provide notice to market participants of the exact date of
implementation prior to the effective date. At any time within 60 days
of the filing of such rule change, the Commission may summarily
[[Page 8244]]
abrogate such rule change if it appears to the Commission that such
action in necessary or appropriate in the public interest, for the
protection of investors, or otherwise in furtherance of the purposes of
the Act.
---------------------------------------------------------------------------
\5\ In reviewing this rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\6\ http://www.nasdaqtrader.com.
---------------------------------------------------------------------------
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the forgoing, including whether the proposed rule
change is consistent with the Act. 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 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
NASDAQ. All submissions should refer to File No. SR-NASD-98-05 and
should be submitted by March 11, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
---------------------------------------------------------------------------
\7\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-3998 Filed 2-17-98; 8:45 am]
BILLING CODE 8010-01-M