[Federal Register Volume 63, Number 65 (Monday, April 6, 1998)]
[Notices]
[Pages 16841-16849]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-8927]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39819; Filed No. SR-NASD-98-26]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Partial Approval to Proposed Rule Change by the 
National Association of Securities Dealers, Inc. To Implement, on a 
Pilot Basis, New Primary Nasdaq Market Maker Standards for all Nasdaq 
National Market Securities and To Extend the Short Sale Rule Pilot

March 30, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on March 19, 1998, the National Association of Securities 
Dealers, Inc. (``NASD'' or ``Association''), through its wholly-owned 
subsidiary, The Nasdaq Stock Market, Inc. (``Nasdaq''), filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule changes as described in Items I and II below, which Items 
have been prepared by Nasdaq. On March 25, 1998, Nasdaq submitted to 
the Commission Amendment No. 1 to the proposed rule changes.\3\ On 
March 26, 1998, Nasdaq submitted to the Commission Amendment No. 2 to 
the proposed rule changes.\4\ The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons. As discussed below, the Commission is also granting 
accelerated approval to a portion of the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Robert E. Aber, Senior Vice President and 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division of Market Regulation, Commission, dated March 25, 
1998.
    \4\ See Letter from Robert E. Aber, Senior Vice President and 
General Counsel, Nasdaq, to Richard Strasser, Assistant Director, 
Division of Market Regulation, Commission, dated March 26, 1998.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NASD and Nasdaq propose to amend the Primary Nasdaq Market 
Maker (``PMM'') standards for all Nasdaq National Market (``NNM'') 
securities, which are found in NASD Rule 4612, and to implement the 
proposed revised PMM standards on a pilot basis beginning on May 1, 
1998, and extending until November 1, 1998. Additionally, the NASD and 
Nasdaq are proposing to: 1) continue the current

[[Page 16842]]

suspension of existing PMM standards through May 1, 1998 (the start 
date of the new PMM pilot); and 2) extend the pilot of the NASD's short 
sale rule--NASD Rule 3350 (``Short Sale Rule'')--including the market 
maker exemption to that rule and the definition of ``legal'' short sale 
until November 1, 1998 (the end date of the proposed PMM pilot). As 
noted below, as part of the PMM pilot program, the NASD and Nasdaq will 
shortly submit amendments to the Short Sale Rule, which would exempt 
from the Short Sale Rule certain customer facilitating, liquidity-
providing transactions, regardless of whether the broker/dealer is 
qualified as a PMM. Proposed new language is italicized; proposed 
deletions are in brackets.
* * * * *

NASD Rule 4612. Primary Nasdaq Market Maker Standards

    (a) A member registered as a Nasdaq market maker pursuant to Rule 
4611 may be deemed to be a Primary Nasdaq Market Maker in Nasdaq 
National Market (``NNM'') securities if the market maker [complies 
with] achieves the threshold standards [(as established and published 
by the Association from time to time)] in the following qualification 
criteria.
    (1) [amount of time a dealer maintains a quotation that represents 
the best bid or best offer as shown in] degree of liquidity 
contribution to The Nasdaq Stock Market as measured by the Net 
Liquidity Ratio \5\; and
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    \5\ The net Liquidity Ratio (``NLR'') formula accords credit for 
liquidity contribution: (1) in an ``up market'' by accumulating all 
sales, irrespective of price; and (2) in a ``down market'' by 
accumulating all purchases, irrespective of price. These trades are 
then divided by total shares traded in both up and down markets, 
excluding volume during neutral periods, sales at the inside offer 
during down markets, and purchases at the inside bid during up 
markets. In addition to excluding from the denominator of the NLR 
sales at the inside offer during down markets and purchases at the 
inside bid during up markets, these sales and purchases are excluded 
from the numerator of the NLR. The result is expressed as a ratio 
with a potential value between zero and one.
    For the purposes of calculating NLR, the direction fo the market 
is defined by looking at the five minute period prior to the trade 
report. If there has been no change in the bid price during that 
time, the last bid direction governs. That is, if the current best 
(inside) bid displayed in The Nasdaq Stock Market is below the 
preceding best (inside) bid (''down bid''), the market is deemed 
down, and if the current best (inside) bid displayed in The Nasdaq 
Stock Market is above the preceding best (inside) bid (``up bid''), 
the market is deemed up. If there has been a change during the 
previous five minutes, then the formula looks to the prior four 
changes and takes the predominant direction as the indicator. Thus, 
if at least three of the last four changes are down bids the market 
is deemed down, and if at least three of the last four changes are 
up bids the market is deemed up. If the changes are evenly split, 
the market is deemed neutral.
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    (2) [relation of individual dealer spread to average dealer spread] 
a market maker's proportionate share of proprietary share-volume 
(``proportionate volume'') or the market maker's proportionate share of 
proprietary trades (``proportionate trades'').\6\ [; and
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    \6\ A market maker's proportionate volume shall be determined 
by: dividing the market maker's total proprietary share-volume in a 
stock by all market maker proprietary share-volume for that stock; 
and then multiplying that ratio by the total number of registered 
market makers in the stock. For example, if a market maker transacts 
10% of the total proprietary share-volume in a stock with 10 
registered market makers, the market maker's proportionate volume 
would be 1.0. A market maker's proportionate trades shall be 
determined by: dividing the market maker's total number of 
proprietary trades in a stock by the total number of proprietary 
trades by all market makers in that stock; and then multiplying that 
ratio by the total number of registered market makers in the stock. 
Subparagraph (b)(1)(ii) establishes the applicable thresholds for 
proportionate volume and proportionate trades.
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    (3) frequency of dealer quotation updates without a corresponding 
execution in the security occurring within three minutes before or 
after a quotation update.\7\]
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    \7\ [The threshold standards initially shall be established as:
    (a) a market maker must maintain the best bid or best offer as 
shown on Nasdaq no less than 35% of the time;
    (b) a market maker must maintain a spread no greater than 102% 
of the average dealer spread;
    (c) no more than 50% of a market maker's quotation updates may 
occur without being accompanied by a trade execution of at least one 
unit of trading.
    The Board of Governors reserves the authority to rescind or 
modify one or more of the threshold standards immediately upon a 
finding that the standard is operating in a manner that is unfair to 
a class of investors or members, or that continued imposition of the 
standard results in a substantial adverse impact on the liquidity or 
market quality of the Nasdaq market.]
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    [(b) A market maker for a Nasdaq National Market security must 
satisfy the threshold standards in at least two of the criteria in 
paragraph (a) in order to be designated a Primary Nasdaq Market Maker 
in that security; provided however, that if a market maker satisfies 
only one of the criteria, it may qualify as a Primary Nasdaq Market 
Maker if it also accounts for a threshold level of proportionate volume 
in the security (as established and published by the Association from 
time to time.) \8\ ]
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    \8\ [The threshold proportionate volume standard initially shall 
require a market maker to account for volume of at least 1\1/2\ 
times its proportionate share of overall volume in the stock for the 
review period.]
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    (b)(1) Except as provided in subparagraphs (b)(2) and (b)(3), to be 
designated as a Primary Nasdaq Market Maker in a particular NNM 
security a market maker must achieve:
    (i) the NLR threshold; and \9\
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    \9\ The NLR threshold initially shall be established as 0.67.
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    (ii) the threshold for proportionate volume or the threshold for 
proportionate trades.\10\
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    \10\ The threshold for proportionate volume and proportionate 
trades shall be 1.0 for each. Accordingly, a market maker must 
account for at least one times its proportionate share of all share-
volume in the stock or must account for at least one times its 
proportionate share of all trades for the stock during the review 
period. For example, if during the review period a stock had 10 
market makers and had an overall share-volume of 1,000,000 shares 
and 15,000 trades, a market maker would have to transact one-tenth 
of all share-volume or trades--100,000 in share-volume or 1,500 
trades.
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    (b)(2) If less than 50% of all registered market makers qualify as 
Primary Nasdaq Market Makers under subparagraph (b)(1), Nasdaq shall 
rank those market makers that achieve only the NLR threshold by:
    (i) the market makers' proportionate volume, and shall designate 
(from highest to lowest ranked) such market makers as Primary Nasdaq 
Market Makers until the total number of market makers qualifying under 
subparagraphs (b)(1) and (b)(2)(i) reaches an amount up to but not 
exceeding 50% of all the registered market makers in that security; and
    (ii) the market makers' proportionate trades, and shall designate 
(from highest to lowest ranked) such market makers as Primary Nasdaq 
Market Makers until the total number of market makers qualifying under 
subparagraphs (b)(1) and (b)(2)(ii) reaches an amount up to but not 
exceeding 50% of all the registered market makers in that security.\11\
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    \11\ The 50% levels set forth in subparagraphs (b)(2)(i) and 
(b)(2)(ii) shall be fixed and not subject to modification by Nasdaq, 
so that if a market maker meets the NLR threshold and falls within 
the top 50% of market makers when ranked by proportionate volume or 
the top 50% of market makers when ranked by proportionate trades, 
and market maker shall automatically be designated as a Primary 
Nasdaq Market Maker. The only instance in which Nasdaq would 
designate Primary Nasdaq Market Makers in an amount less than 50% of 
all registered market makers, would be if less than 50% of the 
registered market makers achieve the NLR threshold.
    When there is an odd number of registered market makers in a 
security, Nasdaq will round up to calculate the ``50%'' level (i.e., 
50% level = (number of market makers +1)/2).
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    (b)(3) If the number of registered market makers in a NNM security 
is eight (8) or fewer, a market maker shall qualify as a Primary Nasdaq 
Market Maker without regard to its proportionate volume or 
proportionate trades in that stock, provided it achieves the NLR 
threshold.
    (c) Unless otherwise provided. [T]he review period for [review of] 
market maker performance in each of the

[[Page 16843]]

qualification criteria in [paragraph] subparagraphs (a), (b), 
[paragraph] and (g)[(1)(B), and paragraph (g)(2)(B)(ii)] shall be one 
calendar month; provided, however, that if a market maker that is a 
Primary Nasdaq Market Maker would fail to maintain that status based on 
the application of the applicable thresholds for a particular month, 
the review period shall be that month (up to and including the last 
trading day of the month) and the prior month.
    (d) If, after the applicable review period, a market maker does not 
satisfy the threshold standards for the criteria in [paragraph] 
subparagraphs (a) and (b), the Primary Nasdaq Market Maker designation 
shall be withheld commencing on the next business day following notice 
of failure to [comply with] achieve the standards.
    (e) Market makers may requalify for designation as a Primary Nasdaq 
Market Maker by satisfying the threshold standards for the next review 
period.
    (f) A market maker may request reconsideration of the notice to 
withhold the Primary Nasdaq Market Maker designation.
    (1) Grounds for requests for reconsideration shall be limited to:
    (A) system failure; or
    (B) excused market maker withdrawal status [; or
    (C) where a market maker failed to qualify under the criteria set 
forth in paragraph (a)(3) because of activity in a related derivative 
or convertible security, or activity in a security subject to 
derivative pricing mechanisms, such as currency differentials with 
foreign stocks.]
    (2) Requests for reconsideration must be sent in writing to Nasdaq 
Market  Operations [within 24 hours of the determination to withhold 
the Primary Nasdaq Market Maker designation].
    (3) Requests for reconsideration will be reviewed by the Market 
Operations Review Committee, whose decisions are final and binding on 
the members.
    (g) In registration situations:
    (1) To register and immediately become a Primary Nasdaq Market 
Maker in a Nasdaq National Market security, a member must be a Primary 
Nasdaq Market Maker in 80% of the securities in which it has 
registered. If the market maker is not a Primary Nasdaq Market Maker in 
80% of its stocks, it may qualify as a Primary Nasdaq Market Maker in 
[that stock] a particular Nasdaq National Market security if the market 
maker registers in [the stock] that security as a regular Nasdaq market 
maker and satisfies the qualification criteria for the next review 
peirod, except that if the market maker is registered in the security 
on or before the fourteenth calendar day of the month, the review 
period shall be that calendar month.
    (2) Notwithstanding paragraph (g)(1) above, after an offering in a 
stock has been publicly announced or a registration statement has been 
filed with the Securities and Exchange Commission, no market maker may 
register in the stock as a Primary Nasdaq Market Maker unless it meets 
the requirements set forth below:
    (A) For secondary offerings:
    (i) the secondary offering has become effective and the market 
maker has satisfied the qualification criteria in the time period 
between registering in the security and the offering becoming 
effective; provided, however, that if the member is a manager or co-
manager of the underwriting syndicate for the secondary offering and it 
is a [PMM] Primary Nasdaq Nasdaq National Market Maker in 80% or more 
of the Nasdaq National Market securities in which it is registered, the 
member is eligible to become a [PMM] Primary Nasdaq Market Maker in the 
issue prior to the effective date of the secondary offering regardless 
of whether the member was a registered market maker in the stock before 
the announcement of the secondary offering; or
    (ii) the market maker has satisfied the qualification criteria for 
40 calendar days.
    (B) For initial public offerings (IPOs):
    (i) the market maker may register in the offering and immediately 
become a Primary Nasdaq Market Maker if it is a Primary Nasdaq Market 
Maker in 80% of the securities in which it has registered; provided 
however, that if, at the end of the first review period, the Primary 
Nasdaq Market Maker has withdrawn on an unexcused basis from the 
security or has not satisfied [the qualification criteria] the 
applicable thresholds, it shall not be afforded a Primary Nasdaq Market 
Maker designation on any subsequent initial public offerings for the 
next 10 business days; or
    (ii) the market maker registers in the stock as a regular Nasdaq 
market maker and satisfies the qualification criteria for the next 
review period, except that if the market maker is registered in the 
security on or before the fourteenth calendar day of the month, the 
review period shall be that calendar month.
    (C) For purposes of subparagraph (B)(i) above:
    (i) an issue ceases to be an IPO once it has traded on Nasdaq for 
five (5) business days; and
    (ii) the applicable first review period for IPOs that come to 
market during the last five (5) business days of a month is the 
calender month after the month in which the IPO commenced trading on 
Nasdaq.
    (3) Notwithstanding subparagraph (g)(1) or (g)(2) above, after a 
merger or acquisition has been publicly announced, a Primary Nasdaq 
Market Maker in one of the two affected securities may immediately 
register as a Primary Nasdaq Market Maker in the other merger or 
acquisition security pursuant to the same-day registration procedures 
in Rule 4611.
    (h) [The Board of Governors may modify the threshold standards set 
forth in paragraphs (a) and (b) above if it finds that maintenance of 
such standards would result in an adverse impact on a class of 
investors or on Nasdaq.] This rule shall be in effect beginning May 1, 
1998, and remain in effect until November 1, 1998.
* * * * *

NASD Rule 3350

    (a)-(k) No Changes.
    (1) This Rule shall be in effect until [April 15, 1998] November 1, 
1998.
* * * * *

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 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. The NASD 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

    The NASD and Nasdaq are proposing to amend the PMM standards, as 
described below, and to implement these revised PMM standards on a six-
month pilot basis beginning May 1, 1998, and continuing until November 
1, 1998. The NASD and Nasdaq are also proposing to extend the current 
suspension of the former PMM standards until the proposed PMM pilot 
program is implemented on May 1, 1998, and to extend the pilot program 
of the Short Sale Rule until November 1, 1998.

Background

    On January 20, 1997, the Commission began phasing in new order 
handling rules (``Order Handling Rules''), which,

[[Page 16844]]

among other things, require Nasdaq market makers to display in their 
quotes customer limit orders that improve the market maker's quoted 
price or size.\12\ With the implementation of the Order Handling Rules, 
trading in Nasdaq migrated to a more order-driven, rather than quote-
driven, environment because market maker's now are required to reflect 
customer limit orders (not only proprietary interests) in their 
quotations. The implementation of the Order Handling Rules, however, 
rendered the PMM standards significantly less relevant because the 
criteria in NASD Rule 4612 \13\ were premised on a quote-driven market; 
that is, these standards were based primarily on a market maker's 
quotes in relation to the inside quote and the quotes of other market 
makers, and the ratio of executions to quote changes.\14\ Accordingly, 
these PMM standards were suspended from February 3, 1997, through April 
1, 1998,\15\ during which time all market makers have qualified as PMMs 
and have been able to avail themselves of the PMM exemption to the 
NASD's short sale rule.\16\
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    \12\ See Securities Exchange Act Release No. 37619A (September 
6, 1996) 61 FR 48290 (September 12, 1996) (``Order Handling Rules 
Adopting Release''). Specifically, the SEC adopted Rule 11Ac1-4, the 
Limit Order Display Rule, which requires the display of customer 
limit orders: (1) that are priced better than a market maker's 
quote; or (2) that add to the size of a market maker's quote when 
the market maker is at the best price in the market. Id.
    \13\ Under the suspended PMM standards in NASD Rule 4612, which 
this proposal seeks to continue to suspend, a Nasdaq market maker is 
deemed to be a PMM if it meets two of three criteria: (1) the market 
maker maintained the best bid or best offer as shown on Nasdaq no 
less than 35% of the time; (2) a market maker maintained a spread no 
greater than 102% of the average dealer spread (``102% test''); and 
(3) no more than 50% of a market maker's quotation changes occurred 
without a trade execution. In addition, if a registered market maker 
meets only one of the above criteria, it nevertheless qualifies if 
the market maker accounts for volume at least 1\1/2\ times its 
proportionate share of overall volume in the stock.
    \14\ Specifically, the implementation of the Order Handling 
Rules raised the following concerns with the PMM standards in NASD 
Rule 4612: (1) it became impossible to tell when market maker quote 
changes were being driven by customer interests that are entered and 
then subsequently canceled without any execution, thus making it 
difficult for market makers to meet the 102% test; (2) the test 
regarding the percentage of time in which the market maker's quote 
was at the inside became less relevant because market maker quotes 
were driven to an extent by customer limit orders; and (3) SOES 
decrementation had a significant impact on individual market maker 
quotations as they could be decreased to zero and automatically 
refreshed at a designated price. See Securities Exchange Act Release 
No. 38294 (February 14, 1997) 62 FR 8289 (February 24, 1997) (order 
granting temporary accelerated approval of suspension of PMM 
standards).
    \15\ Id.; Securities Exchange Act Release No. 39198 (October 3, 
1997) 62 FR 53365 (October 14, 1997) (order granting temporary 
accelerated approval of continuing suspension of PMM standards until 
April 1, 1998; File No. SR-NASD-97-73).
    \16\ This exemption to NASD Rule 3350 allows ``qualified'' 
market makers (i.e., PMMs) to sell short on a down bid (i.e., when 
the current bid is lower than the previous inside bid) when engaging 
in bona fide market making activity. See NASD Rule 3350(c)(1).
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    Since February 1997, the NASD and Nasdaq have worked to develop PMM 
standards that are more meaningful in an order-driven environment and 
better identify firms that are engaging in responsible market maker 
activity deserving of the benefits associated with being a PMM, such as 
being exempt from the short sale rule. The proposed PMM standards 
reward market makers that provide meaningful liquidity to the market 
based on the market makers' buying and selling activity in up and down 
markets and their relative buying and selling activity (in terms of 
share-volume and trading) in comparison to other market makers.
    Specifically, to determine whether the market maker is a provider 
of liquidity, Nasdaq applies the net liquidity ratio (``NLR'' or ``NLR 
Test''). As explained below, a market maker must meet a certain 
numerical threshold to be considered a provider of liquidity, and thus 
``pass'' the NLR threshold. Next, Nasdaq calculates a market maker's 
proportionate share of proprietary share-volume (``proportionate 
volume'') and proportionate share of proprietary trades 
(``proportionate trades'') \17\ in a stock, and determines whether the 
market maker needs a certain numerical threshold for proportionate 
volume or a certain numerical threshold for proportionate trades 
(collectively, the ``Proportionality Test'').\18\ If the market maker 
passes both the NLR and Proportionality Tests, the market maker 
qualifies as a PMM. As further described below, the proposed rule 
contains alternative approaches for stocks where the number of market 
makers meeting the NLR and Proportionality Tests is less than 50% of 
registered market makers and for stocks with fewer than eight 
registered market makers.
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    \17\ A market maker's proportionate volume shall be determined 
by: dividing the market maker's total proprietary share-volume in a 
stock by all market maker proprietary share-volume for that stock; 
and then multiplying that ratio by the total number of registered 
market makers in the stock. A market maker's proportionate trades 
shall be determined by: dividing the market maker's total number of 
proprietary trades in a stock by the total number of proprietary 
trades by all market makers in that stock; and then multiplying that 
ratio by the total number of registered market makers in the stock. 
For example, if a market maker transacts 10% of the total 
proprietary share-volume in a stock with 10 registered market 
makers, the market maker's proportionate volume would be 1.0.
    \18\ The threshold for proportionate volume and proportionate 
trades shall be 1.0 for each. Accordingly, a market maker must 
account for at least one time its proportionate share of all share-
volume in the stock or its proportionate share of all trades for the 
stock during the review period. For example, if during the review 
period a stock had 10 market makers and had an overall share-volume 
of 1,000,000 shares an 15,000 trades, a market maker would have to 
transact one-tenth of all share-volume or trades--100,000 in share-
volume or 1,500 trades.
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    NLR Test and Proportionality Test. Under the NLR Test, Nasdaq first 
determines the direction of the market (i.e., whether the market is 
``up'' or ``down''),\19\ and then examines whether the market maker is 
engaging in liquidity-providing activity during up and down market 
periods. Specifically, a market maker will receive credit for all 
proprietary purchases in down markets, and all proprietary sales during 
up markets. The accumulated proprietary share-volume of these liquidity 
trades is divided by the total proprietary volume traded during up and 
down markets, excluding volume during neutral periods, sales at the 
inside offer during down markets, and purchases at the inside bid 
during up markets.\20\ The NASD and Nasdaq believe that these trades 
demonstrate a positive liquidity contribution to the market; that is, 
the market maker is providing liquidity and market stabilization by 
buying during down markets (when there is significant selling 
interest), and by selling in up markets (when there is significant 
buying interest). The resulting number provides an NLR with a potential 
value between 0 an 1. An NLR of 1.0, for example, indicates that each 
transaction was done in a liquidity-providing, stabilizing manner.
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    \19\ For the purposes of calculating NLR, the direction of the 
market is defined by looking at the five minute period prior to the 
trade report. If there has been no change in the bid price during 
that time, the last bid direction governs. That is, if the current 
best (inside) bid displayed in Nasdaq is below the preceding best 
(inside) bid (``down bid''), the market is deemed down. If the 
current best (inside) bid displayed in Nasdaq is above the preceding 
best (inside) bid (``up bid''), the market is deemed up. If there 
has been a change during the previous five minutes, then the formula 
looks to the prior four changes and takes the predominant direction 
as the indicator. Thus, if at least three of the last four changes 
are down bids the market is deemed down. If at least three of the 
last four changes are up bids the market is deemed up. If the 
changes are evenly split, the market is deemed neutral.
    \20\ These trades are included neither in the equation's 
numerator nor the equation's denominator because they do not clearly 
demonstrate that the market maker is providing stabilizing liquidity 
to the market. Because these trades are eliminated from the 
equation, they count neither for nor against a market maker in 
calculating the market maker's NLR.
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    After the NLR is calculated, Nasdaq applies the Proportionality 
Test and examines whether the market maker transacts either its 
proportionate volume or its proportionate trades for the

[[Page 16845]]

security at issue. The Proportionality Test recognizes that market 
makers may add to liquidity by effecting specified levels of share-
volume or trades. Similarly, this test takes into account situations in 
which a stock may have a few lead market makers that transact a large 
percentage of the share-volume (thus providing liquidity), but also may 
have other market makers that effect a fair share of trades--but a 
comparatively lower percentage of share-volume--in the stock (thus also 
providing liquidity).\21\ A market maker automatically will qualify as 
a PMM in a particular stock if the market maker: (1) passes the NLR 
Test by achieving a liquidity ratio of 0.67 or greater; and (2) passes 
the Proportionality Test by transacting either the market maker's 
proportionate volume or proportionate trades.
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    \21\ For example, Stock X has 12 market makers. Market makers 
ABCD and EFGH attract a large percentage of order flow from 
institutions and account for 30% of the share-volume, but only 15 
percent of the trades in the stock. Market makers QRST and UVWX 
attract a high percent of retail order flow and thus account for 30% 
of the trades, but account only for 15% of the share-volume of the 
stock. Each of these market makers provides liquidity to the market, 
and each would receive credit under the formula.
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    50% Analysis. If after the application of the NLR and 
Proportionality Tests, the number of firms earning PMM status is less 
than 50% of all registered market makers in a stock, Nasdaq will 
augment the number of PMMs using the following method. If there are 
market makers that meet the NLR Test but not the Proportionality Test 
(``Remaining Market Makers''), Nasdaq will calculate the number of 
market makers that will bring the total number of PMMs to 50% of all 
registered market makers in the stock.\22\ (If there are no market 
makers that meet the NLR, Nasdaq will not apply the ``50% Analysis'' 
and will not augment the number of PMMs.) Nasdaq then will rank these 
Remaining Market Makers by proportionate volume, and will designate 
(from highest to lowest ranked) the Remaining Market Makers as PMMs 
until the total number of PMMs (i.e., those market makers that meet 
both the NLR and Proportionality Tests an the top-ranked Remaining 
Market Makers by proportionate volume) reaches a number not more than 
50% of all registered market makers.\23\ Nasdaq also will rank the 
Remaining Market Makers by proportionate trades, and will designate 
these Remaining Market Makers as PMMs until the total number of PMMs 
(i.e., those market makers that meet both the NLR and Proportionality 
Tests and the top-ranked Remaining Market Makers by proportionate 
trades) reaches a number not more than 50% of all registered market 
makers.\24\
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    \22\ For example, if Stock Q has 24 market makers, and 9 meet 
the NLR and Proportionality tests, there would be 3 open slots which 
could be filled when the Remaining Market Makers were ranked by 
volume and then by trades.
    \23\ The 50% levels shall be fixed and not subject to 
modification by Nasdaq, so that if a market maker meets the NLR 
threshold and falls within the top 50% of market makers when ranked 
by proportionate volume or the top 50%of market makers when ranked 
by proportionate trades, the market maker automatically shall be 
designated as a PMM. The only instance in which Nasdaq would 
designate PMMs in an amount less than 50% of all registered market 
makers, would be if less than 50% of the registered market makers 
achieve the NLR.
    \24\ Under the 50% Analysis, the group of market makers 
designated as PMMs by volume and then by trades may not be the same, 
and thus the final number of PMMs may be more than 50% of the total 
number of market makers. Conversely, the number of PMMs may be less 
than 50% of all market makers because all PMMs must meet the NLR 
threshold. For example, Stock Q has 24 market makers, and 9 market 
makers are PMMs because they meet both the NLR and the 
Proportionality Test. If no other market maker (aside from the 9 
PMMs) meet the NLR threshold, no other market makers will be 
designated as PMMs. If there are 3 or more market makers that meet 
the NLR, then these Remaining Market makers will be ranked by 
proportionate volume and then by proportionate trades and the top 3 
from each of these two groups (which may or may not overlap in 
identity) will be designated as PMMs.
---------------------------------------------------------------------------

    Securities with Eight or Fewer Market Makers. If the number of 
market makers in a particular NNM security is eight or fewer, a market 
maker will earn PMM status by satisfying the NLR threshold only. Thus, 
for stocks with eight or fewer market makers, Nasdaq will consider 
neither volume nor trades in determining PMM status. The NASD and 
Nasdaq believe that this approach is appropriate because it makes the 
PMM status more attainable in these circumstances and gives firms an 
incentive to make markets in smaller or less widely-covered securities.
    One Month Look-Back Provision. Proposed NASD Rule 4612 generally 
provides that a market maker may qualify as a PMM for a particular 
stock if the market maker meets the applicable thresholds for the 
particular stock during the review period, which generally is one 
calendar month. The proposed rule, however, contains a one-month 
``look-back'' provision. Under this provision, Nasdaq will consider the 
previous calendar month and the current month to determine a market 
maker's continued PMM eligibility if the market maker attained PMM 
status in a security during the previous month, but fails to meet the 
applicable thresholds for the current month. Specifically, if a market 
maker that is a PPM fails to meet the applicable thresholds during a 
given month (and thus would lose its PMM status for the next month) 
Nasdaq will: (1) calculate the market maker's NLR and proportionate 
volume and trade levels for the month in question (using trade data up 
to and including the last trading day of the month) and the prior 
month; and (2) use these figures to determine if the market maker meets 
the PMM thresholds. Thus, a market maker will retain its PMM status if, 
based on the NLR and proportionate trade and volume numbers for the 
month at issue and the previous month, the market maker meets the 
applicable PMM thresholds.\25\ In effect, this retains the requirement 
that a market maker earn PPM status on a stock-by-stock basis, but 
provides some flexibility in that short-term fluctuations or anomalies 
in a market maker's performance are smoothed out over a longer period.
---------------------------------------------------------------------------

    \25\ Similar to the previous PMM standards, if the market maker 
meets the PMM thresholds for the applicable review period, Nasdaq 
will append a ``P'' next to the market maker's identification symbol 
on the Nasdaq WorkStation beginning the first day of the next month. 
Additionally, if a PMM fails to meet the thresholds for the 
applicable review period, Nasdaq will notify the PMM of such failure 
and remove the ``P'' designation on the next business day following 
notification.
---------------------------------------------------------------------------

    Timing For Implementation of New PMM Standards. As proposed, the 
new PMM standards will become effective May 1, 1998. The NASD and 
Nasdaq note that currently all market makers registered in a security 
are PMMs due to the suspension of previous PMM standards, and will 
continue to be so designated on the pilot's proposed start date of May 
1, 1998. The NASD and Nasdaq recognize that once the pilot begins on 
May 1, 1998, PMMs will not have the ability to avail themselves of the 
one-month look-back provision because there will be no meaningful 
trading to analyze prior to May 1, 1998. Thus, in order to give PMMs 
the full benefit of the one-month look-back period and to allow market 
makers time to adjust their trading activity to the new standards, the 
NASD and Nasdaq propose to implement the new standards so that no 
market maker that is designated as a PMM when the pilot begins on May 
1, 1998, will lose its PMM status--based on a failure to meet the new 
PMM standards--until July 6, 1998. The NASD and Nasdaq believe that it 
is fair to give market makers this time to adjust their training 
activity before they lose their PMM designation, particularly since PMM 
standards have been suspended for more than a year and since the new 
PMMs are more stringent than the previous standards.\26\
---------------------------------------------------------------------------

    \26\ Subparagraph (f) of NASD Rule 4612 permits market makers to 
request reconsideration of a notice to withhold PMM designation 
based on a market maker's excused with drawal status. The NASD and 
Nasdaq note that the rules governing withdrawals from market making 
(i.e., NASD rules 4619-4620, and 4730) recently were amended. See 
Securities Exchange Act Release No. 39423 (December 10, 1997) 62 FR 
66160 (December 17, 1997). Furthermore, the NASD and Nasdaq recently 
submitted a rule proposal (SR-NASD-98-17) to implement a new older 
delivery and execution system to replace SelectNet and SOES. See 
Securities Exchange Act Release No. 39718 (March 4, 1998) 63 FR 
12124 (March 12, 1998). If approved, this proposal also would amend 
the procedures relating to withdrawal for ``SOES-ed out of the box'' 
situations.

---------------------------------------------------------------------------

[[Page 16846]]

    Examples of Operation of Proposed PMM Standards. Below are examples 
---------------------------------------------------------------------------
of how the proposed new PMM standards will operate:

    Example 1. Stock WXYZ has six market makers. Four market makers 
achieve an NLR of at least .67 or above. Because WXYZ has less than 
eight market makers, all four of the market makers with an NLR of at 
least .67 will be designated as PMMs, regardless of their volume or 
trades.
    Example 2. Stock ABCD has 20 market makers; 11 market makers 
achieve an NLR of at least .67 or above. Of those 11 market makers, 
six transact at least their proportional level of share-volume or 
trades. These six market makers automatically are designated as 
PMMS. Because the number of market makers that meet both the NLR and 
Proportionality Tests is less than 50% of the total number of 
registered market makers in ABCD, Nasdaq will rank the remaining 
market makers that have an NLR of at least .67 (five in total) 
according to their proportionate level of share-volume. The top for 
qualify, yielding a total of 10 PPMs (i.e., 50% of the total number 
of market makers). Next, the same five market makers are ranked 
according to the proportionate level of trades and the top four are 
designated as PMMs. In this example, the four market makers chosen 
by ranking by proportionate volume and the four market makers chosen 
by ranking by proportionate trades are the same. Thus, the final 
number of PMMs is 10, or 50% of the total number of registered 
market makers.

----------------------------------------------------------------------------------------------------------------
                                                         Proportionate  Proportionate                           
        Market makers in stock ABCD             NLR          volume         trades                PMM?          
----------------------------------------------------------------------------------------------------------------
Market Maker 1............................          .76          3.80           0.88   YES.                     
Market Maker 2............................          .78          1.58           1.07   YES.                     
Market Maker 3............................          .83          1.17           1.00   YES.                     
Market Maker 4............................          .81          0.80           1.48   YES.                     
Market Maker 5............................          .84          0.79           1.41   YES.                     
Market Maker 6............................          .82          0.97           1.01   YES.                     
Market Maker 7............................          .80          0.98           0.84   YES.                     
Market Maker 8............................          .87          0.65           0.61   YES.                     
Market Maker 9............................          .79          0.54           0.94   YES.                     
Market Maker 10...........................          .85          0.51           0.69   YES.                     
Market Maker 11...........................          .80          0.16           0.24   NO.                      
Market Maker 12...........................          .65          3.94           2.83   NO.                      
Market Maker 13...........................          .66          0.83           1.84   NO.                      
Market Maker 14...........................          .65          0.67           0.94   NO.                      
Market Maker 15...........................          .64          0.51           0.93   NO.                      
Market Maker 16...........................          .61          0.41           0.84   NO.                      
Market Maker 17...........................          .61          0.40           0.49   NO.                      
Market Maker 18...........................          .58          0.70           0.95   NO.                      
Market Maker 19...........................          .51          0.16           0.24   NO.                      
Market Maker 20...........................          .48          0.01           0.02   NO.                      
----------------------------------------------------------------------------------------------------------------

    Example 3. Stock IJKL has 19 market makers; 11 market makers 
have an NLR of .67 or better. Of those 11 market makers, six 
transact at least their proportional level of share-volume or 
trades. These six market makers automatically are designated as 
PMMs. Because the number of market makers that meet both the NLR and 
Proportionality Tests is less than 50% of the total number of 
registered market makers in IJKL, Nasdaq will rank the remaining 
market makers that have an NLR of at least .67 (five in total) 
according to their proportionate level of share-volume. The top four 
are designated as PMMs, thus yielding a total of 10 PMMs.\27\ Next, 
the same five market makers are ranked according to their 
proportionate level of trades and the top four are designated as 
PMMs, thus yielding a total of 10 PMMs. Unlike Example 2, the four 
market makers chosen by ranking by proportionate volume and the four 
market makers chosen by ranking by proportionate trades are not the 
same. Three of the four market makers (i.e., market makers 7, 8, and 
9, listed below) are the same; market maker 10, however, is 
designated as a PMM according to its proportionate volume and market 
maker 11 is designated a PMM according to its proportionate trades. 
Thus, the final number of PMMs is 11, or 55% of the total number of 
registered market makers.
---------------------------------------------------------------------------

    \27\ This example illustrates that when there is an odd number 
of registered market makers, Nasdaq rounds up to calculate the 
``50%'' level (i.e., 50% level = (number of market makers + 1)/2). 
That is, in example 3 where there are 19 registered market makers, 
Nasdaq would round up and would have 10 possible PMM slots when 
ranking by proportionate volume and would have 10 possible slots 
when ranking by proportionate trades (i.e., (19 + 1)/2 = 10).

----------------------------------------------------------------------------------------------------------------
                                                         Proportionate  Proportionate                           
        Market makers in stock IJKL             NLR          volume         trades                PMM?          
----------------------------------------------------------------------------------------------------------------
Market Maker 1............................          .76          3.80           0.88   YES.                     
Market Maker 2............................          .78          1.58           1.07   YES.                     
Market Maker 3............................          .83          1.17           1.00   YES.                     
Market Maker 4............................          .81          0.80           1.48   YES.                     
Market Maker 5............................          .84          0.79           1.41   YES.                     
Market Maker 6............................          .82          0.97           1.01   YES.                     
Market Maker 7............................          .80          0.98           0.84   YES.                     
Market Maker 8............................          .87          0.65           0.61   YES.                     
Market Maker 9............................          .79          0.54           0.94   YES.                     
Market Maker 10...........................          .85          0.51           0.24   YES.                     
Market Maker 11...........................          .80          0.16           0.31   YES.                     

[[Page 16847]]

                                                                                                                
Market Maker 12...........................          .65          3.94           2.83   NO.                      
Market Maker 13...........................          .66          0.83           1.84   NO.                      
Market Maker 14...........................          .65          0.67           0.94   NO.                      
Market Maker 15...........................          .64          0.51           0.93   NO.                      
Market Maker 16...........................          .61          0.41           0.84   NO.                      
Market Maker 17...........................          .61          0.40           0.49   NO.                      
Market Maker 18...........................          .58          0.70           0.95   NO.                      
Market Maker 19...........................          .51          0.16           0.24   NO.                      
----------------------------------------------------------------------------------------------------------------

    Example 4. Stock EFGH has 18 market makers. Six of the 18 market 
makers meet both the NLR and Proportionality Tests. These six market 
markers automatically are designated as PMM. Because less than 50% 
of the total number of registered market makers in EFGH qualify as 
PMMs, Nasdaq would augment this number of the ranking process. 
Since, however, Market Maker 7 is the only remaining market maker 
that meets the NLR, only Market Maker 7 will be designated as a PMM. 
Thus, only 7 (or 38.9%) of the 18 registered market makers qualify 
as PMMs.

----------------------------------------------------------------------------------------------------------------
                                                         Proportionate  Proportionate                           
        Market makers in stock EFGH             NLR          volume         trades                PMM?          
----------------------------------------------------------------------------------------------------------------
Market Maker 1............................          .76          3.80           0.88   YES.                     
Market Maker 2............................          .68          1.58           1.07   YES.                     
Market Maker 3............................          .73          1.17           1.00   YES.                     
Market Maker 4............................          .71          1.00           1.48   YES.                     
Market Maker 5............................          .84          1.02           1.41   YES.                     
Market Maker 6............................          .72          1.21           1.01   YES.                     
Market Maker 7............................          .67          0.91           0.84   YES.                     
Market Maker 8............................          .66          0.65           1.01   NO.                      
Market Maker 9............................          .65          0.54           0.94   NO.                      
Market Maker 10...........................          .65          0.51           0.69   NO.                      
Market Maker 11...........................          .65          0.16           0.24   NO.                      
Market Maker 12...........................          .65          3.94           2.83   NO.                      
Market Maker 13...........................          .65          0.83           1.84   NO.                      
Market Maker 14...........................          .65          0.67           0.94   NO.                      
Market Maker 15...........................          .64          0.51           0.93   NO.                      
Market Maker 16...........................          .61          0.41           0.84   NO.                      
Market Maker 17...........................          .61          0.40           0.49   NO.                      
Market Maker 18...........................          .58          0.70           0.95   NO.                      
----------------------------------------------------------------------------------------------------------------

* * * * *

Extension of Suspension of Existing PMM and Extension of Short Sale 
Rule

    In addition to proposing new PMM standards, the NASD and Nasdaq are 
proposing to extend the current suspension of the presently suspended 
PMM standards until the proposed PMM pilot program is implemented on 
May 1, 1998. This extension will allow for continuity in the market 
until the new PMM standards are phased in.
    Additionally, as explained below, the NASD and Nasdaq are proposing 
to extend until November 1, 1998, the pilot of the Short Sale Rule 
including the market maker exemption to that rule and the amended 
definition of legal short sale.\28\ The Short Sale Rule has been 
operating on a pilot basis since June 29, 1994,\29\ and most recently 
was extended until April 15, 1998.\30\ On August 8, 1997, the NASD and 
Nasdaq submitted a proposal to implement the Short Sale Rule on a 
permanent basis.\31\ Subsequent to submitting this request, the 
Commission instructed the NASD and Nasdaq that it would not determine 
whether to implement the Short Sale Rule on a permanent basis until 
more meaningful PMM standards were developed and implemented. In 
response, the NASD and Nasdaq have proposed the standards described in 
this filing. Furthermore, the NASD and Nasdaq anticipate that under the 
proposed PMM standards, the number of market makers qualifying for PMM 
status will be reduced significantly from the levels under previous PMM 
standards. In order to minimize any unintended consequence of the more 
stringent PMM standards--such as restricting market makers from 
``facilitating'' customer orders or broker/dealers from executing 
riskless principal transactions (and effectively acting as agent) when 
they have a net short position--the NASD and Nasdaq shortly will file a 
rule proposal to amend the Short Sale Rule to provide all market makers 
(not only PMMs) with an exemption to the Short Sale Rule to engage in 
customer-facilitating, liquidity-providing transactions.
---------------------------------------------------------------------------

    \28\ The definition of ``legal'' short sale was amended on a 
pilot basis on September 26, 1997, and has been extended 
commensurate with the subsequent extensions of the Short Sale Rule 
pilot. See Securities Exchange Act Release No. 39139 (September 26, 
1997) 62 FR 52169 (October 6, 1997) (initial temporary approval 
order for amendment to ``legal'' short sale); Securities Exchange 
Act Release No. 39551 (January 14, 1998) 63 FR 3370 (January 22, 
1998) (extending amended legal short sale definition until April 15, 
1998).This amendment provides that a ``legal'' short sale can be 
effected on a down bid: at a price of 1/16th above the bid when the 
inside spread is 1/16th or greater; or at a price equal to or 
greater than the offer price when the inside spread is less than 1/
16th.
    \29\ See Securities Exchange Act Release No. 34277 (June 29, 
1994) 59 FR 34885 (July 7, 1994) (``Short Sale Rule Approval 
Order'').
    \30\ See Securities Exchange Act Release No. 39551 (January 14, 
1998) 63 FR 3370 (January 22, 1998).
    \31\ See Securities Exchange Act Release No. 38979 (August 26, 
1997) 62 FR 46537 (September 3, 1997).
---------------------------------------------------------------------------

    Accordingly, an extension of the Short Sale Rule is necessary to 
allow the NASD and Nasdaq to study the effects of the revised PMMs and 
the soon-to-be filed amendments to the Short Sale Rule, and to study 
the interaction between the revised PMM standards and

[[Page 16848]]

the Short Sale Rule. At the end of the PMM pilot, it is expected that 
the NASD, Nasdaq, and the Commission will be in a better position to 
evaluate the efficacy of the revised PMM standards and to evaluate the 
proposal to permanently approve the Short Sale Rule.

Statutory Basis

    The NASD and Nasdaq believe that the proposed rule change is 
consistent with Sections 15A(b)(6) and 11A(a)(1)(C) of the Exchange 
Act. Among other things, 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 11A(a)(1)(C) 
provides that it is in the public interest and appropriate for the 
maintenance of fair and orderly markets 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, and to assure 
fair competition among brokers and dealers.
    Specifically, the NASD and Nasdaq believe that the proposed PMM 
standards provide a meaningful measure of whether a market maker is 
providing liquidity to the market and thus deserving of an exemption to 
the NASD's Short Sale Rule. Furthermore, by sufficiently restricting 
the number of market makers that may qualify for PMM status, the 
proposed standards foster competition among market makers and benefit 
investors. Similarly, the proposal protects investors by limiting the 
number of market makers that may sell short only to those who regularly 
effect liquidity-providing and stabilizing transactions. Furthermore, 
the temporary extension of the suspension of the presently suspended 
PMM standards until the new standards are in place and an extension of 
the pilot of the Short Sale Rule should provide market makers with 
certainty regarding whether they are entitled to an exemption under the 
rule and continuity of short sale regulation, thus promoting market 
efficiency and orderly markets during a transition period. The proposal 
should also help in reducing investor confusion at this time and 
thereby promote efficient and fair markets.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD and Nasdaq believe 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.

C. 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.
    The NASD and Nasdaq have requested that the Commission find good 
cause pursuant to Section 19(b)(2) for approving the extended 
suspension of the current PMM standards and the extension of the Short 
Sale Rule pilot prior to the 30th day after publication in the Federal 
Register. For the reasons discussed in Item V below, the Commission 
grants accelerated partial approval for these portions of the proposal.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Exchange 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 NASD. All submissions should refer to File No. 
SR-NASD-98-26 and should be submitted by April 27, 1998.

V. Commission's Findings and Order Granting Accelerated Partial 
Approval of the Proposed Rule Change

    After careful consideration, the Commission has concluded, for the 
reasons set forth below, that the extension of the Short Sale Rule 
pilot until November 1, 1998, and the extension of the current 
suspension of existing PMM standards through May 1, 1998, are 
consistent with the requirements of the Exchange Act and the rules and 
regulations applicable to the NASD. In particular, these extensions 
conform with the requirements of Section 15A(b)(6) \32\ of the Exchange 
Act and the rules and regulations thereunder. Pursuant to Section 
15A(b)(6), the NASD's rules must be designed, among other things, to 
prevent fraudulent and manipulative acts and practices and to promote 
just and equitable principles of trade. The Commission believes that 
these portions of the proposal are consistent with Section 15A(b)(6) of 
the Exchange Act because extension of the Short Sale Rule pilot and 
continued suspension of the current PMM standards will maintain the 
status quo while the Commission and the NASD review the operation of 
the pilot program for new PMM standards. It is not unreasonable to 
maintain the NASD's Short Sale Rule for a further short period while 
the Commission evaluates the effect of new PMM standards on market 
maker behavior and use of the short sale exemption. Thus, because the 
Commission's ultimate stance on the Short Sale Rule may be affected, in 
part, by the operation of the proposed new PMM standards, it is 
reasonable to keep the Short Sale Rule in place while the pilot for new 
PPM standards commences. Furthermore, it is judicious, in the short 
term, to avoid reintroducing existing, potentially outdated PMM 
standards prior to the implementation of a new PMM pilot.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78o-3(b)6).
---------------------------------------------------------------------------

    In finding that the extensions of the Short Sale Rule pilot and the 
suspension of the existing PMM standards are consistent with the 
Exchange Act, the Commission reserves judgment on the merits of the 
Short Sale

[[Page 16849]]

Rule, any market maker exemptions, and the proposed new PMM standards. 
The Commission recognizes that the current Short Sale Rule already has 
generated significant public comment. Such commentary, along with any 
further comment on the interaction of the Short Sale Rule with the 
proposed new PMM standards, will help guide the Commission's evaluation 
of the Short Sale Rule and new PMM standards. Moreover, during this 
period, the Commission anticipates that the NASD will continue to 
address the Commission's questions and concerns and provide the 
Commission staff with additional information about the practical 
effects and the operation of the revised PMM standards and possible 
interaction between those standards and the NASD's Short Sale Rule.
    The Commission finds good cause for approving the extension of the 
Short Sale Pilot and the extension of the suspension of existing PMM 
standards prior to the 30th day after the date of publication of notice 
of filing thereof. The Short Sale Rule has been in place since 
September 6, 1994, and the Commission is only extending it for six and 
a half months in order to evaluate its interaction with new PMM 
standards. In addition, as noted above, it could be disruptive to 
market making to reintroduce outdated PMM standards for a brief period 
prior to implementation of a new PMM pilot.
    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\33\ that the portion of the proposed rule change (File 
No. SR-NASD-98-26) containing the extension of the NASD's Short Sale 
Rule pilot until November 1, 1998, and the suspension of existing PMM 
standards until May 1, 1998, is hereby approved on an accelerated 
basis.\34\
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78s(b)(2).
    \34\ In approving this portion of the proposed rule change, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    For the Commission, by the division of Market Regulation, pursuant 
to delegated authority.\35\
---------------------------------------------------------------------------

    \35\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-8927 Filed 4-3-98; 8:45 am]
BILLING CODE 8010-01-M