[Federal Register Volume 63, Number 108 (Friday, June 5, 1998)]
[Notices]
[Pages 30791-30794]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14921]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40047; File No. SR-NASD-98-09]
Self-Regulatory Organizations; Notice of Proposed Rule Change and
Amendment No. 1 by the National Association of Securities Dealers, Inc.
Relating to Trade Reporting Rules
May 29, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
``Act''),\1\ notice is hereby given that on February 2, 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'') a proposed rule change. Nasdaq
filed an amendment to the proposed rule change on May 19, 1998. The
proposed rule change, as amended, is described in Items I, II, and III
below, which Items have been prepared by Nasdaq. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
Nasdaq is proposing to amend various trade reporting rules of the
Association. Specifically the proposal would: (1) Implement a new trade
report modifier to identify trades effected at a prior reference price;
(2) eliminate the 10,000 share limitation on individual trades that may
be ``bunched'' for trade reporting purposes; (3) require electronic
communications networks (``ECNs'') to be responsible for reporting all
trades executed within the ECN; and (4) address riskless principal
trades involving exchange-listed securities traded in the Third Market.
Below is the text of the proposed rule change. Proposed new language is
in italics; proposed deletion are in brackets.
* * * * *
4623. Electronic Communications Networks
(a) No Change.
(b) An electronic communications network that seeks to utilize the
Nasdaq-provided means to comply with the electronic communications
network display alternative shall:
(1)-(5) No Change.
(6) report all transactions executed by or through the electronic
communications network, with the exception of transactions executed
through an automated execution system operated by Nasdaq (e.g.,
SelectNet).
* * * * *
4632. Transaction Reporting
(a)(1) through (a)(8) No Change.
(9) All members shall append a trade report modifier as designated
by the Association to transaction reports that reflect a price
different from the current market when the execution is based on a
prior reference point in time, which shall be accompanied by the prior
reference time.
(b) through (f)(1)(C) No Change.
(D) Orders received or initiated by the reporting member which are
impractical to report individually and are executed at the same price
within 60 seconds of execution of the initial transaction; provided
however, that no individual order of 10,000 shares or more may be
aggregated in a transaction report and that the aggregated transaction
report shall be made within 90 seconds of the initial execution
reported therein. Furthermore, it is not permissible for a member to
withhold reporting a trade in anticipation of aggregating the
transaction with other transactions. The limitation on aggregating
individual orders of 10,000 shares or more for a particular security
shall not apply on the first day of secondary market trading of an IPO
for that security.
Examples: No Changes.
(2) No Change.
* * * * *
4642. Transaction Reporting
(a)(1) through (a)(8) No Change.
(9) All members shall append a trade report modifier as designated
by the Association to transaction reports that reflect a price
different from the current market when the execution is based on a
prior reference point in time, which shall be accompanied by the prior
reference time.
(b) through (f)(1)(C) No Change.
(D) Orders received or initiated by the reporting member which are
impractical to report individually and are executed at the same price
within 60 seconds of execution of the initial transaction; provided
however, that no individual of 10,000 shares or more may be aggregated
in a transaction report and that the aggregated transaction report
shall be made within 90 seconds of the initial execution reported
therein. Furthermore, it is not permissible for a member to withhold
reporting a trade in anticipation of aggregating the transaction with
other transactions. The limitation on aggregating individual orders of
10,000 shares or more for a particular security shall not apply on the
first day of secondary market trading of an IPO for that security.
(2) No Change.
* * * * *
4652. Transaction Reporting
(a)(1) through (a)(7) No Change.
(8) All members shall append a trade report modifier as designated
by the Association to transaction reports that reflect a price
different from the current market when the execution is based on a
prior reference point in time, which shall be accompanied by the prior
reference time.
(b) through (f) No Change.
* * * * *
6420. Transaction Reporting
(a) through (d)(3)(A) No Change.
(B) Exception: A ``riskless'' principal transaction in which a
member [that is not a market maker in the security] after having
received from a customer an order to buy, purchases the security as
principal from another member or customer to satisfy the order to buy
or, after having received from a customer an order to sell, sells the
security as principal to another member or customer to satisfy the
order to sell, shall be reported as one transaction in the same manner
as an agency transaction, excluding the mark-up or mark-down. A
riskless principal transaction in which a member purchases or sells the
security on an exchange to satisfy a customer's order will be reported
by the exchange and the member shall not report.
[[Page 30792]]
Examples: No Change.
(e) No Change.
* * * * *
6620. Transaction Reporting
(a)(1) through (a)(5) No Change.
(6) All members shall append a trade report modifier as designated
by the Association to transaction reports that reflect a price
different from the current market when the execution is based on a
prior reference point in time, which shall be accompanied by the prior
reference time.
(b) through (3) 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, 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. 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
1. Purpose
I. New modifier for trades based on prior reference price. Nasdaq
recommends the implementation of a trade report modifier for firms to
append to certain trade reports to more accurately identify
transactions that are at a price based on a prior reference point in
time. The modifier would apply to trade reports in Nasdaq securities
(both Nasdaq National Market and SmallCap) as well as non-Nasdaq OTC
Equity Securities (e.g., OTC Bulletin Board and Pink Sheets). It would
not, however, apply to exchange-listed securities traded in the Third
Market.
Recently, there have been situations where members execute certain
transactions that, although reported timely, actually relate to an
obligation to trade that arose at an earlier point in the day or that
refer to a prior reference price. These situations include obligations
to trade arising from a preferenced SelectNet order that was not
executed timely, orders that are owned the opening or closing price
(``market on open'' or ``market on close'') but that are not executed
within 90 seconds of the open or close, respectively, and orders that
may have been lost or misplaced. In effect, these trades are late
executions, not late reports of executions.
After earlier discussions with SEC staff it was agreed that the
.SLD modifier could be used to refer to these ``out of sequence'' trade
reports on an interim basis, but that Nasdaq should develop a separate
identifier to accurately reflect these types of trades.\2\ A separate
identifier would provide better information to market participants and
the public as to what these trades actually represent. Because it would
be used to indicate that the price is based on an earlier reference
point, the modifier would identify trades whose pries may bear no
relationship to the current market.
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\2\ See Letter from Robert L.D. Colby, Deputy Director, Division
of Market Regulation, SEC, to Richard G. Ketchum, Vice President,
NASD, dated August 11, 1997.
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Accordingly, Nasdaq is proposing a rule change to implement a new
trade report modifier (``.P'' for discussion purposes). This modifier
must be appended to trade reports that reflect a price that is
different from the current market because the execution is based on a
prior reference point in time. This would be coupled with a requirement
to input the prior reference time. Until a separate time filed in ACT
can be established, Nasdaq staff envision that members can use the
execution time field to insert the prior reference time for these
trades.
In proposing the rule change, Nasdaq intends that the following be
made clear:
Such modifier does not apply to ``stopped'' stock
situations.
By using the modifier, a member is not absolved of its
obligation to provide best execution, in terms of both price and timely
execution.
The modifier would not be required to be used if the
report was made within 90 seconds of the prior reference time.
The following are some specific examples of when the .P modifier
would be used:
1. A member receives a preferenced SelectNet order at the member's
quote (``liability order'') at 11:00. The member fails to execute the
trade. Thirty minutes later, at 11:30, this is brought to the attention
of the receiving member, who agrees that the trade should have taken
place at that time at the price existing then. The receiving member
then executes a trade at that price. The member appends .P to the trade
report and inputs the time ``11:00.''
2. A member receives a large number of customer orders prior to the
open, to be executed at the opening print. Once that price can be
identified, the member's system begins executing each trade at that
price. Amy such trade that is executed at the opening but due to heavy
volume is not printed until after 9:31:30 should be identified with the
.SLD identifier. If, however, at 9:45 the member discovers that a
customer's order that should have been executed at the open has not yet
been executed, it would be appropriate to execute that customer's order
and append the .P modifier with the time ``9:30.'' This tells market
participants that the execution price represents a price that relates
to an earlier point in time (in this case, the open), and thus may not
bear any relation to the current market, which may have moved in the
interim.
The text of the proposed rule changes to implement the new modifier
is contained in NASD Rules 4632(a)(9), 4642(a)(9), 4652(a)(8), and
6620(a)(6).
II. Eliminating the 10,000 share limitation on aggregating trades
in Nasdaq securities that may be bunched for trade reporting. Nasdaq is
proposing to eliminate the 10,000 share limitations on the maximum
number of shares in an individual trade that can be aggregated for
purposes of reporting a ``bunched'' trade in Nasdaq securities, but
only in the context of IPOs.
Rules governing the reporting of transactions in Nasdaq securities
(both National Market and SmallCap) currently permit the aggregation of
transactions into a ``bunched'' trade report in a variety of
situations. Most notably, there is a provision whereby a firm may
aggregate transactions at the same price that would be impractical to
report individually, provided that no individual order of 10,000 shares
or more may be aggregated. Such reports are appealed with a ``.B''
modifier by the reporting firm and are disseminated to the Nasdaq tape
and vendors. This rule was originally adopted in 1982 with a limitation
of 5,000 shares.\3\ It was subsequently increased to 10,000 shares in
1984, but has remained at that level ever since.\4\
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\3\ See Exchange Act Release No. 18602 (March 26, 1982), 47 FR
14642 (April 5, 1982) (notice of filing and order granting
accelerated approval of File No SR-NASD-82-4).
\4\ See Exchange Act Release No. 21202 (August 3, 1984), 49 FR
31971 (August 9, 1984) (order approving File No. SR-NASD-84-12).
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Nasdaq believes that it would be appropriate to remove the 10,000
share limitation for bunching on the first day of secondary market
trading following an IPO. Bunching would remain optional. This would
facilitate more efficient and timely reporting of large numbers of
trades in the IPO aftermarket. Nasdaq does not believe
[[Page 30793]]
that eliminating the 10,000 share limit will result in any relevant
loss in either the amount of value of information disseminated to the
public. Also, as it is today, the individual transaction data will
continue to be captured for clearing and regulatory purposes.
Nasdaq notes that there are currently no limits in place with
respect to bunching on the exchanges. It is Nasdaq's understanding,
however, that some exchanges, unlike Nasdaq, reprint all the component
trades to a bunched report later in the day. While these individual
reports to SIAC, Nasdaq understands that most vendors do not re-
disseminate them to public.\5\
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\5\ It is believed, however, that the exchange count these re-
printed component trades toward their shares of revenue allocation
for market data fees.
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The text of the proposed rule changes to implement the proposed
bunching provision is contained in rules 4632(f)(1)(D) and
4642(f)(1)(D).
III. Requirement that ECNs report on behalf of subscribers. Nasdaq
is proposing a rule requiring ECNs to report all trades executed within
the ECN on behalf on its subscribers.
The reporting of trades involving an ECN is inconsistent today, in
that not all ECNs assume responsibility for reporting all trades within
the ECN. Instead, an NASD member may be responsible for reporting some
trades. For example, in these situations, after an ECN executes a
trade, it must determine which participant, if any, had the trade
reporting obligation, and them notify that participant. That
participant would then put up the trade report.
Nasdaq believes that it is more effective and timely for ECNs to be
responsible for centrally reporting every trade that takes place
through the ECN.\6\ Accordingly, Nasdaq is proposing that it be
mandated by rule, and that the ECN be held responsible for reporting
properly and timely. The text of the rule change is contained in
proposed rule 4623(b)(6).
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\6\ Should a transaction occur between two ECNs, the ``receiving
ECN'' would be responsible for reporting the trade.
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IV. Trade reporting rules for riskless principal trades in the
Third Market. Nasdaq is proposing changes to the trade reporting rules
for exchange listed securities traded in the Third Market to ensure
that all riskless principal trades, including those effected by market
makers, are reported only once. This was determined to be necessary for
several reasons, including (1) misinterpretation by some of the rules
relating to the reporting of Third Market trades of exchange-listed
securities involving an execution on an exchange; (2) the new SEC Order
Handling Rules, which require market makers to match certain orders in
an agency-like fashion as opposed to trading at risk as principal; (3)
the impact of SEC Transaction Fees (Section 31 Fees); and (4) the
potential for the erroneous perception that Third Market trade
reporting may be inflated due to ``double reporting.''
The rules for reporting trades in the Third Market have long
existed in their current form. The rules were broadly designed to
capture all trading activity by broker-dealers, both dealer to dealer
trades and trades with customers. These rules, and the trade reports
that result, serve several important purposes. They form the basis for
public dissemination of ``last sale'' transaction prices to the tape,
thus providing transparency. Trade reports also are an integral part of
the audit trail used by the NASD in its regulatory efforts to surveil
and regulate firms' activities. Given the historical structure of the
dealer market and the need to provide a comprehensive view of all
trading, and because market makers were always deemed to be ``at
risk,'' NASD trade reporting rules always have required the reporting
of all principal trades by market makers.
Non-market makers, however, generally do not report all principal
trades under current rules, to the extent the trades are defined as
``riskless,'' that is, they involve a trade with another member,
usually a market maker, which is used to offset a trade with a
customer. This ``riskless principal exception'' results in one trade
report even though the non-market maker firm is involved in two
separate trades against its principal account.
Nasdaq sees no significant reason to continue this distinction
between market makers and non-market makers in the context of exchange-
listed securities, and thus believes it to be appropriate now to extend
this riskless principal exception where possible to market makers as
well. This determination was reached given the evolution and growth of
the Third Market, advances in technology at the firm level, and
particularly in light of the new SEC Order Handling Rules. IN short,
this would ensure that only one trade report results for transactions
that are clearly one trade. As indicated above, current rules mandate
that market makers report all principal trades, notwithstanding that
such trades may, in effect, be ``riskless'' to the market maker (i.e.,
although the market maker may execute two offsetting trades against its
principal account, the economic reality is that these may be viewed as
one trade without risk to the market maker).
V. Extending riskless principal treatment to transactions in
exchange-listed securities in the Third Market. Nasdaq believes that
the exception applicable to non-market makers (which treats riskless
principal trades as one trade for reporting purposes) should be
extended to market makers in exchange-listed stocks. For example, if a
market maker in an exchange-listed security does not assume a risk
position on an ITS commitment sent to another market, the market maker
should not be reprinting it in its own market when it receives
confirmation of an execution on the commitment. The fact that the firm
is a market maker is irrelevant. Nasdaq also believes that this
analysis should apply to transactions that result from orders sent to
the floor even when sent outside of the ITS linkage (e.g., through a
floor broker or other automated execution system of the exchange).
a. Definition of riskless principal. To implement the above
interpretation, a specific definition of ``riskless principal'' for
reporting purposes would be necessary. A riskless principal trade
generally is one that involves a conditional order rather than one
immediately executable by the firm as principal. Such condition may
involve a customer order whose execution is dependent upon finding the
other side, or a transaction dependent upon the execution of a part of
the order placed with another firm or market. For example, after
receiving an order to buy 500 shares, a firm sends an order to an
exchange for 1,000 shares. The 1,000 share order is executed, and the
member then satisfies the 500 share order. The 1,000 share execution is
reported by the exchange; the 500 share execution by the firm should
not be printed again in the Third Market.
To the extent that the transaction being triggered is greater than
the first leg, only that portion offset by the first leg is deemed
riskless; the balance would be ``at risk'' and reported as a separate
trade. For example, after having received an order for 1,000 shares,
the firm obtains an execution on an exchange for 500 shares. The
exchange reports 500 shares; the firm only reports 500 shares in the
Third Market because the other 500 shares are deemed riskless.
b. ``Marker'' orders. Nasdaq also considered the extent to which
the definition would apply in situations where the first leg is really
just a ``marker'' order. These orders, usually of nominal size, are
used to trigger obligations to other orders the firm may be holding.
Marker orders serve as a mechanism to notify the market maker
[[Page 30794]]
that the market has traded at that price and that the conditional order
has now become executable in accord with the firm's understanding with
its customer. Such orders generally are not intended to offset to any
significant degree other executions by the market maker.
Under the definition above, these executions would appear to merit
riskless principal treatment to the extent of the size of the marker
order. However, given the purpose for which such marker orders are
used, Nasdaq believe that these should not require the breakup of the
order into two separate components to distinguish between a risk and
riskless portion, provided the marker order is no larger than 10% of
the size of an execution or group of executions that it would trigger.
It was felt that the nominal size of the marker order did not to any
material extent change the overall risk profile of the order.
For example, after receiving an order for 5000 shares, a firm
places a marker order of 500 shares on an exchange. The marker order,
which is executed, then triggers the 5000 share order. The firm would
report the 5000 shares in its entirety. In another example, the marker
order triggers 10 different orders of 500 shares each for a total of
5000 shares. Similarly, each of these 500 share executions also are
reported.
Another example involves how an order of 2500 shares would be
reported if 2400 shares were sent to the floor and had been executed.
The 2400 shares would be reported by the exchange, and thus the 100
shares would be separately reported as a risk trade by the market
maker.
Accordingly, Nasdaq is proposing a rule change and corresponding
interpretations as described above to ensure that all riskless
principal trades, including those effected by market makers, are
reported only once. Specifically, the text of the proposed rule change
is in the form of amendments to NASD Rule 6420(d)(3)(B).
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 15A(b)(6) of the Act \7\ in that the proposed
rule change will result in more accurate, reliable, and informative
information regarding last sale transaction reports. Section 15A(b)(6)
requires that the rules of a registered national securities association
be 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.
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\7\ 15 U.S.C. 78o-3.
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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
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 self-regulatory organization consents, the Commission will:
A. by order approve such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submission
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 number SR-NASD-98-08 and
should be submitted by June 26, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\8\
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\8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-14921 Filed 6-4-98; 8:45 am]
BILLING CODE 8010-01-M