[Federal Register Volume 64, Number 7 (Tuesday, January 12, 1999)]
[Notices]
[Pages 1834-1836]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-638]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40869; File No. S7-24-89]


Joint Industry Plan; Solicitation of Comments and Order Approving 
Request to Extend Temporary Effectiveness of Reporting Plan for Nasdaq/
National Market Securities Traded on an Exchange on an Unlisted or 
Listed Basis, Submitted by the National Association of Securities 
Dealers, Inc., the Boston Stock Exchange, Inc., the Chicago Stock 
Exchange, Inc. and the Philadelphia Stock Exchange, Inc.

December 31, 1998.

I. Introduction

    On December 30, 1998, the National Association of Securities 
Dealers, Inc. (``NASD''), on behalf of itself and the Boston Stock 
Exchange, Inc. (``BSE''), the Chicago Stock Exchange, Inc. (``CHX''), 
and the Philadelphia Stock Exchange, Inc. (``Phlx'') submitted to the 
Securities and Exchange Commission (``Commission'' or ``SEC'') a 
proposal to extend the operation of a joint transaction reporting plan 
(``Plan'') \1\ for Nasdaq/National Market (``Nasdaq/NM'') (previously 
referred to as Nasdaq/NMS) securities traded on an exchange on an 
unlisted or listed basis.\2\ The proposal would extend the 
effectiveness of the Plan, as amended by Revised Amendment No. 9, as 
defined in footnote 3, through September 30, 1999.\3\ The Commission 
also is extending certain exemptive relief as described below. The 
December 1998 Extension Request also requests that the Commission 
approve the Plan, as amended, on a permanent basis on or before 
September 30, 1999. During the nine-month extension of the Plan, the 
Commission will consider whether to approve the proposed Plan, as 
amended, on a permanent basis.
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    \1\ See Letter from Robert E. Aber, Vice President and General 
Counsel, Nasdaq, to Jonathan G. Katz, Secretary, Commission, dated 
December 30, 1998 (``December 1998 Extension Request''). The 
December 1998 Extension Request also requests that the Commission 
continue to provide exemptive relief, previously granted in 
connection with the Plan on a temporary basis, from Rules 11Ac1-2 
and 11Aa3-1 under the Securities Exchange Act of 1934, as amended 
(``Act''). 15 U.S.C. 78a et seq. The signatories to the Plan are the 
Participants for purposes of this release, however, the BSE joined 
the Plan as a ``limited participant'' and reports quotation 
information and transaction reports only in Nasdaq/NM securities 
listed on the BSE. Originally, the American Stock Exchange, Inc. 
(``Amex'') was a Participant but withdrew its participation from the 
Plan in August 1994.
    \2\ Section 12 of the Act generally requires an exchange to 
trade only those securities that the exchange lists, except that 
Section 12(f) of the Act permits unlisted trading privileges 
(``UTP'') under certain circumstances. For example, Section 12(f) 
among other things, permits exchanges to trade certain securities 
that are traded over-the-counter (``OTC/UTP''), but only pursuant to 
a Commission order or rule. The present order fulfills this Section 
12(f) requirement. For a more complete discussion of the Section 
12(f) requirement, see November 1995 Extension Order, infra note 7.
    \3\ On March 18, 1996, the Commission solicited comment on a 
revenue sharing agreement among the Participants. See March 1996 
Extension Order, infra note 7. Thereafter the Participants submitted 
certain technical revisions to the revenue sharing agreement 
(``Revised Amendment No. 9''). See Letter from Robert E. Aber, Vice 
President and General Counsel, Nasdaq, to Jonathan G. Katz, 
Secretary, Commission, dated September 13, 1996. See also September 
1996 Extension Order, infra note 7.
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II. Background

    The Plan governs the collection, consolidation and dissemination of 
quotation and transaction information for Nasdaq/NM securities listed 
on an exchange or traded on an exchange pursuant to a grant of UTP.\4\ 
The Commission approved trading pursuant to the Plan on a one-year 
pilot basis, with the pilot period to commence when transaction 
reporting pursuant to the Plan commenced. The Commission originally 
approved the Plan on June 26, 1990.\5\ Accordingly, the pilot period 
commenced on July 12, 1993 and was scheduled to expire on July 12, 
1994.\6\ The Plan has since been in operation on an extended pilot 
basis.\7\
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    \4\ See Section 12(f)(2) of the Act.
    \5\ See Securities Exchange Act Release No. 28146 (June 26, 
1990), 55 FR 27917 (July 6, 1990) (``1990 Plan Approval Order'').
    \6\ See letter from David T. Rusoff, Roley & Lardner, to Betsy 
Prout, Division of Market Regulation (``Division''), SEC, dated May 
9, 1994.
    \7\ See Securities Exchange Act Release No. 34371 (July 13, 
1994), 59 FR 37103 (July 20, 1994); Securities Exchange Act Release 
No. 35221 (January 11, 1995), 60 FR 3886 (January 19, 1995); 
Securities Exchange Act Release No. 36102 (August 14, 1995), 60 FR 
43626 (August 22, 1995) (``August 1995 Approval Order''); Securities 
Exchange Act Release No. 36226 (September 13, 1995), 60 FR 49029 
(September 21, 1995); Securities Exchange Act Release No. 36368 
(October 13, 1995), 60 FR 54091 (October 19, 1995); Securities 
Exchange Act Release No. 36481 (November 13, 1995), 60 FR 58119 
(November 24, 1995) (``November 1995 Extension Order''); Securities 
Exchange Act Release No. 36589 (December 13, 1995), 60 FR 65696 
(December 20, 1995); Securities Exchange Act Release No. 36650 
(December 28, 1995), 61 FR 358 (January 4, 1996); Securities 
Exchange Act Release No. 36934 (March 6, 1996), 61 FR 10408 (March 
13, 1996); Securities Exchange Act Release No. 36985 (March 18, 
1996), 61 FR 12122 (March 25, 1996) (``March 1996 Extension 
Order''); Securities Exchange Act Release No. 37689 (September 16, 
1996), 61 FR 50058 (September 24, 1996) (``September 1996 Extension 
Order''); Securities Exchange Act Release No. 37772 (October 1, 
1996), 61 FR 52980 (October 9, 1996); Securities Exchange Act 
Release No. 38457 (March 31, 1997), 62 FR 16880 (April 8, 1997); 
Securities Exchange Act Release No. 38794 (June 30, 1997) 62 FR 
36586 (July 8, 1997); Securities Exchange Act Release No. 39505 
(December 31, 1997) 63 FR 1515 (January 9, 1998); and Securities 
Exchange Act Release No. 40151 (July 1, 1998) 63 FR 36979 (July 8, 
1998) (``July 1998 Extension Order'').
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III. Description of the Plan

    The Plan provides for the collection from Plan Participants and the 
consolidation and dissemination to vendors, subscribers and others of 
quotation and transaction information in ``eligible securities.''\8\ 
The Plan contains various provisions concerning its operation, 
including: Implementation of the Plan; Manner of Collecting, 
Processing, Sequencing, Making Available and Disseminating Last Sale 
Information; Reporting Requirements (including hours of operation); 
Standards and Methods of Ensuring Promptness, Accuracy and Completeness 
of Transaction Reports; Terms and Conditions of access; Description of 
Operation of Facility Contemplated by the Plan; Method and Frequency of 
Processor Evaluation; Written Understandings of Agreements Relating to 
Interpretation of, or Participation in, the Plan; Calculation of the 
Best Bid and Offer (``BBO''), Dispute Resolution; and Method of 
Determination and Imposition, and Amount of Fees and Charges.\9\
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    \8\ The Plan defines ``eligible security'' as any Nasdaq/NM 
security as to which unlisted trading privileges have been granted 
to a national securities exchange pursuant to Section 12(f) of the 
Act or that is listed on a national securities exchange.
    \9\ The full text of the Plan, as well as a ``Concept Paper'' 
describing the requirements of the Plan, are contained in the 
original filing which is available for inspection and copying in the 
Commission's public reference room.
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IV. Exemptive Relief

    In conjunction with the Plan, on a temporary basis scheduled to 
expire on December 31, 1998, the Commission granted an exemption to 
vendors from

[[Page 1835]]

Rule 11Ac1-2 under the Act regarding the calculation of BBO\10\ and 
granted the BSE an exemption from the provision of Rule 11Aa3-1 under 
the Act that requires transaction reporting plans to include market 
identifiers for transaction reports and last sale data. As discussed 
further below in the Summary of Comments, the Participants ask in the 
December 1998 Extension Request that the Commission grant an extension 
of the exemptive relief described above to vendors until the BBO 
calculation issue is resolved. Additionally, in the December 1998 
Extension Request, the Participants also request that the Commission 
grant an extension of the exemptive relief described above to the BSE 
for as long as the BSE is a Limited Participant under the Plan.
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    \10\ Rule 11Ac1-2 under the Act requires that the best bid or 
best offer be computed on a price/size/time algorithm in certain 
circumstances. Specifically, Rule 11Ac1-2 under the Act provides 
that ``in the event two or more reporting market centers make 
available identical bids or offers for a reported security, the best 
bid or offer . . . shall be computed by ranking all such identical 
bids or offers . . . first by size . . . then by time.'' The 
exemption permits vendors to display the BBO for Nasdaq securities 
to the Plan on a price/time/size basis.
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V. Summary of Comments

    In the July 1998 Extension Order, the Commission requested comment 
on the following issues: whether the BBO calculation for securities 
traded pursuant to the Plan should be based on a price/time/size 
methodology or a price/size/time methodology; whether there is a need 
for a trade through rule; and the impact of the CHX's intended use of 
BRASS, as defined below.
    With respect to the BBO calculation issue, the Nasdaq Board 
approved a recommendation to modify the methodology for calculating the 
BBO on Nasdaq in order to prioritize quotes based on a price/size/time 
algorithm instead of the current price/time/size algorithm, provided 
that Nasdaq market makers are subject to a minimum quote size 
requirement of 100 shares for at least 1,000 Nasdaq securities. In 
furtherance of this goal, on October 29, 1997, the Commission approved 
an NASD proposal to extend and expand the ``Actual Size Rule'' \11\ to 
a total of 150 securities from 100 securities.\12\ More recently, the 
NASD proposed to expand the Actual Size Rule to cover all Nasdaq 
securities and to implement this rule on a permanent basis.\13\ In 
addition, the NASD submitted a proposed rule change to establish an 
integrated order delivery and execution system for directed orders and 
non-directed orders.\14\ The proposed new system, if approved, would 
replace the NASD's SOES and SelectNet systems and would have an impact 
on the Plan (e.g., the manner in which Plan participants interact with 
orders and quotes displayed in Nasdaq). The Nasdaq Board approved a 
recommendation, under which the methodology for calculating the BBO on 
Nasdaq would be changed to a price/size/time algorithm, from the 
current price/time/size algorithm, provided that: Nasdaq market makers 
no longer are subject to a 1,000 share minimum quote size; and the 
formula used to determine the quoted size of the Nasdaq market be 
reconsidered to reflect all market maker quotes at the same price 
level, if, and when, Nasdaq develops the technological capacity to 
afford market makers' simultaneous access to such quotes.\15\ An 
extension of the Plan until September 30, 1999 has been requested in 
order to resolve the BBO issue.\16\
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    \11\ See Securities Exchange Act Release No. 39285 (October 29, 
1997), 62 FR 59932 (November 5, 1997).
    \12\ See Securities Exchange Act Release No. 38513 (April 15, 
1997), 62 FR 19369 (April 21, 1997). Under the Actual Size Rule, 
market makers in certain Nasdaq securities are subject to a minimum 
quotation size requirement of 100 shares instead of the applicable 
small order execution system (``SOES'') tier size for that security.
    \13\ See Securities Exchange Act Release No. 39760 (March 16, 
1998), 63 FR 13894 (March 23, 1998).
    \14\ See Securities Exchange Act Release No. 39718 (March 4, 
1998) 63 FR 12124 (March 12, 1998). (``IODES Proposal'') Directed 
orders are those that an order-entry firm chooses to send to a 
specific Nasdaq market maker, electronic communications network 
(``ECN'') or UTP exchange for delivery and execution. Non-directed 
orders are those that are not sent to a particular Nasdaq market 
maker or ECN. In other words, when the broker-dealer entering the 
order does not specify the particular Nasdaq market maker, ECN or 
UTP exchange it wants to access, the order will be sent to the next 
available executing participant quoting at the national BBO.
    \15\ The NASD Board approved a recommendation that the price/
size/time algorithm be utilized when a meaningful portion of Nasdaq 
securities are subject to a minimum quote size requirement of 100 
shares. In addition, the Nasdaq and NASD Boards agreed that if 
Nasdaq develops the technological capability to afford market makers 
simultaneous electronic access to all market maker quotes at the 
same price level, the methodology used to determine the quoted size 
of the Nasdaq market will be re-examined to accommodate reflection 
of the fully accessible size displayed on Nasdaq.
    \16\ The BSE submitted comments to the SEC concerning the 
proposed new order delivery and execution systems's impact on the 
Plan, preservation of the BSE's rights concerning issues still not 
agreed upon or specifically covered by the Plan (specifically the 
need for a trade-through rule). See Comment letter No. 1511, SR-
NASD-98-17 from Karen A. Aluise, Vice President, BSE to Jonathan G. 
Katz, Secretary, SEC dated May 14, 1998. In addition, the CHX 
submitted comments to the SEC concerning the IODES proposal and 
encouraged the Commission to grant permanent approval of the Plan. 
See Comment letter No. 1160, SR-NASD-98-17 from Patricia L. Levy, 
Senior Vice President and General Counsel, CHX to Jonathan G. Katz, 
Secretary, SEC dated May 13, 1998.
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    With respect to the need for a trade through rule, the NASD has 
represented that it continues to maintain that it would be more 
appropriate to address this issue once the issue of electronic access 
to Nasdaq market makers' quotes has been resolved.
    With regard to the CHX's use of BRASS, by September 30, 1999 the 
CHX intends to replace its existing trade support system for accessing 
securities subject to the Plan and begin using BRASS, developed by 
Automated Securities Clearance, Limited (``ASC''). BRASS is a trade 
support and order routing system which offers subscribers, generally 
broker-dealers, software and hardware to enable them to perform various 
functions. ASC grants its subscribers a license to operate the BRASS 
software through a customized computer terminal purchased from ASC or 
by running the BRASS software on their own terminals. The CHX has 
represented that ASC has specifically customized BRASS to meet the 
special needs of the CHX. Among other things, Nasdaq market makers that 
already subscribe to BRASS will be able to route OTC/UTP orders to 
specialists on the CHX floor through a SelectNet linkage with BRASS 
workstations on the CHX floor. Conversely, CHX specialists will be able 
to route orders into SelectNet through their BRASS workstations.\17\ 
The Commission notes that ASC will be subject to the Commission's 
inspection and examination procedures with regards to the specific 
customized BRASS system that ASC will provide to the CHX because ASC 
will be operating a facility of an exchange.
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    \17\ See December 1997 Extension Request and Letter from George 
T. Simon, Foley & Lardner to Howard L. Kramer, Senior Associate 
Director, Division, SEC, dated December 12, 1997.
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    The Commission notes that the CHX commented on the July 1998 
Extension Order requesting an expansion of the number of Nasdaq/NM 
securities eligible to be traded on an unlisted basis on an exchange, 
from 500 to 1000, pursuant to the Plan.\18\ The CHX notes that exchange 
trading in Nasdaq/NM securities began in April 1987 when the CHX began 
trading 25 Nasdaq/NM securities.\19\ In 1990, the Commission expanded 
the number of eligible Nasdaq/NM securities to 100 \20\ and in 1995 the 
Commission expanded the number to 500.\21\ The CHX believes that 
investors are directly benefited from

[[Page 1836]]

trading Nasdaq/NM securities on the CHX floor because it provides 
investors with auction-based trading, including unified opening 
transactions, in Nasdaq/NM securities. In addition, the CHX represents 
that it has assigned virtually all of its current allocation of 500 
Nasdaq/NM securities.
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    \18\ See Letter from George T. Simon, Foley & Lardner, to Robert 
L.D. Colby, Deputy Director, Division, SEC, dated November 6, 1998.
    \19\ Securities Exchange Act Release No. 24406 (April 29, 1987) 
52 FR 17495 (May 8, 1987).
    \20\ See 1990 Plan Approval Order, supra note 7.
    \21\ See August 1995 Extension Order, supra note 7.
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    The Commission continues to solicit comment regarding the BBO 
calculation, the trade through rule and the CHX's use of the BRASS 
system as well as issues presented by changes occurring in the market 
place. The Commission also solicits comment on the CHX's request to 
expand the number of Nasdaq/NM securities eligible to be traded on an 
unlisted basis on an exchange, pursuant to the Plan.

VI. Discussion

    The Commission finds that an extension of temporary approval of the 
operation of the Plan, as amended, through September 30, 1999, is 
appropriate and in furtherance of Section 11A of the Act. The 
Commission believes that such extension will provide the Participants 
with additional time to seek Commission approval of pending proposals 
concerning the BBO calculation \22\ and to begin to make reasonable 
proposals concerning a trade through rule to facilitate the trading of 
OTC securities pursuant to UTP. In addition, the Commission believes 
that the extension will afford the CHX adequate time to test the BRASS 
system, address any operating issues concerning its use and implement 
it. While the Commission continues to solicit comment on these matters, 
the Commission believes that these matters should be addressed directly 
by the Participants on or before September 30, 1999 so that the 
Commission may have ample time to determine whether to approve the Plan 
on a permanent basis by September 30, 1999.
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    \22\ See e.g., Actual Size Rule Release, supra note 13 and IODES 
Proposal, supra note 14.
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    The Commission also finds that it is appropriate to extend the 
exemptive relief from Rule 11Ac1-2 under the Act until the earlier of 
September 30, 1999 or until such time as the calculation methodology 
for the BBO is based on a price/size/time algorithm pursuant to a 
mutual agreement among the Participants approved by the Commission. The 
Commission further finds that it is appropriate to extend the exemptive 
relief from Rule 11Aa3-1 under the Act, that requires transaction 
reporting plans to include market identifiers for transaction reports 
and last sale data, to the BSE through September 30, 1999. The 
Commission believes that the extensions of the exemptive relief 
provided to vendors and the BSE, respectively, are consistent with the 
Act, the Rules thereunder, and specifically with the objectives set 
forth in Sections 12(f) and 11A of the Act and in Rules 11Aa-3 and 
11Aa3-2 thereunder.

VII. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the extension, including whether the extension 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, DC 20549. Copies of the 
submission, all subsequent amendments, all written statements with 
respect to the proposed plan amendment that are filed with the 
Commission and all written communications relating to the proposed plan 
amendment between the Commission and any person, other than those that 
may be withheld from the public in accordance with the provisions of 5 
U.S.C. 552, will be available for inspection and copying at the 
Commission's Public Reference Room. All submissions should refer to 
File No. S7-24-89 and should be submitted by February 2, 1999.

VIII. Conclusion

    It is therefore ordered, pursuant to Sections 12(f) and 11A of the 
Act and paragraph (c)(2) of Rule 11Aa3-2 thereunder, that the 
Participants' request to extend the effectiveness of the Joint 
Transaction Reporting Plan, as amended, for Nasdaq/National Market 
securities traded on an exchange on an unlisted or listed basis through 
September 30, 1999, and certain exemptive relief through September 30, 
1999, is approved.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\23\
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    \23\ 17 CFR 200.30-3(a)(29).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-638 Filed 1-11-98; 8:45 am]
BILLING CODE 8010-01-M