[Federal Register Volume 64, Number 159 (Wednesday, August 18, 1999)]
[Notices]
[Pages 44983-44985]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-21443]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41731; File No. SR-NASD-99-39]
August 11, 1999.
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the National Association of
Securities Dealers, Inc. Regarding Riskless Principal Trade Reporting
Rules
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on August 5, 1999, 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
change as described in Items I, II, and III below, which Items have
been prepared by Nasdaq. Nasdaq has designated this proposal as one
constituting a stated policy and interpretation with respect to the
meaning of an existing rule under Section 19(b)(3)(A)(i) of the Act \3\
and Rule 19b-4(f)(1) \4\ thereunder, which renders the rule effective
upon the Commission's receipt of this filing. The Commission is
publishing this notice to solicit comments on the proposed rule change
from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A)(i).
\4\ 17 CFR 240.19b-4(f)(1).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
Nasdaq filed with the SEC an interpretation to NASD Rules 4632,
4642, 4652, and 6620, regarding riskless principal trade-reporting. The
interpretation, which will be issued as a Notice to Members, addresses
how mark-ups and other fees will be treated for determining whether
trades are executed at the ``same'' price, for purposes of the
aforementioned NASD rules. The text of the proposed rule change is
available at the NASD, and at the Commission.
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
Background. On March 24, 1999, the Commission approved a proposal
to amend the trade reporting rules relating to riskless principal
transactions in Nasdaq National Market, The Nasdaq SmallCap Market,
Nasdaq convertible debt, and non-Nasdaq OTC equity securities.\5\ When
the SEC approved the rule change, the Commission asked Nasdaq to submit
an interpretation providing examples of how mark-ups, mark-downs, and
other fees will be excluded for purposes of the amended riskless
principal rules.\6\ As requested, Nasdaq is distributing Notice to
Members 99-65,\7\ which provides examples of how mark-ups and other
fees will be excluded for purposes of the riskless principal trade-
reporting rules, as an interpretation to existing NASD Rules 4632,
4642, 4652, and 6620.
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\5\ See Securities Exchange Act Release No. 41208 (March 24,
1999) 64 FR 15386 (March 31, 1999) (SR-NASD-98-59).
\6\ See id. at footnote 15.
\7\ The NASD has submitted Notice to Members 99-65 as Exhibit 2
to this rule filing. The Notice is available for inspection at the
NASD and at the Commission.
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[[Page 44984]]
Substance of the Interpretation. Under the riskless principal trade
reporting rules approved by the Commission, a market maker reports as
``riskless'' principal once if the market maker receives an order to
buy (sell) a security, and then purchases (sells) the security as
principal at the same price as the order in hand to satisfy the order
to buy (sell). As stated in the interpretation contained in Notice to
Members 99-65, to determine whether two transactions are executed at
the same price, a market maker must compare the price reported to the
Automated Confirmation Transaction Service (``ACT'') \8\ pursuant to
NASD trade reporting rules, which require members to exclude any mark-
up or mark-down, commission-equivalent, or other fee when trade
reporting (``tape price''), and the price of the offsetting trade with
the customer, exclusive of any mark-up or mark-down, commission-
equivalent, or other fee (``net price''). If the tape price and the net
price to the customer are the same, then the transaction must be
reported as riskless principal to the NASD and the offsetting leg with
the customer should not be reported to the NASD. If a market maker is
executing a large order through a series of trades and has an
arrangement to charge the customer an average price based on the
various executions received, the net price to the customer and the
volume weighted average price (``VWAP'') of the trades must be the same
for the transaction to receive riskless principal treatment.
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\8\ See NASD Rule 4651(b).
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Notice to Members 99-65 also states that the riskless principal
trade reporting rules do not mandate the prices at which market makers
must execute the various legs of ``riskless principal'' transactions.
Nor do the rules prohibit market makers from trading on a net basis.
Thus, a market maker is not precluded from accumulating a position at
one price and executing the offsetting trade with the customer at
another price (with no mark-up, mark-down, commission-equivalent or
other fee), provided such arrangement satisfies the member's best
execution obligation and is consistent with SEC and NASD statements
regarding the matching of limit and market orders.\9\
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\9\ See Securities Exchange Act Release No. 37619A (September 6,
1996), 61 FR 48290 (September 12, 1996) (Order Handling Rules
Adopting Release); NASD Notice to Members 96-65 (October 1996); NASD
Notice To Members 97-57 (September 1997).
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Nasdaq recognizes that there are times when a market maker will,
while holding a customer's order, effect a buy (sell) at one price and
an offsetting sell (buy) with the customer at another price, such as
when a market maker is trading ``net'' with an institution. If what
otherwise would appear to be a riskless principal trade is effected at
two different net prices, a market maker is required to report both
legs of the transaction to the tape.\10\ Notice to Members 99-65
instructs, however, that if a member is working an order for an
institutional account or a block size and the member finds the other
side of the order, the presumption will be that the orders will be
matched off at the same price (exclusive of any mark-up or mark-down,
commission equivalent or other fee) and reported as riskless principal,
unless the customer has specifically requested that the order be traded
on a net basis, at a different price. The Notice to Members 99-65
further notes that, while net trading is not impermissible, market
makers should endeavor to trade at one price when executing riskless
principal transactions because this will provide greater transactional
integrity and will have the corollary benefit of reducing SEC
transaction fees (commonly known as ``Section 31 fees'').\11\
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\10\ The NASD and Nasdaq currently are examining whether trade
reporting rules should be further amended to cover market makers
reporting riskless principal trades at different prices.
\11\ See Section 31 of the Act, 16 U.S.C. 78ee.
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The following provides an example of how Nasdaq believes the
riskless principal trade reporting rules will operate:
Nasdaq Inside Market: $10--10\3/8\, 10 x 10
Question--MMA receives a not-held order from an institutional
customer to sell 6,000 shares, with instructions to obtain the best
price available with a ``bottom'' of $10\1/8\. Using the phone, MMA
sells 4,000 shares at $10\3/8\ to MMB and 2,000 shares at $10 to
MMC. What are MMA's trade reporting obligations?
Answer--MMA must report to ACT the sell to MMB of 4,000 shares
at $10\3/8\ and the sell to MMC of 2,000 shares at $10. (Note that
the volume weighted average price for this trade is $10\1/4\.) If
MMA buys 6,000 shares from his customer at a volume weighted average
price (VWAP) of $10\1/4\, she/he will not be required to report to
the tape the offsetting buy with the customer. The NASD believes
that it would be consistent with the SEC No Action Letter Regarding
SEC Rule 10b-10 \12\ for MMA to disclose on the confirmation a
reported price of $10\1/4\--the VWAP--instead of a reported price
for each individual transaction. The confirmation must contain a
notation that the disclosed price is an average price, ad must note
that details regarding the actual price are available to the
customer upon request.\13\ If market maker charged a mark-down,
commission-equivalent, or other fee on top of the $10\1/4\, it also
would be permissible for the confirmation to disclose the fee as a
single amount.
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\12\ See, e.g., SEC No-action letter from Catherine McGuire,
SEC, to Eugene Lopez, Nasdaq, dated May 6, 1997 (permitting the
issuance of a single confirmation at an average price and with
multiple capacities for a single customer order effected with
multiple executions).
\13\ See id.
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Alternatively, if MMA trades on a net basis and buys 6,000
shares from his customer at $10 (or another price different than the
VWAP of $10\1/4\), MMA would also report the buy with its customer
to the tape because the VWAP and the buy from the customer are
different prices. The confirmation would disclose a reported price
of $10, a price to the customer of $10, and no differential.
2. Statutory Basis
The NASD and Nasdaq believe that the new interpretation increases
investor protection and clarifies a member's obligations under the NASD
trade reporting rules. Accordingly, the NASD and Nasdaq believe that
the proposed rule change is consistent with the provisions of Section
15A(b)(6) of the Act,\14\ in that it is designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, to remove impediments to, and perfect the
mechanism of a free market and a national market system, and, in
general, to protect investors and the public interest.
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\14\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Completion
Nasdaq does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule change and timing
for Commission Action
The foregoing rule change has become effective pursuant to Section
19(b)(3)(A)(i) of the Act \15\ and Rule 19b-4(f)(1) \16\ in that it
constitutes a stated policy and interpretation with respect to the
meaning of an existing rule.
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\15\ 15 U.S.C. 78s-(b)(3)(A).
\16\ 17 CFR 240.19b-4(f)(1).
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At any time within 60 days of the filing of a rule change pursuant
to Section 19(b)(3)(A) of the Act, the Commission may summarily
abrogate the rule change if it appears to the Commission that such
action is necessary or appropriate in the public interest, for the
protection of investors,
[[Page 44985]]
or otherwise in furtherance of the purposes of the Act.
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 submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609.
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-99-39 and
should be submitted by September 8, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
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\17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-21443 Filed 8-17-99; 8:45 am]
BILLING CODE 8010-01-M