[Federal Register Volume 64, Number 189 (Thursday, September 30, 1999)]
[Notices]
[Pages 52817-52819]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-25383]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-41907; File No. SR-NASD-99-32]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to Firm Quotation 
Requirements

September 23, 1999.
    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 June 17, 1999, the National Association of Securities Dealers, Inc. 
(``NASD''), through its wholly owned subsidiary, the Nasdaq Stock 
Market, Inc. (``Nasdaq'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I and II below, which Items have been prepared by Nasdaq. On 
August 25, 1999, Nasdaq filed Amendment No. 1 to the proposal with the 
Commission.\3\ The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons and to 
grant accelerated approval to the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter from Robert E. Aber, Senior Vice President and 
General Counsel, Nasdaq, to Richard Strasser, Assistant Director, 
Division of Market Regulation, Commission, dated August 24, 1999 
(``Amendment No. 1''). Amendment No. 1 was received by the 
Commission on August 25, 1999, the substance of which is 
incorporated into this notice.
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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 NASD Rule 6750 to provide any Nasdaq 
officer at the executive vice president level or above with limited 
discretionary authority to reduce the minimum quotation size for 
securities quoted at a price exceeding $200 in the OTC Bulletin Board 
(``OTCBB''). Below is the text of the proposed rule change. Proposed 
new language is in italics. 
* * *
6750. Minimum Quotation Size Requirements For OTC Equity Securities
    (a) Every member firm that functions as a market maker in OTC 
Equity Securities by entering firm quotations into the OTC Bulletin 
Board Service (OTCBB) (or any other inter-dealer quotation system that 
permits quotation updates on a real-time basis) must honor those 
quotations for the minimum size defined in the table below. In this 
regard, it is the market maker's responsibility to determine the 
minimum size requirement applicable to its firm bid and/or offer in 
each of its registered securities (excluding OTC Equity Securities for 
which the OTCBB will not accept firm quotations). Depending on the 
price level of the bid or offer, a different minimum size can apply to 
each side of the market being quoted by the member firm in a given 
security.

------------------------------------------------------------------------
                                                                Minimum
                    Price (bid or offer)                      quote size
------------------------------------------------------------------------
0 to .50*...................................................       5,000
.51 to 1.00.................................................       2,500
1.01 to 10.00...............................................         500
10.01 to 100.00.............................................         200
100.01 to 200.00............................................         100
200.01 plus.................................................          50
------------------------------------------------------------------------
A Nasdaq officer at the Executive Vice President level or above, within
  its discretion, may modify the minimum quotation size for those
  securities with a price exceeding $200.
(b) no change.
* The OTCBB can accept bids/offers expressed in fractions as small as 1/
  256 or in decimals up to six places. In applying the price test for
  minimum quotation size, any increment beyond an upper limit in the
  right hand column will trigger application of the minimum quote size
  for the next tier. For example, a bid (or offer) of $.505 must be firm
  for a size of 2,500 shares.

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 III 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
    Nasdaq is proposing to provide any officer at the executive vice 
president level or above \4\ with limited discretionary authority to 
modify the minimum quotation size for securities quoted on the OTCBB 
that exceed a price of $200. Nasdaq believes that this authority is 
necessary to correct a previously unforeseen problem with the schedule 
contained in NASD Rule 6750, which presently mandates that securities 
priced over $200 be traded in units of 50 shares or more. For certain 
highly priced and/or thinly-traded securities, this rule has had an 
undesired and detrimental effect on transparency and liquidity.
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    \4\ See Amendment No. 1.
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    NASD Rule 6750 was approved by the Commission in 1993 \5\ as the 
NASD and market makers were first beginning to gain significant 
experience in dealing with the OTCBB. Prior to implementation of the 
rule, all quotations on the OTCBB were required to be firm for 100 
shares. This approach soon proved unworkable for lower priced 
securities because a quote for 100 shares could represent an 
insignificant aggregate dollar value commitment to the market.
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    \5\ Exchange Act Release No. 32570 (July 1, 1993); 58 FR 36725 
(July 8, 1993).
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    To remedy this situation, the NASD implemented Rule 6750 which 
specified minimum quotation sizes for securities priced at $200 and 
below on a

[[Page 52818]]

``graduated'' or ``tiered'' basis.\6\ For securities quoted at 50 cents 
or below, the market maker quoting such security is required to honor 
that quotation for a minimum of 5,000 shares. This approach was carried 
through to $200 with decreasing levels of 2,500, 500, 200, and 100 
shares. For all quotations exceeding $200, the minimum quote size was 
determined to be 50 shares.
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    \6\ This requirement applies only to market makers entering 
priced quotations. Market makers are permitted to enter unpriced 
indications of interest into the OTCBB which are not held to the 
minimum quotation size standard.
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    The ensuing six years since implementation of this rule have 
witnessed unanticipated changes to the OTCBB. Among those changes has 
been the quotation of certain securities for thousands of dollars per 
share, and, in a few isolated instances, securities quoted in excess of 
$100,000. Obviously, the presence of these highly priced securities was 
not considered when NASD Rule 6750 was originally proposed with the 
smallest minimum quotation size of 50 shares. This has resulted in a 
situation in which market makers have been unwilling to enter priced 
quotations for such highly priced and thinly traded securities for fear 
of potentially significant liability to their proprietary accounts.
    In order to alleviate the potential exposure of quoting 50 shares 
of these highly priced securities, market makers have ceased entering 
quotations and instead post only indications of interest for these 
securities into the OTCBB. While posting an indication of interest is 
permitted in the OTCBB, the purpose of the OTCBB or any inter-dealer 
quotation medium is to permit multiple market participants to quickly 
and efficiently obtain the best bid or offer in a security and execute 
the transaction without unnecessary delay. Additionally, posting firm 
quotations on the OTCBB has the effect of increasing competition among 
market makers and fostering enhanced price discovery, ultimately 
benefiting the investing public.
    Recognizing these goals and the present problems caused by the lack 
of flexibility within NASD Rule 6750, Nasdaq is proposing to allow any 
officer at the executive vice president level or above the flexibility 
to reduce the minimum display size for certain highly priced securities 
in the top tier (securities quoted in excess of $200) of the OTCBB 
schedule. Any modifications would be done within the spirit of NASD 
Rule 6750 and would be based primarily on the impact that the price of 
the security has upon liquidity, which would include consideration of 
the number of shares publicly available. Such quotation size 
modifications may change from time to time as conditions warrant. 
However, any modifications to the minimum quotation size will be 
clearly displayed on the Nasdaq Workstation II screen for the 
appropriate security to avoid any confusion among market makers or 
other market participants.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) \7\ and Section 15A(b)(11) \8\ of 
the Act. Nasdaq believes that the proposed rule specifically promotes 
the objectives of Sections 15A(b)(6) and 15A(b)(11), respectively, by 
facilitating transactions free of impediments to a free and open market 
while producing fair and informative quotations. The rule will 
encourage market makers to display firm quotations in OTCBB securities 
thereby providing increased transparency, competition, and price 
discovery.
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    \7\ 15 U.S.C. 78o-3(b)(6).
    \8\ 15 U.S.C. 78o-3(b)(11).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will impose 
any inappropriate burden on competition.

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. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
argument concerning the foregoing, including whether the proposal 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. 20549-0609. 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 at the 
Commission's Public Reference Room. Copies so 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-99-32 and should 
be submitted by October 21, 1999.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities association.\9\ 
Specifically, the Commission believes that the proposal is consistent 
with Sections 15A(b)(6) and (b)(11) of the Act.\10\ Section 15A(b)(6) 
requires, in part, that the rules of a national securities association 
be designed 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 system, 
and, in general, to protect investors and the public interest.\11\ 
Section 15A(b)(11) requires, among other things, that the rules of a 
national securities association include provisions governing the form 
and content of quotations, and that such rules must be designed to 
produce fair and informative quotations, to prevent fictitious or 
misleading quotations, and to promote orderly procedures for 
collecting, distributing, and publishing quotations.\12\
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    \9\ In approving this proposed rule change, the Commission 
considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
    \10\ 15 U.S.C. 78o-3(b)(6) and (b)(11).
    \11\ 15 U.S.C. 78o-3(b)(6).
    \12\ 15 U.S.C. 78o-3(b)(11)
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    The proposal provides Nasdaq with the flexibility to reduce the 
minimum quote size of highly priced and thinly traded OTCBB securities 
when appropriate. Nasdaq asserts and the Commission agrees that market 
makers may be reluctant to quote 50 shares of a highly priced and 
thinly traded security and, as a result, may instead post indications 
of interest that are not firm. Therefore, the Commission supports 
granting any Nasdaq officer at the executive vice president level or 
above limited discretionary authority to reduce the minimum quote size 
for highly priced and thinly traded OTCBB securities as a means to 
enhance quote activity. The Commission finds that the increased 
opportunity for priced quotations in highly priced OTCBB securities 
that may result from this rule

[[Page 52819]]

change will help improve liquidity and transparency for these 
securities. Moreover, with this rule change, market participants may be 
able to more quickly ascertain the best bid or offer in highly priced 
OTCBB securities. The Commission also believes that reducing the 
minimum quotation size for highly priced and thinly traded securities 
might attract market makers to such securities, thereby enhancing 
competition, which should result in more efficient pricing of these 
securities. As a result, the Commission finds that the proposed rule 
change is consistent with Section 15A(b)(6) of the Act because it will 
benefit investors and facilitate transactions in securities.
    The Commission also finds that the proposal is consistent with 
Section 15A(b)(11) because it is intended to result in additional 
priced quotations for highly priced OTCBB securities. This should help 
produce fair and informative quotations for these highly priced OTCBB 
securities.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register. Accelerated approval will 
permit Nasdaq to quickly redress an unforeseen consequence of NASD 
6750, as originally adopted, which made quoting certain OTCBB 
securities prohibitive. Accordingly, the Commission believes that good 
cause exists, consistent with Section 15A(b)(6) and Section 19(b)(2) of 
the Act, to grant accelerated approval to the proposed rule change.\13\
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    \13\ 15 U.S.C. 78o-3(b)(6) and 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-NASD-99-32) is approved.

    \14\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-25383 Filed 9-29-99; 8:45 am]
BILLING CODE 8010-10-M