[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] ----------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \4\ See Amendment No. 1. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \5\ Exchange Act Release No. 32570 (July 1, 1993); 58 FR 36725 (July 8, 1993). --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \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. --------------------------------------------------------------------------- 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. --------------------------------------------------------------------------- \7\ 15 U.S.C. 78o-3(b)(6). \8\ 15 U.S.C. 78o-3(b)(11). --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \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) --------------------------------------------------------------------------- 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\ --------------------------------------------------------------------------- \13\ 15 U.S.C. 78o-3(b)(6) and 78s(b)(2). --------------------------------------------------------------------------- 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). --------------------------------------------------------------------------- For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\15\ --------------------------------------------------------------------------- \15\ 17 CFR 200.30-3(a)(12). --------------------------------------------------------------------------- Margaret H. McFarland, Deputy Secretary. [FR Doc. 99-25383 Filed 9-29-99; 8:45 am] BILLING CODE 8010-10-M