[Federal Register Volume 65, Number 42 (Thursday, March 2, 2000)]
[Notices]
[Pages 11359-11361]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-5060]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42461; File No. SR-NASD-99-49]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Regulation ATS

February 25, 2000.
    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 September 21, 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.\3\ 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\On November 10, 1999, Nasdaq filed Amendment No. 1, which 
refiled the proposed rule change pursuant to Rule 19(b)(2) rather 
than pursuant to Rule 19(b)(3)(A) and Rule 19b-4(f)(6), as it was 
originally filed. Letter from Peter R. Geraghty, Assistant General 
Counsel, the Nasdaq Stock Market Inc., to Richard Strasser, 
Assistant Director, SEC, Market Regulation, dated November 10, 1999.
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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 Rules 4623 and 4613(e) of the NASD to 
incorporate the requirements of Regulation ATS into the NASD's rule. 
Below is the text of the proposed rule change. Proposed new language is 
in italics; proposed deletions are in brackets.
4623. Alternative Trading Systems [Electronic Communications Networks]
    (a) The Association may provide a means to permit alternative 
trading systems (``ATSs''), as such term is defined in Regulation ATS, 
and electronic communications networks (``ECNs''), as such term is 
defined in SEC Rule 11Ac1-1(a)(8),
    (1) to [meet] comply with SEC Rule 301(b)(3);
    (2) to comply with the terms of the ECN display alternative 
provided for in SEC Rule 11Ac1-1(c)(5)(ii)(A) and (B) (``ECN display 
alternatives''); or
    (3) to provide orders to Nasdaq voluntarily.

In providing any such means, the Association shall establish a 
mechanism that permits the ATS or ECN to display the best prices and 
sizes of orders entered into the ATS or ECN by Nasdaq market makers 
(and other [entities] subscribers of the ATS or ECN, if the ECN or ATS 
so chooses [)] or is required by SEC Rule 301(b)(3) to display a 
subscriber's order in Nasdaq) [into the ECN], and allows any NASD 
member the electronic ability to effect a transaction with such priced 
orders that is equivalent to the ability to effect a transaction with a 
Nasdaq market maker quotation in Nasdaq operated systems.
    (b) An ATS or ECN that seeks to utilize the Nasdaq-provided means 
to comply with SEC Rule 301(b)(3), the ECN display alternatives, or to 
provide orders to Nasdaq voluntarily shall:
    (1) demonstrate to the Association that it is in compliance with 
Regulation ATS or that it qualifies as an ECN meeting the definition in 
the SEC Rule;
    (2) be registered as a NASD member;
    (3) enter into and comply with the terms of a Nasdaq Workstation 
Subscriber Agreement, as amended for ATSs and ECNs;
    (4) agree to provide for Nasdaq's dissemination in the quotation 
data made available to quotation vendors the prices and sizes of Nasdaq 
market maker orders (and orders from other [entities] subscribers of 
the ATS or ECN, if the ATS or ECN so chooses [)] or is required by SEC 
Rule 301(b)(3) to display a subscriber's order in Nasdaq), at the 
highest buy price and the lowest sell price for each Nasdaq security 
entered in and widely disseminated by the ATS or ECN; and prior to 
entering such prices and sizes, register with Nasdaq Market Operations 
as an ATS or ECN; [and]
    (5) provide an automated execution or, if the price is no longer 
available, an automated rejection of any order routed

[[Page 11360]]

to the ASTS or ECN through the Nasdaq-provided system[.]; and
    (6) not charge to broker-dealers that access the ATS or ECN through 
Nasdaq any fee that is inconsistent with the requirements of SEC Rule 
301(b)(4).
    (c) When a NASD member attempts to electronically access through a 
Nasdaq-provided system an ATS or ECN-displayed order by sending an 
order that is larger than the ATS's or ECN's Nasdaq-displayed size and 
the ATS or ECN is displaying the order in Nasdaq on a reserved size 
basis, the NASD member that operates the ATS or ECN shall execute such 
Nasdaq-delivered order:
    (1) Up to the size of the Nasdaq-delivered order, if the ATS or ECN 
order (including the reserved size and displayed portions) is the same 
size or larger than the Nasdaq delivered order; or
    (2) Up to the size of the ATS or ECN order (including the reserved 
size and displayed portions), if the Nasdaq-delivered order is the same 
size or larger than the ATS or ECN order (including the reserved size 
and displayed portions).
    No ATS or ECN operating in Nasdaq pursuant to this rule is 
permitted to provide a reserved-size function unless the size of the 
order displayed in Nasdaq is 100 shares or greater. For purposes of 
this rule, the term ``reserved size'' shall mean that a customer 
entering an order into an ATS or ECN has authorized the ATS or ECN to 
display publicly part of the full size of the customer's order with the 
remainder held in reserve on an undisplayed basis to be displayed in 
whole or in part as the displayed part is executed.
4613. Character of Quotations
* * * * *
    (e) Locked and Crossed Markets
    (1) * * *
    The prohibitions of this rule include the entry of a locking or 
crossing quotation at or after 9:25:00 a.m. Eastern Time if such 
quotation continues to lock or cross the market at the market's 
opening, and requires a market maker, [or] ECN, or an ATS that enters a 
locking or crossing quotation at or after 9:25:00 a.m. Eastern Time to 
take action to avoid the lock or cross at the market's open or 
immediately thereafter, but in no case more than 30 seconds after 
9:30:00 a.m.
    (2) No Changes
    (3) For purposes of this rule, the term ``market maker'' shall 
include:
    ([i]A) any NASD member that enters into an ECN, as that term is 
defined in SEC Rule 11Ac1-1(a)(8), priced order that is displayed in 
The Nasdaq Stock Market; [and]
    ([ii]B) any NASD member that operates the ECN when the priced order 
being displayed has been entered by a person or entity that is not a 
NASD member;[.]
    (C) any NASD member that enters into an ATS, as that term is 
defined in SEC Regulation ATS, an order that is displayed in The Nasdaq 
Stock Market; and
    (D) any NASD member that operates the ATS when the order being 
displayed ha been entered by a person or entity that is not an NASD 
member.

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
    Recently, the Commission adopted a set of rules under the Act\4\ 
that govern alternative trading systems, including electronic 
communication networks (``ECN'').\5\ Regulation ATS governs alternative 
trading systems that choose to register as broker-dealers (hereinafter 
referred to as ``ATSs''). The most familiar type of ATS is an ECN; 
however, the definition of ATS encompasses other types of trading 
systems that register as broker dealers. For example, an electronic 
trading system that only accepts orders from institutions and non-
market-maker broker-dealers would be an ATS. Such a system would not be 
an ECN, however, because, by definition, an ECN is a system that 
accepts orders from market makers.\6\
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    \4\17 CFR 242.300 et seq. (``Regulation ATS'').
    \5\See Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844 (December 22, 1998).
    \6\SEC Rule 11Ac1-1(a)(8), 17 CFR 240.11Ac1-1(a)(8).
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    The NASD's current rules capture only those ATSs that meet the 
definition of ECN. Therefore, it is necessary to amend these rules to 
capture those ATSs that do not meet the definition of ECN. The NASD 
also must make several other changes to incorporate the requirements of 
Regulation ATS into its rules. Nasdaq is proposing to amend NASD Rule 
4623, which currently governs ECNs that display orders in Nasdaq (``ECN 
Rule''), and NASD Rule 4613(e), which governs locked and crossed 
markets (``Locked and crossed Market Rule''). The amendments will: (1) 
Incorporate into the ECN Rule the new obligations that are imposed on 
ECNs under Regulation ATS, (2) extend the current ECN Rule so that it 
captures other types of ATSs, and (3) extend the current Locked and 
Crossed Market Rule to capture other types of ATSs.
ECN Rule
    Regulation ATS requires ATSs (including ECNs) that account for a 
significant percentage of the volume in a security listed on Nasdaq to 
display in the public quotation stream the orders of all subscribers of 
the ATS, which includes orders from institutions and broker-dealers 
that are not market makers.\7\ Currently, the ECN Rule only requires 
ECNs to display orders entered by market makers. Accordingly, Nasdaq is 
proposing to amend the ECN Rule to require ECNs to display in Nasdaq 
any subscriber orders required under Regulation ATS.
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    \7\Specifically, if during at least 4 of the preceding 6 
calendar months an ATS accounts for five percent or more of the 
aggregate average share volume in a Nasdaq National Market (``NNM'') 
or SmallCap security, the ATS must display the best prices of orders 
entered by all subscribers (e.g., market makers, non-market makers, 
and institutions). For example, if as calculated on July 1, 1999 an 
ATS accounted for 7% of the trading volume in an NNM security during 
January, February, April, and May 1999, the ATS would be required to 
reflect in Nasdaq its best priced order even if the order is from an 
institution or other entity that is not a Nasdaq market maker. The 
Nasdaq securities subject to this requirement are being phased-in 
according to a schedule set by the Commission. See Securities 
Exchange Act Release No. 41297 (April 16, 1999), 64 FR 19450 (April 
21, 1999).
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    As discussed above, Regulation ATS also governs alternative trading 
systems that are organized other than as ECNs. Consequently, these 
other types of ATSs may be required to display orders in Nasdaq. Nasdaq 
is proposing to expand the current ECN Rule to encompass these other 
types of ATSs. These systems will have to fulfill a series of 
obligations identical to those imposed on ECNs that display orders in 
Nasdaq.
Locked and Crossed Markets
    The Locked and Crossed Markets Rule, NASD Rule 4613(e), is designed 
to limit locked and crossed markets by imposing on market makers an 
obligation to take reasonable measures

[[Page 11361]]

before locking or crossing a market. Currently included within the 
definition of market maker for purposes of this rule is: (1) Any NASD 
member that enters orders into an ECN, or (2) any NASD member that 
operates as an ECN (when the priced order being displayed by the ECN 
has been entered by an entity that is not an NASD member). Reasonable 
measures include attempting to execute against the contra side of the 
market prior to entering an order into Nasdaq's systems that would lock 
or cross the market in a security. Nasdaq is proposing to amend the 
Locked and Crossed Markets Rule to capture NASD members that place 
orders in an ATS or operate as an ATS (when the priced order being 
displayed by the ATS has been entered by an entity that is not an NASD 
member).
* * * * *
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Sections 11A and 15A(b)(6) of the Act.\8\ Section 
11A(a)(1)(C)\9\ provides that is in the public interest and appropriate 
for the protection of investors and the maintenance of fair and orderly 
markets to assure: (1) Economically efficient execution of securities 
transactions; (2) fair competition among brokers and dealers; (3) the 
availability to brokers, dealers and investors of information with 
respect to quotations and transactions in securities; (4) the 
practicability of brokers executing investors orders in the best 
market; and (5) an opportunity for investors' orders to be executed 
without the participation of a dealer. Section 15A(b)(6)\10\ 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 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 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. Nasdaq believes the proposal is consistent with 
Sections 11A(a)(1)(C) and Section 15A(b)(6)\11\ because it will permit 
Nasdaq to incorporate ATS orders into the Nasdaq quote montage and 
provide NASD members with the ability to access these orders. In 
addition, to limit market disruptions caused by locked or crossed 
markets, the proposal would require members that submit orders to ATSs 
and ATSs, in certain circumstances, to take reasonable measures before 
locking or crossing a market. Finally, the amendments would incorporate 
into the NASD's rules the new obligations imposed on ECNs by Regulation 
ATS.
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    \8\15 U.S.C. 78k-1 and 78o-3(b)(6).
    \9\15 U.S.C. 78k-1(a)(1)(C).
    \10\15 U.S.C. 78o-3(b)(6).
    \11\15 U.S.C. 78k-1 and 78o-3(b)(6).
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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. Persons making written submissions 
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 
rue 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 submisisons should refer to SR-NASD-99-49 and should be 
submitted by March 23, 2000.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\12\
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    \12\17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-5060 Filed 3-1-00; 8:45 am]
BILLING CODE 8010-01-M