[Federal Register Volume 65, Number 110 (Wednesday, June 7, 2000)]
[Notices]
[Pages 36193-36194]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14251]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42851; File No. SR-NASD-99-49]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change Relating to 
Regulation ATS

May 30, 2000.

I. Introduction

    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''), 
pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19(b)-4 thereunder,\2\ a proposed rule change to 
amend NASD Rules 4623 and 4613(e) to incorporate the requirements of 
Regulation ATS into the NASD's rules.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change was published for comment in the Federal 
Register on March 2, 2000.\3\ The Commission did not receive any 
comments on the proposed rule change. This order approves the proposed 
rule change.
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    \3\ Securities Exchange Act Release No. 42461 (February 25, 
2000), 64 FR 11359.
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II. Description of Proposed Rule Change

    The proposal would amend the NASD Rules to incorporate the 
requirements of Regulation ATS. Specifically, the proposal would amend 
NASD Rule 4623, which currently governs electronic communications 
networks (``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 would: (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 alternative trading systems (``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.\4\ Currently, the ECN Rule only requires 
ECNs to display orders entered by market makers. Accordingly, the 
proposal would amend the ECN Rule to require ECNs to display in Nasdaq 
any subscriber orders required under Regulation ATS.
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    \4\ 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, nonmarket makers, 
and institutions). For example, if as calculated on July 1, 1999 an 
ATS account 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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    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. The proposal would 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 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. The 
proposal would 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).

III. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act \5\ and the rules and regulations 
thereunder applicable to a national securities association. In 
particular, the Commission finds the proposal is consistent with the 
requirements of Sections 11A \6\ and 15A(b)(6) \7\ of the Act. Section 
11A(a)(1)(C) \8\ provides that it 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) \9\ 
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.
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    \5\ The Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78k-1.
    \7\ 15 U.S.C. 78o-3(b)(6).
    \8\ 15 U.S.C. 78k-1(a)(1)(C).
    \9\ 15 U.S.C. 78o-3(b)(6).
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    Recently, the Commission adopted a set of rules under the Act \10\ 
that govern alternative trading systems, including ECNs.\11\ Regulation 
ATS governs alternative trading systems that choose to register as 
broker-dealers (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

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market makers.\12\ The NASD's current rules capture only those ATSs 
that meet the definition of ECN. Therefore, the Commission believes 
that it is necessary to amend these rules to capture those ATSs that do 
not meet the definition of ECN.
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    \10\ 17 CFR 242.300 et seq. (``Regulation ATS'').
    \11\ See Securities Exchange Act Release No. 40760 (December 8, 
1998), 63 FR 70844 (December 22, 1998).
    \12\ SEC Rule 11Ac1-1(a)(8), 17 CFR 240.11Ac1-1(a)(8).
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    Accordingly, the Commission finds that the proposal is consistent 
with sections 11A(a)(1)(C) and section 15A(b)(6) \13\ 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 will 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 will incorporate 
into the NASD's rules the new obligations imposed on ECNs by Regulation 
ATS.
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    \13\ 15 U.S.C. 78k-1 and 78o-3(b)(6).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\14\ that the proposed rule change (SR-NASD-99-49) is approved.
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    \14\ 15 U.S.C. 78s(b)(2).

    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. 00-14251 Filed 6-6-00; 8:45 am]
BILLING CODE 8010-01-M