[Federal Register Volume 65, Number 166 (Friday, August 25, 2000)]
[Notices]
[Pages 51887-51888]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-21746]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43176; File No. SR-NASD-00-17]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the National Association of Securities Dealers, Inc., 
Relating to Minimum Quotation Size Requirements for OTC Equity 
Securities

August 18, 2000.

I. Introduction

    On April 10, 2000, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, the Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 \2\ thereunder, a 
proposed rule change that would modify the minimum quotation sizes for 
securities quoted on the OTC Bulletin Board (``OTCBB''), or any other 
inter-dealer quotation system that permits quotation updates on a real-
time basis, at a price exceeding $200 per share. The proposal was 
published for comment in the Federal Register on June 7, 2000.\3\ The 
Commission received no comments on the proposal. This order approves 
Nasdaq's proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Securities Exchange Act Release No. 42852 (May 30, 2000), 65 
FR 36191.
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II. Description of the Proposal

    Currently, NASD Rule 6750 provides that every member firm that 
functions as a market maker in over-the counter (``OTC'') equity 
securities must honor its quotations for those securities in certain 
minimum sizes. Quotes for OTC securities priced over $200 per share 
must be firm for blocks of 50 shares or more.\4\ Nasdaq has stated that 
this rule has had an undesired and detrimental effect on the 
transparency and liquidity of certain highly priced or thinly traded 
securities.
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    \4\ However, Rule 6750 also provides that certain Nasdaq 
officers may modify the minimum quotation size for OTC securities 
with a price greater than $200 per share.
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    Rule 6750 was originally approved by the Commission in 1993 \5\ 
during the early stages of the OTCBB service. Prior to implementation 
of the rule, all priced quotations on the OTCBB were required to be 
firm for blocks of 100 shares or more. This approach soon proved 
unworkable for lower priced securities for which a quote of 100 shares 
could represent an insignificant aggregate dollar value commitment to 
the market.
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    \5\ See Securities 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 the minimum 
quotation size rule for securities priced at $200 per share and below 
on a ``graduated'' or ``tiered'' basis.\6\ For securities quoted at 50 
cents per share or less, the market maker quoting such security is now 
required to honor that quotation for a minimum of 5000 shares. This 
approach was extended up to $200 per share, with different minimum 
quotation sizes at 2500, 500, 200, and 100 shares. For all quotations 
exceeding $200 per share, 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, see NASD Rule 6520, which 
are not held to the minimum quotation size standard.
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    However, the presence of the highly priced securities on the OTC 
market was not considered when Rule 6750 was originally proposed.\7\ A 
situation has resulted in which market makers have been unwilling to 
enter priced quotations for highly priced and thinly traded securities 
for fear of incurring potentially significant liability to their 
proprietary accounts. Nasdaq states that, to alleviate the risk of 
posting a firm quote for 50 of these shares, market

[[Page 51888]]

makers do not enter firm quotations but instead post only indications 
of interest for these securities.
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    \7\ For example, since January 2000, 246 OTC equity securities 
have traded in excess of $200 per share, and five of these 
securities have traded in excess of $10,000 per share. Telephone 
conversation between Scott W. Anderson, Attorney, Nasdaq, and 
Michael Gaw, Attorney-Adviser, Commission, on August 17, 2000.
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    In light of these problems, Nasdaq recently amended Rule 6750 to 
allow certain Nasdaq officers to modify the minimum quotation size for 
OTC securities with a price greater than $200 per share.\8\ Nasdaq has 
now proposed to amend Rule 6750 again to establish four additional tier 
sizes for OTC securities quoted at prices in excess of $200 per share 
and to delete the provision granting certain Nasdaq officers 
discretionary authority to modify the minimum quotation sizes, as this 
authority will no longer be necessary. Under the proposal, the minimum 
quote size for shares priced between $200.01 and $500 will be 25 
shares; between $500.01 and $1000, ten shares; between $1000.01 and 
$2500, five shares; and from $2500.01 upwards, one share.\9\
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    \8\ See Securities Exchange Act Release No. 41907 (September 23, 
1999), 64 FR 52817 (September 30, 1999).
    \9\ Nasdaq has stated that the proposed tier sizes are 
consistent with those in the original rule in that they require firm 
quotations for OTC equity securities to represent trading interest 
of approximately $5000 to $20,000.
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III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act and the 
regulations thereunder applicable to the NASD.\10\ In particular, the 
Commission believes that the proposal is consistent with Sections 
15A(b)(6) and 15A(b)(9) of the Act.\11\ Section 15A(b)(6) requires, 
among other things, that the rules of a national securities association 
be 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 and open market and 
a national market system; and, in general, to protect investors and the 
public interest. Section 15A(b)(9) requires that the rules of the 
association not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Act.
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    \10\ In approving this rule, the Commission has considered its 
impact on efficiency, competition, and capital function. See 15 
U.S.C. 78c(f).
    \11\ 15 U.S.C. 78o-3(b)(6) and (b)(9).
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    The Commission supports the NASD's efforts to create a more 
competitive market and to foster enhanced price discovery of the OTC 
markets. Currently, Rule 6750 requires quotations for OTC equity 
securities with prices in excess of $200 per share to be firm for at 
least 50 shares (unless an exemption is granted). As a result, market 
makers often decline to post firm quotes for these highly priced 
securities. While posting an indication of interest is permitted on the 
OTCBB, the Commission believes that it is appropriate for Nasdaq to 
encourage the entry of firm quotations. Decreasing the minimum quote 
size for highly priced OTC equity securities should encourage market 
makers to post priced quotes for these securities. A larger number of 
firm quotes should help to improve price discovery and transparency in 
this marketplace. Accordingly, the Commission believes the proposed 
rule is consistent with the purposes of the Act.

IV. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-NMASD-00-17) is approved.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 300.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-21746 Filed 8-24-00; 8:45 am]
BILLING CODE 8010-01-M