[Federal Register Volume 65, Number 245 (Wednesday, December 20, 2000)]
[Notices]
[Pages 79909-79911]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-32333]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43720; File No. SR-NASD-00-67]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to Interval Delay Parameters for the 
Nasdaq National Market Execution System

December 13, 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 November 6, 2000, the National Association of Securities Dealers, 
Inc., 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. 
Nasdaq filed the proposed rule change pursuant to section 19(b)(3)(A) 
of the Act,\3\ and Rule 19b-4(f)(5) thereunder.\4\ Pursuant to Rule 
19b-4(f)(5), Nasdaq has designated this proposal as one effecting a 
change in an existing order-entry or trading system of a self-
regulatory organization that does not: (1) Significantly affect the 
protection of investors or the public interest, (2) impose any 
significant burden on competition, or (3) significantly have the effect 
of limiting the access to or availability of the system. As such, the 
proposed rule change is immediately effective upon the Commission's 
receipt of this filing. 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(5).

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[[Page 79910]]

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq is proposing to amend Rule 4710(b) of the National 
Association of Securities Dealers, Inc. (``NASD'' or ``Association``), 
to modify the Nasdaq National Market Execution System (``NNMS'') to 
reduce from five seconds to two seconds the interval delay between 
executions against the same market maker in any security included in 
the Nasdaq 100 Index. Nasdaq will establish this rule change as a pilot 
program for six months, beginning on the date of launch of the NNMS, 
during which time Nasdaq will monitor and analyze system performance 
with respect to the interval delay. Below is the text of the proposed 
rule change. Proposed new language is italicized; proposed deletions 
are in brackets.
* * * * *

4710. Participant Obligations in NNMS

    (a) No Change.
    (b) Market Makers:
    (1) An NNMS Market Maker in an NNMS Security shall be subject to 
the following requirements:
    (A) No change.
    (B) No Change.
    (C) No Change.
    (D) (1) Except as provided in subparagraph (2) below, [A] after 
the NNMS system has executed an order against a market maker's 
displayed quote and reserve size (if applicable), that market maker 
shall not be required to execute another order at its bid or offer 
in the same security until 5 seconds [a predetermined time period] 
has elapsed from the time the order was executed, as measured by the 
time of execution in the Nasdaq system. [This period of time shall 
initially be established as 5 seconds, but may be modified upon 
Commission approval and appropriate notification to NNMS 
participants.]
    (2) For securities included in the Nasdaq 100 Index, after the 
NNMS system has executed an order against a market maker's displayed 
quote and reserve size (if applicable), that market maker shall not 
be required to execute another order at its bid or offer in the same 
security until 2 seconds has elapsed from the time the order was 
executed, as measured by the time of execution in the Nasdaq system.
    (c) through (e). No Change.
* * * * *

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

    On January 14, 2000, the Commission approved the creation of The 
Nasdaq National Market Execution System (NNMS), a new platform for 
trading Nasdaq National Market (NNM) securities.\5\ Under the rule 
changes, the NNMS will become Nasdaq's primary automatic execution 
trading platform, and SelectNet generally will be used to deliver 
negotiable orders to market makers and ECNs that participate in the 
NNMS. The NNMS will enhance the automatic execution system for the 
trading of NNMM securities by, among other things, reducing from 17 
seconds to five seconds the delay between executions against the same 
market maker. The NNMS will not affect trading of Nasdaq SmallCap 
securities.
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    \5\ See Securities Exchange Act Release 34-42344 (January 14, 
2000), 65 FR 3897 (January 25, 2000).
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    Nasdaq has determined that it is necessary to modify the approved 
interval delay parameter of the NNMS, prior to implementation of the 
system. Nasdaq expects that changing SelectNet from a liability to a 
non-liability system will cause much of the order and message traffic 
now in SelectNet to migrate to the automatic execution facility, the 
NNMS. If this occurs, the presence of a five-second interval delay 
could hinder the efficient and orderly operation of the system by 
causing a queuing of orders. Following Commission approval to the NNMS, 
Nasdaq market participants have expressed to Nasdaq their concern that 
such quering will occur in the NNMS in securities with rapid order flow 
unless the interval delay parameter is reduced from the current five 
seconds. Accordingly, Nasdaq proposes to reduce from five seconds to 
two seconds the delay between executions against the same market 
participant in the same security for any security included in the 
Nasdaq 100 Index, which are generally the securities with the heaviest 
order flow.\6\
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    \6\ Nasdaq represents that it is establishing this rule change 
as a pilot program beginning on the date of launch of the NNMS and 
continuing for six months. During that time, Nasdaq will monitor the 
performance of the system under these parameters to determine 
whether the Nasdaq 100 Index is the proper measure for identifying 
stocks that require a shortened interval delay. Nasdaq states that 
it is also evaluating whether to shorten the interval delay on a 
stock-by-stock and day-to-day basis to accommodate increased trading 
in non-Nasdaq-100 issues due to significant corporate or market 
events.
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    As noted in the original rule proposal, SR-NASD-99-11, the interval 
delay is designed to balance both the need for fast executions and also 
the necessity of giving market makers adequate time to monitor and 
update their quotes in response to rapidly changing market conditions. 
Nasdaq now strongly believes that, with respect to securities included 
in the Nasdaq 100 Index, the need for fast executions in rapidly moving 
securities is greater than originally anticipated. Nasdaq shares the 
concerns of its members that the risk of a queuing of orders in these 
securities is significantly higher than in other, slower-moving issues. 
At the same time, the cost of such queuing is also higher in fast-
moving markets, as it would delay orders from many market participants 
for the benefit of a single market participant. Reducing the interval 
delay from five seconds to two seconds would also protect investors by 
decreasing the likelihood that the market will move against them after 
an order is placed.
    In addition, Nasdaq believes that two seconds is an adequate time 
period for market makers in Nasdaq 100 Index securities to monitor and 
update their quotes. A large number of market makers compete for order 
executions in these securities, and market makers in these securities 
have become accustomed to fast-moving markets, and to monitoring and 
updating their quotations under such conditions. In addition to the 
interval delay parameter, market makers have several other tools for 
managing their quotes, including the Actual Size Rule and the system's 
Auto-Quote Refresh functionality. Considering all these factors, Nasdaq 
believes that this reduction in the interval delay is reasonable and 
appropriate to maintaining orderly markets in rapidly moving securities 
such as those in the Nasdaq 100 Index.
    Based on the above, Nasdaq believes that the proposed rule changes 
are consistent with the provisions of Section 15A(b)(6) of the Act in 
that the proposed rule changes are 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 the 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

[[Page 79911]]

general, to protect investors and the public interest.
    Nasdaq believes that the proposal also is consistent with Section 
11A(a)(1)(C), which 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. Specifically, Nasdaq believes 
that this proposal will improve the mechanism for the efficient display 
and automatic execution of customer limit orders. Thus, the proposed 
rule change is consistent with Section 11A and the SEC's Order Handling 
Rules, and in particular the Display Rule.

(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.

(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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) \7\ of the Act and Rule 19b-4(f)(5) \8\ thereunder in that 
it constitutes a change in an existing order-entry or trading system of 
a self-regulatory organization that does not: (1) significantly affect 
the protection of investors or the public interest, (2) impose any 
significant burden on competition, or (3) significantly have the effect 
of limiting the access to or availability of the system. At any time 
within 60 days of the filing of such proposed rule change, the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(5).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
is consistent with the Act. Persons making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 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 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 
submissions should refer to the file number in the caption above and 
should be submitted by January 10, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-32333 Filed 12-19-00; 8:45 am]
BILLING CODE 8010-01-M