[Federal Register Volume 66, Number 67 (Friday, April 6, 2001)]
[Notices]
[Pages 18331-18332]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-8470]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44142; File No. SR-NASD-01-03]


Self, Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 to the Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Relating to the Elimination of 
the Interval Delay Between Executions for Initial Public Offerings and 
Secondary Offerings in the Nasdaq National Market Execution System

April 2, 2001.

I. Introduction

    On January 5, 2001, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its 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 10b-4 
thereunder,\2\ a proposed rule change, on a six-month pilot basis, to 
amend NASDd Rule 4710, ``Participant Obligations in NNMS,'' to 
eliminate the internal delay between executions against the same market 
maker at the same price level during the first day of trading of the 
securities of initial public offerings (``IPOs'') and secondary 
offerings in the Nasdaq National Market Execution System (``NNMS'' or 
``SuperSOESS'').\3\ On January 31, 2001, the NASD filed Amendment No. 1 
to the proposed rule change.\4\ The proposed rule change Amendment No. 
1 were published for comment in the Federal Register on February 21, 
2001.\5\ No comments were received regarding the proposal. This order 
approves the proposed rule change, as amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On January 14, 2000, the Commission approved the creation of 
SuperSOES, a new platform for trading Nasdaq National Market 
(``NNM'') securities. See Securities Exchange Act Release No. 42344 
(January 14, 2000), 65 FR 3897 (January 25, 2000). SuperSOES will 
become Nasdaq's primary automatic execution trading platform. To 
date, Nasdaq has not implemented SuperSOES.
    \4\ See  Letter from Thomas P. Moran, Assistant General Counsel, 
Nasdaq, to Jack Drogin, Assistant Director, Division of Market 
Regulation, Commission, dated January 30, 2001 (``Amendment No. 
1''). In Amendment No. 1, the Nasdaq added a footnote to proposed 
NASD Rule 4710(b)(1)(D)(3) requiring the lead underwriter of a 
secondary offering to submit a written request to the Nasdaq Market 
Operations Department no later than the business day prior to the 
start of trading in the secondary offering to obtain immediate 
processing of executions in the secondary offering.
    \5\ See Securities Exchange Act Release No. 43958 (February 13, 
2001), 66 FR 11076.
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II. Description of the Proposed Rule Change

    The rules governing Nasdaq's Small Order Execution System 
(``SOES'') currently establish a delay of 17 seconds (15 seconds for 
quote management and two seconds for system processing) between 
executions against the same market maker in the same security at the 
same price level. This delay will be reduced to five seconds (plus two 
seconds system processing time) for the majority of Nasdaq NMS 
securities when Nasdaq implements SuperSOES. In response to market 
participants' concerns that significant order flow could potentially 
produce queuing within the the system, Nasdaq filed a rule change with 
the Commission in December 2000 to reduce the interval delay between 
executions in Nasdaq 100 Index securities to two seconds, commencing on 
the date that Nasdaq launches SuperSOES.\6\
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    \6\ See Securities Exchange Act Release No. 43720 (December 13, 
2000), 65 FR 79909 (December 20, 2000) (notice of filing and 
immediate effectiveness of File No. SR-NASD-00-67) (``2000 
Notice''). Nasdaq will implement the two-second interval delay on a 
six-month pilot basis.
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    Nasdaq filed the current proposal to address similar queuing 
concerns raised by market participants in connection with the rapid 
flow of orders accompanying IPOs and secondary

[[Page 18332]]

offerings. Under the proposal, on the first day of trading of the 
securities of a SuperSOES-eligible IPO or secondary offering, after 
SuperSOES has executed an order against a market maker's displayed 
quote and reserve size (if applicable), the market maker will be 
required to execute another order at its posted bid or offer in that 
security as soon as SuperSOES delivers another order to the market 
maker's quote. Consequently, a market maker will be available for 
subsequently execution at its posted quote as quickly as the system can 
transmit instructions between the execution and quote-update engines, 
an operation that, according to Nasdaq, generally requires from one to 
one and one half seconds.
    After the first day of trading in the IPO or secondary offering, 
the NNMS interval delay between executions against the same market 
maker at the same price level will be determined by whether or not the 
security is part of the Nasdaq 100 Index. Thus, on subsequent trading 
days, the NNMS interval delay between executions against the same 
market maker at the same price level for a Nasdaq 100 Index security 
would be two seconds and the NNMS interval delay between executions 
against the same market maker at the same price level for a security 
that is not a part of the Nasdaq 100 Index would be five seconds.\7\
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    \7\ Nasdaq will continue its current practice of using the same 
interval delay between multiple round-lot executions against the 
same market participant for odd-lot executions of that same 
security. For example, if the interval delay in a security is five 
seconds, the interval delay after an odd-lot execution would also be 
five seconds. In addition, Nasdaq represents that it will closely 
monitor odd-lot order entry activity in NNMS to ensure that such 
activity dos not adversely impact market quality.
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    Nasdaq proposes to implement the proposal on a six-month pilot 
basis beginning when SuperSOES become operational. During operation of 
the pilot program, Nasdaq represents that it will monitor the 
performance of the system under the proposed parameters to determine 
whether the proposed measures adequately address the concerns expressed 
by market participants.
    Nasdaq believes that reducing the interval delay between executions 
on the first day of trading of NNMS-eligible IPOs and secondary 
offerings will ensure that customer orders for those securities are 
processed in the most expeditious manner possible. Nasdaq also believes 
that such processing will improve market function and aid in the price 
discovery process.

III. Discussion

    After careful review, 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.\8\ In particular, the Commission finds that the proposal 
is consistent with section 15A(b)(6) of the Act \9\ because it is 
designed to promote just and equitable principles of trade, foster 
cooperation and coordination with persons engaged in processing 
information with respect to and facilitating transactions in 
securities, as well as to remove impediments to and perfect the 
mechanism of a free and open market, and, in general, to protect 
investors and the public interest.
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    \8\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78o-3(b)(6).
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    As discussed more fully above, the interval delay in SuperSOES will 
be two seconds for Nasdaq 100 Index securities and five seconds for all 
other Nasdaq NMS securities. In its proposal to establish a two-second 
interval delay for Nasdaq 100 Index securities, Nasdaq noted that 
market participants had expressed concern that a five-second interval 
delay could hinder the efficient and orderly operation of SuperSOES by 
causing a queuing of orders in securities with rapid order flow.\10\
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    \10\ See 2000 Notice, supra note 6.
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    According to Nasdaq, market participants have raised similar 
queuing concerns in connection with the rapid flow of orders 
accompanying IPOs and secondary offerings. The Commission believes that 
the current proposal responds to concerns raised by market participants 
and should help to minimize the queuing of orders for IPOs and 
secondary offerings on their first day of trading. The Commission 
believes that the prompt execution of orders for IPOs and secondary 
offerings may facilitate the price discovery process, to the benefit of 
all market participants.
    Nasdaq proposes to implement the proposal on a six-month pilot 
basis, commencing with the launch of SuperSOES. The Commission believes 
that implementing the proposal on a six-month pilot basis should 
provide Nasdaq with time to evaluate the operation of the proposed 
changes and their impact on the market.
    Amendment No. 1 requires the lead underwriter of a secondary 
offering to communicate to the Nasdaq Market Operations Department, no 
later than the business day prior to the start of the trading in the 
secondary offering, that it wishes to obtain immediate processing of 
executions in the secondary offering.\11\ If the request is not made in 
a timely manner, the secondary offering will be processed pursuant to 
the interval delays applicable to the security. The Commission finds 
that this requirement will help ensure that Nasdaq is specifically made 
aware of the need to remove the interval delay on the first day of such 
an offering.
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    \11\ See Amendment No. 1, supra note 4.
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IV. Conclusion

    For the foregoing reasons, the Commission finds that the proposal, 
as amended, is consistent with the requirements of the Act and rules 
and regulations thereunder.
    It Is Therefore Ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-NASD-01-03) and Amendment 
No. 1 thereto are approved on a six-month pilot basis, commencing with 
the launch of SuperSOES.
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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 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-8470 Filed 4-5-01; 8:45 am]
BILLING CODE 8010-01-M