[Federal Register Volume 66, Number 108 (Tuesday, June 5, 2001)]
[Notices]
[Pages 30252-30254]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14029]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-44365; File No. SR-NASD-2001-35]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the National Association of
Securities Dealers, Inc. Relating to the Elimination of the Interval
Delay Between Executions in the Nasdaq National Market Execution System
and the Effect of Odd-Lot Orders on Market Makers' Displayed Quotations
in the Nasdaq National Market Execution System
May 29, 2001.
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 May 10, 2001, the National Association of Securities Dealers, Inc.
(``NASD'' or ``Association''), through its subsidiary,
[[Page 30253]]
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. On May 24, 2001, the NASD, through Nasdaq,
filed Amendment No. 1 to the proposed rule change.\3\ The Commission is
publishing this notice to solicit comments on the proposed rule change
and Amendment No. 1 from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from John M. Yetter, Assistant General Counsel,
Nasdaq, to Katherine A. England, Division of Market Regulation,
Commission, dated May 22, 2001 (``Amendment No. 1). In Amendment No.
1, the Nasdaq made a minor technical correction to the rule text of
NASD Rule 4710(b)(1). See infra note 5.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
Nasdaq proposes to amend NASD Rule 4710, ``Participant Obligations
in NNMS,'' to: (1) Eliminate the interval delay between executions
against the same market maker at the same price level in the Nasdaq
National Market Execution System (``NNMS'' or ``SuperSOES''),\4\ and
(2) establish rules governing the decrementation of market makers'
displayed quotations by odd-lot orders in the NNMS.
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\4\ The Commission approved the NNMS, a new platform for trading
Nasdaq National Market (``NNM'') securities, on January 14, 2000.
See Securities Exchange Act Release No. 42344 (January 14, 2000), 65
FR 3897 (January 25, 2000), (order approving File No. SR-NASD-99-
11).
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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 NNM[S] [S]security \5\ shall be
subject to the following requirements.
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\5\ Nasdaq revised the rule text of NASD Rule 4710(b)(1) to
replace the phrase ``NNM security'' with the phrase ``NNMS
Security.'' See Amendment No. 1, supra note 3.
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(A) No change.
(B) No change.
(C) (i) The size of the displayed quotation will be decremented
upon the execution of an NNMS order in an amount equal to or greater
than one normal unit of trading[; provided, however that the execution
of an NNMS order that is a mixed lot (i.e., an order that is for more
than a normal unit of trading but not a multiple thereof) will only
decrement a displayed quotation's size] by the member of shares
represented by the number of round lots contained in the [mixed lot]
order.
(ii) The size of the displayed quotation will also be decremented
by the number of shares represented by one normal unit of trading when
the number of shares executed against a displayed quotation as the
result of:
a. orders in an amount less than a round lot, and
b. the portion of an order for a mixed lot (i.e., an order that is
for more than a normal unit of trading but not a multiple thereof) that
is in excess of the number of shares represented by the number of round
lots contained in such mixed-lot order, equals one normal unit of
trading.
(D) [(1) Except as provided in subparagraphs (2) and (3) below,
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 has elapsed from the time the order
was executed, as measured by the time of execution in the Nasdaq
system.]
[(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.]
[(3) For both the first day of trading of the securities of initial
public offerings and the first day of trading of the securities of
secondary offerings,\6\ 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 be required to execute another
order at its posted bid or offer in that same security as soon as the
NNMS system delivers another order to that market maker's quote. [After
the first day of trading, subsequent multiple executions against the
same market maker's quote at the same price level in such securities
shall be processed pursuant to subparagraph (D)(2) of this rule if the
security is included in the Nasdaq 100 Index, or if not included in
that index, multiple executions against the same market maker's quote
at the same price level in such securities shall be processed pursuant
to subparagraph (D)(1) of this rule.]
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[\6\ In order to obtain immediate processing of executions in
secondary offerings, the lead underwriter of the secondary offering
shall communicate its request in writing to the Nasdaq Market
Operations Department no later than the business day immediately
prior to the start of the trading in the secondary offering. Failure
to do so may result in the secondary offering being processed
pursuant to the interval delay time frames applicable to the
currently trading shares of the issuer.]
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* * * * *
(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
1. Purpose
Elimination of Interval Delays. Currently, the rules governing the
Nasdaq Small Order Execution System 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. It was originally anticipated that with the
launch of SuperSOES \7\ this delay would be reduced to five seconds
(plus two seconds system processing time) for the vast majority of NNM
securities. Nasdaq market participants, however, raised concerns that
significant order flow could potentially produce queuing within the
system, especially for Nasdaq 100 securities and securities that have
recently been the subject of initial public offerings or secondary
offerings. Accordingly, Nasdaq filed proposals with the Commission to:
(i) Reduce the interval delay between executions in Nasdaq 100
securities to two seconds,\8\ and (ii) reduce the interval delay
between round-lot executions for the first day of trading of all
SuperSOES-eligible initial public offerings and
[[Page 30254]]
secondary offerings to zero seconds (plus system processing time).\9\
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\7\ The implementation of SuperSOES is currently scheduled for
July 9, 2001.
\8\ 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).
\9\ See Securities Exchange Act Release No. 44142 (April 2,
2001), 66 FR 18331 (April 6, 2001) (order approving File No. SR-
NASD-01-03.)
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Nasdaq has now determined that it is technically feasible to reduce
the interval delay to zero seconds (plus system processing time) for
all transactions on SuperSOES. This would mean that a market maker
would be available for executions as quickly as the system an transmit
instructions between the execution and quote-update engines, an
operation that generally requires from one to one an one-half seconds.
Nasdaq market participants have indicated to Nasdaq that they would
support elimination of the interval delay for all transactions on
SuperSOES because this would further minimize the risk of queuing
within the system. Accordingly, the proposed rule change would provide
that market makers will be required to execute orders against their
displayed quotes whenever the SuperSOES system delivers such orders.
Decrementation of Market Makers' Quotations. The rules governing
the NNMS currently provide that an NNMS market maker's displayed
quotation will be decremented upon the execution of an NNMS order in an
amount equal to or greater than a round lot, and that in the event of
the execution of an NNMS order for a mixed lot (i.e., an order that is
for more than a round lot but not a multiple thereof), the displayed
quotation size will be decremented only by the number of shares
represented by the number of round lots contained in the mixed-lot
order.
The proposed rule change would establish a mechanism for
decrementing the displayed quotation size to take account of odd-lot
orders and the portion of mixed-lot orders that is not covered by the
current rule. Nasdaq has determined that it is technically feasible for
SuperSOES to track the number of shares executed against a displayed
quotation as the result of: (i) Orders in an amount less than a round
lot, and (ii) the portion of an order for a mixed lot that is in excess
of the number of shares represented by the number of round lots
contained in the mixed-lot order. When the total quantity of such
shares equals a round lot, the size of the displayed quotation would
then be decremented accordingly. Nasdaq market participants have
indicated that they would support this change because it will guard
against the possibility that a market participant could execute
multiple odd-lot orders against a market maker's quote without the size
of the displayed quotation being decremented.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
Section 15A(b)(6) \10\ of the Act, in that the proposed rule change 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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\10\ 15 U.S.C. 78o-3(b)(6).
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Nasdaq believes that eliminating the interval delay between
executions on the NNMS will ensure that customer orders are processed
in the most expeditious manner possible. Similarly, providing a
mechanism for decrementing market makers' displayed quotations for all
orders executed against such quotations will allow the NNMS to provide
more up-to-date information about the size of displayed quotations. In
turn, these improvements in order processing and display will improve
market function and aid in the crucial price discovery process.
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
No written comments were solicited or received with respect to the
proposed rule change.
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, including whether the proposed rule
change, as amended, 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 File No.
SR-NASD-2001-35 and should be submitted by June 26, 2001.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
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\11\ 17 CFR 200.30-30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-14029 Filed 6-4-01; 8:45 am]
BILLING CODE 8010-01-M