[Federal Register Volume 66, Number 132 (Tuesday, July 10, 2001)]
[Notices]
[Pages 36020-36022]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17133]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44506; File No. SR-NASD-2001-40]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 to the 
Proposed Rule Change by the National Association of Securities Dealers, 
Inc. Relating to Non-Liability SelectNet Messages in the Nasdaq 
National Market System

July 3, 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 June 21, 2001, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its subsidiary, The Nasdaq Stock 
Market, Inc. (``Nasdaq''),\3\ 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 has filed the proposed rule change pursuant to 
section 19(b)(3)(A) of the Act \4\ and Rule 19b-4(f)(5) thereunder.\5\ 
Nasdaq has designated the proposal as a change to an existing order 
entry or trading system of a self-regulatory organization that (i) does 
not significantly affect the protection of investors or the public 
interest; (ii) does not impose any significant burden on competition; 
and (iii) does not have the effect of limiting the access to or 
availability of the system. This designation renders the proposed rule 
change, as amended, immediately effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On June 21, 2001, Nasdaq amended its proposal to indicate 
that the NASD, through its subsidiary, Nasdaq, filed the proposed 
rule change. See letter from Thomas P. Moran, Associate General 
Counsel, Office of General Counsel, Nasdaq, to Katherine A. England, 
Assistant Director, Division of Market Regulation, Commission, dated 
June 20, 2001 (``Amendment No. 1'').
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(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 4720(c), ``Prohibition Regarding 
the Entry of Certain Preferenced Orders to Nasdaq National Market 
Execution System Market Makers,'' to allow

[[Page 36021]]

members to send a SelectNet preferenced (i.e., directed) order to a 
Nasdaq National Market Execution System (``NNMS'' or ``SuperSOES'') \6\ 
market maker if the order is designated as a non-liability order that 
is entered at a price that is inferior to the displayed quote to which 
the preferenced order is directed. Nasdaq plans to implement the 
proposed change upon the commencement of SuperSOES trading, which 
currently is scheduled to begin on July 9, 2001. The text of the 
proposed rule change appears below. Proposed new language is 
italicized; proposed deletions are in brackets.

    \6\ 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) 
(``SuperSOES Order'').
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* * * * *

4720. SelectNet Service

(a) No Change

(b) No Change

(c) Prohibition Regarding the Entry of Certain Preferenced Orders to 
Nasdaq National Market Execution System Market Makers

    No member may direct a SelectNet preferenced order to a Nasdaq 
National Market Execution System (``NNMS'') market maker (as defined 
in NASD Rule 4701) including that market maker's Agency Quote (as 
defined in NASD rule 4613) unless that order is designated as:
    (i) a non-liability order that is entered as an ``All-or-None'' 
order (``AON'') and is at least one normal unit of trading (i.e., 
100 shares) in excess of the displayed quote to which the referenced 
order is directed; or
    (ii) a non-liability order that is entered as a ``Minimum 
Acceptable Quantity'' order (``MAQ''), with a MAQ value of at least 
one normal unit of trading in excess of the displayed quote to which 
the preferenced order is directed[.] ; or
    (iii) a non-liability order that is entered at a price that is 
inferior to the displayed quote to which the preferenced order is 
directed.
The prohibitions of this paragraph shall not apply to preferenced 
orders sent by a UTP Specialist to an NNMS market maker or to 
preferenced orders sent by an NNMS market maker to a UTP Specialist. 
For purposes of this rule a ``UTP Specialist'' shall mean a broker/
dealer registered as a specialist in Nasdaq securities pursuant to 
the rules of an exchange that is a signatory to the Joint Self-
Regulatory Organization Plan Governing the Collection, Consolidation 
and Dissemination of Quotation and Transaction Information for 
Exchange-Listed Nasdaq/National Market System Securities Traded On 
Exchanges On An Unlisted Trading Privilege Basis (``Nasdaq/NMS/UTP 
Plan'').
* * * * *

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

    Currently, NASD Rule 4720(c) prohibits the entry of preferenced 
SelectNet orders to NNMS market makers unless those orders are 
designated by the sending party as either an ``All-or-None'' or 
``Minimum Acceptable Quantity'' order that is at least one normal unit 
of trading (i.e., 100 shares) in excess of the displayed quote to which 
the preferenced order is directed. In response to input from market 
participants that desire greater flexibility in sending non-liability 
SelectNet orders in a SuperSOES environment, Nasdaq has determined to 
amend NASD Rule 4720(c) to provide an additional alternative method for 
sending non-liability messages to NNMS market makers. Specifically, 
Nasdaq proposes to adopt NASD Rule 4720(c)(iii), which will allow NNMS 
participants to enter preferenced SelectNet orders to NNMS market 
makers if the preferenced orders contain prices that are inferior to 
the quoted bids and/or offers to which they are directed. For example, 
if a SuperSOES market maker is quoting 20.00 bid and 20.03 offer, the 
proposed rule change would allow a market participant to preference 
that market maker with either an order to sell at 20.01 or more, or an 
order to buy at 20.02 or less. Because these orders are not priced at 
levels that would obligate the receiving market maker to execute them 
under current firm quote standards, the NNMS market maker could choose 
to either ignore the orders or negotiate with the sending party to 
reach an agreement that would allow a trade to take place.
    Nasdaq notes that the proposed alternative method of sending non-
liability SelectNet messages is consistent with the Nasdaq rules 
approved previously by the Commission \7\ that generally limit 
SelectNet to a negotiation function when accessing market maker 
quotes.\8\ Nasdaq adopted the limitation to reduce potential dual 
liability for market makers who under Nasdaq's current system may be 
forced to provide share amounts in excess of their displayed quote when 
they contemporaneously receive a liability SelectNet message and an 
execution through Nasdaq's Small Order Execution System.
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    \7\ See SuperSOES Order, Supra note 6.
    \8\ Market makers and electronic communication networks 
(``ECNs'') will continue to be allowed to send liability SelectNet 
messages at the displayed price and size of the quotes of those ECNs 
that do not agree to become full participants in NNMS and provide 
automatic executions for orders received from NNMS participants. See 
SuperSOES Order, supra note 6. In addition, unlisted trading 
privilege (``UTP'') exchange specialists will continue to send 
SelectNet preferenced liability orders to NNMS market makers and 
NNMS market makers will continue to send SelectNet preferenced 
liability orders to UTP exchange specialists. See NASD Rule 4720(c).
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    Based on the above, Nasdaq believes that the proposed rule change 
is consistent with the provisions of section 15A(b)(6) of the Act \9\ 
in that the proposal is 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.
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    \9\ 15 U.S.C. 78o-3(b)(6).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will impose 
any burden on competition 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 with respect 
to the proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Nasdaq represents that the proposed rule change would effect a 
change in an existing order entry or trading system that: (1) Does not 
significantly affect the protection of investors or the public 
interest; (ii) does not impose any

[[Page 36022]]

significant burden on competition; and (iii) does not have the effect 
of limiting the access to or availability of the system. Accordingly, 
the proposal, as amended, has become effective upon filing with the 
Commission pursuant to section 19(b)(3)(A) of the Act and Rule 19b-
4(f)(5) thereunder. At any time within 60 days of the filing of a 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether it 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 at the Commission's Public 
Reference Section, 450 Fifth Street, NW., Washington, DC. 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-2001-40 and should be submitted by July 31, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. 01-17133 Filed 7-9-01; 8:45 am]
BILLING CODE 8010-01-M