[Federal Register Volume 66, Number 135 (Friday, July 13, 2001)]
[Notices]
[Pages 36814-36815]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17522]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44526; File No. SR-NASD-00-30]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change and Notice of 
Filing and Order Granting Accelerated Approval to Amendment No. 1 to 
the Proposed Rule Change To Include UTP Exchanges on a Voluntary Basis 
in the Nasdaq National Market Execution Service

July 6, 2001.

I. Introduction

    On May 25, 2000, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its wholly-owned 
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 19b-4 thereunder,\2\ a proposed rule change to 
include unlisted trading privilege exchanges (``UTP Exchanges'') in the 
automatic-execution function of the Nasdaq National Market Execution 
Service (``NNMS'') on a voluntary basis. The proposed rule change was 
published for comment in the Federal Register on June 5, 2000.\3\ The 
Commission received one comment letter on the proposed rule change.\4\ 
On July 6, 2001, the Association submitted Amendment No. 1 to the 
proposed rule change.\5\ This order approves the proposed rule change. 
The Commission also is granting accelerated approval to Amendment No. 1 
to the proposed rule change and is soliciting comment on 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\ Securities Exchange Act Release No. 42847 (May 26, 2000), 65 
FR 35690.
    \4\ See letter to Jonathan G. Katz, Secretary, SEC, from Gerald 
D. Putnam, Chief Executive Officer, Archipelago, L.L.C., dated 
October 25, 2000 (``Archipelago Letter'').
    \5\ See letter to Katherine A. England, Assistant Director, 
Division of Market Regulation, SEC, from Thomas Moran, Associate 
General Counsel, Nasdaq, dated July 6, 2001 (``Amendment No. 1''). 
In Amendment No. 1, the Association amended the language of NASD 
Rule 4720 to reflect amendments recently published by the 
Commission. See Securities Exchange Act Release No. 44506 (July 3, 
2001). In addition, the Association clarified that participation by 
UTP Exchanges in the NNMS is voluntary. Finally, the Association 
added language to clarify the continued use SelectNet upon 
implementation of NNMS.
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II. Description of the Proposal

    On January 14, 2000, the Commission approved the NNMS trading 
platform, which is scheduled to be phased-in on July 9, 2001.\6\ As 
approved, the NNMS will be an automatic execution system that will 
serve as the primary trading platform for Nasdaq National Market 
securities. Under the NNMS rules, participation in the NNMS will be 
mandatory for Nasdaq market makers, and those market makers will be 
required to participate in the automatic-execution function of the 
system. In this proposed rule change, Nasdaq amended the NASD rules 
governing the NNMS to enable UTP Exchanges to participate in the 
automatic-execution function of the NNMS. Participation by UTP 
Exchanges in the NNMS, however, is voluntary.\7\
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    \6\ The NNMS trading platform was scheduled for implementation 
on July 10, 2000, prompting Nasdaq's request for approval of this 
proposed rule change by that date. On June 30, 2000, Nasdaq 
announced that it was postponing the implementation until the last 
quarter of 2000. Telephone conversation between Tom Moran, Associate 
General Counsel and John Malitzis, Assistant General Counsel, Office 
of the General Counsel, Nasdaq, and Heather Traeger, Attorney, 
Division of Market Regulation, SEC, on July 5, 2000. See also 
Securities 2000) (approving the new NNMS trading platform).
    \7\ See Amendment No. 1.
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    In the NNMS, the quotes of market makers, ECNs \8\ (Full 
Participant ECNs and Order Entry ECNS), and UTP Exchanges are accessed 
in general price/time priority. As the NNMS was originally proposed and 
approved, UTP Exchanges would only receive orders through Nasdaq's 
SelectNet system. This was because UTP Exchanges have traditionally 
received orders against their quotes through the order-delivery 
functionality of SelectNet. Because SelectNet is an order-delivery 
system--as opposed to an automatic-execution system like the NNMS--UTP 
Exchanges that receive SelectNet orders must manually respond to the 
order to complete a trade.
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    \8\ For a description of the NNMS and the terms used in this 
order, see Securities Exchange Act Release No. 42344 (January 14, 
2000), 65 FR 3987 (January 25, 2000).
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    After the Commission approved the NNMS, the Chicago Stock Exchange 
(``CHX'') and Nasdaq began discussion the possibility of the CHX 
participating in the automatic-execution functionality of the NNMS. 
Both Nasdaq staff and the CHX recognized that there cold be delays in 
processing orders if a UTP Exchange is alone at the inside and does not 
respond, within 90 seconds, to orders delivered to its quote.\9\ This 
could occur if the UTP Exchange is experiencing system problems, is 
slow to process an order, or if there are delays in Nasdaq systems.
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    \9\ While this is also a concern with ECNs, Nasdaq believes the 
concern is substantially smaller because ECNs are required to 
provide an automated response to SelectNet messages, and, in 
Nasdaq's experience, they generally respond in 5 seconds or less to 
orders presented to their quotes. UTP Exchanges are not under the 
same explicit obligation.
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    In light of the above, Nasdaq is proposing to permit UTP Exchanges 
to participate in the automatic-execution functionality of the NNMS. 
Participation by UTP Exchanges is voluntary. The proposed rule change 
also clarifies that if a UTP Exchange participates in the automatic-
execution functionality of the NNMS, orders preferenced to the UTP 
Exchange's quotes mut meet the oversized requirement or other 
conditions of the rule. This is to limit the potential for dual 
liability for UTP Exchanges.
    In addition, Nasdaq is proposing non-substantive rule changes to 
correct drafting errors in the original rule proposal to clarify that 
orders sent to quotes of Order Entry ECNs are not subject to the 
oversized order or the requirements in the rule, while orders sent to 
Full Participant ECNs are subject

[[Page 36815]]

to these requirements. Further, the proposed rule change clarified the 
use of SelectNet for order sent to, or orders sent by, UTP Exchanges 
that do participant in the automatic functionality of the NNMS. 
Finally, the Association proposed a definition for ``UTP Exchange'' are 
eliminated the definition and references to ``UTP Specialists''.

Summary of Comments

    The Commission received one comment letter on the proposed rule 
changes from Archipelago.\10\ This commenter objected to the differing 
treatment of ECNs and UTP Exchanges in the NNMS. Specifically, the 
commenter whether it was consistent with the Act for the Association to 
permit ECNs to participate in the NNMS as either a Full Participate ECN 
or an Order Entry ECN, while only permitting UTP Exchanges the option 
of participating fully in the automatic execution functionality of the 
NNMS; i.e., UTP Exchanges that choose to participate in NNMS must both 
route orders for automatic execution in the NNMS as well as provide 
automatic execution for orders routed to their quotes.
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    \10\ See note 4 supra.
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    The commenter also argued that as a securities information 
processor (``SIP''), Nasdaq should remain neutral with respect to all 
market centers and that Nasdaq therefore should not be able to treat 
UTP Exchanges differently than NASD members.
    The Commission notes that the Archipelago Letter was submitted 
prior to the Commission's SuperMontage Order,\11\ which specifically 
addressed Archipelago's concerns.\12\ In that order, the Commission 
stated that the NASD did not have to make accommodations for competing 
exchanges that are comparable to accommodations provided to its 
members. The Commission further noted that it believed that NASD should 
be able to provide access to a competing exchange that is equivalent to 
the access the competing exchange provides for NASD members. In 
addition, the Commission also addressed Nasdaq's role as an exclusive 
SIP.\13\ Specifically, in the SuperMontage Order, the Commission 
directed the NASD and the UTP Exchanges to re-evaluate 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 Privileges Basis (``UTP Plan'').\14\
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    \11\ Securities Exchange Act Release No. 43863 (January 19, 
2001), 66 FR 8020 (January 26, 2001) (``SuperMontage Order'').
    \12\ For the Commission's complete discussion, see SuperMontage 
Order, Section V.G.
    \13\ See SuperMontage Order, Section V.I.3.
    \14\ The Commission notes the UTP Plan participants are 
currently considering these issues.
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IV. Discussion

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act \15\ and the rules and regulations 
thereunder applicable to a national securities association. In 
particular, the Commission finds that the proposal is consistent with 
the requirements of sections 15A(b)(6) \16\ of the Act because the 
proposed rule change is designed 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 general, to 
protect investors and the public interest.
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    \15\ 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).
    \16\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that, by allowing UTP Exchanges to 
participate in the automatic-execution functionality of the NNMS, the 
proposed rule change will eliminate the potential for order queuing or 
for the system to stop processing orders when an UTP Exchange is alone 
at the best bid/best offer. The Commission notes that UTP Exchange 
participation in the auto-ex feature of NNMS is voluntary; these rules 
merely describe how a UTP Exchange that chooses to participate in the 
automatic execution function will need to operate.
    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. The NASD plans 
to implement the NNMS system on July 9, 2001 and thus, accelerated 
approval is necessary to accommodate this timeframe. Since Amendment 
No. 1 clarifies the application of the proposed rule change, but did 
not change the intent of the proposal, the Commission believes that 
good cause exists, consistent with section 15A(b)(6) \17\ and 19(b) of 
the Act \18\ to accelerate approval of Amendment No. 1 to the proposed 
rule change.
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    \17\ 15 U.S.C. 78o-3(b)(5).
    \18\ 15 U.S.C. 78s(b).
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V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1, including whether the amendment 
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-00-30 and should be 
submitted by August 3, 2001.

VI. Conclusion

    It Is Therefore Ordered, pursuant to section 19(b)(2) of the Act, 
\19\ that the proposed rule change, as amended, (SR-NASD-00-30), is 
approved.
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    \19\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-17522 Filed 7-12-01; 8:45 am]
BILLING CODE 8010-01-M