[Federal Register Volume 66, Number 219 (Tuesday, November 13, 2001)]
[Notices]
[Pages 56870-56872]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-28273]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45020; File No. SR-NASD-2001-80]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc., To Extend the Pilot for Limit Order 
Protection of Securities Priced in Decimals

November 5, 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 November 2, 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 (``Commission'') the proposed rule change as described in 
Items I, II and III below, which Items have been prepared by Nasdaq. 
Nasdaq filed the proposal pursuant to Section 19(b)(3)(A) of the 
Act,\3\ and Rule 19b-4(f)(6) \4\ thereunder, which renders the proposal 
effective upon filing with the Commission. 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)(6).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq proposes to extend through January 14, 2002, the current 
pilot price-improvement standards for decimalized securities contained 
in NASD Interpretive Material 2110-2--Trading Ahead of Customer Limit 
Order (``Manning Interpretation'' or ``Interpretation''). Without such 
an extension these standards would terminate on November 5, 2001. 
Nasdaq does not propose to make any substantive changes to the pilot; 
the only change is an extension of the pilot's expiration date through 
January 14, 2002. Nasdaq requests that the

[[Page 56871]]

Commission waive both the 5-day notice and 30-day pre-operative 
requirements contained in Rule 19b-4(f)(6)(iii) \5\ of the Act. If such 
waivers are granted by the Commission, Nasdaq will implement this rule 
change immediately.
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    \5\ 17 CFR 240.19b-4(f)(6)(iii).
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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 its proposal and discussed any 
comments it received regarding the proposal. 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
    NASD's Manning Interpretation requires NASD member firms to provide 
a minimum level of price improvement to incoming orders in NMS and 
SmallCap securities if the firm chooses to trade as principal with 
those incoming orders at prices superior to customer limit orders they 
currently hold. If a firm fails to provide the minimum level of price 
improvement to the incoming order, the firm must execute its held 
customer limit orders. Generally, if a firm fails to provide the 
requisite amount of price improvement and also fails to execute its 
held customer limit orders, it is in violation of the Manning 
Interpretation.
    On April 6, 2001,\6\ the Commission approved, on a pilot basis, 
Nasdaq's proposal to establish the following price improvement 
standards whenever a market maker wished to trade proprietarily in 
front of its held customer limit orders without triggering an 
obligation to also execute those orders:
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    \6\ See Securities Exchange Act Release No. 44165 (April 6, 
2001), 66 FR 19268 (April 13, 2001) (order approving proposed rule 
change modifying NASD's Interpretative Material 2110-2--Trading 
Ahead of Customer Limit Order).
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    (1) For customer limit orders priced at or inside the best inside 
market displayed in Nasdaq, the minimum amount of price improvements 
required is $0.01; and
    (2) For customer limit orders priced outside the best inside market 
displayed in Nasdaq, the market maker must price improve the incoming 
order by executing the incoming order at a price at least equal to the 
next superior minimum quotation increment in Nasdaq (currently 
$0.01).\7\
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    \7\ Pursuant to the terms of the Decimals Implementation Plan 
for the Equities and Options Markets, the minimum quotation 
increment for Nasdaq securities (both National Market and SmallCap) 
at the outset of decimal pricing is $0.01. As such, Nasdaq displays 
priced quotations to two places beyond the decimal point (to the 
penny). Quotations submitted to Nasdaq that do not meet this 
standard are rejected by Nasdaq systems. See Securities Exchange Act 
Release No. 43876 (January 23, 2001), 66 FR 8251 (January 30, 2001).
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    Since approval, these standards have operated on a pilot basis and 
are currently scheduled to terminate on November 5, 2001. Nasdaq 
selected the termination date of its Manning Interpretation pilot to 
coincide with deadline for submitting rule filings related to 
decimalization contained in the Commission's June 8th, 2000 Order 
directing the submission of a Decimals Implementation Plan for the 
Equities and Options Markets.\8\
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    \8\ See Securities Exchange Act Release No. 42914 (June 8, 
2000), 65 FR 38010 (June 19, 2000).
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    Subsequent to the Interpretation pilot's approval, the Commission 
extended the deadline for the submission of decimal-related rule 
filings to January 14, 2002.\9\ As such, Nasdaq has determined to seek 
an extension of its current Manning Interpretation pilot until that 
date. Nasdaq believes that such an extension will provide needed 
additional time for Nasdaq and the Commission to analyze data and the 
many complex issues related to customer limit order protection in a 
decimalized Nasdaq.
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    \9\ See Securities Exchange Act Release No. 44846 (September 25, 
2001), 66 FR 49983 (October 1, 2001), see also Securities Exchange 
Act Release No. 44336 (May 22, 2001), 66 FR 29368 (May 30, 2001) 
(order extending the deadline for submission of decimal-related rule 
filings to November 5, 2001).
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act \10\ in that it is 
designed to: (1) Promote just and equitable principles of trades; (2) 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to and 
facilitating transactions in securities; (3) perfect the mechanism of a 
free and open market and a national market system; and (4) protect 
investors and the public interest.
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    \10\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organizations' Statement on Burden on Competition

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

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

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) Impose any significant burden on competition; and
    (iii) Become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest, it 
has become effective pursuant to Section 19(b)(3)(A) of the Act \11\ 
and Rule 19b-4(f)(6) thereunder.\12\ At any time within 60 days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate such rule change if its 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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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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    Nasdaq has requested the Commission waive both the 5-day notice and 
30-day pre-operative requirements contained in Rule 19b-4(f--(6) \13\ 
and has requested that the Commission accelerate the operative date. 
The Commission finds good cause to designate the proposal to become 
operative immediately because such designation is consistent with the 
protection of investors and the public interest. Acceleration of the 
operative date will allow the pilot to continue uninterrupted through 
January 14, 2002, the deadline for which self-regulatory organizations 
must file proposed rule changes to set the minimum price variation for 
quoting in a decimals environment. For these reasons, the Commission 
finds good cause to designate that the proposal is both effective and 
operative upon filing with the Commission.\14\
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    \13\ Id.
    \14\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).

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[[Page 56872]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposal 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 Nasdaq. All 
submissions should refer to file number SR-NASD-2001-08 and should be 
submitted by December 4, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-28273 Filed 11-9-01; 8:45 am]
BILLING CODE 8010-01-M