[Federal Register Volume 66, Number 219 (Tuesday, November 13, 2001)]
[Notices]
[Pages 56875-56876]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-28276]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45016; File No. SR-NASD-2001-66]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change, Amendment No. 1, and Amendment No. 2 Thereto by the National 
Association of Securities Dealers, Inc. Relating To Display 
Requirements When Using Reserve Size in the Nasdaq National Market 
Execution System

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 October 4, 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'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by the NASD. On October 23, 2001, the NASD submitted Amendment No. 1 to 
the proposed rule change.\3\ On October 29, 2001, the NASD submitted 
Amendment No. 2 to the proposed rule change.\4\ 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\ See letter from Thomas P. Moran, Associate General Counsel, 
Nasdaq, to Katherine England, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated October 23, 2001 
(``Amendment No. 1''). In Amendment No. 1, the NASD intended to 
amend rule text; however, an unintentional oversight by the NASD 
resulted in the rule text remaining the same.
    \4\ See letter from Thomas P. Moran, Associate General Counsel, 
Nasdaq, to Katherine England, Assistant Director, Division, 
Commission, dated October 29, 2001 (``Amendment No. 2''). In 
Amendment No. 2, the NASD included the rule text change it 
unintentionally omitted in Amendment No. 1. Specifically, the NASD 
amended Nasdaq Rule 4710(b) to require a minimum of 100 shares 
displayed in a market maker's quote and that the market maker's 
quotation must be refreshed to 100 shares consistent with other 
provisions within the Rule. The NASD also changed the status of the 
proposed rule change from one filed pursuant to section 19(b)(3)(A) 
of the Act, 15 U.S.C. 78s(b)(3)(A), to one filed pursuant to section 
19(b)(2) of the Act, 15 U.S.C. 78s(b)(2).
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NASD proposes to amend NASD Rule 4710 to reduce the 1000 share 
display size requirement to 100 shares for using the reserve size 
functionality in the Nasdaq National Market Execution System (``NNMS'' 
or ``SuperSOES'').
    The text of the proposed rule change, as amended, appear below. New 
text is in italics; deletions are in brackets.
    4710. Participant Obligations in NNMS
    (a) No Change.
    (b) Market Makers
    (1) An NNMS Market Maker in an NNMS Security shall be subject to 
the following requirements:
    (A) For each NNM security in which it is registered as an NNMS 
Market Maker, the market maker must execute individual orders against 
its quotation including its Agency Quote (if applicable), in an amount 
equal to or smaller than the combination of the displayed quotation and 
reserve size of such quotation(s). For purposes of this rule, the term 
``reserved size'' shall mean that a NNMS Market Maker or a customer 
thereof wishes to display publicly part of the full size of its order 
or interest with the remainder held in reserve on an undisplayed basis 
to be displayed in whole or in part as the displayed part is executed. 
To utilize the reserve size function, a minimum of [1,000] 100 shares 
must initially be displayed in the market maker's quote (including the 
Agency Quote), and the quotation must be refreshed to [1,000] 100 
shares consistent with subparagraph (b)(2)(A) of this rule.
    (B)-(E) No Change.
    (2) Refresh Functionality
    (A) Reserve Size Refresh--Once an NNMS Market Maker's displayed 
quotation size on either side of the market in the security has been 
decremented to zero due to NNMS executions, Nasdaq will refresh the 
market maker's displayed size out of reserve size to a size-level 
designated by the NNMS Market Maker, or in the absence of such size-
level designation, to the automatic refresh size. If the market maker 
is using the reserve size function for its proprietary quote or Agency 
Quote, the market maker must refresh to a minimum of [1,000] 100 
shares, consistent with subparagraph (b)(1)(A) of this rule.
    (B) 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, the NASD included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, and discussed any comments it received on the proposed rule 
change. The text of

[[Page 56876]]

these statements may be examined at the places specified in Item IV 
below. The NASD 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
    The NASD asserts that NNMS/SuperSOES allows market makers to divide 
quoted share amounts submitted to the system between those shares they 
direct to display publicly in the Nasdaq montage and the shares they 
desire to keep in reserve. Known as ``reserve size,'' shares kept in 
reserve are available for execution through SuperSOES, but are not 
shown to the marketplace.\5\ The NASD believes that reserve size is an 
important tool for market participants seeking to execute large 
securities transactions while limiting negative market price impacts 
associated with public knowledge of those attempted sales of purchases.
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    \5\ Under NNMS's execution algorithm, the system executes 
against all publicly-displayed shares at the same price level before 
executing in time priority against reserve size at that same price.
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    Currently, the rules of Nasdaq's SuperSOES system prohibit the use 
of its reserve size functionality unless a market maker is displaying 
at least 1000 shares in its public quote. To Nasdaq's knowledge, it is 
the only market or trading venue that imposes such a display 
obligation. The NASD claims that this requirements was initially 
imposed in the belief that it would encourage the display of larger 
sized share amounts in the Nasdaq market. The NASD believes that the 
advent of decimalization, however, has resulted in a diffusion of 
trading interest and liquidity across multiple price points that 
militates against the continuous display of large share amounts at a 
single price level. The NASD asserts that this particularly true for 
stocks that trade less frequently. In addition, the NASD believes that 
the continuation of the current rule places NNMS at a competitive 
disadvantage to other execution systems that allow the use of reserve 
size without a 1000-share display requirement.
    As a result, Nasdaq proposes to eliminate the 1000-share display 
requirement for using NNMS reserve size. Under the proposed rule 
change, market makers would be allowed to use NNMS' reserve size 
anytime they displayed a quote of at least one round lot (100 shares). 
Nasdaq would continue its policy of allowing the use of reserve size 
even if a particular displayed quotation dropped below 100 shares based 
on partial, interim, executions against that un-updated quote. The NASD 
believes that the elimination of the 1000-share display requirement 
makes NNMS reserve size functionality available to market makers on 
terms similar to the reserve size facilities of competing trading 
systems while continuing to encourage the display of trading interest 
through NNMS' ``displayed size first'' execution algorithm.
2. Statutory Basis
    The NASD believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\6\ in general, and with 
Section 15A(b)(6) of the Act,\7\ in particular, 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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    \6\ 15 U.S.C. 78o-3.
    \7\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe that the proposed rule change, as 
amended, 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.

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 NASD consents, the Commission will:
    (A) By order approve such proposed rule change; or
    (B) Institute proceedings to determine whether the proposed rule 
change, as amended, 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, as amended, 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 filings will also be available for inspection and 
copying at the principal office of the NASD. All submissions should 
refer to File No. SR-NASD-2001-66 and should be submitted by December 
4, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-28276 Filed 11-9-01; 8:45 am]
BILLING CODE 8010-01-M