[Federal Register Volume 66, Number 221 (Thursday, November 15, 2001)]
[Notices]
[Pages 57496-57498]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-28587]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45047; File No. SR-NASD-20001-77]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval 
of Proposal to Permit SuperSOES To Trade Through the Quotations of UTP 
Exchanges That Do Not Participate in the Nasdaq National Market 
Execution Service

November 8, 2001.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), \1\ and Rule 19b-4 thereunder,\2\

[[Page 57497]]

notice is hereby given that on October 31, 2001, the National 
Association of Securities Dealers, Inc. (``NASD''), through its 
subsidiary, The Nasdaq Stock Market, Inc. (``Nasdaq''), filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') a 
proposed rule change, and an amendment thereto \3\ as described in 
Items I and II below, which Items have been substantially prepared by 
Nasdaq. The Commission is publishing this notice and simultaneously 
granting approval on a temporary basis to the proposed rule change, as 
amended.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Edward S. Knight, General Counsel, Nasdaq, 
to Belinda Blaine, Associate Director, SEC dated November 7, 2001 
(``Amendment No. 1'').
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I. Self-Regulatory organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NASD filed a proposed rule change to amend Rule 4710 to state 
that if an exchange that trades Nasdaq securities pursuant to unlisted 
trading privileges (``UTP exchange'' elects not to participate in 
SuperSOES, SuperSOES will not include the UTP exchange's quoation for 
order processing and execution and purposes. The text oif the proposed 
rule change is available from the NASD and from the Commission.

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 statemenets 
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 polaces specified in 
Item III 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
    Nasdaq is proposing to amend NASD Rule 4710 to specify that if a 
UTP exchange elects not to participate in SuperSOES, SuperSOES will not 
include the UTP exchange's quotation for order processing and execution 
purposes. Nasdaq is seeking approval of this rule change as a pilot 
that would be effective until February 28, 2002.
    Background. On January 14, 2000, the Commission approved a rule 
change to establish the Nasdaq National Market Execution System 
(``NNMS'').\4\ On July 30, 2001, NNMS was implemented for all Nasdaq 
National Market securities.
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    \4\ See Securities Exchange Act Release No. 42344 (January 14, 
2000), 65 FR 3987 (January 25, 2000).
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    NNMS refers to Nasdaq's reconfigured Small Order Execution System 
named SuperSOES. SuperSOES is an automated execution system that allows 
the entry of orders for up to 999,999 shares. By removing the size and 
capacity restrictions from its principal automatic execution system, 
Nasdaq intended for most of the orders executed through Nasdaq's 
systems to migrate to SuperSOES. Consistent with that approach, and 
with the exceptions discussed below, access to SelectNet was limited to 
certain types of non-liability orders that require negotiation with the 
receiving market participant.\5\
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    \5\ As originally proposed, market participants were permitted 
to enter into the modified SelectNet Only: (1) those orders that 
specify a minimum acceptable quantity for a size that is a least 100 
shares greater than the posted quote of the receiving market 
participant; or (2) All-None-or-None orders that are at least 100 
shares greater than the displayed bid/offer size. Since the original 
proposal, the SEC also approved the entry of non-liability, 
inferior-priced orders through SelectNet.
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    Nasdaq market makers are required to participate in SuperSOES and, 
therefore, to accept automatic execution against their displayed 
quotations. However, a subset of Nasdaq market participants, UTP 
exchanges, as well as Electronic Communications Networks (``ECNs''), 
continue to have their quotes in Nasdaq accessed through SelectNet and, 
as such, are not required to accept automatic executions.\6\ Whereras 
Nasdaq can require, by rule, that its member ECNs provide immediate 
response to an inbound SelectNet order, it has no authority to extend 
that requirement to a UTP exchange. As a result, when a UTP exchange is 
alone at the best bid/best offer for a particular security, and that 
UTP exchange is only accessible through SelectNet, SuperSOES will stop 
processing orders in that security and will hold those orders in queue 
for up to 90 seconds.
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    \6\ ECNs may choose whether or not to take automatic executions 
through SuperSOES. ECNs that choose to take automatic execution 
against their quotes through SuperSOES are referred to as ``Full 
Participant ECNs.'' Full Participant ECNs are not required to take 
liability orders through Select Net. ECNs that choose not to take 
automatic execution against their quotes through SuperSOES must 
conttinue to take delivery of liability orders against their quotes 
through SelectNet. These ECNs are referred to as Order-Entry ECNs.'' 
(A ``liability order rdquo; imposes an obligation on the market 
participant that receives the order to respond to the order in a 
manner consistent with the Firm Quote Rule (Rule 11Ac1-1 under the 
Act) (e.g., by executing the order for that market participant's 
displayed size.).
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    This pause serves two purposes. First, it provides a Nasdaq market 
participant the opportunity to send a SelectNet liability message to 
the UTP exchange (if that exchange has chosen to participate in 
SelectNet \7\), but at the risk of substantial queuing of market and 
marketable lilmit orders for that security as the Nasdaq market 
participant awaits a response to its order. Second, it enables a 
SuperSOES market participant (i.e., market maker, Full Participant ECN, 
or participating UTP exchange) to join the current best bid/best offer 
or create a new best bid/best offer.
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    \7\ The Cincinnati Stock Exchange does not participate in any 
Nasdaq market systems. Instead, it relies on the language in 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 and for Nasdaq/national Market System Securities Traded 
on Exchangges on an Unlisted Trading Privilege Basis (``OTC/UTP 
Plan''), and provides telephone access to its quotes.
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    If, after 90 seconds, a SuperSOES market participant does not join 
the current best bid/best offer, and the UTP exchange does not respond 
to its inbound SelectNet order, SuperSOES returns the orders in the 
queue and the system shuts down for that security. The system will only 
resume once the UTP exchange responds to orders delivered to its quote, 
or moves its quote away from the inside.\8\ Nasdaq believes that such 
delays have adversely affected Nasdaq's ability to ensure the proper 
functioning of its market, as well as the ability of market 
participants to obtain executions for their customers.
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    \8\ To illustrate, assume CHX does not participate in SuperSOES 
and is alone at the current best bid of $20 for 1,000 shares of 
ABCD. MMA enters an order into SuperSOES and MMB directs (or 
preferences) 1,000 shares via SelectNet to CHX. If no other market 
maker or Full Participant ECN joins the current best bid of $20, 
SuperSOES stops processing orders in ABCD for 90 seconds. CHX waits 
2 minutes before responding to MMB's preferenced SelectNet liability 
order either by filling or declining the order. (This delay could 
occur if there are equipment problems at CHX, in Nasdaq, or both.) 
The result is that the market in ABCD effectively is held up for 2 
minutes and SuperSOES is shut off for ABCD after 90 seconds.
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    Proposed Amendment. To address these problems, Nasdaq is proposing 
to amend NASD Rule 4710 to require UTP exchanges that chose to trade 
Nasdaq securities through Nasdaq market systems to participate fully in 
the automatic executions through SuperSOES, or paritipate in SelectNet 
pursuant to existing NASD Rules and have their quotations removed from 
the SuperSOES execution and order processing functionality. 
Specifically, if a UTP exchange elects not to participate in SuperSOES, 
SuperSOES will trade through the UTP exchange quotation. This will 
prevent SuperSOES from effectively shutting down the market in that 
security.

[[Page 57498]]

    UTP exchanges that choose this option would be accessible by 
telephone as contemplated in the OTC/UTP Plan, or via a mutually 
agreed-upon alternative bilateral link negotiated by the UTP exchange. 
Nasdaq states that it welcomes the opportunity to explore the 
possibility of bilateral linkages, which Nasdaq anticipates could be 
formed via separate agreement between Nasdaq and the exchange(s).\9\
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    \9\ The OTC/UTP Plan governs the trading of Nasdaq-listed 
securities pursuant to unlisted trading privileges. Subsection (b) 
of Section IX of the OTC/UTP Plan states, in pertinent part, that 
Plan participants ``shall have direct telephone access to the 
trading desk of each Nasdaq market participant in each [e]ligible 
[s]ecurity in which the [p]articipant displays quotations.'' See 
Section IX, Market Access, OTC/UTP Plan. This currently is the 
method that the Cincinnati Stock Exchange has elected to use for 
trading Nasdaq securities under the OTC/UTP Plan.
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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, in that the proposal is 
designed to facilitate 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. In particular, Nasdaq believes that modifying 
SuperSOES to trade through quotations of nonautomatic execution UTP 
exchanges is necessary for the fair and orderly operation of the Nasdaq 
Stock Market because it helps reduce the potential for order queuing or 
for system stoppages, when a UTP Exchange's quote is inaccessible 
through SuperSOES and is alone at the best bid or best offer.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD 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, as amended.

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. 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 the 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-2001-77 and should be 
submitted by December 6, 2001.

IV. Commission's Findings and Order Granting Accelerated Approval 
of Proposed Rule Change

    The Commission finds that the proposal, as amended, is consistent 
with Section 15A of the Act, and in particular with paragraph (b)(6), 
which requires that the rules of a national securities asssociated be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and 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.\10\ The proposal will permit SuperSOES to continue 
providing executions to investor's orders when a UTP exchange is alone 
at the inside with a quote that cannot be reached through SuperSOES.
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    \10\ In reviewing this proposal, the Commission has considered 
its potential impact on efficiency, competition and capital 
formation. 15 U.S.C. 78c(f).
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    Nasdaq has requested that the Commission grant accelerated approval 
of the proposed rule change because it believes that the potential for 
shut down in its automatic execution systems is a serious, imminent 
concern. Up to four additional national securities exchanges plan to 
begin trading Nasdaq listed securities in the near future.
    The Commission finds good cause pursuant to Section 19(b)(2) of the 
Act,\11\ for approving the proposed rule change, as amended prior to 
the thirtieth day after the date of publication of notice of filing 
thereof in the Federal Register. With several UTP exchanges planning to 
trade Nasdaq securities, the potential for queuing in SuperSOES when a 
non-automatic execution UTP exchange is alone at the inside will 
increase.\12\
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    \11\ 15 U.S.C. 78s(b)(2).
    \12\ For exchanges that participate in SuperSOES, this is not an 
issue.
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V. Conclusion

    It Is Therefore Ordered pursuant to Section 19(b)(2) of the 
Act,\13\ that the proposed rule change (SR-NASD-2001-77) and Amendment 
No. 1 thereto, are hereby granted accelerated approval, through 
February 28, 2002.
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    \13\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12)
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-28587 Filed 11-14-01; 8:45 am]
BILLING CODE 8010-01-M