[Federal Register Volume 66, Number 222 (Friday, November 16, 2001)]
[Notices]
[Pages 57761-57764]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-28718]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45048; File No. SR-NASD-2001-81]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the National 
Association of Securities Dealers, Inc. Regarding Temporary Access by 
UTP Exchanges to Certain Nasdaq Stock Market Systems

November 8, 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 7, 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'' or ``SEC'') the proposed rule change as 
described in Items I and II below, which Items have been substantially 
prepared by Nasdaq. The Commission is publishing this notice and order 
to solicit comments on the proposed rule change from interested persons 
and to approve the proposed rule change on an accelerated basis.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq proposes to make available to the UTP Exchanges on a limited 
basis the Nasdaq Workstation II (``NWII''), the NWII Applications 
Programming Interface (``NWII/API''), and the Computer-to-Computer 
Interface (``CTCI'') for the submission of quotations and trade reports 
of Nasdaq-listed securities. Temporary access shall be granted to these 
systems until: (1) 120 days after the technical specifications for the 
upgraded UTP Line have been made available to the UTP Exchanges; (2) 60 
days after the upgraded UTP Line has been made available to the UTP 
Exchanges for testing; and (3) 30 days after the upgraded UTP Line has 
been made available to the UTP Exchanges for entry of actual quotations 
and trade reports. Below is the text of the proposed rule change. 
Proposed new language is in italics.

4799. Temporary UTP Exchange Access

    a. Definitions.
    (i) The term ``Automated Confirmation Transaction'' or ``ACT'' 
shall mean the Nasdaq proprietary service by which trades in Nasdaq-
listed securities are reported to Nasdaq for comparison, risk 
management, and clearing purposes and for dissemination to the tape.
    (ii) The term ``Computer-to-Computer Interface'' or ``CTCI'' shall 
mean a method by which Nasdaq subscribers can enter orders to 
designated Nasdaq execution systems, as well as ACT trade reports, from 
their computer systems to Nasdaq's proprietary computer systems without 
using a NWII or NWII/API.
    (iii) The term ``Nasdaq Workstation II'' or ``NWII'' shall mean the 
primary presentation device consisting of hardware and software offered 
by Nasdaq for trading Nasdaq stocks.
    (iv) The term ``Nasdaq Workstation II/Application Programming 
Interface'' or ``NWII/API'' shall mean the method by which Nasdaq 
subscribers create customized software, consistent with Nasdaq 
technical specifications, that allows their computer systems to 
interact with Nasdaq's proprietary systems in place of NWII 
presentation devices.
    (v) The term ``UTP Exchange'' shall mean any registered national 
securities exchange that has unlisted trading privileges in Nasdaq 
National Market securities pursuant to the Joint Self-Regulatory 
Organization Plan Governing

[[Page 57762]]

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 Exchanges On An Unlisted Trading Privilege Basis (``Nasdaq 
UTP Plan'').
    (vi) The term ``UTP Line'' shall mean the facilities described in 
the Nasdaq UTP Plan for the submission of quotations and trade reports 
for Nasdaq-listed securities by UTP Exchanges. Nasdaq is upgrading the 
UTP Line to a TCP/IP protocol pursuant to the vote of the Operating 
Committee of the Nasdaq UTP Plan.
    (b) Each UTP Exchange shall have temporary access to the following 
Nasdaq proprietary services, provided it meets the conditions set forth 
in paragraph (c) below:
    (i) NWII and NWII/API for the submission of quotations in Nasdaq 
securities, and also for reporting into ACT trades in Nasdaq-listed 
securities that are effected through the facilities of a UTP Exchange; 
and
    (ii) CTCI for reporting into ACT trades in Nasdaq-listed securities 
that are effected through the facilities of a UTP Exchange
    (c) A UTP Exchange that chooses to access Nasdaq proprietary 
services pursuant to this rule, shall first execute an agreement with 
Nasdaq governing the terms and conditions of such usage.
    (d) Duration of Temporary Access Pursuant to Paragraph (b):
    (i) Nasdaq shall make the technical specifications for the upgraded 
UTP Line available 120 days prior to terminating temporary access;
    (ii) Nasdaq shall make the upgraded UTP Line available for testing 
by UTP Exchanges 60 days prior to terminating temporary access; and
    (iii) Nasdaq shall make the upgraded UTP Line available for entry 
of actual quotations and trade reports by UTP Exchanges 30 days prior 
to terminating temporary access.

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. The 
text of these statements may be examined at the places 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 occupies dual roles within the national market system: it 
operates an independent securities market and also serves as an 
exclusive securities information processor (``ESIP'') pursuant 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 and for Nasdaq/National Market System Securities Traded on 
Exchanges on an Unlisted Trading Privileges Basis (``OTC/UTP Plan''). 
As an ESIP, Nasdaq is obligated to provide to all exchange members of 
the OTC/UTP Plan (``UTP Exchanges'') access to the facilities 
enumerated in the OTC/UTP Plan. However, subject only to SEC approval, 
Nasdaq believes that it is entitled to condition the manner in which it 
may voluntarily make its proprietary systems available to UTP Exchanges 
that choose to use them.\3\
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    \3\ Nasdaq has permitted UTP Exchanges to participate in the 
Nasdaq National Market Execution System (``SuperSOES'') on a 
voluntary basis and has filed rules defining the manner in which 
those exchanges may use this system. Nasdaq has filed a rule 
proposal for public comment to make SuperSOES the exclusively Nasdaq 
proprietary execution system available for UTP Exchanges to quote 
and trade Nasdaq securities on Nasdaq. See File No. SR-NASD-2001-69. 
See also Securities Exchange Act Release No. 45047 (November 8, 
2001) which permits SuperSOES to trade through a UTP Exchange's 
quote that is at the inside if that exchange does not participate in 
SuperSOES.
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    Because several UTP Exchanges plan to begin contemporaneously 
trading Nasdaq stocks, and at the request of the staff of the 
Commission, Nasdaq has decided to grant UTP Exchanges temporary access 
to Nasdaq proprietary services that will provide them with access to 
the ESIP. As described in more detail below, the proposed pilot would 
make available the NWII, the NWII/API, and the CTCI for the submission 
of quotations and trade reports of Nasdaq-listed securities. Temporary 
access shall be granted to these systems until: (1) 120 days after the 
technical specification for the upgraded UTP Line have been made 
available to the UTP Exchanges; (2) 60 days after the upgraded UTP Line 
has been made available to the UTP Exchanges for testing; and (3) 30 
days after the upgraded UTP Line has been made available to the UTP 
Exchanges for entry of actual quotations and trade reports. Each UTP 
Exchange that chooses to access Nasdaq proprietary services pursuant to 
this rule shall first execute an agreement with Nasdaq governing the 
terms and conditions of such usage.
    Background
    Nasdaq's Dual Roles. As a market, Nasdaq builds and operates 
systems that enable its members to execute and report trades in Nasdaq-
listed and over-the-counter securities, consistent with section 15A of 
the Act. Among the systems that provide the core functionality of the 
Nasdaq market are its quotation display device, the NWII/API,\4\ its 
execution system--SuperSOES and SelectNet--and its trade reporting 
system, ACT, which is accessed through the CTCI. The NWII/API, 
SuperSOES, SelectNet, and ACT/CTCI are Nasdaq proprietary systems.
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    \4\ Nasdaq offers two proprietary routes of entry into its 
proprietary systems: the API and the CTCI. Both interfaces exist as 
part of Nasdaq's proprietary Enterprise Wide Network II, a network 
provided through an extensive contract with MCI WorldCom.
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    Processor/ESIP. As an ESIP under section 11A of the Act, Nasdaq 
operates pursuant to a national market system plan, the OTC/UTP Plan, 
for processing quotes and trades in Nasdaq National Market stocks by 
Nasdaq and UTP Exchanges (``OTC/UTP Plan Participants''). Specifically, 
as the ESIP for the OTC/UTP Plan, Nasdaq operates facilities to 
collect, consolidate, and disseminate quotations and last sale reports 
of all markets quoting and trading Nasdaq-listed securities.
    The OTC/UTP Plan states that UTP Exchanges shall submit quote and 
trade reports in eligible securities to the ESIP through a dedicated 
line (``UTP Line''). The UTP Line is the only OTC/UTP Plan-sponsored 
means for submitting trade reports and quotes in Nasdaq securities to 
the ESIP. All other means for submitting quote and trade information is 
through Nasdaq proprietary systems.
    Unprecedented Expansion of UTP Trading. From 1986 until 1999, only 
the Chicago Stock Exchange (``CHX'') traded Nasdaq-listed securities 
pursuant to the OTC/UTP Plan, and, even then, only on a very limited 
scale. During that period CHX interacted with Nasdaq pursuant to the 
OTC/UTP Plan by entering quotes and trade reports via the UTP Line. In 
the last twenty-four months, the Nasdaq landscape has been transformed. 
In late 1999 and early 2000, trading volumes in Nasdaq securities 
exploded, significantly increasing the allure of UTP trading. As a 
result, five exchanges--the Cincinnati Stock Exchange, the Philadelphia 
Stock Exchange, the Pacific Exchange, the American Stock Exchange, and 
the

[[Page 57763]]

Boston Stock Exchange--have sought to begin UTP trading.
    TCP/IP Upgrade to UTP Interface. This unprecedented influx or new 
entrants in to the OTC/UTP Plan has exceeded the capacity on the UTP 
Line to provide access to the ESIP. The UTP Line is a bi-synchronous 
electronic transmission vehicle. The UTP interface was established in 
the late 1980's as a stand-alone circuit to accommodate the anticipated 
message traffic from the Midwest Stock Exchange into the ESIP. All 
quote updates and trade reports are transmitted to a Tandem system, 
which then transfers the messages to the appropriate ESIP facility for 
transmission of the data over the consolidated market data feeds. The 
UTP Line was migrated to a national network infrastructure in 1992 
based on requirements from CHX. Until 2001, the UTP Operating Committee 
had not made any formal requests to upgrade the UTP interface.
    In June 2001, the UTP Operating Committee voted to upgrade the 
current UTP Line (which is a 19.2-56KB bi-synch protocol) to a TCP/IP 
protocol using a robust MCI/WorldCom network that scales from 56 KB to 
``T1'' in bandwidth. The TCP/IP upgrade is scheduled for production at 
the end of January 2002 and will greatly expand the capacity available 
to provide access to the ESIP through OTC/UTP Plan facilities.
    Rule Proposal
    Given the current capacity limitations on the UTP Line, Nasdaq has 
decided to give UTP Exchanges short-term, temporary access to ACT and 
the NWII/API, until the TCP/IP upgrade to the UTP Line is complete. 
Until the TCP/IP interface is available for the submission of quote and 
trade information to the ESIP, Nasdaq will temporarily allow UTP 
Exchanges to use the following interfaces:
    (i) NWII/API for the submission of quote updates and trade 
reports--applies to UTP Exchanges that wish to submit quotes and trade 
reports, and/or participate in SuperSOES/SelectNet.
    (ii) CTCI for the submission of trade reports--applies to UTP 
Exchanges that wish only to submit trade reports.\5\

    \5\ CTCI is only coded for trade reporting and for order-entry 
in SuperSOES/SelectNet. CTCI functionality does not permit users to 
submit quotes or receive SuperSOES/SelectNet executions/orders.
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These systems will be available only until the TCP/IP upgrade is 
complete, and Nasdaq will terminate access to these systems (NWII, 
NWII/API, and CTCI) according to the schedule described in proposed 
NASD Rule 4799(d). Thereafter, UTP Exchanges will be required to report 
their floor trades via the TCP/IP.
    Existing NASD rules also permit UTP Exchanges to use SuperSOES and 
SelectNet to access the Nasdaq market. UTP Exchanges that choose to use 
these Nasdaq execution systems must access those systems via the NWII 
or NWII/API interface. In that case, the UTP Exchange may temporarily 
use the NWII or NWII/API to report trades executed on the floor or 
through the facilities of that UTP Exchange. NWII/API will be available 
to report such trades only until the TCP/IP upgrade is complete, at 
which time the UTP Exchange will be required to report such trades via 
the UTP Line.
    As with trades executed through SuperSOES and SelectNet, trades 
reported to the ESIP through the NWII, NWII/API or CTCI interface will 
be appended with the Nasdaq market center ID. That is, the UTP 
Exchange's floor or facility trades submitted via NWII, NWII/API or 
CTCI will not carry the market center of execution, as set forth in the 
OTC/UTP Plan and as required under SEC rule 11Ac1-2, the ``Vendor 
Display Rule.'' \6\ Trades submitted through the TCP/IP interface will 
carry the entering market center's ID for transmission over the 
appropriate ESIP.
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    \6\ See Exemption Letter to Jeffrey T. Brown, Chairman, OTC/UTP 
Operating Committee, from Belinda Blaine, Associate Director, SEC 
(November 8, 2001).
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    A UTP Exchange that plans to use NWII, NWII/API or CTCI as a 
temporary alternative to the UTP Line will be required to execute a 
contract with Nasdaq governing the terms and conditions of usage. 
Nasdaq will make these contracts available to the UTP Exchanges at 
their request following approval of the pilot rule.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
section 15A(b)(6) of the Act, which requires, among other things, that 
the NASD rules be 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 
permitting UTP Exchanges temporary access to Nasdaq proprietary systems 
removes a temporary obstacle to the trading of Nasdaq-listed 
securities. Temporary access will be available until upgraded 
facilities are available pursuant to the OTC/UTP Plan.

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 that is not necessary or appropriate in 
furtherance of the purpose of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Nasdaq has neither solicited nor received written comments on the 
proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change 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-2001-81 and 
should be submitted by December 7, 2001.

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

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities association, and, in 
particular, the requirements of sections 11A and 15A of the Act.\7\ 
Specifically, the Commission finds that the proposal is consistent with 
sections 11A(a)(1)(C) and 15A(b)(6) of the Act.\8\ In section 
11A(a)(1)(C) Congress found that it is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets

[[Page 57764]]

for the Commission to assure fair competition among brokers and 
dealers, among exchange markets, and between exchange markets and 
markets other than exchange markets, and to assure the availability to 
brokers, dealers, and investors of information with respect to 
quotations for and transactions in securities. Section 15A(b)(6) 
requires that the rules of the NASD be designed to promote just and 
equitable principles of trade, foster cooperation and coordination with 
persons engaged in processing information with respect to an 
facilitating transactions in securities, as well as to remove 
impediments to and perfect the mechanism of a free and open market, 
and, in general, to protect investors and the public interest.\9\ The 
Commission believes that the proposal to make available to the UTP 
Exchanges on a limited basis the NWII, the NWII/API, and the CTCI for 
the submission of quotations and trade reports of Nasdaq-listed 
securities will enable Nasdaq to fulfill its existing obligations as 
the ESIP, provide the UTP Exchanges with the means to participate 
effectively in trading Nasdaq-listed securities, and maintain a fair, 
orderly, and efficient marketplace for the benefit of all investors in 
Nasdaq-listed securities.
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    \7\ 15 U.S.C. 78k-1 and 15 U.S.C. 78o-3.
    \8\ 15 U.S.C. 78k-1(a)(1)(C) and 15 U.S.C. 78o-3(b)(6).
    \9\ 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 believes that good cause exists to approve this rule 
proposal on an accelerated basis. Nasdaq will make these services 
available to eligible UTP Exchanges as soon as this proposal is 
approved. Any delay in approval could delay the launch of trading by up 
to five UTP Exchanges, resulting in a potential loss of any increased 
competition that may be derived from the addition of these UTP 
Exchanges.
    Pursuant to section 19(b)(2) of the Act,\10\ the Commission finds 
good cause for approving the proposed rule change prior to the 
thirtieth day after the date of publication of notice of filing thereof 
in the Federal Register so that UTP Exchanges will be able to trade 
Nasdaq securities as soon as they are capable of doing so.
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    \10\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-NASD-2001-81) is hereby 
approved on an accelerated basis through February 28, 2002.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-28718 Filed 11-15-01; 8:45 am]
BILLING CODE 8010-01-M