[Federal Register Volume 67, Number 67 (Monday, April 8, 2002)]
[Notices]
[Pages 16784-16786]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-8366]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45671; File No. SR-NASD-2002-01]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the National Association of 
Securities Dealers, Inc. Relating to the Automatic Refreshing of 
Quotations in Nasdaq's SuperMontage System and the Withdrawal of Market 
Makers That Fail To Maintain a Clearing Relationship

March 28, 2002.
    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 January 3, 2002, 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 submitted Amendment No. 1 on March 5, 2002.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change, 
as amended, from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Letter from Thomas P. Moran, Associate General Counsel, 
Nasdaq, to Katherine A. England, Assistant Director, Division of 
Market Regulation, Commission, dated March 4, 2002 (``Amendment No. 
1''). In Amendment No. 1, Nasdaq modified its filing, as originally-
proposed, by removing the words ``at least'' from each reference to 
the phrases ``at least $0.01 inferior'' and ``at least one penny 
inferior'' in both Nasdaq's proposed amendments to NASD Rule 
4710(b)(5) and the text of Nasdaq's Form 19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq proposes to amend NASD Rules 4710(b)(5) and 4619(c) to 
modify the procedures for refreshing exhausted market maker quotes in, 
and withdrawing market makers that fail to maintain proper clearing 
arrangements from, Nasdaq's future Order Display and Collector Facility 
(collectively referred to as the Nasdaq National Market System ``NNMS'' 
or ``SuperMontage''). Below is the text of the proposed rule change. 
Proposed new language is in italics; proposed deletions are in 
[brackets].
* * * * *
    4710. Participant Obligations in NNMS
    (a) through (b)(4) No Change.
    (5) If an NNMS Market Maker's Attributable Quote/Order is reduced 
to zero on one side of the market due to NNMS executions, the NNMS will 
close the Market Maker's quote in the NNMS [with respect to both sides 
of its market] on that side of the market, and the NNMS Market Maker 
will be permitted a grace period of [three minutes] 30 seconds within 
which to take action to restore its Attributable Quote/Order if the 
market maker has not authorized use of the QR functionality or does not 
otherwise have an Attributable Quote/Order on that side[s] of the 
market in the system. An NNMS Market Maker that fails to transmit an 
Attributable Quote/Order in a security within the allotted time will 
have [its] the exhausted side of its quotation restored by the system 
at a price $0.01 inferior to the lowest displayed bid price [and] or 
the highest displayed offer price in that security as appropriate. If 
all bids and/or offers are exhausted so that there are no longer any 
Quote/Orders displayed on the bid and/or offer side of the market, the 
system will refresh a market maker's exhausted bid or offer quote to a 
normal unit of trading priced $0.01 inferior to the lesser of either: 
(a) The last valid displayed inside bid/offer in the security before 
all such bids/offers were exhausted; or b) the market maker's last 
displayed bid/offer before exhaustion. If the resulting bid/offer quote 
would create a locked or crossed market, NNMS will instead re-open the 
exhausted market maker's bid/offer quote at a price $0.01 inferior to 
the unexhausted inside bid/offer in that security. If at any time this 
automatic quote restoration process would result in the creation of a 
bid/offer of less than $0.01, the system will refresh that bid/offer to 
a price of $0.01. Except as provided in subparagraph (b)(6) of this 
rule, an NNMS Market Maker that withdraws from a security may not re-
register in the system as a market maker in that security for twenty 
(20) business days. The requirements of this subparagraph shall not 
apply to a market maker's Agency Quote.
    (6) through (10) No Change.
* * * * *

[[Page 16785]]

    4619. Withdrawal of Quotations and Passive Market Making
    (a)-(b) No Change.
    (c) Excused withdrawal status may be granted to a market maker that 
fails to maintain a clearing arrangement with a registered clearing 
agency or with a member of such an agency and is withdrawn from 
participation in the Automated Confirmation Transaction service, 
thereby terminating its registration as a market maker in Nasdaq 
issues. Provided however, that if the Association finds that the market 
maker's failure to maintain a clearing arrangement is voluntary, the 
withdrawal of quotations will be considered voluntary and unexcused 
pursuant to Rule 4620 and the Rule 4700 Series governing the Nasdaq 
National Market Execution System. Market makers that fail to maintain a 
clearing relationship will have their NNMS system status set to 
``suspend'' and be thereby prevented from entering, or executing 
against, any quotes/orders in the system.
* * * * *

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 and 
discussed any comments it received on the proposed rule change. 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
    As part of its ongoing preparation for the launch of 
SuperMontage,\4\ Nasdaq is engaging in a continuing review of the 
system's functionality and rules with a view to constant improvement. 
As a result of this review, and in consultation with industry 
professionals, Nasdaq has determined to: (a) modify SuperMontage's 
procedure for the automatic re-entering of the quotations of market 
makers that have been reduced to zero on either the bid or offer side 
of the market as the result of previous executions; and (b) alter the 
NNMS system status of market makers that fail to maintain a clearing 
relationship.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 43863 (January 19, 
2001), 66 FR 8020 (January 26, 2001) (order approving SuperMontage).
---------------------------------------------------------------------------

a. Refreshing Exhausted Quotations First, Nasdaq proposes to change the 
way Nasdaq market makers' quotes on the SuperMontage would be 
automatically refreshed after being reduced to zero by executions. 
Currently, the NASD rules for SuperMontage provide that if a market 
maker's quote/order is reduced by executions to zero on either the bid 
or offer side of the market, and not voluntarily refreshed by that 
market maker within 3 minutes, the system will automatically zero out 
and refresh both sides of the quote to a size of 100 shares priced at 
the lowest bid or highest offer currently being displayed by any other 
quoting participant in that security.
    Upon further review, and after consulting with market participants, 
Nasdaq has determined to make several improvements to this process. 
First, Nasdaq proposes to reduce, from 3 minutes to 30 seconds, the 
amount of time that a market maker can leave its bid or offer quotation 
at zero before SuperMontage begins its automatic quote refreshing 
process. Nasdaq believes that the current 3 minute time period is 
simply too long for a quote to remain inaccessible given the rapid 
automated nature of trading that is expected in the SuperMontage 
environment.
    Further, Nasdaq proposes to limit the automatic refreshing of 
quotes to the single bid or offer side of a quotation that has been 
reduced to zero through executions. Under current NASD rules for 
SuperMontage, if a market maker is displaying a two-sided quote and 
either its bid or offer is reduced to zero and not voluntarily 
refreshed, the system will automatically zero out the market maker's 
entire quote (both the bid and offer sides) and create a new bid and 
offer based on the displayed prices of other quoting participants in 
the security. Upon further review, Nasdaq has determined that altering 
both sides of the market maker's quote in this situation unfairly 
disadvantages the orders of market participants that remain on the 
unexhausted side of that quote. By automatically zeroing out and 
refreshing a side of the market maker's quote where trading interest 
remains, the orders represented by that unexhausted side of the quote 
lose their execution priority in the system and have their ability to 
interact with the quotes and orders of others unfairly impaired. To 
remedy this situation, Nasdaq proposes to alter the process for the 
refreshing of exhausted quotes in SuperMontage so that the process only 
operates against the sides of market makers' quotations where trading 
interest has been reduced to zero by executions. In addition, Nasdaq 
has determined to refresh exhausted bid/offers to prices $0.01 inferior 
to the lowest bid or highest offer displayed in the particular 
security. The unexhausted sides of such quotes would remain displayed 
in the system and available for execution.
    Finally, Nasdaq also proposes to establish a method for refreshing 
the exhausted sides of market maker quotations in situations where 
there are no available quotes from which to determine a refresh price. 
In this situation, SuperMontage would refresh the exhausted side of a 
quote to a normal unit or trading at a price level that is one penny 
inferior to the lesser of either: (a) the last valid displayed inside 
bid/offer in the security before all such bids/offers were exhausted; 
or (b) the market maker's last displayed bid/offer. If the resulting 
bid/offer quote would create a locked or crossed market, NNMS would 
instead re-open the market maker's bid/offer quote at a price that is 
one penny inferior to the unexhausted contra side of the market. Nasdaq 
believes that this process provides a uniform and fair method to 
quickly establish reasonable market maker quotes in situations where no 
trading interest is being currently displayed.
b. Withdrawal of Quotations for Failure to Maintain a Clearing 
Relationship
    In addition to changing the way SuperMontage will handle exhausted 
quotes, Nasdaq also proposes to alter the designation given to market 
makers that withdraw from the market based on their failure to maintain 
a clearing relationship. Currently, when a market maker seeks to leave 
the market because of a lack of a clearing relationship, it is placed 
in ``excused withdrawal'' status. In that status, the market maker is 
expected not to enter quotes or orders into the SuperMontage, but is 
not technologically prevented from doing so. To ensure that withdrawing 
market makers are precluded from participating in the system without a 
clearing relationship, Nasdaq proposes that such market makers have 
their system status designated as ``suspend.'' Once a market maker is 
designated in the system as being in a suspend status, SuperMontage 
would be able to prevent that market maker from placing quotes or 
orders into the system. Once the market maker regains a clearing 
relationship, the suspend status would be lifted, and the market maker 
would be free to participate again. Nasdaq

[[Page 16786]]

believes that this proposal should enhance the integrity of the system 
and significantly reduce the potential for inappropriate quoting and 
trading activity.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of section 15A(b)(6) of the Act,\5\ in 
that the proposals are designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principals of trade, 
to foster cooperation and coordination with person 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.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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

    Nasdaq 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.

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

    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 self-regulatory organization consents, the Commission will:
    A. by order approve the proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change 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 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 at 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-2002-01 and should be submitted by April 29, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
---------------------------------------------------------------------------

    \6\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-8366 Filed 4-5-02; 8:45 am]
BILLING CODE 8010-01-P