[Federal Register Volume 67, Number 84 (Wednesday, May 1, 2002)]
[Notices]
[Pages 21792-21794]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-10717]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45813; File No. SR-NASD-2002-55]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to the Minimum Life of Directed Orders in Nasdaq's SuperMontage System 
and the Minimum Life of SelectNet Orders

April 24, 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 April 18, 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 (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by Nasdaq. 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.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NASD proposes to: (1) establish a minimum life of five seconds 
for Directed Orders in Nasdaq's future Order Display and Collector 
Facility (``NNMS'' or ``SuperMontage''), and (2) reduce from ten 
seconds to five seconds the minimum time period before an order entered 
into Nasdaq's SelectNet system may be cancelled by the entering party. 
If approved, Nasdaq will implement both rule changes on July 1, 2002.
    Proposed new language is italicized; proposed deletions are in 
[brackets].
* * * * *

4706. Order Entry Parameters

    (a) No Change.
    (b) Directed Orders: A participant may enter a Directed Order into 
the NNMS to access a specific Attributable Quote/Order displayed in the 
Nasdaq Quotation Montage, subject to the following conditions and 
requirements:
    (1) through (3) No Change.
    (4) a Directed Order entered into the system may not be cancelled 
until a minimum of five seconds has elapsed after the time of entry. 
This five second time period shall be measured by NNMS.
* * * * *

4720. SelectNet Service

    (a) Cancellation of a SelectNet Order
    No member shall cancel or attempt to cancel an order, whether 
preferenced to a specific market maker or electronic communications 
network, or broadcast to all available members, until a minimum time 
period of [ten] five seconds has expired after the order to be canceled 
was entered. Such [ten] five second time period, shall be measured by 
the Nasdaq processing system processing the SelectNet order.
    (b) through (c) 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, 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 analysis of its current and future trading 
systems, Nasdaq continuously reviews system 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: (1) 
establish a five-second minimum life for Directed Orders in 
SuperMontage, and (2) reduce from ten seconds to five seconds the 
minimum time period before an order entered into SelectNet may be 
cancelled by the entering party. Because the SuperMontage Directed 
Order Process will utilize an enhanced version of the current SelectNet 
system, Nasdaq is jointly proposing these rule changes because it 
believes that the rules must become effective simultaneously to ensure 
uniformity of minimum order life parameters across both systems during 
the phase-in period.\3\
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    \3\ Nasdaq intends to introduce SuperMontage through a phased 
roll-out process where limited numbers of securities will transition 
to trading in the new SuperMontage environment under new rules, 
while the remainder will continue to trade in Nasdaq's current 
environment. Nasdaq represents that, during this transition, both 
SuperMontage and SelectNet will continue to operate, and a single 
uniform minimum order cancellation time parameter will be needed 
governing both systems.
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    a. Creation of Five-Second Minimum Life for Directed Orders in 
SuperMontage
    Directed Orders are orders at any price that have been specifically 
dispatched to a particular market participant by the sender through the 
SuperMontage's Directed Order Process. Recipients of Directed Orders 
have an option to elect to receive such orders as either liability 
orders with which they must interact consistent with the Commission's 
Firm Quote Rule,\4\ or as non-liability orders that create no 
obligation to respond by the recipient under the Commission's Firm 
Quote Rule, and instead may serve as the basis for negotiating a trade.
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    \4\ See Rule 11Ac1-1 under the Act, 17 CFR 240.11Ac1-1.
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    The minimum life of a Directed Order is the shortest period of time 
that a Directed Order must remain active and available for a response 
before an entering party may cancel it. Currently, there is no minimum 
life for Directed Orders in SuperMontage. Directed Orders may be 
cancelled immediately after entry, well before a recipient has

[[Page 21793]]

had an opportunity to interact or respond to them.\5\
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    \5\ Nasdaq notes that the SuperMontage Directed Order Process 
operates differently than the process for Non-Directed Orders. If a 
Non-Directed Order is ``in delivery'' (delivered to a recipient), 
SuperMontage prevents the entering party from canceling that order. 
Directed Orders in SuperMontage are not subject to that processing 
restriction and can, under current SuperMontage rules, be cancelled 
immediately after entry, even if they have been already delivered to 
a market participant.
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    Currently, in SelectNet an order cancellation can occur even if the 
order has been accepted and executed by the recipient, if the 
cancellation message from the entering party reaches the Nasdaq system 
before the recipient's acceptance and execution. The SuperMontage will 
also operate in this manner. Thus, if after the five-second minimum 
life of a Directed Order the entering party submits a cancellation but 
the order has been accepted and executed by the recipient, the system 
would recognize whichever message, cancellation or execution, that it 
receives first. However, Nasdaq anticipates that, in most cases, the 
proposed five-second minimum life for Directed Orders will provide the 
recipient with ample time to accept and execute the order before the 
sender is eligible to submit a cancellation message.\6\
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    \6\ Telephone conversation between Thomas P. Moran, Associate 
General Counsel, Nasdaq, and Sapna C. Patel, Attorney, Division of 
Market Regulation, Commission, on April 23, 2002.
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    In order to ensure that recipients are given a reasonable 
opportunity to answer or otherwise process incoming Directed Orders, 
Nasdaq proposes to establish a five-second minimum life for those 
orders. Under this proposed rule change, a party entering a Directed 
Order into SuperMontage cannot cancel that order for at least five 
seconds. Nasdaq believes that minimum order life parameters reduce the 
potential for electronic gaming and system burdens that can result when 
orders are entered and are thereafter immediately cancelled in rapid 
succession, and therefore do not represent true trading interest. 
Conversely, Nasdaq believes that having too long a time period in which 
such orders must remain in force before cancellation exposes order-
entry parties to the potential for inferior executions during rapid 
price movements. Balancing these considerations, Nasdaq proposes to 
adopt the five-second minimum life standard for Directed Orders. Nasdaq 
believes that a five-second minimum life for Directed Orders should 
create a proper balance between the needs of market participants to 
respond to the rapid, more automated nature of trading in a 
SuperMontage environment and the prevention of inappropriate order-
entry and cancellation activity. In connection with the introduction of 
a five-second Directed Order minimum life parameter, Nasdaq proposes to 
reduce the minimum life of SelectNet orders, as set forth below.
    b. Reduction of SelectNet Minimum Time Period Before Order 
Cancellation
    Currently, market participants entering SelectNet orders must wait 
a minimum of ten seconds after entry before they may cancel them. Like 
the minimum life standards proposed above for SuperMontage Directed 
Orders, this ten-second time period was designed to give the recipients 
of SelectNet messages time to process and respond to those messages.
    Nasdaq represents that SuperMontage's Directed Order Process will 
rely on a substantially improved version of Nasdaq's current SelectNet 
system architecture and processing functionality, including the 
parameter dictating the minimum life of orders. The parameter dictating 
the minimum life of orders is a single integrated functional and timing 
standard that will be shared simultaneously by both the SelectNet and 
SuperMontage systems. Therefore, in order for Nasdaq to implement the 
five-second order cancellation parameter for SuperMontage Directed 
Orders, it will be necessary, prior to the launch of SuperMontage, to 
adopt a single uniform minimum time period before orders (both 
SelectNet orders and SuperMontage Directed Orders) may be cancelled by 
entering market participants. Nasdaq therefore proposes to reduce the 
SelectNet pre-cancellation waiting period from ten seconds to five 
seconds, and use that same five-second cross-system standard going 
forward for Directed Orders when SuperMontage becomes operational. 
Nasdaq notes that the average SelectNet message response time of the 
overwhelming majority of order-delivery market participants is 
currently less than two seconds. As such, Nasdaq believes that a five-
second SelectNet minimum order time period is more than sufficient to 
allow time for a response to incoming messages both during the 
transition period from SelectNet to SuperMontage, and thereafter for 
the Directed Order Process.
    Nasdaq proposes to implement the reduction of the SelectNet order 
pre-cancellation minimum on July 1, 2002. As stated above, Nasdaq 
proposes to make the five-second pre-cancellation minimum for 
SuperMontage Directed Orders effective on that same date and proposes 
to implement the rule change upon launch of the SuperMontage system.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
Section 15A(b)(6) \7\ of the Act, in that the proposed rule change is 
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.
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    \7\ 15 U.S.C. 78o-3(b)(6).
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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

    The Exchange neither solicited nor received written comments with 
respect to the proposed rule change.

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 such 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 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.,

[[Page 21794]]

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-2002-55 and should be 
submitted by May 22, 2002.

    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).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-10717 Filed 4-30-02; 8:45 am]
BILLING CODE 8010-01-P