[Federal Register Volume 67, Number 101 (Friday, May 24, 2002)]
[Notices]
[Pages 36653-36654]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-13055]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45957; File No. SR-NASD-2002-23]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 by National Association of Securities 
Dealers, Inc. Relating to Continuous Operation of the Nasdaq National 
Market System During Market Hours

May 17, 2002.
    Pursuant to section 19(b)(1) of the Act,\1\ notice is hereby given 
that on February 14, 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. Nasdaq filed Amendment No. 1 on May 17, 
2002.\2\ 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\ See Letter from Thomas P. Moran, Associate General Counsel, 
Nasdaq, to Katherine A. England, Assistant Director, Division of 
Market Regulation, Commission (May 17, 2002).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The proposed rule change will allow the continued operation of the 
National Market Execution System (``NNMS'' or ``SuperSoes'') so as to 
trade through the inside quotations of market participants that are 
inaccessible through the SuperSoes system. Below is the text of the 
proposed rule change. Proposed deletions are in brackets.
* * * * *
4710. Participant Obligations in NNMS (a) through (b)(9)
    [(10) In the event that there are no NNMS Market Makers at the best 
bid (offer) disseminated by Nasdaq, market orders to sell (buy) entered 
into NNMS will be held in queue until executable, or until 90 seconds 
has elapsed, after which such orders will be rejected and returned to 
their respective order entry firms.]
* * * * *

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

    In July of 2001, Nasdaq implemented SuperSoes, which provides for 
automatic execution against most market participant quotes in Nasdaq 
National Market Securities. While a great improvement over the order-
delivery environment prevalent in Nasdaq before its adoption, the 
current operation and functionality of SuperSoes can, in a specific 
instance, inappropriately inhibit the smooth functioning of the Nasdaq 
market. This occurs when non-SuperSoes, and thus non-auto-executable, 
Electronic Communications Networks (``ECNs'') that link to the market 
via Nasdaq's SelectNet order-delivery system are alone in posting the 
best price to buy or sell a particular security. SuperSoes will 
automatically execute only at the best-displayed bid or offer. If an 
ECN is alone in displaying either the best price to buy or sell a 
particular security, all SuperSoes orders entered into the system on 
the opposite side of the market where the ECN's best price remains 
alone are held by the SuperSoes system for up to 90 seconds, or until 
the ECN moves its quote, or until a market participant accessible via 
SuperSoes also moves to the inside price. During the period an ECN 
remains alone at the best price, the SuperSoes system, in effect, shuts 
down. The suspension of the SuperSoes system's operation in this 
circumstance prevents other market participants from automatically 
accessing liquidity at and near the inside and significantly degrades 
market quality and functionality for the overwhelming majority of 
Nasdaq market participants, including public investors. These negative 
impacts are borne out by a recent analysis by Nasdaq's Economic 
Research Department of execution times in the SuperSoes system. That 
analysis is summarized below.
    First, the analysis indicates approximately 42% of total SuperSoes 
orders are significantly slowed down (taking over \1/2\ second to 
execute) because an ECN that does not accept automatic execution is 
alone at the inside.\3\ In Nasdaq 100 securities, approximately 47% of 
SuperSoes orders are similarly delayed. The sheer length of these 
delays is also troublesome, with the average execution time of 
SuperSoes orders in Nasdaq 100 securities when an ECN is alone at the 
inside taking over 5 times as long (1.03 seconds) to execute, than when 
an auto-ex participant is at the inside and the SuperSoes system 
operates without restriction (0.19 seconds).
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    \3\ A portion of this delay is also attributable to processing 
queues in the SuperSoes system itself. It is Nasdaq's view that many 
of these queues form as the direct result of orders not being 
allowed to execute automatically because SuperSoes suspends 
operation when an ECN that does not take automatic execution is 
alone at the inside.
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    These delays are also related to just how often SuperSoes is 
prevented from performing at all. In Nasdaq 100 stocks, ECNs that do 
not take automatic execution are alone at either the bid or offer an 
average 70% of the time (for the median stock, 75% of the time). This 
means that Nasdaq's SuperSoes system is not processing normally on 
either the bid or offer side of market the majority of the time in one 
or more of Nasdaq's most active securities.
    Not surprisingly, these delays also have a material impact on the 
execution that a party entering a SuperSoes order can expect. Nasdaq's 
analysis indicates that a party entering an order into SuperSoes when 
an ECN is alone at the inside has just a 33% chance that its order will 
be executed in full. When SuperSoes has an auto-ex participant at the 
inside, the system continues to operate, and the chance of getting an 
order executed in full rises dramatically to over 70%. In short, 
Nasdaq's analysis shows that the continuous shutting down of Nasdaq's 
primary execution facility has dramatic detrimental consequences for 
the investing public.
    In response, Nasdaq has determined to modify the operation of 
SuperSoes as it relates to the processing of orders where an ECN is 
alone at the best price. In short, SuperSoes will be modified so as to 
not automatically shut down when an ECN is alone at the inside. Market 
participants will be able, consistent with ongoing best execution 
obligations, to continue to send market orders, or marketable limit 
orders, to SuperSoes

[[Page 36654]]

for execution. Firms not wishing to bypass ECNs alone at the inside 
quote will continue to have the option to direct Nasdaq to attempt to 
access the ECN's quote via SelectNet if they so desire.
    By enhancing SuperSoes to allow it to automatically access 
liquidity on an ongoing basis, Nasdaq market participants will be given 
the maximum amount of flexibility to protect and service their 
customers. In addition, the removal of the potential single point of 
failure represented by a single ECN quote at the inside market which is 
accessible only through a separate, and non-automatic, execution 
linkage ensures that the main trading system of the Nasdaq market 
continues to operate throughout the day without the potential for 
disruptive, intermittent suspensions that negatively impact both the 
price-discovery and trading process for the vast bulk of the Nasdaq 
market community.
    Based on the above, Nasdaq believes this proposed rule change is 
consistent with the provisions of section 15A(b)(6) of the Act \4\ 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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    \4\ 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, 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. 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 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, 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-2002-23 and 
should be submitted by June 14, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
Jill M. Peterson,
Assistant Secretary.
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    \5\ 17 CFR 200.30-3(a)(12).
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[FR Doc. 02-13055 Filed 5-23-02; 8:45 am]
BILLING CODE 8010-01-P