[Federal Register Volume 67, Number 129 (Friday, July 5, 2002)]
[Notices]
[Pages 44906-44907]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16847]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46141; File No. SR-NASD-2002-01]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 
thereto and Notice of Filing and Order Granting Accelerated Approval of 
Amendment No. 2 to the Proposed Rule Change 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

June 28, 2002.
    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''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change 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 (``NNMS'' or ``SuperMontage'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    Specifically, 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 
refresh process. The process would only operate against the single bid 
or offer side of a quotation that has been reduced to zero through 
executions. If there are no available quotes from which to determine a 
refresh price, SuperMontage would refresh the exhausted side of a quote 
to a normal unit of 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

[[Page 44907]]

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 
unexchanged contra side of the market. Finally, Nasdaq proposes to 
suspend from trading on SuperMontage market makers that fail to 
maintain a clearing relationship. 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 submitted Amendment No. 1 on March 5, 2002.\3\ The proposed 
rule change and Amendment No. 1 thereto were published for comment in 
the Federal Register on April 8, 2002.\4\ The Commission received no 
comments on the proposal. Nasdaq submitted Amendment No. 2 on June 13, 
2002.\5\
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    \3\ See Letter from Thomas P. Moran, Associate General Counsel, 
Nasdaq, to Katherine A. England, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated March 4, 2002 
(``Amendment No. 1'').
    \4\ See Securities Exchange Act Release No. 45671 (March 28, 
2002), 67 FR 16784.
    \5\ See Letter from Thomas P. Moran, Associate General Counsel, 
Nasdaq, to Marc F. McKayle, Special Counsel, Division, Commission, 
dated June 13, 2002 (``Amendment No. 2''). In Amendment No. 2, 
Nasdaq made two points of clarification: (1) References to automatic 
adjustment of quotes at ``inferior'' prices refer to both bid and 
offer prices, with an inferior price adjustment on the bid side of 
the quote resulting in a lower bid price, and an inferior price 
adjustment on the offer price resulting in a higher offer price, (2) 
references to a ``clearing relationship'' refer to a clearing 
relationship between a firm and a registered clearing agency or, 
alternatively, with a member of such an agency.
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    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities association 
\6\ and, in particular, the requirements of section 15A of the Act \7\ 
and the rules and regulations thereunder. The Commission finds 
specifically that the proposed rule change, as amended, is consistent 
with section 15A(b)(6) of the Act,\8\ which requires, among other 
things, that the rules of an association be 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, and, in general, to protect investors and the public 
interest.
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    \6\ In approving this proposed rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \7\ 15 U.S.C. 78o-3.
    \8\ 15 U.S.C. 78o-3 (b)(6).
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    The Commission believes that the proposed rule change, as amended, 
should assist market makers in maintaining two-sided quotes and 
facilitate their continued participation in Nasdaq. By reducing the 
amount of time, from 3 minutes to 30 seconds, that a quote is in a 
closed state and by only closing out the side of the quote that has 
been zeroed out, the revised procedures should help ensure the presence 
of liquidity providers, while preserving priority for orders that may 
be represented by the unexhausted side of the quote. Further, Nasdaq, 
by establishing procedures for refreshing an exhausted quote where 
there are no available quotes, has addressed any potential instance in 
which trading interest is not being displayed. This should ensure that 
quotes may be refreshed in all instances. Finally, Nasdaq's proposal to 
suspend market makers who fail to maintain clearing relationships from 
participating in the SuperMontage should encourage market makers to 
maintain appropriate clearing relationships at all times.
    The Commission finds good cause for accelerating approval of 
Amendment No. 2 to the proposed rule change prior to the thirtieth day 
after the date of publication in the Federal Register, pursuant to 
section 19(b)(2) of the Act.\9\ The Commission finds that Amendment No. 
2 merely clarifies the proposed rule change by explaining that 
references to automatic adjustment of quotes at ``inferior'' prices 
refer to both bid and offer prices, with an inferior price adjustment 
on the bid side of the quote resulting in a higher offer price, and 
that references to a ``clearing relationship'' refer to a clearing 
relationship between a firm and a registered clearing agency or, 
alternatively, with a member of such an agency. Accordingly, the 
Commission believes that granting accelerated approval of Amendment No. 
2 is appropriate and consistent with section 15A(b)(6) \10\ and 
19(b)(2) of the Act \11\ in that it should prevent fraudulent and 
manipulative acts and practices, promote just and equitable principles 
of trade, foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities, and, in general, protect 
investors and the public interest.
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    \9\ 15 U.S.C. 78s(b)(2).
    \10\ 15 U.S.C. 78o-3(b)(6).
    \11\ 15 U.S.C. 78s(b)(2).
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    As stated previously in the order approving SuperMontage, the 
Commission wishes to again emphasize that it fully expects that the 
NASD will monitor the use of the system defaults by market makers to 
ensure that they do not become a surrogate for meaningful market 
making, and that the NASD will reevaluate the penalties against market 
makers for failure to properly maintain two-sided quotes if there is a 
decline in the overall quality of market making, particularly during 
market volatility.
    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change, as amended (File No. SR-NASD-
2002-01) be, and it hereby is, approved.
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    \12\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-16847 Filed 7-3-02; 8:45 am]
BILLING CODE 8010-01-M