[Federal Register Volume 67, Number 147 (Wednesday, July 31, 2002)]
[Notices]
[Pages 49822-49850]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-19274]



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Part VI





Securities and Exchange Commission





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Self-Regulatory Organizations; Notice of Filing and Order Granting 
Accelerated Approval on a Pilot Basis to a Proposed Rule Change by the 
National Assocation of Securities Dealers, Inc., Relating to the 
Operation of the Alternative Display Facility for Quoting and Trading 
in Securities of the Nasdaq Stock Market, Inc.; Notice

  Federal Register / Vol. 67, No. 147 / Wednesday, July 31, 2002 / 
Notices  

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46249; File No. SR-NASD-2002-97]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval on a Pilot Basis to a Proposed Rule 
Change by the National Association of Securities Dealers, Inc., 
Relating to the Operation of the Alternative Display Facility for 
Quoting and Trading in Securities of The Nasdaq Stock Market, Inc.

July 24, 2002.
    The Commission is approving the National Association of Securities 
Dealers, Inc.'s (``NASD's'' or ``Association's'') Alternative Display 
Facility (``ADF'') for Nasdaq stocks for a nine-month pilot period. 
This proposal for a pilot was filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 
thereunder,\2\ on July 22, 2002, by the NASD. In this proposal, as 
described by the NASD in Items I, II, and III below, the NASD proposes 
to establish, implement, and operate the ADF on a pilot basis (``ADF 
Pilot''). As discussed below, the Commission is granting accelerated 
approval of the proposed rule change for a pilot period to expire at 
the close of daily operation of the ADF Pilot on April 24, 2003. The 
rules related to the establishment, implementation, and operation of 
the Pilot ADF are substantially similar to the proposed permanent rules 
contained in the original ADF proposal related to the establishment, 
implementation, and operation of the permanent ADF.\3\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release Nos. 45156 (December 14, 
2002), 67 FR 388 (January 3, 2002) (Notice of filing of SR-NASD-
2001-90); 45278 (January 14, 2002), 67 FR 3252 (January 23, 2002) 
(Extending the public comment period for SR-NASD-2001-90); 45501 
(March 4, 2002), 67 FR 10942 (March 11, 2002) (Notice of filing of 
SR-NASD-2002-28 relating to ADF fees); 45991 (May 28, 2002), 67 FR 
39476 (June 7, 2002) (Notice of filing of Amendment No. 2 to SR-
NASD-2001-90) (collectively, ``ADF Proposal''). The Commission 
intends to approve simultaneously and set an identical effective 
date for SR-NASD-2001-90 and SR-NASD-2002-28. The Commission notes 
that the ADF Proposal contains additional proposed rules not 
contained in the ADF Pilot. For instance, the ADF Proposal contains 
rules related to the separation of the NASD and the Nasdaq Stock 
Market, Inc. (``Nasdaq'') corporate entities. The Commission is 
publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD proposes to establish, implement, and operate, on a pilot 
basis, the ADF. For purposes of this ADF Pilot, NASD members will be 
able to quote and trade only Nasdaq securities on or through the Pilot 
ADF. The text of the proposed rule change is below. Additions are in 
italics, and deletions are in brackets.

IM-2110-5. Anti-Intimidation/Coordination

    The Board of Governors is issuing this interpretation to codify a 
longstanding policy. It is conduct inconsistent with just and equitable 
principles of trade for any member or person associated with a member 
to coordinate the prices (including quotations), trades, or trade 
reports of such member with any other member or person associated with 
a member; to direct or request another member to alter a price 
(including a quotation); or to engage, directly or indirectly, in any 
conduct that threatens, harasses, coerces, intimidates, or otherwise 
attempts improperly to influence another member or person associated 
with a member. This includes, but is not limited to, any attempt to 
influence another member or person associated with a member to adjust 
or maintain a price or quotation, whether displayed on any [automated 
system] facility operated by NASD [The Nasdaq Stock Market, Inc. 
(Nasdaq),] or otherwise, or refusals to trade or other conduct that 
retaliates against or discourages the competitive activities of another 
market maker or market participant. Nothing in this interpretation 
respecting coordination of quotes, trades, or trade reports shall be 
deemed to limit, constrain, or otherwise inhibit the freedom of a 
member or person associated with a member to:
    (1) set unilaterally its own bid [and] or ask in any [Nasdaq] 
security, the prices at which it is willing to buy or sell any [Nasdaq] 
security, and the quantity of shares of any [Nasdaq] security that it 
is willing to buy or sell;
    (2) set unilaterally its own dealer spread, quote increment, or 
quantity of shares for its quotations (or set any relationship between 
or among its dealer spread, inside spread, or the size of any quote 
increment) in any [Nasdaq] security;
    (3) communicate its own bid or ask, or the prices at or the 
quantity of shares in which it is willing to buy or sell any [Nasdaq] 
security to any person, for the purpose of exploring the possibility of 
a purchase or sale of that security, and to negotiate for or agree to 
such purchase or sale;
    (4) communicate its own bid or ask, or the price at or the quantity 
of shares in which it is willing to buy or sell any [Nasdaq] security, 
to any person for the purpose of retaining such person as an agent or 
subagent for the member or for a customer of the member (or for the 
purpose of seeking to be retained as an agent or subagent), and to 
negotiate for or agree to such purchase or sale;
    (5) through (7) No Change.
* * * * *
2700. SECURITIES DISTRIBUTIONS
* * * * *
2720. Distribution of Securities of Members and Affiliates--Conflicts 
of Interest
    (a) No Change.
    (b) Definitions
    For purposes of this Rule, the following words shall have the 
stated meanings:
    (1) through (3) No Change.
    (4) Bona fide independent market maker--a market maker [which] 
that:
    (A) is registered as a Nasdaq or ADF market maker in the security 
to be distributed pursuant to this Rule;
    (B) through (C) No Change.
    (5) through (18) No Change.
    (c) through (p) No Change.
* * * * *
3340. Prohibition on Transactions, Publication of Quotations, or 
Publication of Indications of Interest During Trading Halts
    No member or person associated with a member shall, directly or 
indirectly, effect any transaction or publish a quotation, a priced bid 
and/or offer, an unpriced indication of interest (including ``bid 
wanted'' and ``offer wanted'' and name only indications), or a bid or 
offer accompanied by a modifier to reflect unsolicited customer 
interest, in any security as to which a trading halt is currently in 
effect. If ADF closes trading in Nasdaq securities pursuant to its 
authority under Rule 4120A(a)(2), members would not be prohibited from 
trading through other markets for which trading is not halted.
3350. Short Sale Rule
    (a) No member shall effect a short sale for the account of a 
customer or for its own account in a Nasdaq National Market security at 
or below the current national best (inside) bid when the current 
national best (inside) bid [as displayed by The Nasdaq Stock Market] is 
below the preceding national best (inside) bid in the security.
    (b) No Change.

[[Page 49823]]

    (c) The provisions of paragraph (a) shall not apply to:
    (1) Sales by a qualified market maker or an ADF market maker 
registered in the security in connection with bona fide market making 
activity. For purposes of this paragraph, transactions unrelated to 
normal market making activity, such as index arbitrage and risk 
arbitrage that are independent from a member's market making functions, 
will not be considered bona fide market-making activity.
    (2) through (8) No Change.
    (d) through (e) No Change.
    (f) A member that is not currently registered as a Nasdaq or ADF 
market maker in a security and that has acquired a security while 
acting in the capacity of a block positioner shall be deemed to own 
such security for the purposes of this Rule notwithstanding that such 
member may not have a net long position in such security if and to the 
extent that such member's short position in such security is the 
subject of one or more offsetting positions created in the course of 
bona fide arbitrage, risk arbitrage, or bona fide hedge activities.
    (g) through (h) No Change.
    (i)(1) A member shall be permitted, consistent with its quotation 
obligations, to execute a short sale for the account of a warrant 
market maker that would otherwise be in contravention of this Rule, if:
    (A) the warrant market maker is a registered Nasdaq or ADF market 
maker for the warrant; and
    (B) No Change.
    (j) through (l) No Change.
* * * * *

IM-3350. Short Sale Rule

    (a) (1) In developing a Short Sale Rule for Nasdaq National Market 
securities, [the Association] NASD adopted an exemption to the Rule for 
certain market making activity. This exemption was deemed an essential 
component of the Rule because bona fide market making activity is 
necessary and appropriate to maintain continuous, liquid markets in 
Nasdaq National Market securities. Rule 3350(c)(1) states that short 
selling prohibitions shall not apply to sales by qualified Nasdaq 
market makers or registered ADF market makers in connection with bona 
fide market making activity and specifies that transactions unrelated 
to normal market making activity, such as index arbitrage and risk 
arbitrage that are independent from a member's market making functions, 
will not be considered as bona fide market making. Thus two standards 
are to be applied: one must be a ``qualified'' Nasdaq market maker or a 
registered ADF market maker and one must engage in ``bona fide'' market 
making activity to take advantage of this exemption. With this 
interpretation, [the Association] NASD wishes to clarify for members 
some of the factors that will be taken into consideration when 
reviewing market making activity that may not be deemed to be bona fide 
market making activity and therefore would not be exempted from the 
Rule's application.
    (2) through (3) No Change.
    (b) [(1)] Rule 3350 requires that no member shall effect a short 
sale for the account of a customer or for its own account in a Nasdaq 
National Market security at or below the current national best (inside) 
bid when the current national best (inside) bid [as displayed by The 
Nasdaq Stock Market] is below the preceding national best (inside) bid 
in the security. [The Association] NASD has determined that in order to 
effect a ``legal'' short sale when the current best bid is lower than 
the preceding best bid the short sale must be executed at a price of at 
least $0.01 above the current inside bid when the current inside spread 
is $0.01 or greater. The last sale report for such a trade would, 
therefore, be above the inside bid by at least $0.01.
    (c) (1) No Change.
    (2) For example, in instances where the current best bid is below 
the preceding best bid, if a market maker alone at the inside best bid 
were to lower its bid and then raise it to create an ``up bid'' for the 
purpose of facilitating a short sale, [the Association] NASD would 
consider such activity to be a manipulative act and a violation of [the 
Association's] NASD's Short Sale Rule. NASD [The Association] also 
would consider it a manipulative act and a violation of the Rule if a 
market maker with a long stock position were to raise its bid above the 
inside bid and then lower it to create a ``down bid'' for the purpose 
of precluding market participants from selling short. In addition, if a 
market maker agrees to an arrangement proposed by a member or a 
customer whereby the market maker raises its bid in The Nasdaq Stock 
Market or in the ADF in order to effect a short sale for the other 
party and is protected against any loss on the trade or on any other 
executions effected at its new bid price, the market maker would be 
deemed to be in violation of Rule 3350. Similarly, a market maker would 
be deemed in violation of the Rule if it entered into an arrangement 
with a member or a customer whereby it used its exemption from the rule 
to sell short at the bid at successively lower prices, accumulating a 
short position, and subsequently offsetting those sales through a 
transaction at a prearranged price, for the purpose of avoiding 
compliance with the Rule, and with the understanding that the market 
maker would be guaranteed by the member or customer against losses on 
the trades.
    (3) No Change.
* * * * *
3370. Prompt Receipt and Delivery of Securities
    (a) No Change.
    (b) (1) No Change.
    (2) ``Short Sales''
    (A) No Change.
    (B) Proprietary short sales.
    No member shall effect a ``short'' sale for its own account in any 
security unless the member or person associated with a member makes an 
affirmative determination that the member can borrow the securities or 
otherwise provide for delivery of the securities by the settlement 
date. This requirement will not apply to transactions in corporate debt 
securities, to bona fide market making transactions by a member in 
securities in which it is registered as a Nasdaq or ADF market maker, 
to bona fide market maker transactions in non-Nasdaq securities in 
which the market maker publishes a two-sided quotation in an 
independent quotation medium, or to transactions [which] that result in 
a fully hedged or arbitraged position.
    (C) No Change.
    (3) through (5) No Change.
* * * * *
4000. THE NASDAQ STOCK MARKET
* * * * *
4619. Withdrawal of Quotations and Passive Market Making
    (a) A market maker that wishes to withdraw quotations in a security 
or have its quotations identified as the quotations of a passive market 
maker shall contact Nasdaq Market Operations to obtain excused 
withdrawal status prior to withdrawing its quotations or identification 
as a passive market maker. If a Registered Reporting Nasdaq market 
maker also is a Registered Reporting ADF Market Maker as defined in 
Rule 5420, it must obtain excused withdrawal status in both facilities 
for the same time period. Withdrawals of quotations or identifications 
of quotations as those of a passive market maker shall be granted by 
Nasdaq Market Operations only upon satisfying one of the conditions 
specified in this Rule.
* * * * *

[[Page 49824]]

4600. NASDAQ MARKET MAKER REQUIREMENTS
    This Rule 4600 Series applies to quotation and trading activities 
by Nasdaq market makers, ATS or ECNs in The Nasdaq Stock Market, Inc. 
operated on behalf of NASD by the Nasdaq Stock Market, Inc.
* * * * *
4630. Reporting Transactions in Nasdaq National Market Securities
    This Rule 4630 Series applies to the reporting by [all] members of 
transactions in Nasdaq National Market securities (``designated 
securities'') through the Automated Confirmation Transaction Reporting 
Service (ACT). [These securities have been designated pursuant to the 
``National Market System Securities Designation Plan with Respect to 
Nasdaq Securities'' (``Plan'') which has been approved by the 
Commission pursuant to SEC Rule 11Aa2-1.]
4631. Definitions
    [(a)] Terms used in this Rule 4630 Series shall have the meaning as 
defined in [the Association's] NASD's By-Laws and Rules, SEC Rule 
11Aa2-1 and the Joint Self-Regulatory Organization Plan Governing the 
Collection, Consolidation, and Dissemination of Quotation and 
Transaction Information for Nasdaq-Listed Securities Traded on 
Exchanges on an Unlisted Trading Privilege Basis [Plan], unless 
otherwise defined herein.
    Paragraphs (b) through (d) are renumbered as paragraphs (b) through 
(d) of proposed Rule 5420.
4632. Transaction Reporting
    Paragraphs (a) and (b) are renumbered as paragraphs (a) and (b) of 
proposed Rule 5430.

(a) When and How Transactions Are Reported

    Members shall comply with Rule 5430(a) for determining when and how 
transactions are reported.

(b) Which Party Reports Transaction

    Members shall comply with Rule 5430(b) for determining which party 
reports a transaction.
(c) No Change.
(d) Procedures for Reporting Price and Volume
    Members [which] that are required, or have the option, to report 
transactions using ACT, pursuant to paragraph (b) above shall transmit 
last sale reports for all purchases and sales in designated securities 
in the following manner:
    (1) For agency transactions, report the number of shares and the 
price excluding the commission charged.
Example:
    SELL as agent 100 shares at 40 less a commission of $12.50;
    REPORT 100 shares at 40.
    (2) For dual agency transactions, report the number of shares only 
once, and report the price excluding the commission charged.
Example:
    SELL as agent 100 shares at 40 less a commission of $12.50;
    BUY as agent 100 shares at 40 plus a commission of $12.50;
    REPORT 100 shares at 40.
    (3) (A) For principal transactions, except as provided below, 
report each purchase and sale transaction separately and report the 
number of shares and the price. For principal transactions which are 
executed at a price which includes a mark-up, mark-down or service 
charge, the price reported shall exclude the mark-up, mark-down or 
service charge. Such reported price shall be reasonably related to the 
prevailing market, taking into consideration all relevant circumstances 
including, but not limited to, market conditions with respect to the 
security, the number of shares involved in the transaction, the 
published bids and offers with size at the time of the execution 
(including the reporting firm's own quotation), the cost of execution 
and the expenses involved in clearing the transaction.
Example:
    BUY as principal 100 shares from another member at 40 (no mark-down 
included);
    REPORT 100 shares at 40.
[Example:
    BUY as principal 100 shares from a customer at 39\7/8\ which 
includes a \1/8\ mark-down from prevailing market at 40;
    REPORT 100 shares at 40.]
Example:
    BUY as principal 100 shares from a customer at 39.90 which includes 
a $0.10 mark-down from prevailing market at 40;
    REPORT 100 shares at 40.
[Example:
    SELL as principal 100 shares to a customer at 40\1/8\, which 
includes a \1/8\ mark-up from the prevailing market of 40;
    REPORT 100 shares at 40.]
Example:
    SELL as principal 100 shares to a customer at 40.10, which includes 
a $0.10 mark-up from the prevailing market of 40;
    REPORT 100 shares at 40.
[Example:
    BUY as principal 10,000 shares from a customer at 39\3/4\, which 
includes a \1/4\ mark-down or service charge from the prevailing market 
of 40;
    REPORT 10,000 shares at 40.]
    Example:
    BUY as principal 10,000 shares from a customer at 39.75, which 
includes a $0.25 mark-down or service charge from the prevailing market 
of 40;
    REPORT 10,000 shares at 40.
    (B) Exception: A ``riskless'' principal transaction in which a 
member after having received an order to buy a security, purchases the 
security as principal at the same price to satisfy the order to buy or, 
after having received an order to sell, sells the security as principal 
at the same price to satisfy the order to sell, shall be reported as 
one transaction in the same manner as an agency transaction, excluding 
the mark-up or mark-down, commission-equivalent, or other fee.
Example:
    SELL as a principal 100 shares to another member at 40 to fill an 
existing order;
    BUY as principal 100 shares from a customer at 40 minus a mark-down 
of $12.50;
    REPORT 100 shares at 40.
(e) Transactions Not Required To Be Reported
    The following types of transactions shall not be reported:
    (1) transactions executed through [the Computer Assisted Execution 
System (CAES),] the Nasdaq National Market Execution System (``NNMS''), 
the Primex Auction System, or the SelectNet service;
    (2) through (6) No Change.
    (f) No Change.
* * * * *
4640. Reporting Transactions in Nasdaq SmallCap Market Securities
    This Rule 4640 Series sets forth the [applicable reporting] 
requirements for reporting transactions in Nasdaq SmallCap Market 
securities (``designated securities'') utilizing [. Members shall 
utilize] the Automated Confirmation Transaction Service (ACT)[ for 
transaction reporting].

[[Page 49825]]

4641. Definitions
    [(a) ]Terms used in this Rule 4640 Series shall have the same 
meaning as those defined in [the Association's] NASD's By-Laws and 
Rules, SEC Rule 11Aa2-1 and Joint Self-Regulatory Organization Plan 
Governing the Collection, Consolidation, and Dissemination of Quotation 
and Transaction Information for Nasdaq-Listed Securities Traded on 
Exchanges on an Unlisted Trading Privilege Basis, unless otherwise 
specified herein.
    Paragraphs (b) through (d) are renumbered as paragraphs (b) through 
(d) of Rule 5420.
4642. Transaction Reporting
    Paragraphs (a) and (b) are renumbered as paragraphs (a) and (b) of 
proposed Rule 5430.

(a) When and How Transactions are Reported

    Members shall comply with Rule 5430(a) for determining when and how 
transactions are reported.

(b) Which Party Reports Transaction

    Members shall comply with Rule 5430(b) for determining which party 
reports a transaction.
    (c) No Change.
(d) Procedures for Reporting Price and Volume
    Members [which] that are required, or have the option, to report 
transactions using ACT, pursuant to paragraph (b) above shall transmit 
last sale reports for all purchases and sales in designated securities 
in the following manner:
    (1) through (3) No Change.
(e) Transactions Not Required To Be Reported
    The following types of transactions shall not be reported:
    (1) transactions executed through [the Computer Assisted Execution 
System (CAES),] the SmallCap Small Order Execution System (SOES), the 
Primex Auction System, or the SelectNet service.
    (2) through (5) No Change.
    (f) No Change.
* * * * *

4650. Reporting Transactions in Nasdaq Convertible Debt Securities

    This Rule 4650 Series sets forth the applicable reporting 
requirements for transactions in convertible bonds that are listed on 
Nasdaq (designated securities). [Members shall utilize] and reported 
utilizing the Automated Confirmation Transaction Service (ACT) [for 
transaction reporting].
4651. Definitions
    [(a)] Terms used in this Rule 4650 Series shall have the same 
meaning as those defined in [the Association's] NASD's By-Laws and 
Rules, unless otherwise specified herein.
    Paragraphs (b) through (d) are renumbered as paragraphs (b) through 
(d) of Rule 5420.
4652. Transaction Reporting
    Paragraphs (a) and (b) are renumbered as paragraphs (a) and (b) of 
Rule 5430.

(a) When and How Transactions are Reported

    Members shall comply with Rule 5430(a) for determining when and how 
transactions are reported.

(b) Which Party Reports Transaction

    Members shall comply with Rule 5430(b) for determining which party 
reports a transaction.
    (c) No Change.
(d) Procedures for Reporting Price and Volume
    Members that are required, or have the option, to report 
transactions using ACT, pursuant to paragraph (b) above shall transmit 
last sale reports for all purchases and sales in designated securities 
in the following manner:
    (1) through (3) No Change.
    (e) and (f) No Change.

4000A. NASD Alternative Display Facility

4100A. General

    NASD Alternative Display Facility (``ADF'') is the facility to be 
operated by NASD on a nine-month pilot basis for members that choose to 
quote or effect trades in Nasdaq securities (``ADF-eligible 
securities'') otherwise than on Nasdaq or on an exchange. The ADF will 
collect and disseminate quotations, compare trades, and collect and 
disseminate trade reports. Those NASD members that utilize ADF systems 
for quotation or trading activities must comply with the Rule 4000A, 
Rule 5400 and Rule 6000A Series, as well as all other applicable NASD 
Rules. The ADF pilot will expire on [insert nine months from SEC 
approval date]. 4110A. Use of NASD Alternative Display Facility Data 
Systems.
    NASD may at any time authorize the use of NASD's Alternative 
Display Facility data systems on a test basis for whatever studies it 
considers necessary and appropriate.

4120A. Trading Halts

(a) Authority to Initiate Halts In Trading on the Alternative Display 
Facility

    NASD, pursuant to the procedures set forth in paragraph (b):
    (1) shall halt trading otherwise than on an exchange in the 
Alternative Display Facility in an ADF-eligible security whenever any 
market eligible to trade that security imposes a trading halt, or 
suspends the listing, to:
    (A) permit dissemination of material news;
    (B) obtain information from the issuer relating to material news;
    (C) obtain information relating to the issuer's ability to meet 
listing qualification requirements; or
    (D) obtain any other information that is necessary to protect 
investors and the public interest.
    (2) shall close NASD Alternative Display Facility to quotation 
activity whenever NASD's Alternative Display Facility is unable to 
transmit real-time quotation or trade reporting information to the 
applicable Securities Information Processor. If ADF closes trading 
pursuant to this subparagraph (2), members would not be prohibited from 
trading through other markets for which trading is not halted.
    Members shall promptly notify NASD whenever they have knowledge of 
any matter related to a security or the issuer thereof that has not 
been adequately disclosed to the public or where they have knowledge of 
a regulatory problem relating to such security.

(b) Commencement and Termination of a Trading Halt

    (1) In the event NASD determines that a basis exists under Rule 
4120A(a) to initiate a trading halt, the commencement of the trading 
halt will be effective simultaneously with appropriate notice via an 
administrative message.
    (2) Trading in a halted security shall resume upon notice via an 
administrative message that a trading halt is no longer in effect.

4200A. DEFINITIONS

    (a) Unless the context requires otherwise, the terms used in the 
Rule 4000A and Rule 6000A Series shall have the meanings below. Terms 
not specifically defined below shall have the meaning in NASD's By-Laws 
and Rules and SEC Rule 11Aa3-1.
    (1) ``Act'' means the Securities Exchange Act of 1934.
    (2) ``ADF-eligible security'' means a Nasdaq National Market, 
Nasdaq SmallCap Market security and Nasdaq Convertible Debt securities.

[[Page 49826]]

    (3) ``Nasdaq'' means the facilities operated by The Nasdaq Stock 
Market, Inc.
    (4) ``Nasdaq market maker'' shall have the meaning as defined in 
Rule 4200.
    (5) ``Nasdaq National Market'' or ``NNM'' is a distinct tier of the 
Nasdaq Stock Market comprised of securities that meet the requirements 
of and are authorized as a Nasdaq National Market Security.
    (6) ``Nasdaq security'' means a security that is listed on Nasdaq.
    (7) ``Nasdaq SmallCap Market'' or ``SCM'' is a distinct tier of The 
Nasdaq Stock Market compromised of securities that meet the 
requirements of and are authorized as a Nasdaq SmallCap Security.
    (8) ``Normal unit of trading'' means 100 shares of a security 
unless, with respect to a particular security, the market where the 
security is listed determines that a normal unit of trading shall 
constitute other than 100 shares. If a normal unit of trading is other 
than 100 shares, a special identifier shall be appended to the issuer's 
symbol.
    (9) ``Registered Reporting ADF ECN'' means a member of NASD that is 
an electronic communications network (``ECN'') that elects to display 
orders in NASD's Alternative Display Facility. A member is a Registered 
Reporting ADF ECN in only those designated securities for which it is 
registered with NASD. A member shall cease being a Registered Reporting 
ADF ECN in a designated security when it has withdrawn or voluntarily 
terminated its quotations in that security on the ADF or when its 
quotations have been suspended or terminated by action of NASD. This 
term also shall include an NASD member that is an alternative trading 
system (``ATS'') that displays orders in NASD's Alternative Display 
Facility.
    (10) ``Registered Reporting ADF Market Maker'' means a member of 
NASD that is registered as an NASD market maker in a particular 
designated security and, with respect to that security, holds itself 
out (by entering quotations in NASD's Alternative Display Facility) as 
being willing to buy and sell such security for its own account on a 
regular and continuous basis. A member is a Registered Reporting ADF 
Market Maker in only those designated securities for which it is 
registered as an ADF market maker. A member shall cease being a 
Registered Reporting ADF Market Maker in a designated security when it 
has withdrawn or voluntarily terminated its quotations in that security 
on the ADF or when its quotations have been suspended or terminated by 
action of NASD.
    (11) ``SEC Rule 100,'' ``SEC Rule 101,'' ``SEC Rule 103,'' and 
``SEC Rule 104'' mean the rules adopted by the Commission under 
Regulation M, and any amendments thereto.
    (12) ``Stabilizing bid'' means the terms ``stabilizing'' or to 
``stabilize'' as defined in SEC Rule 100.
    (13) ``Underwriting Activity Report'' is a report provided by the 
Market Regulation Department of NASD in connection with a distribution 
of securities subject to SEC Rule 101 pursuant to NASD Rule 2710(b)(11) 
and includes forms that are submitted by members to comply with their 
notification obligations under Rules 4614A, 4619A, and 4623A.
    (b) For purposes of Rules 4619A, and 4623A, the following terms 
shall have the meanings as defined in SEC Rule 100: ``affiliated 
purchaser,'' ``distribution,'' ``distribution participant,'' 
``independent bid,'' ``net purchases,'' ``passive market maker,'' 
``penalty bid,'' ``reference security,'' ``restricted period,'' 
``subject security,'' and ``syndicate covering transaction.''

4300A. Quote and Order Access Requirements

    (a) To ensure that NASD Market Participants comply with their quote 
and order access obligations as defined below, for each security in 
which they elect to display a bid and offer (for Registered Reporting 
ADF Market Makers), or a bid and/or offer (for Registered Reporting ADF 
ECNs), in the Alternative Display Facility, NASD Market Participants 
must:
    (1) Provide other NASD Market Participants direct electronic 
access, as defined below; and
    (2) Provide NASD member broker-dealers that are not NASD Market 
Participants direct electronic access, if requested, and allow for 
indirect electronic access, as defined below. In any event, an NASD 
Market Participant is prohibited from (A) in any way directly or 
indirectly influencing or prescribing the prices that their customer 
broker-dealer may choose to impose for providing indirect access; and 
(B) precluding or discouraging indirect electronic access, including 
through the imposition of discriminatory pricing or quality of service 
with regard to a broker-dealer that is providing indirect electronic 
access.
    (3) Market Participants shall share equally the costs of providing 
to each other the direct electronic access required pursuant to 
paragraph (a)(1), unless those Market Participants agree upon another 
cost-sharing arrangement.
    (b) Subject to the terms and conditions contained herein, all NASD 
Market Participants that display quotations in NASD's Alternative 
Display Facility must record each item of information described in 
paragraphs (b)(1) and (2) of this Rule for all orders they receive from 
another broker-dealer via direct or indirect electronic access, and 
report this information to NASD as specified below.
    (1) NASD Market Participants must record the following information 
for every order they receive from another broker-dealer via direct or 
indirect electronic access during the trading day:
    (A) Unique Order Identifier
    (B) Order Entry Firm (OEID)
    (C) Order Side (Buy/Sell)
    (D) Order Quantity
    (E) Issue Identifier
    (F) Order Price
    (G) Order Negotiable Flag
    (H) Time In Force (i.e. regular hours, entire day, other)
    (I) Order Date
    (J) Order Time (including seconds)
    (K) Minimal Acceptable Quantity (i.e. ANY, all or none (AON), 
volume)
    (L) Market Making Firm (MMID)
    (M) Trade-or-Move Flag
    The information described in paragraphs (A) through (M) must be 
reported to NASD within 10 seconds of receipt of the order.
    (2) In addition to the information previously provided pursuant to 
paragraph (b)(1), NASD Market Participants must record the following 
information, as applicable, for every order received via direct or 
indirect access from another broker-dealer that has been acted upon or 
responded to:
    (A) Unique Order Identifier (as provided in paragraph (b)(1)(A))
    (B) Order Response (i.e. E=Execute, D=Decline, X=Cancel, T=timed 
out, P=partial, I=Price improvement)
    (C) Order Response Time (including seconds)
    (D) Quantity
    (E) Price
    The information described in paragraphs (A) through (E) must be 
reported to NASD within 10 seconds of any response to or action taken 
regarding an order. In the event that a member receives and executes an 
order within 10 seconds, the member may submit a single report that 
contains the information required in (b)(1) and (b)(2).

(3) Maintaining and Preserving Records

    (A) In addition to submitting the information described herein to 
NASD, each member shall maintain and preserve records of the 
information

[[Page 49827]]

required to be recorded under this Rule for the period of time and 
accessibility specified in SEC Rule 17a-4(b).
    (B) The records required to be maintained and preserved under this 
Rule may be immediately produced or reproduced on ``micrographic 
media'' as defined in SEC Rule 17a-4(f)(1)(i) or by means of 
``electronic storage media'' as defined in SEC Rule 17a-4(f)(1)(ii) 
that meet the conditions set forth in SEC Rule 17a-4(f) and may be 
maintained and preserved for the required time in that form.

(4) Orders Not Required To Be Recorded

    The recording and reporting requirements contained in paragraphs 
(a) and (b) of this Rule shall not apply to orders received via ITS or 
any system operated by a national securities exchange or national 
securities association.

(5) Method of Transmitting Data

    Members shall transmit this information in such form as prescribed 
by NASD.

(6) Reporting Agent Agreements

    (A) ``Reporting Agent'' shall mean a third party that enters into 
any agreement with a member pursuant to which such third party agrees 
to fulfill such member's obligations under this Rule.
    (B) Any member may enter into an agreement with a Reporting Agent 
pursuant to which the Reporting Agent agrees to fulfill the obligations 
of such member under this Rule. Any such agreement shall be evidenced 
in writing, which shall specify the respective functions and 
responsibilities of each party to the agreement that are required to 
effect full compliance with the requirements of this Rule.
    (C) All written documents evidencing an agreement described in 
paragraph (6)(B) shall be maintained by each party to the agreement.
    (D) Each member remains responsible for compliance with the 
requirements of this Rule, notwithstanding the existence of an 
agreement described in this paragraph.

(7) Withdrawal of Quotations

    If an NASD Market Participant knows or has reason to believe that 
it or its Reporting Agent is not complying with the requirements of 
this Rule, the member must withdraw its quotations from NASD's 
Alternative Display Facility until such time that the member is 
satisfied that its order information is being properly recorded and 
reported.
    (c) NASD Market Participants are required to specify as part of 
their NASD Alternative Display Facility Workstation Subscriber 
Agreement the method and terms by which they will comply with the 
requirements of this Rule. NASD staff will not approve a Market 
Participant's Subscriber Agreement unless the method and terms provided 
by the Market Participant are in compliance with this Rule.
    (d) Definitions
    (1) ``Customer broker-dealer'' is any broker-dealer that has, or 
seeks to have, an ongoing relationship with a Market Participant, 
including an ECN subscriber, for the purposes of executing securities 
transactions.
    (2) ``Direct electronic access'' means the ability to deliver an 
order for execution directly against an individual NASD Market 
Participant's best bid and offer subject to quote and order access 
obligations, as defined herein, without the need for voice 
communication, with the equivalent speed, reliability, availability, 
and cost (as permissible under the federal securities laws, the rules 
and regulations thereunder, and the NASD Rules), as are made available 
to NASD Market Participant's own customer broker-dealers or other 
active customers or subscribers.
    (3) ``Indirect electronic access'' means the ability to route an 
order through customer broker-dealers of an NASD Market Participant 
that are not affiliates of NASD Market Participant, for execution 
against NASD Market Participant's best bid and offer subject to quote 
and order access obligations, without the need for voice communication, 
with equivalent speed, reliability, availability, and cost, as are made 
available to the Market Participant's customer broker-dealer providing 
the indirect access or other active customers or subscribers. NASD 
Market Participant's customer broker-dealers providing indirect 
electronic access shall remain responsible for all orders routed 
through them as though the orders were the firms' own orders.
    (4) ``NASD Market Participant'' means (a) an NASD ADF Registered 
Reporting Market Maker, (b) an ATS, (c) or an NASD ADF Registered ECN.
    (5) ``Best bid and offer'' for purposes of this Rule includes the 
best-priced buy and sell orders of an NASD Market Participant.
    (6) ``Quote and Order Access Obligations'' include the requirements 
under this Rule, the firm quote obligations under Rule 11Ac1-1 under 
the Act, and for ADF Registered ECNs, the standards under Rule 11Ac1-
1(c)(5)(ii)(A)(2) under the Act, Sections 301(b)(3) through (5) of 
Regulation ATS and other order access-related regulatory requirements 
for ATSs, ECNs and market makers. Obligations under this Rule include 
providing the ability to send or receive Trade-or-Move messages, 
identifiable as such, as required by Rule 4613A(d) and providing access 
to any reserved size orders as required by Rule 4623A(c).

(e) Minimum Performance Standards

    (1) Direct electronic access provided by a Market Participant must 
allow the Market Participant the technological ability to respond to an 
order in two seconds or less. The two-second standard shall be measured 
from the time an order is received from the broker-dealer sending the 
order to the time an execution report or notice to decline the order is 
sent from the Market Participant to the broker-dealer that sent the 
order. With respect to orders received from other Market Participants, 
Market Participants must have in place a system that can accomplish 
turnaround of an order in three or fewer seconds, measured from the 
time an order is released by a Market Participant until the time an 
execution report is received by the Market Participant that placed the 
order. As a precondition to becoming a registered member of NASD 
Alternative Display Facility, Market Participants must certify to NASD 
their compliance with this paragraph based on reasonable forecasts of 
peak volume activity.
    (2) In the event that a Market Participant experiences three (3) 
unexcused system outages during a period of five (5) business days, the 
Market Participant shall be suspended from quoting in NASD's 
Alternative Display Facility in all issues for a period of twenty (20) 
business days. For the purposes of this paragraph, a ``system outage'' 
shall mean an inability to post quotations in NASD's Alternative 
Display Facility or an inability to respond to orders.
    (3) Officers of NASD or its subsidiaries designated by the Chief 
Executive Officer of NASD shall, pursuant to the procedures set forth 
in paragraph (f) below, have the authority to review any system outage 
to determine whether the system outage should be excused. An officer 
may deem a system outage excused upon proof by the Market Participant 
that the system outage resulted from circumstances not within the 
control of the Market Participant. The burden shall rest with the 
Market Participant to demonstrate that a system outage should be 
excused.
    (4) A Market Participant may contact NASD Alternative Display 
Facility Operations and request that a system outage be deemed excused, 
whether or not the system outage resulted from

[[Page 49828]]

circumstances within the control of the Market Participant; however, if 
NASD Alternative Display Facility Operations becomes aware of the 
system outage prior to the Market Participant's request for an excused 
system outage, NASD Alternative Display Facility Operations may, at its 
own discretion, deem the system outage to be unexcused, based on the 
specific facts and circumstances surrounding the outage. In any event, 
a Market Participant shall be granted no more than five (5) excused 
system outages within 30 calendar days.

(f) Procedures for Reviewing System Outages

    (1) Any Market Participant that seeks to have a system outage 
reviewed pursuant to paragraph (e)(3) hereof, shall submit a written 
request, via facsimile or otherwise, to NASD Alternative Display 
Facility Operations by close of the business day on which the system 
outage occurs, or the following business day if the system outage 
occurs outside of normal market hours.
    (2) A Market Participant that seeks review of a system outage shall 
supply any supporting information for a determination under paragraph 
(e)(3) to NASD staff by the close of business on the day following the 
system outage.
    (3) A Market Participant that seeks review of a system outage shall 
supply NASD staff with any information requested to make a 
determination pursuant to paragraph (e)(3).
    (4) An officer shall, in accordance with paragraph (e)(3), make a 
determination whether a system outage is excused by the close of 
business on the day following the receipt of information supplied 
pursuant to paragraphs (f)(2) and (f)(3).
    (5) A Market Participant may appeal a determination made under 
paragraph (e)(3) to NASD's Alternative Display Facility Market 
Operations Review Committee in writing, via facsimile or otherwise, by 
the close of business on the day a determination is rendered pursuant 
to paragraph (e)(3). An appeal to the Committee shall operate as a stay 
of the determination made pursuant to paragraph (e)(3). Once a written 
appeal has been received, the Market Participant may submit any 
additional supporting written documentation, via facsimile or 
otherwise, up until the time the appeal is considered by the Committee. 
The Committee shall render a determination by the close of business 
following the day a notice of appeal is received. The Committee's 
determination shall be final and binding.
* * * * *

4600A. TRADING IN NASDAQ SECURITIES

4610A. Registration and Other Requirements

4611A. Registration as an ADF Market Maker

    (a) Quotations and quotation sizes in Nasdaq securities may be 
entered into NASD's Alternative Display Facility only by a Registered 
Reporting ADF Market Maker or other entity approved by NASD to function 
in a market-making capacity.
    (b) An NASD member seeking registration as a market maker in the 
ADF shall file an application with NASD. The application shall certify 
the member's good standing with NASD and shall demonstrate compliance 
with the net capital and other financial responsibility provisions of 
the Act. It shall be sufficient to obtain registration as a market 
maker for a member to demonstrate proof that it is a registered Nasdaq 
market maker in good standing. A member's registration as an ADF market 
maker shall become effective upon receipt by the member of notice of 
approval of registration from NASD.
    (c) A registered reporting ADF market maker may become registered 
in an issue by entering a registration request via an NASD terminal or 
other NASD approved electronic interface with NASD's systems or by 
contacting NASD Alternative Display Facility Operations. If the 
requirements of paragraph (b) above are satisfied, registration shall 
become effective on the day the registration request is entered. It 
shall be sufficient to obtain registration in an issue for a member to 
demonstrate proof that it is currently registered in that issue as a 
Registered Reporting Nasdaq market maker and is in good standing.
    (d) A market maker's registration in an issue shall be terminated 
if the market maker fails to enter quotations in the issue within five 
(5) business days after the market maker's registration in the issue 
becomes effective.

4612A. Reserved

4613A. Character of Quotations

(a) Two-Sided Quotations

    (1) For each Nasdaq security for which a member is a Registered 
Reporting ADF Market Maker, the member shall be willing to buy and sell 
such security for its own account on a continuous basis and shall enter 
and maintain two-sided quotations through NASD's Alternative Display 
Facility, subject to the procedures for excused withdrawal set forth in 
Rule 4619A.
    (A) A Registered Reporting ADF Market Maker in a security listed on 
Nasdaq must display a quotation size for at least one normal unit of 
trading (or a larger multiple thereof) when it is not displaying a 
limit order in compliance with SEC Rule 11Ac1-4, provided, however, 
that a Registered Reporting ADF Market Maker may augment its displayed 
quotation size to display limit orders priced at the market maker's 
quotation.

(B) Minimum Price Variation for Decimal-based Quotations

    The minimum quotation increment for securities authorized for 
decimal pricing as part of the SEC-approved Decimals Implementation 
Plan for the Equities and Options Markets shall be $0.01. Quotations 
failing to meet this standard shall be rejected.

(b) Firm Quotations

    (1) A Registered Reporting ADF Market Maker that receives an offer 
to buy or sell from another NASD member shall execute a transaction for 
at least a normal unit of trading at its displayed quotations as 
disseminated through NASD's Alternative Display Facility at the time of 
receipt of any such offer. If a Registered Reporting ADF Market Maker 
displays a quotation for a size greater than a normal unit of trading, 
it shall, upon receipt of an offer to buy or sell from another NASD 
member, execute a transaction at least at the size displayed.
    (2) If a Registered Reporting ADF Market Maker, upon receipt of an 
offer to buy or sell from another NASD member in any amount that is at 
least one normal unit of trading greater than its published quotation 
size as disseminated through NASD's Alternative Display Facility at the 
time of receipt of any such offer, executes a transaction in an amount 
of shares less than the size of the offer, then such Registered 
Reporting ADF Market Maker shall, immediately after such execution, 
display a revised quotation at a price that is inferior to its previous 
published quotation. The failure of a Registered Reporting ADF Market 
Maker to execute the offer in an amount greater than its published 
quotation size shall not constitute a violation of subparagraph (b)(1) 
of this rule.

(c) Quotations Reasonably Related to the Market

    A Registered Reporting ADF Market Maker shall enter and maintain 
quotations that are reasonably related to the prevailing market. In the 
event it appears that a Registered Reporting ADF Market Maker's 
quotations are no longer reasonably related to the prevailing market, 
NASD may require

[[Page 49829]]

the market maker to re-enter its quotations. If a Registered Reporting 
ADF Market Maker whose quotations are no longer reasonably related to 
the prevailing market fails to re-enter its quotations, NASD may 
suspend the market maker's quotations in one or all securities.
    (1) In the event that a Registered Reporting ADF Market Maker's 
ability to enter or update quotations is impaired, the Registered 
Reporting ADF Market Maker shall immediately contact NASD Alternative 
Display Facility Operations to request the withdrawal of its 
quotations.
    (2) In the event that a Registered Reporting ADF Market Maker's 
ability to enter or update quotations is impaired and the Registered 
Reporting ADF Market Maker elects to continue to participate through 
NASD's Alternative Display Facility, the Registered Reporting ADF 
Market Maker shall execute an offer to buy or sell received from 
another NASD member at its quotations as disseminated through NASD's 
Alternative Display Facility.

(d) Locked and Crossed Markets

    (1) A Registered Reporting ADF Market Maker shall not, except under 
extraordinary circumstances, enter or maintain quotations through 
NASD's Alternative Display Facility during normal business hours if:
    (A) the bid quotation entered is equal to (``lock'') or greater 
than (``cross'') the asked quotation of another market maker entering 
quotations in the same security; or
    (B) the asked quotation is equal to (``lock'') or less than 
(``cross'') the bid quotation of another market maker entering 
quotations in the same security.

(2) Obligations Regarding Locked/Crossed Market Conditions Prior to 
Market Opening

    (A) Locked/Crossed Market Prior to 9:20 a.m.--For locks/crosses 
that occur prior to 9:20 a.m. Eastern Time, a Registered Reporting ADF 
Market Maker that is a party to a lock/cross because the Registered 
Reporting ADF Market Maker either has entered a bid (ask) quotation 
that locks/crosses another market maker's quotation(s) or has had its 
quotation(s) locked/crossed by another market maker (``party to a lock/
cross'') may, beginning at 9:20 a.m. Eastern Time, send a message, 
making use of direct electronic access in accordance with Rule 4300, of 
any size, that is at the receiving market maker's quoted price 
(``Trade-or-Move Message''). Any Registered Reporting ADF Market Maker 
that receives a Trade-or-Move Message at or after 9:20 a.m. Eastern 
Time, and that is a party to a lock/cross, must within 30 seconds of 
receiving such message either: fill the incoming Trade-or-Move Message 
for the full size of the message; or move its bid down (offer up) by a 
quotation increment that unlocks/uncrosses the market.
    (B) Locked/Crossed Market Between 9:20 and 9:29:59 a.m.
    (i) Before a Registered Reporting ADF ECN enters a quote that would 
lock or cross the market between 9:20 and 9:29:29 a.m. Eastern Time, 
the ECN must first send, making use of direct electronic access in 
accordance with Rule 4300, to the market maker or ECN whose quote it 
would lock or cross a Trade-or-Move Message that is at or superior to 
the receiving market maker's or ECN's quoted price. An ECN that sends a 
Trade-or-Move Message during these periods must then wait at least 10 
seconds before entering a quote that would lock or cross the market
    (ii) If a Registered Reporting ADF Market Maker locks or crosses 
the market between 9:20 and 9:29:29 a.m. Eastern Time, the Registered 
Market Maker must then immediately send, making use of direct 
electronic access in accordance with Rule 4300, to the market maker 
whose quotes it is locking or crossing a Trade-or-Move message that is 
at the receiving market maker's or ECNs quoted price.
    (iii) Market participants shall be prohibited from entering a quote 
that would lock or cross the market between 9:29:30 and 9:29:59.
    (C)(i) In the case of securities included in the Nasdaq 100 Index 
or the S&P 400 Index, a Trade-or-Move Message must be for at least 
10,000 shares (in instances where there are multiple market makers to a 
lock/cross, the locking/crossing market maker must send a message to 
each party to the lock/cross and the aggregate size of all such 
messages must be at least 10,000 shares); provided, however, that if a 
market participant is representing an agency order, the market 
participant shall be required to send a Trade-or-Move Message(s) in an 
amount equal to the agency order, even if that order is less than 
10,000 shares.
    (ii) In the case of all other securities, a Trade-or-Move Message 
must be for at least 5,000 shares (if multiple market makers would be 
locked/crossed, each one must receive a Trade-or-Move Message and the 
aggregate size of all such messages must be at least 5,000 shares); 
provided, however, that if a market participant is representing an 
agency order, the market participant shall be required to send a Trade-
or-Move Message(s) in an amount equal to the agency order, even if that 
order is less than 5,000 shares.
    (D) A market maker that receives a Trade-or-Move Message must, 
within 10 seconds of receiving such message, either fill the incoming 
Trade-or-Move Message for the full size of the message, or move its bid 
down (offer up) by a quotation increment that restores or maintains an 
unlocked/uncrossed market.
    (E) A Registered Reporting ADF Market Maker that sends a Trade-or-
Move Message pursuant to this rule must append to the message a symbol 
indicating that it is a Trade-or-Move Message.
    (F) For the purposes of this rule ``agency order'' shall mean an 
order(s) that is for the benefit of the account of a natural person 
executing securities transactions with or through or receiving 
investment banking services from a broker/dealer, or for the benefit of 
an ``institutional account'' as defined in NASD Rule 3110. An agency 
order shall not include an order(s) that is for the benefit of a market 
maker in the security at issue, but shall include an order(s) that is 
for the benefit of a broker/dealer that is not a market maker in the 
security at issue.

(3) Obligations Regarding Locked/Crossed Market Conditions During 
Market Hours

    A Registered Reporting ADF Market Maker, prior to entering a 
quotation that locks or crosses another quotation, must make reasonable 
efforts to avoid such locked or crossed market by executing 
transactions with all market makers whose quotations would be locked or 
crossed. Reasonable efforts shall include making use of direct 
electronic access in accordance with Rule 4300A. Pursuant to the 
provisions of paragraph (b) of this Rule, a Registered Reporting ADF 
Market Maker whose quotations are causing a locked or crossed market is 
required to execute transactions at its quotations as displayed through 
NASD's Alternative Display Facility at the time of receipt of any 
order.
    (4) Except as indicated in subsection (2)(B), for purposes of this 
Rule 4613A(d), the term ``Registered Reporting ADF Market Maker'' shall 
include:
    (A) any NASD member that enters into an ECN, as that term is 
defined in SEC Rule 11Ac1-1(a)(8), an order that is displayed through 
NASD's Alternative Display Facility;
    (B) any NASD member that operates the ECN when the order being 
displayed has been entered by a person or entity that is not an NASD 
member;

[[Page 49830]]

    (C) any NASD member that enters into an ATS, as that term is 
defined in SEC Regulation ATS, a priced order that is displayed through 
NASD's Alternative Display Facility; and
    (D) any NASD member that operates the ATS when the priced order 
being displayed has been entered by a person or entity that is not an 
NASD member. (e) Other Quotation Obligations
    (1) Members that display priced quotations on a real-time basis for 
Nasdaq securities in two or more market centers that permit quotation 
updates on a real-time basis must display the same priced quotations 
for the security in each market center.
    (2) A member that is registered as a market maker in a Nasdaq 
security shall be obligated to have available in close proximity to 
NASD's Alternative Display Facility terminal at which it makes a market 
in a Nasdaq security a quotation service that disseminates the bid 
price and offer price then being furnished by or on behalf of other 
market makers trading and quoting that Nasdaq security.

IM-4613A. Autoquote Policy

    (a) General Prohibition--NASD bans the automated update of 
quotations by market makers through NASD's Alternative Display 
Facility. Except as provided below, this policy prohibits systems known 
as ``autoquote'' systems from effecting automated quote updates or 
tracking of inside quotations through NASD's Alternative Display 
Facility. This ban is necessary to offset the negative impact on the 
capacity and operation of NASD's Alternative Display Facility that may 
be caused by certain autoquote techniques that track changes to the 
inside quotation and automatically react by generating another quote to 
keep the market maker's quote away from the best market.
    (b) Exceptions to the General Prohibition--Automated updating of 
quotations is permitted when: (1) the update is in response to an 
execution in the security by that firm (such as execution of an order 
that partially fills a market maker's quotation size), and is in 
compliance with Rule 4613A(b)(2); (2) it requires a physical entry 
(such as a manual entry to the market maker's internal system which 
then automatically forwards the update to Nasdaq); or (3) the update is 
to reflect the receipt, execution, or cancellation of a customer limit 
order.

4614A. Reserved

4615A. Reserved

4616A. Reserved

4617A. Normal Business Hours

    A Registered Reporting ADF Market Maker shall be open for business 
as of 9:30 a.m. Eastern Time and shall close no earlier than 4:00 p.m. 
Eastern Time. A Registered Reporting ADF Market Maker may remain open 
for business on a voluntary basis for any period of time between 4:00 
p.m. Eastern time and 6:30 p.m. Eastern Time. Registered Reporting ADF 
Market Makers whose quotes are open after 4:00 p.m. Eastern Time shall 
be obligated to comply, while their quotes are open, with all NASD 
Rules that are not by their express terms, or by an official 
interpretation of NASD, inapplicable to any part of the 4:00 p.m. to 
6:30 p.m. Eastern Time period.

4618A. Clearance and Settlement

    (a) A market maker shall clear and settle transactions effected on 
the ADF in Nasdaq securities that are eligible for net settlement 
through the facilities of a registered clearing agency that uses a 
continuous net settlement system. This requirement may be satisfied by 
direct participation, use of direct clearing services, or by entry into 
a correspondent clearing arrangement with another member that clears 
trades through such an agency.
    (b) Notwithstanding paragraph (a), transactions in Nasdaq 
securities may be settled ``ex-clearing'' provided that both parties to 
the transaction agree.

4619A. Withdrawal of Quotations and Passive Market Making

    (a) A Registered Reporting ADF Market Maker that wishes to withdraw 
quotations in a security or have its quotations identified as the 
quotations of a passive market maker shall contact NASD Alternative 
Display Facility Operations to obtain excused withdrawal status prior 
to withdrawing its quotations or identification as a passive market 
maker. If a Registered Reporting ADF Market Maker also is a Registered 
Reporting Nasdaq Market Maker, it must obtain excused withdrawal status 
in both facilities for the same time period. Withdrawals of quotations 
or identifications of quotations as those of a passive market maker 
shall be granted by NASD Alternative Display Facility Operations only 
upon satisfying one of the conditions specified in this Rule.
    (b) Excused withdrawal status based on circumstances beyond the 
market maker's control may be granted for up to five (5) business days, 
unless extended by NASD Alternative Display Facility Operations. 
Excused withdrawal status based on demonstrated legal or regulatory 
requirements, supported by appropriate documentation and accompanied by 
a representation that the condition necessitating the withdrawal of 
quotations is not permanent in nature, may, upon notification, be 
granted for not more than sixty (60) days (unless such request is 
required to be made pursuant to paragraph (d) below). Excused 
withdrawal status based on religious holidays may be granted only if 
notice is received by NASD one business day in advance and is approved 
by NASD. Excused withdrawal status based on vacation may be granted 
only if:
    (1) the request for withdrawal is received by NASD one business day 
in advance, and is approved by NASD; and
    (2) the request includes a list of the securities for which 
withdrawal is requested.
    (c) Excused withdrawal status may be granted to a Registered 
Reporting ADF Market Maker that has withdrawn from an issue prior to 
the public announcement of a merger or acquisition and wishes to re-
register in the issue pursuant to the same-day registration procedures 
contained in Rule 4611A, above, provided the Registered Reporting ADF 
Market Maker has remained registered in one of the affected issues. The 
withdrawal of quotations because of pending news, a sudden influx of 
orders or price changes, or to effect transactions with competitors 
shall not constitute acceptable reasons for granting excused withdrawal 
status.
    (d) Excused withdrawal status may be granted to a member that 
experiences a documented problem or failure impacting the operation or 
utilization of any automated system operated by or on behalf of the 
firm (chronic system failures within the control of the member will not 
constitute a problem or failure impacting a firm's automated system).
    (e) Excused withdrawal status may be granted to a Registered 
Reporting ADF Market Maker that fails to maintain a clearing 
arrangement with a registered clearing agency or with a member of such 
an agency, thereby terminating its registration as a Registered 
Reporting ADF Market Maker; provided however, that if NASD finds that 
the Registered Reporting ADF Market Maker's failure to maintain a 
clearing arrangement is voluntary, the withdrawal of quotations will be 
considered voluntary and unexcused pursuant to Rule 4620A.
    (f) Excused withdrawal status or passive market maker status may be

[[Page 49831]]

granted to a Registered Reporting ADF Market Maker that is a 
distribution participant (or, in the case of excused withdrawal status, 
an affiliated purchaser) in order to comply with SEC Rules 101, 103, or 
104 under the Act on the following conditions:
    (1) A member acting as a manager (or in a similar capacity) of a 
distribution of a security that is a subject security or reference 
security under Rule 101 and any member that is a distribution 
participant or an affiliated purchaser in such a distribution that does 
not have a manager shall provide written notice to NASD Alternative 
Display Facility Operations and the Market Regulation Department of 
NASD no later than the business day prior to the first entire trading 
session of the one-day or five-day restricted period under SEC Rule 
101, unless later notification is necessary under the specific 
circumstances.
    (A) The notice required by subparagraph (f)(1) of this Rule shall 
be provided by submitting a completed Underwriting Activity Report that 
includes a request on behalf of each market maker that is a 
distribution participant or an affiliated purchaser to withdraw the 
market maker's quotations, or that includes a request on behalf of each 
market maker that is a distribution participant (or an affiliated 
purchaser of a distribution participant) that its quotations be 
identified as those of a passive market maker and includes the 
contemplated date and time of the commencement of the restricted 
period.
    (B) The managing underwriter shall advise each Registered Reporting 
ADF Market Maker that it has been identified as a distribution 
participant or an affiliated purchaser to NASD Alternative Display 
Facility Operations and that its quotations will be automatically 
withdrawn or identified as passive market maker quotations, unless a 
market maker that is a distribution participant (or an affiliated 
purchaser of a distribution participant) notifies NASD Alternative 
Display Facility Operations as required by subparagraph (f)(2), below.
    (2) A Registered Reporting ADF Market Maker that has been 
identified to NASD Alternative Display Facility Operations as a 
distribution participant (or an affiliated purchaser of a distribution 
participant) shall promptly notify NASD Alternative Display Facility 
Operations and the manager of its intention not to participate in the 
prospective distribution or not to act as a passive market maker in 
order to avoid having its quotations withdrawn or identified as the 
quotations of a passive market maker.
    (3) If a Registered Reporting ADF Market Maker that is a 
distribution participant withdraws its quotations in a Nasdaq security 
in order to comply with the net purchases limitation of SEC Rule 103 or 
with any other provision of SEC Rules 101, 103, or 104 and promptly 
notifies NASD Alternative Display Facility Operations of its action, 
the withdrawal shall be deemed an excused withdrawal. Nothing in this 
subparagraph shall prohibit NASD from taking such action as is 
necessary under the circumstances against a member and its associated 
persons for failure to contact NASD Alternative Display Facility 
Operations to obtain an excused withdrawal as required by subparagraph 
(a) of this Rule.
    (4) The quotations of a passive market maker shall be identified on 
NASD Alternative Display Facility Data Systems as those of a passive 
market maker.
    (5) A member acting as a manager (or in a similar capacity) of a 
distribution subject to subparagraph (f)(1) of this Rule shall submit a 
request to NASD Alternative Display Facility Operations and the Market 
Regulation Department of NASD to rescind the excused withdrawal status 
or passive market making status of distribution participants and 
affiliated purchasers, which request shall include the date and time of 
the pricing of the offering, the offering price, and the time the 
offering terminated, and, if not in writing, shall be confirmed in 
writing no later than the close of business the day the offering 
terminates. The request referenced in this subparagraph may be 
submitted on the Underwriting Activity Report.
    (g) NASD's Alternative Display Facility Operations Review Committee 
shall have jurisdiction over proceedings brought by market makers 
seeking review of a denial of an excused withdrawal pursuant to this 
Rule, or the conditions imposed on their reentry.

4620A. Voluntary Termination of Registration

    A Registered Reporting ADF Market Maker may voluntarily terminate 
its registration in a security by (1) withdrawing its quotations from 
NASD's Alternative Display Facility and not re-entering its quotations 
for five (5) minutes, or (2) failing to re-enter quotations within 
thirty (30) minutes of the end of a trading halt. A Registered 
Reporting ADF Market Maker that voluntarily terminates its registration 
in a security may not re-register as a market maker in that security 
for twenty (20) business days, absent an excused withdrawal specified 
in Rule 4619A. Withdrawal from participation as a Registered Reporting 
ADF Market Maker in NASD's Alternative Display Facility shall 
constitute termination of registration as a market maker in that 
security for purposes of this Rule; provided, however, that a 
Registered Reporting ADF Market Maker that fails to maintain a clearing 
arrangement with a registered clearing agency or with a member of such 
an agency and thereby terminates its registration as a market maker in 
Nasdaq securities may register as a market maker at any time after a 
clearing arrangement has been reestablished.

4621A. Suspension and Termination of Quotations by NASD Action

    NASD may, pursuant to the procedures set forth in the Rule 9000 
Series, suspend, condition, limit, prohibit or terminate a Registered 
Reporting ADF Market Maker's authority to enter quotations in one or 
more authorized securities for violations of applicable requirements or 
prohibitions.

4622A. Termination of NASD Alternative Display Facility Data System 
Service

    NASD may, upon notice, terminate NASD Alternative Display Facility 
Data System service in the event that a Registered Reporting ADF Market 
Maker fails to qualify under specified standards of eligibility or 
fails to pay promptly for services rendered by NASD.

4623A. Alternative Trading Systems

    (a) NASD may provide a means to permit alternative trading systems 
(``ATSs''), as such term is defined in Regulation ATS, and electronic 
communications networks (``ECNs''), as such term is defined in SEC Rule 
11Ac1-1(a)(8), to comply with the display requirements of SEC Rule 
301(b)(3) and the terms of the ECN display alternative provided for in 
SEC Rule 11Ac1-1(c)(5)(ii)(A) and (B) (``ECN display alternatives''). 
NASD will not facilitate compliance with access requirements, which are 
the responsibility of Market Participants under Rule 4300A.
    (b) An ATS or ECN that seeks to use NASD-provided means to comply 
with SEC Rule 301(b)(3) and/or the ECN display alternatives shall:
    (1) demonstrate to NASD that it is in compliance with Regulation 
ATS or that it qualifies as an ECN meeting the definition in the SEC 
Rule;
    (2) be registered as an NASD member;
    (3) enter into and comply with the terms of an NASD Alternative 
Display

[[Page 49832]]

Facility Workstation Subscriber Agreement, as amended for ATSs and 
ECNs;
    (4) agree to provide for NASD's dissemination in the quotation data 
made available to quotation vendors the prices and sizes of NASD 
Registered Market Maker orders (and orders from other subscribers of 
the ATS or ECN, if the ATS or ECN so chooses or is required by SEC Rule 
301(b)(3) to display a subscriber's order in NASD's Alternative Display 
Facility), at the highest buy price and the lowest sell price for each 
Nasdaq security entered in and widely disseminated by the ATS or ECN; 
and prior to entering such prices and sizes, register with NASD 
Alternative Display Facility Operations as an ATS or ECN; and
    (5) comply with Rule 4300A.
    (c) When an NASD member attempts to access electronically an ATS or 
ECN-displayed order by sending an order that is larger than the ATS' or 
ECN's Nasdaq-displayed size and the ATS or ECN is displaying the order 
on a reserved size basis, the NASD member that operates the ATS or ECN 
shall execute such delivered order:
    (1) up to the size of the delivered order, if the ATS or ECN order 
(including the reserved size and displayed portions) is the same size 
or larger than the delivered order; or
    (2) up to the size of the ATS or ECN order (including the reserved 
size and displayed portions), if the delivered order is the same size 
or larger than the ATS or ECN order (including the reserved size and 
displayed portions).
    No ATS or ECN operating through NASD's Alternative Display Facility 
pursuant to this Rule is permitted to provide a reserved-size function 
unless the size of the order displayed through NASD's Alternative 
Display Facility is 100 shares or greater. For purposes of this Rule, 
the term ``reserved size'' shall mean that a customer entering an order 
into an ATS or ECN has authorized the ATS or ECN to display publicly 
part of the full size of the customer's order with the remainder held 
in reserve on an undisplayed basis to be displayed in whole or in part 
as the displayed part is executed.

4624A. Reserved

4625A. Reserved

4630A. Reporting Transactions in Nasdaq Securities

    This Rule 4630A Series governs the reporting by members of ADF-
eligible securities through NASD's Trade Reporting and Comparison 
Service (``TRACS''). The Rule 5400 Series provides the rules for 
determining which member must report a trade and whether a trade must 
be reported to TRACS pursuant to this Rule 4630A Series. Participation 
in the trade reporting function of TRACS is mandatory for all members 
that have a trade reporting obligation through TRACS under the Rule 
5400 Series or that choose to report transactions through TRACS. 
Participation in the trade reporting function of TRACS is conditioned 
upon (a) execution of, and continuing compliance with, a TRACS trade 
reporting Participant Application Agreement and (b) maintenance of the 
physical security of the equipment on the premises of the member to 
prevent unauthorized entry of information into the trade reporting 
function of TRACS.

4631A. Reserved

4632A. Transactions Reported by Members

(a) When and How Transactions are Reported

    Members shall comply with Rule 5430(a) for determining when and how 
transactions are reported.

(b) Which Party Reports Transaction

    Members shall comply with Rule 5430(b) for determining which party 
reports a transaction.

(c) Information To Be Reported--Two Party Trade Reports

    (1) A two party trade report is a last sale report that denotes a 
trade between one Reporting NASD member and one Non-Reporting Member. 
The Reporting NASD Member is denoted as the (``MMID'') side of the 
trade report and the Non-Reporting Member is denoted as the (``OEID'') 
side of the report.
    (2) Each two party last sale report submitted by a reporting nasd 
member should contain:
    (A) Security identification symbol (SECID);
    (B) Number of shares or bonds;
    (C) Price of the transaction as required by paragraph (h) below;
    (D) A designated symbol denoting whether the transaction, from the 
Reporting NASD Member's perspective, is a buy, sell, sell short, sell 
short exempt, or cross;
    (E) If known, a designated symbol denoting whether the transaction, 
from the perspective of the Non-Reporting Member, is a buy, sell, sell 
short, or sell short exempt;
    (F) A designated symbol denoting whether the transaction, from the 
perspective of the Reporting Member, is a principal, riskless 
principal, or agent;
    (G) If known, a designated symbol denoting whether the transaction, 
from the perspective of the Non-Reporting Member, is a principal, 
riskless principal, or agent;
    (H) For any transaction in an order for which a member has 
recording and reporting obligations under NASD Rules 6954 and 6955, the 
trade report must include:
    (i) an order identifier, meeting such parameters as may be 
prescribed by NASD, assigned to the order that uniquely identifies the 
order for the date it was received (see Rule 6954(b)(1));
    (ii) The time of execution. This information must be reported 
regardless of the period of time between execution of the trade and the 
NASD report.
    (I) Execution time for any transaction not reported within 90 
seconds of execution;
    (J) The market participant identifier of the Reporting Member and 
the Non-Reporting Member;
    (K) Reporting Member clearing broker;
    (L) Reporting Member Executing Broker in case of a ``give up;''
    (M) Non-Reporting Member Executing Broker;
    (N) Non-Reporting Member introducing broker in case of a ``give 
up;''
    (O) Non-Reporting Member clearing broker;
    (P) A designated symbol denoting whether the trade report should be 
published;
    (Q) A designated symbol denoting whether the trade report should be 
compared in TRACS;
    (R) If the contra side to the trade report is a customer of the 
Reporting Member, the Reporting Member shall denote that the trade is 
an internalized trade with the designated symbol;
    (S) If the contra side to the trade report is a Non-NASD member, 
the Reporting Member shall indicate with the designated symbol that the 
contra side is a non-member.
    (T) For two party trade reports submitted pursuant to an Automated 
Give Up (``AGU'') arrangement or a Qualified Service Representative 
(``QSR'') Agreement, disclosure of the information set forth in 
subparagraphs (e)(2)(E) and (G) is mandatory.
    (3)(A) In the event that the MMID side or the OEID side determines 
that any information provided pursuant to subparagraphs (e)(2)(D), (E), 
(F), (G), or (H)(i) is inaccurate or incomplete, the MMID side or OEID 
side, as applicable, must submit a trade report addendum within fifteen 
(15) minutes of the submission of the original trade report to correct 
or provide some or all of the following information:
    (i) Short sale indicator;
    (ii) Volume related to short sale indicator change;

[[Page 49833]]

    (iii) Capacity Indicator;
    (iv) Volume related to capacity change; or
    (v) Branch Sequence Number
    (B) The trade report addendum feature of TRACS may also be used by 
members to add or modify the User Assigned Reference Number.
    (C) Each trade report addendum must contain the following 
information:
    (i) Reference number for the original trade report that is being 
amended or modified;
    (ii) OEID side or MMID side flag; and
    (iii) MPID.

(d) Information To Be Reported--Three Party Trade Reports

    (1) A three party trade report is a single last sale trade report 
that denotes one Reporting Member and two contra parties. The Reporting 
Member is denoted as the MMID side of the trade report and the two non-
reporting sides are denoted as the OEID side of the trade report. In a 
three party report, the Reporting Member is the buyer to one OEID and 
the seller to the other OEID. Registered ECNs may submit three party 
trade reports. Riskless principal trades also may be submitted by 
reporting members as three party trade reports.
    (2) Each Three Party Trade Report Submitted by a Reporting Member 
shall contain the following information:

Transaction Information

    (A) Security Identification Symbol (SECID);
    (B) Number of shares or bonds;
    (C) Price of the transaction as required by paragraph (h) below;
    (D) Execution time for any transaction not reported within 90 
seconds of execution;
    (E) The market participant identifier of the Reporting Member and 
the two Non-Reporting Members;
    (F) A designated symbol denoting whether the trade should be 
published;
    (G) For any transaction in an order for which a member has 
recording and reporting obligations under NASD Rules 6954 and 6955, the 
trade report must include:
    (i) an order identifier, meeting such parameters as may be 
prescribed by NASD, assigned to the order that uniquely identifies the 
order for the date it was received (see Rule 6954(b)(1)). This order 
number must associate both the buy side and sell side OATS Execution 
Reports to the TRACS report;
    (ii) The time of execution. This information must be reported 
regardless of the period of time between execution of the trade and the 
NASD report.

MMID Side

    (H) All three party trade reports from ECNs must be marked as 
agency cross transactions;
    (I) All three party trade reports from Non-ECNs must be denoted as 
riskless principal trade reports and shall include a designated symbol 
denoting whether the trade between the non-ECN and the buy-side OEID is 
a sell, sell short, or sell short exempt transaction;
    (J) Reporting Member clearing broker;
    (K) Reporting Member Executing Broker in the case of a ``give up''; 
Buy Side OEID
    (L) Buy Side OEID executing broker;
    (M) Buy Side OEID introducing broker in case of a ``give up'';
    (N) Buy Side OEID clearing broker;
    (O) If known, a designated symbol denoting whether the trade, from 
the Buy Side OEID's perspective, is as principal, riskless principal, 
or agent;
    (P) If the Buy Side OEID is a customer of the Reporting Member, the 
Reporting Member shall denote that the trade is an internalized trade 
with the designated symbol;
    (Q) If the Buy Side OEID is a non-NASD member, the Reporting Member 
shall indicate with the designated symbol that the buy side OEID is a 
non-member;
    (R) A designated symbol denoting whether the trade between the MMID 
and the Buy Side OEID shall be compared in TRACS;

Sell Side OEID

    (S) Sell Side OEID executing broker;
    (T) Sell Side OEID introducing broker in case of a ``give up'';
    (U) Sell Side OEID clearing broker;
    (V) If known, a designated symbol denoting whether the trade, from 
the Sell Side OEID's perspective, is as principal, riskless principal, 
or agent;
    (W) If known, a symbol denoting whether the trade, from the Sell 
Side OEID's perspective, is a sell, sell short, or sell short exempt 
transaction;
    (X) If the Sell Side OEID is a customer of the Reporting Member, 
the Reporting Member shall denote that the trade is an internalized 
trade with the designated symbol;
    (Y) If the Sell Side OEID is a non-NASD Member, the Reporting 
Member shall indicate with the designated symbol that the buy side OEID 
is a non-member;
    (Z) A designated symbol denoting whether the trade between the MMID 
and the Sell Side OEID shall be compared in TRACS;
    (AA) If the transaction between the Buy Side OEID and the Reporting 
Member is reported pursuant to an AGU arrangement or a QSR agreement, 
disclosure of the information set forth in subparagraph (f)(2)(O) is 
mandatory; and
    (BB) If the transaction between the Sell Side OEID and the 
Reporting Member is reported pursuant to an AGU arrangement or a QSR 
agreement, disclosure of the information set forth in subparagraphs 
(f)(2)(V) and (W) is mandatory.
    (3)(A) In the event that the MMID side or the OEID side determines 
that any information provided pursuant to subparagraphs (f)(2)(G)(i), 
(I), (O), (V), or (W) is inaccurate or incomplete, the MMID side or 
OEID side, as applicable, must submit a trade report addendum within 
fifteen (15) minutes of the submission of the original trade report to 
correct or provide some or all of the following information:
    (i) Short sale indicator;
    (ii) Volume related to short sale indicator change;
    (iii) Capacity Indicator;
    (iv) Volume related to capacity change; or
    (v) Branch Sequence Number
    (B) The trade report addendum feature of TRACS may also be used by 
members to add or modify the User Assigned Reference Number.
    (C) Each trade report addendum must contain the following 
information:
    (i) Reference number for the original trade report that is being 
amended or modified;
    (ii) OEID side or MMID side flag; and
    (iii) MPID.
    (e) Procedures for Reporting Price and Volume
    (1) Members that are required, or have the option, to report 
transactions pursuant to paragraph (d) above shall transmit last sale 
reports in the following manner:
    (A) For agency transactions, report the number of shares (or bonds) 
and the price excluding the commission charged.

Example:

    SELL as agent 100 shares at 40 less a commission of $12.50;
    REPORT 100 shares at 40.
    (B) For dual agency transactions, report the number of shares (or 
bonds) only once, and report the price excluding the commission 
charged.

Example:

    SELL as agent 100 shares at 40 less a commission of $12.50;
    BUY as agent 100 shares at 40 plus a commission of $12.50;
    REPORT 100 shares at 40.
    (C)(i) For principal transactions, except as provided below, report 
each

[[Page 49834]]

purchase and sale transaction separately and report the number of 
shares (or bonds) and the price. For principal transactions that are 
executed at a price that includes a mark-up, mark-down or service 
charge, the price reported shall exclude the mark-up, mark-down or 
service charge. Such reported price shall be reasonably related to the 
prevailing market, taking into consideration all relevant circumstances 
including, but not limited to, market conditions with respect to the 
security, the number of shares (or bonds) involved in the transaction, 
the published bids and offers with size at the time of the execution 
(including the reporting firm's own quotation), the cost of execution 
and the expenses involved in clearing the transaction.

Example:

    BUY as principal 100 shares from another member at 40 (no mark-down 
included);
    REPORT 100 shares at 40.

Example:

    BUY as principal 100 shares from a customer at 39.85 which includes 
a .15 mark-down from prevailing market at 40;
    REPORT 100 shares at 40.

Example:

    SELL as principal 100 shares to a customer at 40.15, which includes 
a .15 mark-up from the prevailing market of 40;
    REPORT 100 shares at 40.

Example:

    BUY as principal 10,000 shares from a customer at 39.75, which 
includes a .25 mark-down or service charge from the prevailing market 
of 40;
    REPORT 10,000 shares at 40.
    (ii) Exception: A ``riskless'' principal transaction in which a 
member after having received an order to buy a security, purchases the 
security as principal at the same price to satisfy the order to buy or, 
after having received an order to sell, sells the security as principal 
at the same price to satisfy the order to sell, shall be reported as 
one three party transaction, excluding the mark-up or mark-down, 
commission-equivalent, or other fee. Alternatively, a member may report 
a riskless principal transaction by submitting the following report(s) 
to NASD:
    a. The member with the obligation to report the transaction 
pursuant to paragraph (d) above must submit a last sale report for the 
initial leg of the transaction.
    b. Regardless of whether a member has a reporting obligation 
pursuant to paragraph (d) above, the firm must submit, for the 
offsetting, ``riskless'' portion of the transaction, either:
    1. a clearing-only report with a capacity indicator of ``riskless 
principal,'' if a clearing report is necessary to clear the 
transaction; or
    2. a non-tape, non-clearing report with a capacity indicator of 
``riskless principal,'' if a clearing report is not necessary to clear 
the transaction.

Example:

    SELL as a principal 100 shares to another member at 40 to fill an 
existing order;
    BUY as principal 100 shares from a customer at 40 minus a mark-down 
of $12.50;
    REPORT 100 shares at 40 by submitting to NASD either a single trade 
report marked with a ``riskless principal'' capacity indicator or by 
submitting the following reports:
    3. where required by this Rule, a tape report marked with a 
``principal'' capacity indicator; and
    4. either a non-tape, non-clearing report or a clearing-only report 
marked with a ``riskless principal'' capacity indicator.
    (D) For transactions that are executed at a price different from 
the current market when the execution is based on a prior reference 
point in time, members shall append to the transaction report a trade 
report modifier designated by NASD and shall include in the transaction 
report the prior reference time.

Example:

    At 9:45 a.m., a member discovers that a customer's order to BUY 100 
shares at the opening price has not been executed.
    The member executes the customer's order at 9:45 a.m. at the 
opening price (40). Current market is 41.
    REPORT 100 shares at 40 and append the .PRP modifier with the time 
9:30.

(f) Aggregation of Transaction Reports

    (1) Under the following conditions, individual executions of orders 
in a security at the same price may be aggregated, for transaction 
reporting purposes, into a single transaction report. Individual 
transactions in convertible debt securities cannot be aggregated 
pursuant to this paragraph.
    (A) Orders received prior to the opening of the reporting member's 
market in the security and simultaneously executed at the opening. 
Also, orders received during a trading or quotation halt in the 
security and executed simultaneously when trading or quotations resume. 
In no event shall a member delay its opening or resumption of 
quotations for the purpose of aggregating transactions.

Example:

    A firm receives, prior to its market opening, several market orders 
to sell which total 10,000 shares. All such orders are simultaneously 
executed at the opening at a reported price of 40.
    REPORT 10,000 shares at 40.
    (B) Simultaneous executions by the member of customer transactions 
at the same price, e.g., a number of limit orders being executed at the 
same time when a limit price has been reached.

Example:

    A firm has several customer limit orders to sell which total 10,000 
shares at a limit price of 40. That price is reached and all such 
orders are executed simultaneously.
    REPORT 10,000 shares at 40.
    (C) Orders relayed to the trading department of the reporting 
member for simultaneous execution at the same price.

Example:

    A firm purchases a block of 50,000 shares from an institution at a 
reported price of 40.
    REPORT 50,000 at 40.
    Subsequently, one of the firm's branch offices transmits to the 
firm's trading department for execution customer buy orders in the 
security totaling 12,500 shares at a reported price of 40.
    REPORT 12,500 at 40.
    Subsequently, another branch office transmits to the firm's trading 
department for execution customer buy orders totaling 15,000 shares in 
the security at a reported price of 40.
    REPORT 15,000 at 40.

Example:

    Due to a major change in market conditions, a firm's trading 
department receives from a branch office for execution customer market 
orders to sell totaling 10,000 shares. All are executed at a reported 
price of 40.
    REPORT 10,000 at 40.
    (D) Orders received or initiated by the reporting member that are 
impractical to report individually and are executed at the same price 
within 60 seconds of execution of the initial transaction; provided 
however, that no individual order of 10,000 shares or more may be 
aggregated in a transaction report and that the aggregated transaction 
report shall be made within 90 seconds of the initial execution 
reported therein. Furthermore, it is not permissible for a member to 
withhold reporting a trade in

[[Page 49835]]

anticipation of aggregating the transaction with other transactions. 
The limitation on aggregating individual orders of 10,000 shares or 
more for a particular security shall not apply on the first day of 
secondary market trading of an IPO for that security.

Examples:

    A reporting member receives and executes the following orders at 
the following times and desires to aggregate reports to the maximum 
extent permitted under this Rule.

First Example

    11:01:00 500 shares at 40
    11:01:05 500 shares at 40
    11:01:10 9,000 shares at 40
    11:01:15 500 shares at 40
    REPORT 10,500 shares at 40 within ninety seconds of 11:01.

Second Example

    11:01:00 100 shares at 40
    11:01:10 11,000 shares at 40
    11:01:30 300 shares at 40
    REPORT 400 shares within ninety seconds of 11:01 and 11,000 shares 
within ninety seconds of 11:01:10

(individual transactions of 10,000 shares or more must be reported 
separately).

Third Example

    11:01:00 100 shares at 40
    11:01:15 500 shares at 40
    11:01:30 200 shares at 40
    11:02:30 400 shares at 40
    REPORT 800 shares at 40 within ninety seconds of 11:01 and 400 
shares at 40 within ninety seconds of 11:02:30 (the last trade is not 
within sixty seconds of the first and must, therefore, be reported 
separately).
    (2) The reporting member shall identify aggregated transaction 
reports and order tickets of aggregated trades in a manner directed by 
NASD.

(g) Reporting Transactions on Form T

    All Reporting NASD Members required (or that elect) to report 
transactions to NASD's Alternative Display Facility shall report, as 
soon as practicable to NASD's Market Regulation Department on Form T, 
last sale reports of transactions in designated securities for which 
electronic submission to NASD's Alternative Display Facility is not 
possible (e.g., the ticker symbol for the security is no longer 
available, a market participant identifier is no longer active, or NASD 
will not accept the date of execution because NASD's Alternative 
Display Facility was closed on that date). Transactions that can be 
reported to NASD, whether on trade date or on a subsequent date on an 
``as of'' basis (T+N), shall not be reported on Form T.

(h) Trade Tickets

    All trade tickets for transactions in Nasdaq securities shall be 
time-stamped at the time of execution.

(i) Special Trade Indicator

    A Reporting Member shall append the designated symbol for special 
trades, step out trades, reversals, and as-of trades.

(j) Clearing Indicators

    A Reporting Member shall use a designated symbol to denote whether 
the trade is to be: (i) compared in TRACS; (ii) not compared in TRACS; 
(iii) compared in TRACS pursuant to an Automatic Give Up Agreement 
(``AGU''); or (iv) not compared in TRACS, but locked in pursuant to a 
Qualified Service Representation Agreement (``QSR'').

(k) Transactions Not To Be Reported To NASD

    The following types of transactions effected by NASD members shall 
not be reported to TRACS for publication purposes:
    (1) odd-lot transactions;
    (2) transactions that are part of a primary distribution by an 
issuer or of a registered secondary distribution (other than ``shelf 
distributions'') or of an unregistered secondary distribution;
    (3) transactions made in reliance on Section 4(2) of the Securities 
Act of 1933;
    (4) transactions where the buyer and seller have agreed to trade at 
a price substantially unrelated to the current market for the security 
(e.g., to enable the seller to make a gift);
    (5) purchases or sales of securities effected upon the exercise of 
an option pursuant to the terms thereof or the exercise of any other 
right to acquire securities at a pre-established consideration 
unrelated to the current market.

(l) Dissemination of Transaction Reports in Convertible Debt Securities

    For surveillance purposes, NASD will collect and process trade 
reports for all transactions in convertible debt securities listed on 
Nasdaq and effected through NASD's Alternative Display Facility. On a 
real-time basis, NASD will disseminate to members and the public 
through NASD, and through securities information processors, 
transactions in convertible debt securities reported to it equaling 99 
bonds or less.
* * * * *

5400. Nasdaq Stock Market and Alternative Display Facility Trade 
Reporting

5410. Applicability

    (a) For a period of time, NASD will operate two facilities for 
collecting trade reports for executions in Nasdaq National Market, 
Nasdaq SmallCap Market, and Nasdaq Convertible Debt securities 
(``designated securities''): The Nasdaq Stock Market and the 
Alternative Display Facility (``ADF''). Nasdaq will continue to operate 
the Automated Confirmation Transaction Service (``ACT''), and NASD, 
through the ADF, will operate Trade Reporting and Comparison Service 
(``TRACS''). This Rule 5400 Series establishes the rules for 
determining which member must report a trade and whether a trade must 
be reported to ACT, pursuant to the Rule 4630, 4640, 4650 and 6100 
Series or TRACS, pursuant to the Rule 4630A and 6100A Series.
    (b) The requirements of this Rule 5400 Series are in addition to 
the trade reporting requirements contained in Rule Series 4630, 4640, 
4650, 6100, 4630A and 6100A Series.
5420. Definitions
    (a) Terms used in this Rule 5400 Series shall have the meaning as 
defined in the NASD's By-Laws and Rules, SEC Rule 11Aa3-1, and the 
Joint Self-Regulatory Organization Plan Governing the Collection, 
Consolidation, and Dissemination of Quotation and Transaction 
Information for Nasdaq-Listed Securities Traded on Exchanges on an 
Unlisted Trading Privilege Basis, unless otherwise defined herein.
    (b) ``Automated Confirmation Transactions Service'' or ``ACT'' is 
the service that, among other things, accommodates reporting and 
dissemination of last sale reports in designated securities.
    (c) ``Registered Reporting Nasdaq Market Maker'' means a member of 
[the Association which] NASD that is registered as a Nasdaq market 
maker in a particular designated security. A member is a Registered 
Reporting Nasdaq Market Maker in only those designated securities for 
which it is registered as a Nasdaq market maker. A member shall cease 
being a Registered Reporting Nasdaq Market Maker in a designated 
security when it has withdrawn or voluntarily terminated its quotations 
in that security or when its quotations have been suspended or 
terminated by action of NASD [the Association].
    (d) ``Non-Registered Reporting Member'' means a member of [the 
Association which] NASD that is not a

[[Page 49836]]

Registered Reporting Nasdaq Market Maker nor a Registered Reporting ADF 
Market Maker.
    (e) ``Registered Reporting ADF Market Maker'' means a member of 
NASD that is registered as an Alternative Display Facility (``ADF'') 
market maker in a particular designated security. A member is a 
Registered Reporting ADF Market Maker in only those designated 
securities for which it is registered as an ADF market maker. A member 
shall cease being a Registered Reporting ADF Market Maker in a 
designated security when it has withdrawn or voluntarily terminated its 
quotations in that security on the ADF or when its quotations have been 
suspended or terminated by action of NASD.
    (f) ``Trade Reporting and Comparison Service'' or ``TRACS'' is the 
service offered to those members that participate in the ADF that 
accommodates last sale reporting and dissemination and trade comparison 
of transactions in designated securities.
5430. Transaction Reporting
    (a) When and How Transactions are Reported.
    (1) Registered Reporting Nasdaq Market Makers and Registered 
Reporting ADF Market Makers shall, within 90 seconds after execution, 
transmit [through ACT] last sale reports of transactions in designated 
securities executed during normal market hours. Transactions not 
reported within 90 seconds after execution shall be designated as late 
and such trade reports must include the time of execution.
    (2) Non-Registered Reporting Members shall, within 90 seconds after 
execution, transmit through ACT or TRACS, as applicable, or if ACT or 
TRACS is unavailable due to system or transmission failure, by 
telephone to Market Operations Department, last sale reports of 
transactions in designated securities executed during normal market 
hours. Transactions not reported within 90 seconds after execution 
shall be designated as late and such trade reports must include the 
time of execution.
    (3) Non-Registered Reporting Members shall report weekly to the 
Market Operations Department, on a form designated by the Board of 
Governors, last sale reports of transactions in designated securities 
which are not required to be reported under subparagraph (2) or (4).
(4) Transaction Reporting Outside Normal Market Hours
    (A) Last sale reports of transactions in designated securities 
executed between 8:00 a.m. and 9:30 a.m. Eastern Time shall be reported 
[transmitted through ACT] within 90 seconds after execution and shall 
be designated as ``.T'' trades to denote their execution outside normal 
market hours. Additionally, last sale reports of transactions in 
designated securities executed between the hours of 4:00 p.m. and 6:30 
p.m. Eastern Time shall be reported [transmitted through ACT] within 90 
seconds after execution; trades executed and reported after 4:00 p.m. 
Eastern Time shall be designated as ``.T'' trades to denote their 
execution outside normal market hours. Transactions not reported within 
90 seconds must include the time of execution on the trade report.
    (B) Last sale reports of transactions in designated securities 
executed outside the hours of 8:00 a.m. and 6:30 p.m. Eastern Time 
shall be reported as follows:
    (i) Last sale reports of transactions executed between midnight and 
8:00 a.m. Eastern Time shall be reported [transmitted through ACT] 
between 8:00 a.m. and 9:30 a.m. Eastern Time on trade date, be 
designated as ``.T'' trades to denote their execution outside normal 
market hours, and be accompanied by the time of execution. The party 
responsible for reporting on trade date, the information to be 
reported, and the applicable procedures shall be governed, 
respectively, by paragraphs (b), (c), and (d) below;
    (ii) Last sale reports of transactions executed between 6:30 p.m. 
and midnight Eastern Time shall be reported [transmitted through ACT] 
on the next business day (T+1) between 8:00 a.m. and 6:30 p.m. Eastern 
Time, be designated ``as/of'' trades to denote their execution on a 
prior day, and be accompanied by the time of execution. [The party 
responsible for reporting on T+1, the trade details to be reported, and 
the applicable procedures shall be governed, respectively, by 
paragraphs (b), (c), and (d) below.]
    (5) All members shall report as soon as practicable to the Market 
Regulation Department on Form T, last sale reports of transactions in 
designated securities for which electronic submission into ACT or TRACS 
is not possible (e.g., the ticker symbol for the security is no longer 
available or a market participant identifier is no longer active). 
Transactions that can be reported into ACT or TRACS, whether on trade 
date or on a subsequent date on an ``as of'' basis (T+N), shall not be 
reported on Form T.
    (6) All members shall report transactions occurring at prices based 
on average-weighting, or other special pricing formulae, [to Nasdaq] 
using a special indicator[, as] designated by NASD [the Association] 
and set out in the Symbol Directory.
    (7) All trade tickets for transactions in eligible securities shall 
be time-stamped at the time of execution.
    (8) Transactions not reported within 90 seconds after execution 
shall be designated as late. A pattern or practice of late reporting 
without exceptional circumstances may be considered conduct 
inconsistent with high standards of commercial honor and just and 
equitable principles of trade in violation of Rule 2110.
    (9) All members shall append a trade report modifier as designated 
by NASD [the Association] to transaction reports that reflect a price 
different from the current market when the execution is based on a 
prior reference point in time, which shall be accompanied by the prior 
reference time.
(b) Which Party Reports Transaction and to Which Facility
    (1) In transactions between two Registered Reporting Nasdaq Market 
Makers, [only] the member representing the sell side shall report the 
trade using ACT.
    (2) In transactions between a Registered Reporting Nasdaq Market 
Maker and a Non-Registered Reporting Member, [only] the Registered 
Reporting Nasdaq Market Maker shall report the trade using ACT.
    (3) In transactions between two Non-Registered Reporting Members, 
[only] the member representing the sell side shall report the trade 
using ACT or TRACS.
    (4) In transactions between a member and a customer, the member 
shall report[.] as follows:
    (A) A Registered Reporting Nasdaq Market Maker shall report the 
trade using ACT;
    (B) A Registered Reporting ADF Market Maker shall report the trade 
using TRACS; and
    (C) A Non-Registered Reporting Member shall report the trade using 
ACT or TRACS.
    (5) In transactions between two Registered Reporting ADF Market 
Makers, the member representing the sell side shall report the trade 
using TRACS.
    (6) In transactions between a Registered Reporting ADF Market Maker 
and a Non-Registered Reporting Member, the Registered Reporting ADF 
Market Maker shall report the trade using TRACS.
    (7) In transactions between a Registered Reporting Nasdaq Market 
Maker and a Registered Reporting ADF

[[Page 49837]]

Market Maker, the member representing the sell side shall report as 
follows:
    (A) A Registered Reporting Nasdaq Market Maker shall report the 
trade using ACT; and
    (B) A Registered Reporting ADF Market Maker shall report the trade 
using TRACS.
    (8) If a member simultaneously is a Registered Reporting Nasdaq 
Market Maker and a Registered Reporting ADF Market Maker, and has the 
trade reporting obligation pursuant to paragraphs (1), (2), (4), (5), 
(6), or (7), the member can report the trade using either ACT or TRACS, 
unless the trade is executed using ACES; the Nasdaq National Market 
Execution System (``NNMS''); the SelectNet Service; the SmallCap Small 
Order Execution System (``SOES''); or the Primex Auction System 
(``Primex''). A trade executed using ACES must be reported using ACT, 
and trades executed using NNMS, SelectNet, SOES, or Primex will be 
reported to ACT automatically.
* * * * *
6000. NASD SYSTEMS AND PROGRAMS
6100. AUTOMATED CONFIRMATION TRANSACTION SERVICE (ACT)
6110. Definitions
    (a) through (l) No Change.
    (m) The term ``Reportable ACT Transaction'' shall mean [all] inter-
dealer transactions, including those for less than one round lot, in an 
ACT eligible security, and shall also include [all] transactions that 
are required or eligible to be submitted utilizing ACT [to the 
Association for trade reporting purposes] pursuant to the Rule 4630, 
4640, 4650, 5400, 6400, 6600, and 6900 Series.
    (n) through (p) No Change.
6120. Participation in ACT
    (a) Mandatory Participation for Clearing Agency Members
    (1)(A) Participation in ACT is mandatory for all members that 
execute transactions using the Nasdaq National Market Execution System, 
the SelectNet Service, the Primex Auction System, the SmallCap Small 
Order Execution System; ACES; the Computer Assisted Execution System, 
and the Intermarket Trading System/Computer Assisted Execution System.
    (B) [Pursuant to Article VII, Section 1(a)(vi) and (vii) of the By-
Laws,] P[p]articipation in ACT is mandatory for [all brokers that are] 
members that are participants of a clearing agency registered with the 
Commission pursuant to Section 17A of the Act, and for [all brokers] 
members that have a clearing arrangement with such a broker, unless a 
member subscribes to TRACS. Such participation in ACT shall include the 
reconciliation of all over the counter clearing agency eligible 
transactions.
    (2) through (6) No Change.
    (b) No Change.
* * * * *
6130. Trade Report Input
(a) Reportable ACT Transactions
    Members shall utilize ACT to report [All] transactions [in eligible 
securities] that are required to be [shall be] reported to [ACT] Nasdaq 
pursuant to the Rule Series 4630, 4640, 4650, 5430, 6400, 6500 and 6600 
Series, including executions of less than one round lot if those 
executions are to be compared and locked-in. Members may utilize ACT to 
report transactions that are eligible to be reported to Nasdaq pursuant 
to Rule 5430, including executions of less than one round lot if those 
executions are to be compared and locked-in. All trades that are 
reportable transactions will be processed through the National Trade 
Reporting System; however, only those trades that are subject to 
regular way settlement and are not already locked-in trades will be 
compared and locked-in through ACT. Trades that are reported as other 
than regular way settlement (i.e., Cash, Next-Day, Seller's Option) 
will not be compared in ACT or reported to NSCC. All transactions in 
Direct Participation Program securities shall be reported to ACT 
pursuant to the Rule 6900 Series as set forth therein.
(b) When and How Trade Reports are Submitted to ACT
    ACT Participants shall transmit trade reports to ACT [the system] 
for transactions in Nasdaq securities within 90 seconds after 
execution, or shall utilize the Browse function in ACT to accept or 
decline trades within twenty (20) minutes after execution, according to 
the requirements of paragraph (c) of this Rule.
(c) Which Party Inputs Trade Reports to ACT
    ACT Participants [Both parties executing a transaction] shall, 
subject to the input requirements below, either input trade reports 
into the ACT system or utilize the Browse feature to accept or decline 
a trade within the applicable time-frames as specified in paragraph (b) 
of this Rule. Trade data input obligations are as follows:
    (1) through (13) No Change.
    (e) No Change.
* * * * *

6000A. NASD ADF SYSTEMS AND PROGRAMS

6100A. TRACS TRADE COMPARISON SERVICE

6110A. Definitions

    (a) The term ``Browse'' shall mean the function of TRACS that 
permits a Participant to review (or query) for trades in the system 
identifying the Participant as a party to the transaction, subject to 
the specific uses contained in the TRACS Users Guide.
    (b) The term ``Clearing Broker/Dealer'' or ``Clearing Broker'' 
shall mean the member firm that has been identified in the TRACS system 
as principal for clearing and settling a trade, whether for its own 
account or for a correspondent firm.
    (c) The term ``Correspondent Executing Broker/Dealer'' or 
``Correspondent Executing Broker'' shall mean the member firm that has 
been identified in the TRACS system as having a correspondent 
relationship with a clearing firm whereby it executes trades and the 
clearing function is the responsibility of the clearing firm.
    (d) The term ``Introducing Broker/Dealer'' or ``introducing 
broker'' shall mean the member firm that has been identified in the 
TRACS system as a party to the transaction, but does not execute or 
clear trades.
    (e) The term ``Participant'' shall mean any member of NASD in good 
standing that uses the TRACS system as an NASD ADF Registered Reporting 
Market Maker according to the requirements of Rule 4611A , an ECN 
registered in accordance with Rule 4623A, an Order Entry Firm, or a 
clearing broker/dealer, correspondent executing broker/dealer, or 
introducing broker/dealer.
    (f) The terms ``Participant,'' ``TRACS Order Entry Firm,'' 
``correspondent executing broker/dealer,'' ``correspondent executing 
broker,'' ``introducing broker/dealer,'' ``introducing broker,'' 
``clearing broker/dealer,'' and ``clearing broker'' shall also include, 
where appropriate, the Non-Member Clearing Organizations listed in Rule 
6120A(a)(5) below and their qualifying members.
    (g) The term ``Parties to the Transaction'' shall mean the 
executing brokers, introducing brokers and clearing brokers, if any.
    (h) The term ``Reportable TRACS Transaction'' shall mean those 
transactions in a TRACS eligible security that are required, or are 
eligible, to be submitted utilizing TRACS pursuant to the Rule 4630A, 
5400 and 6400A Series. The term also shall include transactions in 
TRACS eligible

[[Page 49838]]

securities that are for less than one round lot, and those transactions 
that are to be compared and locked-in for settlement.
    (i) The term ``Reporting Party'' shall mean the TRACS Participant 
that is required to input the trade information, according to the 
requirements in NASD Rule 4630A Series.
    (j) The term ``Trade Reporting and Comparison Service'' or 
``TRACS'' shall mean the automated system owned and operated by NASD as 
part of the Alternative Display Facility that reports trades and 
compares trade information entered by TRACS participants and submits 
``locked-in'' trades to Depository Trust Clearing Corporation (DTCC) 
for clearance and settlement; transmits reports of the transactions 
automatically to the Securities Information Processor, if required, for 
dissemination to the public and the industry; and provides participants 
with monitoring capabilities to facilitate participation in a ``locked-
in'' trading environment.
    (k) The term ``TRACS ECN'' shall mean a member of NASD that is an 
electronic communications network (``ECN'') that elects to display 
orders in NASD's Alternative Display Facility pursuant to Rule 4623A 
and is a member of a registered clearing agency for clearing or 
comparison purposes or has a clearing arrangement with such a member. 
This term shall also include an NASD member that is an alternative 
trading system (``ATS'') that displays orders in NASD's Alternative 
Display Facility pursuant to Rule 4623A and is a member of a registered 
clearing agency for clearing or comparison purposes or has a clearing 
arrangement with such a member.
    (l) The term ``TRACS Eligible Security'' shall mean Nasdaq National 
Market, Nasdaq SmallCap Market security and Nasdaq Convertible Debt 
securities.
    (m) The term ``TRACS Market Maker'' shall mean a member of NASD 
that is registered as an NASD ADF Market Maker and is a member of a 
registered clearing agency for clearing or comparison purposes or has a 
clearing arrangement with such a member.
    (n) The term ``TRACS Order Entry Firm'' shall mean a member of NASD 
that is a firm that executes orders but does not act as a market maker 
in the instant transaction and is a member of a registered clearing 
agency for clearing or comparison purposes or has a clearing 
arrangement with such a member.

6120A. Participation in TRACS Trade Comparison Feature by Participants 
in the Alternative Display Facility

    The following Rules 6120A through 6190A apply to members that 
effect transactions in ADF-eligible securities through the Alternative 
Display Facility.

(a) Mandatory Participation for Clearing Agency Members

    (1) Participation in TRACS trade comparison feature is mandatory 
for any NASD member that effects transactions in ADF-eligible 
securities through the Alternative Display Facility, which are not 
locked-in and sent directly to Deposit Trust Clearing Corporation 
(``DTCC'') by that member. All members, whether or not they must 
participate in the TRACS trade comparison feature, must comply with the 
trade reporting requirements described in the Rule 4630A Series.
    (2) Participation in the TRACS trade comparison feature as a Market 
Maker shall be conditioned upon the TRACS Market Maker's initial and 
continuing compliance with the following requirements:
    (A) execution of, and continuing compliance with, a TRACS trade 
comparison Participant Application Agreement;
    (B) membership in, or maintenance of, an effective clearing 
arrangement with a member of a clearing agency registered pursuant to 
the Act;
    (C) registration as an NASD ADF Market Maker or ECN for Nasdaq 
securities pursuant to Rule 4611A , if applicable, and compliance with 
all applicable rules and operating procedures of NASD and the 
Commission;
    (D) maintenance of the physical security of the equipment located 
on the premises of the TRACS Market Maker to prevent unauthorized entry 
of information into the TRACS trade comparison feature; and
    (E) acceptance and settlement of each trade that the TRACS trade 
comparison feature identifies as having been effected by such TRACS 
Market Maker, or if settlement is to be made through a clearing member, 
guarantee of the acceptance and settlement of each TRACS identified 
trade by the clearing member on the regularly scheduled settlement 
date.
    (3) Participation in the TRACS trade comparison feature as an Order 
Entry Firm shall be conditioned upon the Order Entry Firm's initial and 
continuing compliance with the following requirements:
    (A) execution of, and continuing compliance with, a TRACS trade 
comparison Participant Application Agreement;
    (B) membership in, or maintenance of, an effective clearing 
arrangement with a member of a clearing agency registered pursuant to 
the Act;
    (C) compliance with all applicable rules and operating procedures 
of NASD and the Commission;
    (D) maintenance of the physical security of the equipment located 
on the premises of the TRACS Order Entry Firm to prevent the 
unauthorized entry of information into the TRACS trade comparison 
feature; and
    (E) acceptance and settlement of each trade that the TRACS trade 
comparison feature identifies as having been effected by such TRACS 
Order Entry Firm, or if settlement is to be made through a clearing 
member, guarantee of the acceptance and settlement of each TRACS 
identified trade by the clearing member on the regularly scheduled 
settlement date.
    (4) Participation in the TRACS trade comparison feature as a 
Clearing Broker shall be conditioned upon the Clearing Broker's initial 
and continuing compliance with the following requirements:
    (A) execution of, and continuing compliance with, a TRACS trade 
comparison Participant Application Agreement;
    (B) membership in a clearing agency registered pursuant to the Act;
    (C) compliance with all applicable rules and operating procedures 
of NASD and the Commission;
    (D) maintenance of the physical security of the equipment located 
on the premises of the TRACS Clearing Broker to prevent the 
unauthorized entry of information into the TRACS trade comparison 
feature; and
    (E) acceptance and settlement of each trade that the TRACS trade 
comparison feature identifies as having been effected by itself or any 
of its correspondents on the regularly scheduled settlement date.
    (5) Participation in the TRACS trade comparison feature as an ECN 
shall be conditioned upon the ECN's initial and continuing compliance 
with the following requirements:
    (A) execution of, and continuing compliance with, a TRACS trade 
comparison Participant Application Agreement;
    (B) membership in, or maintenance of an effective clearing 
arrangement with a member of, a clearing agency registered pursuant to 
the Act;
    (C) compliance with all applicable rules and operating procedures 
of NASD and the Commission;

[[Page 49839]]

    (D) maintenance of the physical security of the equipment located 
on the premises of the ECN to prevent the unauthorized entry of 
information into the TRACS trade comparison feature; and
    (E) acceptance and settlement of each trade that the TRACS trade 
comparison feature identifies as having been effected by such TRACS 
ECN, or if settlement is to be made through a clearing member, 
guarantee of the acceptance and settlement of each TRACS identified 
trade by the clearing member on the regularly scheduled settlement 
date.
    (6) Each TRACS trade comparison Participant shall be obligated to 
inform NASD of non-compliance with any of the participation 
requirements set forth above.

(b) Participant Obligations in TRACS

(1) Access to TRACS

    Upon execution and receipt by NASD of the TRACS trade comparison 
Participant Application Agreement, a TRACS trade comparison Participant 
may commence input and validation of trade information in TRACS 
eligible securities. TRACS trade comparison Participants may access the 
service via NASD terminals or Workstations or through computer 
interface during the hours of operation specified in the TRACS Users 
Guide. Prior to such input, all TRACS comparison Participants, 
including those that have trade report information submitted to NASD by 
any third party, must obtain from NASD a unique identifying Market 
Participant Symbol (``MMID'' or ``MPID''), and use that identifier for 
trade reporting and audit trail purposes.

(2) Market Maker Obligations

    (A) TRACS Market Makers shall commence participation in the TRACS 
trade comparison feature by initially contacting the TRACS Operation 
Center to verify authorization for submitting trade data to the TRACS 
system for TRACS eligible securities.
    (B) A TRACS Market Maker that is a self-clearing firm shall be 
obligated to accept and clear each trade that the TRACS trade 
comparison feature identifies as having been effected by that Market 
Maker.
    (C) A TRACS Market Maker that is an introducing broker or a 
correspondent executing broker shall identify its clearing broker when 
it becomes a TRACS trade comparison participant and notify the TRACS 
Operation Center if its clearing broker is to be changed; this will 
necessitate execution of a revised TRACS trade comparison Participant 
Application Agreement.
    (D) If at any time a TRACS Market Maker fails to maintain a 
clearing arrangement, it shall be removed from the TRACS trade 
comparison feature, and be precluded from participation as a Market 
Maker in ADF until such time as a clearing arrangement is reestablished 
and notice of such arrangement, with an amended TRACS trade comparison 
Participant Application Agreement, is filed with NASD. If, however, 
NASD finds that the TRACS Market Maker's failure to maintain a clearing 
arrangement is voluntary, the withdrawal of quotations will be 
considered voluntary and unexcused pursuant to Rule 4619A.

(3) Order Entry Firm Obligations

    (A) TRACS Order Entry Firms shall commence participation in the 
TRACS trade comparison feature by initially contacting the TRACS 
Operation Center to verify authorization for submitting trade data to 
the TRACS system for TRACS eligible securities.
    (B) A TRACS Order Entry Firm that is a self-clearing firm shall be 
obligated to accept and clear each trade that the TRACS trade 
comparison feature identifies as having been effected by the Order 
Entry Firm.
    (C) A TRACS Order Entry Firm that is an introducing broker or a 
correspondent executing broker shall identify its clearing broker when 
it becomes a TRACS trade comparison Participant and notify the TRACS 
Operations Center if its clearing broker is to be changed; this change 
will necessitate execution of a revised TRACS trade comparison 
Participant Application Agreement.
    (D) If at any time a TRACS Order Entry Firm fails to maintain a 
clearing arrangement, it shall be removed from the TRACS trade 
comparison feature until such time as a clearing arrangement is 
reestablished, and notice of such arrangement, with an amended TRACS 
trade comparison Participant Application Agreement, is filed with NASD.

(4) Clearing Broker Obligation

    TRACS clearing brokers shall be obligated to accept and clear as a 
party to the transaction each trade that the system identifies as 
having been effected by itself or any of its correspondent executing 
brokers. Clearing brokers may cease to act as principal for a 
correspondent executing broker at any time provided that notification 
has been given to, received and acknowledged by the TRACS Operations 
Center and affirmative action has been completed by the Center to 
remove the clearing broker from the TRACS trade comparison feature for 
that correspondent executing broker. The clearing broker's obligation 
to accept and clear trades for its correspondents shall not cease prior 
to the completion of all of the steps detailed in this subparagraph 
(4).

(5) ECN Obligations

    (A) TRACS ECNs shall commence participation in the TRACS trade 
comparison feature by initially contacting the TRACS Operations Center 
to verify authorization for submitting trade data to the TRACS trade 
comparison feature for TRACS eligible securities.
    (B) A TRACS ECN that is a self-clearing firm shall be obligated to 
accept and clear each trade that the TRACS trade comparison feature 
identifies as having been effected by the ECN.
    (C) A TRACS ECN that is an introducing broker or a correspondent 
executing broker shall identify its clearing broker when it becomes a 
TRACS trade comparison Participant and notify the TRACS Operations 
Center if its clearing broker is to be changed; this change will 
necessitate execution of a revised TRACS trade comparison Participant 
Application Agreement.
    (D) If at any time a TRACS ECN fails to maintain a clearing 
arrangement, it shall be removed from the TRACS trade comparison 
feature until such time as a clearing arrangement is reestablished, and 
notice of such arrangement, with an amended TRACS trade comparison 
Participant Application Agreement, is filed with NASD.

6130A. Trade Report Input

(a) Reportable TRACS Transactions

    Members shall utilize TRACS to report transactions that are 
required to be reported to NASD through the ADF pursuant to the Rule 
4630A and 5430 Series, including executions of less than one round lot 
if those executions are to be compared and locked-in. Members may 
utilize TRACS to report transactions that are eligible to be reported 
to NASD pursuant to Rule 5430, including executions of less than one 
round lot if those executions are to be compared and locked-in. TRACS 
also will process trades that are submitted on an automatic locked-in 
basis for transmission to NSCC. All trades that are reportable 
transactions pursuant to NASD Rule 4630A Series will be transmitted to 
the applicable securities information processor; however, only those 
trades that are subject to regular way settlement and are not already

[[Page 49840]]

locked-in trades will be compared and locked-in through TRACS. Trades 
that are reported as other than regular way settlement (i.e., Cash, 
Next-Day, Seller's Option) will not be compared in TRACS or reported to 
DTCC.

(b) When and How Trade Reports are Submitted to TRACS

    (1) TRACS trade comparison Participants who are Reporting Members 
that choose to submit a trade for comparison shall transmit to TRACS 
the information required by Rule 4630A Series, as applicable, within 90 
seconds of execution.
    (2) A TRACS trade comparison Participant who is a Non-Reporting 
Member to a transaction shall, within twenty (20) minutes after 
execution accept (or decline, if applicable) a transaction submitted by 
the Reporting Member for comparison through TRACS. A Non-Reporting 
Member has an obligation to ensure that the information that it 
transmits or accepts in TRACS is timely, accurate and complete. 
Therefore, if a Non-Reporting Member accepts a transaction in TRACS 
transmitted by the Reporting Member for comparison through TRACS, then 
the Non-Reporting Member shall be deemed to have adopted all of the 
data elements required by Rule 4632(c) or (d), as applicable, 
concerning the Non-Reporting Member's side of the transaction, absent 
any subsequent modification of the trade through TRACS.
    (3) Trades not required to be reported for public dissemination may 
still be compared and locked-in through TRACS.
    (4) Reporting NASD Members may conduct the following functions in 
TRACS pursuant to TRACS specifications established by NASD: (i) MMID 
Trade Entry; (ii) Trade Cancellation; and (iii) Trade Break.
    (5) Non-Reporting NASD Members may conduct the following functions 
in TRACS pursuant to TRACS specifications established by NASD: (i) 
Trade Accept; (ii) Trade Decline; and (iii) Trade Break.
    (6) A party entering a trade report into the TRACS trade comparison 
feature shall use a designated symbol to denote whether the party is 
submitting the trade report as the Reporting Member or the Non-
Reporting Member.

6140A. TRACS Processing

    Locked-in trades may be determined through the TRACS trade 
comparison feature through one of the following methods:

(a) Trade Acceptance

    The reporting party enters its version of the trade into the system 
and the contra party reviews the trade report and accepts or declines 
the trade. An acceptance results in a locked-in trade; a declined trade 
report is purged from the TRACS system at the end of trade date 
processing;

(b) T+N Trade Processing

    T+N entries may be submitted until 6:30 p.m. each business day. At 
the end of daily matching, all declined trade entries will be purged 
from the TRACS system. TRACS will not purge any open trade (i.e. 
unmatched or unaccepted) at the end of its entry day, but will carry-
over such trades to the next business day for continued comparison and 
reconciliation. TRACS will automatically lock in and submit to NSCC as 
such any carried-over T to T+21 (calendar day) trade if it remains open 
as of 2:30 p.m. on the next business day. TRACS will not automatically 
lock in T+22 (calendar day) or older open ``as-of'' trades that were 
carried-over from the previous business day; these trades will be 
purged by TRACS at the end of the carry-over day if such trades remain 
open. Members may re-submit these T+22 or older ``as-of'' trades into 
TRACS on the next business day for continued comparison and 
reconciliation for up to one calendar year.

6150A. Reserved

6160A. Obligation to Honor Trades

    If a TRACS trade comparison Participant is reported by TRACS as a 
party to a trade that has been treated as locked-in and sent to DTCC, 
notwithstanding any other agreement to the contrary, that party shall 
be obligated to act as a principal to the trade and shall honor such 
trade on the scheduled settlement date.

6170A. Audit Trail Requirements

    The data elements specified in the Rule 4600A Series are critical 
to NASD's compilation of a transaction audit trail for regulatory 
purposes. As such, all member firms using the TRACS Service have an 
ongoing obligation to input such information accurately and completely.

6180A. Reserved

6190A. Termination of TRACS Service

    NASD may, upon notice, terminate TRACS service as to a Participant 
in the event that a TRACS Participant fails to abide by any of the 
rules or operating procedures of the TRACS service or NASD, or fails to 
honor contractual agreements entered into with NASD or its 
subsidiaries, or fails to pay promptly for services rendered by the 
TRACS Service.
* * * * *
6950. ORDER AUDIT TRAIL SYSTEM
* * * * *
6954. Recording of Order Information
    (a) through (c) No Change.
    (d) Order Modifications, Cancellations, and Executions
    Order information required to be recorded under this Rule when an 
order is modified, canceled, or executed includes the following.
    (1) through (2) No Change.
    (3) When a Reporting Member executes an order, in whole or in part, 
the Reporting Member shall record:
    (A) the order identifier assigned to the order by the Reporting 
Member,
    (B) the market participant symbol assigned by [the Association] 
NASD to the Reporting Member,
    (C) the date the order was first originated or received by the 
Reporting Member,
    (D) the Reporting Member's number assigned for purposes of 
identifying transaction data in ACT,
    (E) the designation of the order as fully or partially executed,
    (F) the number of shares to which a partial execution applies and 
the number of unexecuted shares remaining,
    (G) the identification number of the terminal where the order was 
executed, [and]
    (H) the date and time of execution[.] and
    (I) the national securities exchange or facility operated by a 
registered securities association where the trade was reported.
7000A. CHARGES FOR ADF SERVICES AND EQUIPMENT
7010A. System Services

(a) Trade Comparison and Reporting Service

    The following charges shall be paid by ADF participants for use of 
the Trade Comparison and Reporting Service (TRACS):
    Transaction Related Charges:
Comparison--$0.014/side per 100 shares (minimum 400 shares; maximum 
7,500 shares)
Automated Give-Up--$0.029/side
Late Report--T+N--$0.30/side
Browse/query--$0.28/query*

[[Page 49841]]

Trade Reporting--$.029/side (applicable only to reportable transaction 
not subject to trade comparison through TRACS)**
Corrective Transaction Charge--$0.25/ Break, Decline transaction, paid 
by each party
---------------------------------------------------------------------------

    *Each TRACS query incurs the $0.28 fee; however, the first 
accept or decline processed for a transaction is free, to insure 
that no more than $0.28 is charged per comparison. Subsequent 
queries for more data on the same security will also be processed 
free. Any subsequent query on a different security will incur the 
$0.28 query charge.
    **The trade reporting service charge is applicable to those 
trades input into TRACS for reporting purposes only, such as NSCC 
Qualified Special Representative reports and reports of internalized 
transactions.
---------------------------------------------------------------------------

(b) Quotation Updates

    A member will be charged $0.01 per quotation update in the ADF 
quotation montage on those quotation updates that exceed three times 
the number of transactions reported to the ADF by the member. A 
``quotation update'' includes any change to the price or size of a 
displayed quotation. This charge will be determined on a monthly basis.

(c) Volume Discounts on Transaction and Quotation Fees

    During the initial six months of operation of the ADF, except as 
provided in paragraph (d) below, transaction fees incurred pursuant to 
paragraph (a) above, except the browse/query fee, and quotation update 
fees incurred pursuant to paragraph (b) above will be discounted on the 
following incremental basis:

------------------------------------------------------------------------
                                      Chargeable quotation     Discount
         Trades per month              updates per month       (Percent)
------------------------------------------------------------------------
Up to 2,000......................  Up to 8,000..............           0
2,001 to 4,000...................  8,001 to 15,000..........          10
4,001 to 6,000...................  15,001 to 25,000.........          25
6,001 to 8,000...................  25,001 to 35,000.........          35
8,001 or greater.................  35,001 or greater........          50
------------------------------------------------------------------------

(d) Limited Period Without Transaction and Quotation Charges

    During the initial six months of operation of the ADF, members will 
not be charged for transaction fees incurred pursuant to paragraph (a) 
above and the quotation fees incurred pursuant to paragraph (b) above 
for up to a three-month period. The three-month ``no transaction'' fee 
period begins on the first day on which a member has incurred charges 
under paragraph (a) or paragraph (b) above, and will continue until the 
earlier of three months or the end of the six-month period.

7020A. Equipment Related Charges

    The charge for using ADF terminal software shall be $275 per month 
for each terminal and $550 per month for each server.

7030A. Reserved

7040A. Installation, Removal, Relocation or Maintenance

    ADF subscribers shall pay a minimum charge of $5,000 for 
installation costs associated with connecting to the ADF. Upon 
installation, removal, relocation or maintenance of terminal and 
related equipment, or combination thereof, the subscriber shall pay 
charges incurred by NASD or its subsidiaries above the $5,000 minimum, 
on behalf of the subscriber for the work being performed by the 
maintenance organization retained by NASD or its subsidiaries. Upon 
payment of $5,000 under this provision, members will receive a credit 
of up to $5,000 to be used toward their trade reporting and comparison 
charges imposed under Rule 7010A(a).

7050A. Other Services

(a) Daily Reports to Newspapers

    Reports for regular public release, such as a list of closing 
quotations or market summary information for newspaper publication, 
shall be produced in a format acceptable to most publishers without 
charge. Should such information be transmitted to another location at 
the request of any firm, a charge may be imposed for such services by 
NASD or a subsidiary.

(b) Other Requests for Data

    NASD or a subsidiary may impose and collect compensatory charges 
for data supplied upon request, where there is no provision elsewhere 
in this Rule 7000A Series for charges for such service or sale.

(c) Testing Services

    (1) Subscribers that conduct tests of their computer-to-computer 
(CTCI) or digital interface (DIS/CHIPS) with the central processing 
facilities of Alternative Display Facility shall pay the following 
charges:

$285/hour--For CTCI/DIS/CHIPS testing between 9:00 a.m. and 5:00 p.m. 
Eastern Time on business days;
$333/hour--For testing at all other times on business days, or on 
weekends and holidays.

    (2) The foregoing fees shall not apply to testing occasioned by:
    (A) new or enhanced services and/or software provided by ADF or
    (B) modifications to software and/or services initiated by ADF in 
response to a contingency.

7060A. Partial Month Charges

    The charges for the month of commencement or termination of service 
will be prorated based on the number of trade days in that month.

7070A. Reserved

7080A. Late Fees

    (a) All charges imposed by NASD that are past due 45 days or more 
will be subject to a late fee computed by taking the summation of one 
and one-half percent (1\1/2\%) of the amount past due for the first 
month plus one and one-half percent (1\1/2\%) of the amount past due 
for any month thereafter, compounded by late fees assessed for previous 
months.
    (b) To illustrate how late fees are assessed, if an account is past 
due $1,000 for 45 days, the late fee would be $30.22. This charge 
reflects a charge of $15 for the first month past due ($1,000 x 1\1/
2\%) and $15.22 for the second month past due ($1,015 x 1\1/2\%).

7100A. Minor Modifications in Charges

    (a) To compensate for minor variations in annual net income, the 
Board of Governors of NASD may increase or decrease the total charges 
in this Schedule by 10% from the base charges as adopted on [insert 
adoption date] upon filing such change with the Commission pursuant to 
Section 19(b)(3) of the Act.
    (b) To facilitate the development of new information services and 
uses under appropriate terms and conditions, arrangements of limited 
duration, geography and/or scope may be entered into with Broker/
Dealers,

[[Page 49842]]

Vendors and other persons which may modify or dispense with some or all 
of the charges contained in this Rule or the terms and conditions 
contained in standard agreements. The arrangements contemplated will 
permit the testing and pilot operation of proposed new information 
services and uses to evaluate their impact on and to develop the 
technical, cost and market research information necessary to formulate 
permanent charges, terms and conditions for filing with and approval by 
the Commission.
* * * * *
9000. Code of Procedure
9100. Application and Purpose
* * * * *
9120. Definitions
    (a) through (r) No Change.
    (s) ``Market Regulation Committee''
    The term ``Market Regulation Committee'' means the committee of 
NASD [Regulation] designated to consider the federal securities laws 
and the rules and regulations adopted thereunder and various NASD Rules 
[of the Association] and policies relating to:
    (1) through (3) No Change.
    (4) trading practices, including rules prohibiting manipulation and 
insider trading, and those Rules designated as Trading Rules (Rule 3300 
Series), the Nasdaq Stock Market Rules, (Rule 4000 Series), NASD 
Alternative Display Facility Rules (Rule 4000A Series) other Nasdaq and 
NASD Market Rules (Rule 5000 Series), NASD Systems and Programs Rules 
(Rule 6000 and 6000A Series), and Charges for Services and Equipment 
Rules (Rule 7000 and 7000A Series).
    (t) through (cc) No Change.
* * * * *
9700. Procedures on Grievances Concerning the Automated Systems
9710. Purpose
    The purpose of this Rule 9700 Series is to provide, where 
justified, redress for persons aggrieved by the operations of any 
automated quotation, execution, or communication system owned or 
operated by NASD [the Association], or any subsidiary thereof, and 
approved by the Commission, not otherwise provided for by the Code of 
Procedure as set forth in the Rule 9000 Series the Uniform Practice 
Code as set forth in the Rule 11000 Series or the Procedures for Review 
of Nasdaq Listing Determinations as set forth in the Rule 4800 Series.
* * * * *
9720. Form of Application
    All applications shall be in writing, and shall specify in 
reasonable detail the nature of and basis for the redress requested. If 
the application consists of several allegations, each allegation shall 
be stated separately. All applications must be signed and shall be 
directed to Nasdaq relating to automated quotation, execution or 
communications system owned or operated by Nasdaq and to NASD for any 
such system owned and operated by NASD.
* * * * *
9730. Request for Hearing
    Upon request, the applicant shall be granted a hearing after 
reasonable notice. In the absence of such request for a hearing, NASD 
or Nasdaq, as applicable, may, in its discretion, have any application 
set down for hearing or consider the matter on the basis of the 
application and supporting documents.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the NASD included statements 
concerning the purpose of, and the 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. NASD 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
    Background. NASD is proposing to operate the ADF on a pilot basis 
for nine months, pending the anticipated approval of the ADF Proposal 
and the anticipated approval of Nasdaq as a national securities 
exchange \4\ and its resultant separation from NASD. As described in 
detail in the ADF Proposal, the ADF is a quotation collection, trade 
comparison, and trade reporting facility developed by NASD in 
accordance with the Commission's approval order for Nasdaq's Order 
Collector and Display Facility (``SuperMontage'') \5\ and in 
conjunction with Nasdaq's anticipated registration as a national 
securities exchange.
---------------------------------------------------------------------------

    \4\ Securities Exchange Act Release No. 44396 (June 7, 2001), 66 
FR 31952 (June 13, 2001) (File No. 10-131).
    \5\ Securities Exchange Act Release No. 43863 (January 19, 
2001), 66 FR 8020 (January 26, 2001) (File No. SR-NASD-99-53).
---------------------------------------------------------------------------

    The ADF Pilot will provide ADF Pilot market participants \6\ the 
ability to post quotations in Nasdaq securities and will provide all 
NASD members that participate in the ADF Pilot the ability to view 
quotations and report transactions in Nasdaq securities to the 
appropriate Securities Information Processor (``SIP'') \7\ for 
consolidation and dissemination of data to vendors and ADF Pilot Market 
Participants. The facility also will provide for trade comparison 
through the Trade Comparison and Reporting Service (``TRACS''), which 
is described in detail below. The facility further will provide for 
real-time data delivery to NASD for regulatory purposes, including 
enforcement of firm quote and related rules.
---------------------------------------------------------------------------

    \6\ Proposed ADF Pilot Rule 4300A defines ``Market 
Participants'' as either an NASD registered Market Maker or an NASD 
Registered electronic communication network (``ECN'').
    \7\ Nasdaq initially will be the designated SIP for all 
transactions in Nasdaq securities. It is anticipated that during the 
ADF Pilot, the SIP will distribute a best bid and offer for both 
NASD and Nasdaq. See note 24, infra for further discussion on this 
issue.
---------------------------------------------------------------------------

    As proposed in the ADF Proposal, the ADF would provide Market 
Participants the ability to quote and trade Nasdaq and exchange-listed 
securities. However, several regulatory issues relating to the trading 
of exchange-listed securities on the ADF have not been resolved. 
Because these open issues do not relate to trading Nasdaq securities, 
NASD is proposing to operate the ADF Pilot with respect to Nasdaq 
National Market and Nasdaq SmallCap Market securities (collectively, 
``Nasdaq Securities'') only. The ADF Pilot would operate on a pilot 
basis until the close of daily operation of the ADF Pilot on April 24, 
2003.
    During the ADF Pilot, the NASD will own and operate both Nasdaq and 
the ADF Pilot. Accordingly, the proposed rules for the ADF Pilot 
relating to specific quotation and trading requirements for activities 
through the ADF Pilot are separate from the quotation and trading rules 
relating to Nasdaq. Further, certain Nasdaq rules have been amended to 
reflect the fact that members that choose to participate in both Nasdaq 
and the ADF Pilot may elect to trade report to either facility, except 
for those transactions that are executed or facilitated by a Nasdaq 
system.\8\
---------------------------------------------------------------------------

    \8\ See proposed ADF Pilot Rule 4630, Rule 5430, and Rule 6100.
---------------------------------------------------------------------------

    The proposed ADF Pilot trade reporting rules are consistent with 
current requirements applicable to

[[Page 49843]]

Nasdaq market participants and are not intended to require new or 
different trade reporting responsibilities for parties to transactions. 
As described in more detail herein, the proposed Rule 5400 Series 
details which party to a transaction has the trade reporting 
responsibility and where the party with the trade reporting 
responsibility is required, or has the choice, to trade report to TRACS 
or ACT.
    Market Maker and ECN Registration. As required by existing rules 
applicable to Nasdaq market makers, ADF Pilot Market Participants would 
be required to register as market makers or electronic communications 
networks (``ECNs'') for each security in which they make a market or 
display orders. Market makers would receive approval for registration 
upon demonstration that they are members in good standing and comply 
with the net capital and other financial responsibility requirements of 
the Act. To ease the administrative burden on NASD members, the ADF 
Pilot rules initially would allow registration as a market maker in the 
ADF Pilot upon proof that a firm is a registered Nasdaq market maker. 
Additionally, the proposed rule change tracks Nasdaq requirements that 
market makers maintain continuous two-sided, firm quotations and 
prescribes market maker obligations when a bid or offer locks or 
crosses the market. ECNs, however, may post one-sided quotes. If a 
Registered ADF Pilot market maker that also is a Registered Nasdaq 
market maker is seeking excused withdrawal status, it must obtain such 
excused withdrawal status in both facilities for the same time period.
    Order Access Rule. The ADF Pilot rules differ from current rules 
applicable to trading in Nasdaq securities most significantly with 
respect to participants' ability to reach quotes for Nasdaq securities 
displayed in the ADF Pilot. NASD will not provide Market Participants 
in the ADF Pilot an order routing capability.\9\ To provide a means to 
enforce compliance with firm quote obligations, locked and crossed 
quotation obligations,\10\ and to provide other market participants 
within the ADF Pilot and in other markets the ability to provide best 
execution, in the absence of an NASD-provided router, the proposed rule 
change contains new Rule 4300A.
---------------------------------------------------------------------------

    \9\ The NASD will not provide an order routing capability for 
Nasdaq securities because the NASD believes this will allow it to 
better perform its core investor protection mission by focusing on 
regulation rather than market operations. The NASD also believes 
that market participants already do, and can continue to, establish 
and run order linkage facilities that are as or more efficient and 
innovative than a facility NASD could provide. The NASD believes 
that this approach comports with the requirements of the Act and is 
consistent with the NASD's obligation to promulgate rules that are 
designed generally to facilitate the orderly collection, 
distribution, and publication of quotations in securities traded 
otherwise than on a national securities exchange. See Section 
15A(b)(11) of the Act, 15 U.S.C. 78o-3(b)(11).
    \10\ This proposed Rule 4300A would be the basis for satisfying, 
among other things, locked and crossed quotation obligations.
---------------------------------------------------------------------------

    Direct and Indirect Access. Generally, proposed Rule 4300A requires 
NASD Market Participants to provide direct electronic access to other 
Market Participants and to provide to all other NASD members direct 
electronic access and allow for indirect electronic access to the 
individual Market Participant's quote. As discussed above, the rule 
defines Market Participants as either an NASD Registered Market Maker 
or an NASD Registered ECN. In other words, Market Participants are 
those members that post quotations in the ADF Pilot.
    The rule requires Market Participants to provide other Market 
Participants with direct electronic access to their quotes. ``Direct 
electronic access'' is defined in the rule as the ability to deliver an 
order for execution directly against an individual NASD Market 
Participant's best bid or offer without the need for voice 
communication, with equivalent speed, reliability, availability, and 
cost, as are made available to NASD Market Participant's own customers. 
Therefore, while the linkage must be electronic--telephone access is 
insufficient--the proposed rule allows Market Participants flexibility 
to determine the type and method of linkage. For example, the proposed 
rule would permit Market Participants to link directly among themselves 
bilaterally using their own technology or to use a provider with 
multilateral order routing facilities to satisfy the linkage 
requirements. The rule requires that a Market Participant be equally 
accessible to all other Market Participants via this electronic link.
    The quote access requirements of proposed Rule 4300A would not 
extend to intermarket access for trading Nasdaq securities. Unlike for 
CQS securities, the Commission has not mandated an intermarket linkage 
like ITS for Nasdaq securities. Accordingly, the NASD does not believe 
it appropriate for it to unilaterally impose such an intermarket 
linkage obligation. Rather, the NASD would propose that members of 
another market that desire to access a Market Participant's quotes in 
the ADF Pilot in Nasdaq securities establish an execution arrangement 
with that ADF Pilot Market Participant or, alternatively, become a 
member of the NASD.
    The proposal also would require Market Participants to provide all 
other NASD broker-dealer members (i.e., those members that do not quote 
in ADF Pilot but want to access ADF Pilot quotes) with direct 
electronic access and allow for indirect electronic access through 
their customer broker-dealers. Indirect electronic access is defined in 
the proposal as the ability to route an order through a Market 
Participant's customer broker-dealer for execution against the Market 
Participant's best bid and offer, without the need for voice 
communication, with equivalent speed, reliability, availability, and 
cost, as are made available to the Market Participant's customer 
broker-dealer providing access to the Market Participant's quotes.
    The proposed rule change requires a Market Participant to offer 
both direct and indirect access to member broker-dealers. Market 
Participants must make themselves accessible to those member broker-
dealers that wish to link with them directly and also must permit 
access indirectly through their customer broker-dealers. Similarly, the 
requirement to allow for indirect access does not permit Market 
Participants to refuse direct access to member broker-dealers that 
would prefer direct connectivity; rather, it creates an additional 
means for non-Market Participant broker-dealers to access Market 
Participants' quotes.
    Rule 4300A prohibits Market Participants from in any way 
discouraging or discriminating against NASD members that wish to reach 
their quotes. NASD believes this approach is the most appropriate means 
to ensure equal and universal access by its members to the quotations 
displayed in the ADF Pilot. A Market Participant may deny access only 
in the limited circumstances where a broker-dealer fails to pay 
contractually obligated costs for access to a Market Participant's 
quotes; otherwise, Market Participants must provide access to their 
quotes displayed in the ADF Pilot to all NASD member broker-dealers 
seeking such access.
    The order access rule would apply only to a Market Participant's 
top of book, i.e., the best bid and offer that is displayed in the ADF 
Pilot. Therefore, Market Participants retain substantial flexibility to 
negotiate the terms of many other services, such as full book access, 
placing orders, and use of reserve sizes. ECNs are permitted under the 
proposed rule to charge more for ``hit or take'' access only `` purely 
a liquidity taking function--than for full subscriber services, 
provided that the fee is

[[Page 49844]]

reasonable, based on objective criteria, and not imposed 
discriminatorily.
    Cost Allocation. Under the proposed rule change, Market 
Participants must share equally the costs of providing to each other 
the direct electronic access required by rule, unless those Market 
Participants agree upon another cost-sharing arrangement. For example, 
assume the ADF Pilot consisted of five Market Participants and a sixth 
broker-dealer then registered as an ADF Pilot Market Participant. Under 
this scenario, each of the five existing Market Participants would be 
required to split with the new Market Participant the costs to 
establish their respective bilateral links with the new Market 
Participant, unless the parties agreed upon a different cost 
allocation.
    Market Participants also must pay the costs to enable direct 
electronic access, as defined in the proposed rule, to their quotes. 
Thus, a Market Participant must bear the costs to build, upgrade or 
otherwise reconfigure its technology to allow other broker-dealers to 
connect to it, including the costs to accommodate additional volume 
resulting from indirect electronic access order flow through customer 
broker-dealers. NASD believes that these costs are part and parcel of 
choosing to operate in the ADF Pilot as a Market Participant and 
therefore must be borne by the Market Participant. Similarly, those 
non-Market Participant broker-dealers seeking access to a Market 
Participant's quote must bear the line or other costs necessary to 
connect with a Market Participant's network to send and receive orders.
    Access Fees. A customer broker-dealer may charge its customers a 
fee to provide indirect access to a Market Participant's quotes. Under 
the rule proposal, a Market Participant may not influence or prescribe 
what a customer broker-dealer may charge its customers for indirect 
access to the Market Participant.\11\ Nor may the Market Participant 
preclude or discourage a specific customer broker-dealer from providing 
indirect access, either through discriminatory pricing or by degrading 
its quality of service to its customer broker-dealer. A Market 
Participant may, however, offer to provide direct electronic access at 
a competitive price as part of the services it provides to customers.
---------------------------------------------------------------------------

    \11\ The fact that a Market Participant has an ownership 
interest in a customer broker-dealer or multilateral linkage 
provider does not, in and of itself, constitute influence for the 
purposes of this proposed rule.
---------------------------------------------------------------------------

    Connectivity costs should be distinguished from fees for various 
other services provided by Market Participants. NASD recognizes that 
Market Participants have a variety of existing business relationships 
with broker-dealers for which they charge fees for services rendered, 
e.g., the handling of limit orders, price improvement opportunities, 
and liquidity enhancement. Market Participants may continue to assess 
fees for these types of services, as permissible under current rules 
and regulations.
    While ECNs may charge to execute against their best bid and offer, 
the fee must be based on reasonable and objective criteria. And while 
ECNs are permitted under the proposal to charge more for hit-or-take 
access than for full service access, they may not impose hit-or-take 
fees in a way that discriminates against a particular broker-dealer or 
class of broker-dealers. Thus, in setting its fee schedule, an ECN may 
not look through its order flow to identify and discriminate against 
the source of the order flow, e.g., a competitor or a broker-dealer 
that is accessing the quote indirectly. Rather, an ECN may set a 
reasonable fee for order flow that takes liquidity--a fee that may be 
higher than for order flow that provides liquidity--and apply that fee 
to all such order flow, irrespective of its origin. Similarly, an ECN 
that offers a volume discount must offer the same terms to all broker-
dealers accessing its quote, without regard to the identity of the 
broker-dealer or the source of its order flow. NASD believes that this 
rule is necessary to ensure fair and equitable access to ECN quotes 
displayed in the ADF Pilot.
    Performance Standards. Because the ADF Pilot will not be providing 
an order router or automatic execution system, NASD believes that a 
minimum performance standard is appropriate to ensure that quotes in 
the ADF Pilot are reliable and accessible. Specifically, the proposed 
rule change would impose a technological requirement on Market 
Participants, mandating that their order linkage system provide them 
the capability to respond to an order--i.e., accept or decline it--from 
another Market Participant or customer broker-dealer, within two 
seconds of receipt. Additionally, Market Participants would be required 
to have in place a system that can accomplish a ``round trip'' of an 
order from another Market Participant in three or fewer seconds, 
measured from the time an order is released by a Market Participant 
until the time notification of action taken on the order is received 
back by the Market Participant from whom the order originated. In 
short, there are two relevant time standards to ensure a minimum 
performance capability: Three-second turnaround for communications 
between Market Participants and two seconds for execution of orders 
received by Market Participants from other Market Participants, as well 
as customer broker-dealers.
    Market participants will be required to certify that their systems 
can meet these standards at peak capacity, based on reasonable 
forecasts, before they are authorized to post quotes on the ADF Pilot. 
On an ongoing basis, Market Participants will be required to re-certify 
that they can meet these performance standards when volumes exceed 
those on which the initial certification was based. NASD will review 
test data to confirm the accuracy of such certifications.
    The proposed performance standards are independent of existing firm 
quote requirements in Rule 11Ac1-1 under the Act,\12\ NASD Rule 3320 
and proposed NASD Rule 4613A(b), which require immediate execution of 
an order up to the quotation size displayed by the Market Participant 
upon receipt of an order to buy or sell. The performance standards 
ensure that all Market Participants have adequate technology that will 
not degrade the overall accessibility of quotes in the ADF Pilot. By 
comparison, the firm quote rule addresses a Market Participant's 
obligation to honor their quotes when they receive an order and 
prohibits backing away. Accordingly, the proposal would not require 
market makers to fill orders in two seconds. However, due to their 
structure, broker-dealers whose business models rely primarily upon 
electronic execution systems, for example ECNs, would be expected to 
fill orders in less than two seconds.
---------------------------------------------------------------------------

    \12\ 17 CFR 240.11Ac1-1.
---------------------------------------------------------------------------

    System Outages. In addition, to further ensure the reliability of 
linkages and the integrity of the ADF Pilot, the NASD is proposing to 
suspend from quoting for 20 business days any Market Participant that 
experiences three unexcused, confirmed system outages during any period 
of five business days.
    NASD proposes to define system outages as (1) an inability to quote 
or (2) an inability to respond to orders. The proposal provides for a 
review and appeal process, where the burden will rest with the Market 
Participant to establish that a confirmed system outage was 
attributable to another party. The proposal also would give NASD 
discretion to excuse certain outages where the Market Participant 
voluntarily brings the matter to the

[[Page 49845]]

attention of NASD. Finally, NASD will investigate complaints related to 
failure to provide direct or indirect access.
    Trading Rules Compliance. To allow NASD to monitor compliance with 
certain trading rules, such as the firm quote rule and ``trade or 
move'' rules, the proposed rule change also requires that all NASD 
Market Participants that display quotations or orders in the ADF Pilot 
record specified items of information pertaining to orders they receive 
from broker-dealers via direct or indirect electronic access, and 
report this information to NASD on a real-time basis. The proposed rule 
requires this information be provided to NASD within 10 seconds of the 
receipt of an order and, if applicable, when an order is acted upon or 
responded to. As part of the subscriber agreement approval process, 
Market Participants would be required to provide the terms and methods 
by which they will comply with these rules. The NASD would review these 
terms prior to approving a subscriber agreement.
    Trade Reporting and Trade Comparison Service. As noted above, the 
NASD intends to operate trade reporting and comparison services as part 
of the ADF Pilot. The trade reporting service would collect trade 
reports for NASD Market Participants, as well as any NASD member that 
chooses to or is required to report transactions through the ADF Pilot. 
The service would transmit the reports automatically to the respective 
SIP, if required, for dissemination to the public and the industry.
    This service would operate similarly to the trade reporting 
functions of Nasdaq's Automated Confirmation Transaction (``ACT'') 
Service,\13\ but would contain one notable distinguishing feature. The 
ADF Pilot will support a ``three party trade report'' that will make it 
easier for ECNs to submit trade reports involving their subscribers and 
for market makers to submit riskless principal trade reports. A three 
party trade report will be a single last sale trade report that would 
denote one reporting member--i.e., the party with the trade reporting 
responsibility as defined in Rule 4633A--and two contra parties. The 
ADF will be designed to split the three party trade report into two 
separate reports that will then be processed independently in 
accordance with existing trade reporting rules. Each of these reports 
will contain its own identifier and a reference to the original three 
party trade report, so that the separate reports can be mapped to the 
same transaction. Therefore, the ADF Pilot trade reporting system would 
streamline the reporting process by reducing from three or two to one 
the number of trade reports for most ECN and riskless principal 
transactions.
---------------------------------------------------------------------------

    \13\ The NASD service would not perform risk management services 
that are provided by Nasdaq's ACT service.
---------------------------------------------------------------------------

    The NASD also will operate a trade comparison service as part of 
TRACS that would (1) compare trade information entered by TRACS 
participants and submit ``locked-in'' trades to the Depository Trust 
Clearing Corporation (``DTCC'') for clearance and settlement; (2) 
transmit reports of the transactions automatically to the respective 
SIP, if required, for dissemination to the public and the industry; and 
(3) provide participants with monitoring capabilities to facilitate 
participation in a ``locked-in'' trading environment. The proposed 
trade comparison rules are found in proposed Rule 6100A.
    The NASD expects that a significant volume of trades will be 
locked-in and submitted directly to DTCC by way of agreements between 
Market Participants and Qualified Service Representatives (``QSRs''). 
As a result, NASD expects the volume of trades requiring comparison 
sent through TRACS to be relatively low.\14\ For those trades where one 
party is a TRACS subscriber and the other party is an ACT subscriber, 
both TRACS and ACT will accept one-sided trade reports and submit those 
trades to NSCC. In such cases, NSCC will compare the trade.
---------------------------------------------------------------------------

    \14\ DTCC has agreed to continue its existing trade comparison 
service for over-the-counter equity securities to provide comparison 
services between an ADF Pilot Market Participant and a Nasdaq market 
participant.
---------------------------------------------------------------------------

    Transaction Reporting. The proposed rule change adopts the current 
Nasdaq approach to trade reporting for Nasdaq securities whether the 
member is reporting through TRACS or ACT. Proposed Rule 5430(b) 
designates which party to a transaction has the trade reporting 
responsibility and where the party with the trade reporting 
responsibility is required, or has the choice, to trade report to TRACS 
or ACT. Specifically, proposed Rule 5430(b) requires that the seller 
report trades between two market makers or two non-market makers, the 
market maker report trades between it and a customer, and an NASD 
member report trades between it and a customer.
    The proposed rule change also provides NASD members that are market 
makers in both the ADF Pilot and Nasdaq and have a trade reporting 
obligation under Rule 5430(b), the choice to trade report to the ADF 
Pilot or Nasdaq, except for those transactions that are executed or 
facilitated by a Nasdaq system. If a member is a market maker in either 
Nasdaq or the ADF Pilot, but not the other facility, the member must 
report to the facility of which it is a market maker. For example, if a 
member is an ADF Pilot market maker, but not a Nasdaq market maker in a 
security, the member, if it has a trade reporting obligation, must 
report the transaction in that security to TRACS, unless the trade is 
executed using ACES, the Nasdaq National Market Execution System 
(``NNMS''), the SelectNet Service, the SmallCap Small Order Execution 
System (``SOES''), or the Primex Auction System (``Primex''). A trade 
executed using ACES must be reported using ACT, and trades executed 
using NNMS, SelectNet, SOES, or Primex will be reported to ACT 
automatically. A member that is not a market maker in either facility 
but is a participant in both facilities and has a trade reporting 
obligation, may trade report to either facility, unless the trade is 
executed using ACES, NNMS, SelectNet, SOES, or Primex. Trades executed 
using ACES must be reported to ACT, and trades executed using these 
other systems will be reported to ACT automatically.
    With respect to trade reporting by ECNs, ECNs that currently 
display quotes in Nasdaq have developed different methods of reporting 
trades. ECNs may continue to report to Nasdaq and/or the ADF in this 
same manner.
    Short Sale Rule. The proposed rule change would amend the short 
sale rule and its accompanying interpretation such that the current 
Nasdaq short sale rule should apply to trading in Nasdaq Securities on 
the ADF Pilot with the exception described below. The proposed rule 
change, however, would establish a different bid on which to base the 
applicability of the short sale rule for purposes of trading on the ADF 
Pilot. Specifically, the proposed amendment would require members 
trading on the ADF Pilot to comply with the short sale rule based on 
the national best bid rather than the Nasdaq best bid. Although a best 
bid will be calculated for the ADF Pilot, NASD believes that for the 
purposes of the short sale rule, the national best bid will be more 
reflective of market-wide trading in a security and therefore will 
better further the purposes of the rule. Aside from the changes noted 
above, the ADF Pilot short sale rule would mirror Nasdaq's short sale 
rule, including the current exemption for registered market makers 
engaged in bona fide market making activity.

[[Page 49846]]

    Trading Halts. Proposed Rule 4120A would provide the NASD with 
authority to halt trading through the ADF Pilot in Nasdaq Securities. 
For ADF Pilot-eligible securities, the proposed rule would mandate a 
trade halt when another market halts trading in a security for 
regulatory reasons and would give the NASD discretionary authority to 
halt trading when another market halts trading for operational reasons. 
Similar discretionary authority would extend to circumstances where a 
security traded through the ADF Pilot is a derivative or component of a 
security that has been halted. In addition, the NASD would have 
authority to close the ADF Pilot to quotation activity when the ADF 
Pilot is unable to transmit real-time quotation and trade reporting 
data to the SIP. In the event that the NASD chooses not to halt trading 
under the aforementioned discretionary circumstances, market 
participants could continue to trade through the ADF Pilot and would be 
required to meet all applicable trade reporting requirements.
    Any trading halt initiated by the NASD would become effective 
simultaneously with notification via an administrative message sent 
through the ADF Pilot terminal or interface. Trading similarly would 
resume after an administrative notice has been issued.
    Withdrawal of Quotations. The proposed rule change eliminates for 
ADF market makers one of the conditions in existing Rule 4619(b)(3) for 
a market maker seeking excused withdrawal status based on vacation. 
Under the current rule, excused withdrawal status may only be granted 
to a market maker that has three or fewer Nasdaq Level 3 terminals. 
Proposed Rule 4619A(b)(3) does not replicate that requirement for ADF 
Pilot market makers because the ADF Pilot will not operate as a primary 
market. As such, the absence of a market maker with more than three ADF 
Pilot terminals would not have a significant impact on the liquidity in 
those securities in which it makes a market.
    Obligations When Quoting in Multiple Market Centers. Existing Rule 
2320(g)(2) requires members that display quotations for non-Nasdaq 
securities in two or more quotation mediums to post the same priced 
quotations in each medium. The proposed rule change adds a similar 
obligation under proposed Rule 4613A(e)(1) for members that display 
quotations for Nasdaq Securities in two or more market centers, 
including the ADF Pilot. The proposed rule, however, does not prohibit 
displaying different size quotations in two or more mediums or market 
centers, provided that the price displayed is the same.
    Obligation to Have Quotations From Other Market Centers in Close 
Proximity. Proposed Rule 4613A(e)(2) would require a registered NASD 
market maker to have in close proximity to the ADF Pilot terminal or 
interface at which it makes a market in a Nasdaq security a quotation 
service that disseminates quotations in that security. A similar rule, 
Rule 6330(c), currently exists with respect to CQS market makers. As 
with the CQS rule, it is the NASD's intention for the quotations 
displayed in the ADF Pilot terminals or interfaces to function as a 
verification mechanism whereby Market Participants in the ADF can 
monitor their current ADF Pilot quotations and ensure that the NASD is 
timely updating and disseminating their quotations. NASD will not 
disseminate to Market Participants in the ADF Pilot any consolidated 
quotation or trade data in a security from securities exchanges and 
market centers. To ensure that ADF Pilot Market Participants have the 
data necessary to make proper order routing decisions and to satisfy 
the Vendor Display Rule,\15\ NASD will require Market Participants in 
the ADF Pilot to obtain from vendors dynamic quotations and last-sale 
information on the securities they trade through the ADF Pilot, and to 
display this data in close proximity to the ADF Pilot data displayed on 
their terminals, just as is currently required of CQS market makers in 
Rule 6330(c).
---------------------------------------------------------------------------

    \15\ Securities Exchange Act Rule 11Ac1-1, 17 CFR 240.11Ac1-1.
---------------------------------------------------------------------------

    Voluntary Termination of Registration. The proposal contains a new 
provision related to voluntary termination as an NASD market maker. 
Proposed Rule 4620A provides that registration as a Registered ADF 
market maker in a security is voluntarily terminated where the market 
maker (1) withdraws its quotations from the ADF Pilot and does not re-
enter quotations in the security for five minutes or (2) fails to re-
enter quotations within 30 minutes of the end of a trading halt. In 
either circumstance, a market maker would be prohibited from re-
registering as an ADF Pilot market maker in that security for twenty 
(20) business days, unless the market maker meets the conditions for 
excused withdrawal specified in Rule 4619A.
    OATS Requirements. For NASD members, the Order Audit Trail System 
(``OATS'') requirements will remain substantially the same as current 
requirements. NASD, however, is proposing to require that members 
complete an additional field on the OATS execution report indicating 
where the trade was reported. This requirement will enable the NASD to 
clearly identify which execution reports are associated with ADF Pilot 
trade reports and which are associated with Nasdaq trade reports and, 
thereby, keep this data separate and confidential, as necessary.
    All NASD members must continue to record in electronic form and 
report to the NASD on a daily basis certain information with respect to 
orders originated, received, transmitted, modified, canceled, or 
executed (``reportable events'') by NASD members relating to equity 
securities traded on Nasdaq. When the ADF Pilot and Nasdaq are both 
operating, NASD members, in many cases, will have at least two options 
as to where they may choose to report their transactions in Nasdaq 
Securities. As such, NASD will be required to ``match'' OATS execution 
reports to either TRACS data or ACT data (or neither) depending upon 
where the transaction was reported. By having a field in the OATS 
execution report indicating where the trade was reported, NASD systems 
will be able to more efficiently compare the execution report to the 
appropriate trade report.
    Fees and Assessments. The proposed rule change includes proposed 
fees and assessments in the proposed Rule 7000A Series applicable to 
the ADF Pilot. These proposed fees are substantially similar to those 
fees proposed in the ADF Proposal, except in two ways that are 
described below. The following are fees that will be charged relating 
to transactions on the ADF Pilot: Comparison--$0.014/side per 100 
shares (minimum 400 shares; maximum 7,500 shares); Automated Give-Up--
$0.029/side; Late Report--T+N--$0.30/side; Browse/query--$0.28/query; 
Trade Reporting--$.029/side (applicable only to reportable transaction 
not subject to trade comparison through TRACS); and Corrective 
Transaction Charge--$0.25.
    The NASD will charge an ADF Pilot workstation fee of $275 per month 
for each ADF Pilot terminal software license and $550 per month for 
each ADF Pilot server license. The NASD also will charge members a 
minimum of $5,000 for installation costs associated with connecting to 
the ADF Pilot, and will require reimbursement from members for charges 
incurred by the NASD above $5,000 due to the installation, removal, 
relocation or maintenance of terminal and related equipment. However, 
the NASD will provide market participants with a credit of up to $5,000 
toward their trade reporting and comparison charges.

[[Page 49847]]

    The proposed rule change also provides for several administrative 
provisions, including partial month charges and late charges for all 
fees that are past due 45 days or more. The proposed rule change also 
permits the NASD to increase or decrease the total charges described in 
the Rule 7000A series by 10% upon filing such changes with the SEC. 
Similar to existing NASD Rule 7100(b), the proposed rule change also 
permits the NASD to enter into agreements with certain broker/dealers, 
vendors and other persons, which may modify or dispense with some or 
all of the charges described in the 7000A Series.
    NASD also is proposing to charge a quotation update fee of $.01 per 
quotation update in the ADF Pilot quotation montage. This quotation 
update fee, however, will apply only to those quotation updates by the 
member in the ADF Pilot that exceed three times the number of 
transactions reported by the member through the ADF Pilot. This 
quotation update fee will be determined on a monthly basis. By imposing 
this fee only where the quotation updates significantly exceed the 
number of transactions reported, this fee structure will fairly impose 
costs on those members whose quotation activity creates system capacity 
demands, and therefore costs that are not covered by a trade reporting 
fee.
    As noted above, the proposed ADF Pilot fees differ with respect to 
the ADF fees proposed in the ADF Proposal in two ways. First, NASD is 
proposing to waive transaction and quotation update fees (proposed 
Rules 7010A(a) and (b), respectively) for a period of up to three 
months during the initial six months of operation of the ADF Pilot. As 
a result, during this six-month period, for up to three months starting 
from the initial transaction by an ADF Pilot participant, the 
participant would not be charged transaction or quotation fees. 
However, the time period for which the three months of ``no charges'' 
is available concludes at the end of the six-month period, irrespective 
of whether the member has participated in the ADF Pilot for three 
months. For example, if the ADF Pilot has been operational for four 
months and a market participant begins trading at that time, it only 
would be eligible for ``no charges'' for two months.
    Second, for the initial six month period of the ADF Pilot's 
operation, NASD is proposing to adjust its fees imposed on trade 
reporting and quotation activities through the ADF Pilot to provide for 
volume discounts subsequent to the three month ``no charges'' period. 
NASD believes that this approach will make the overall cost of trade 
reporting and quoting through the ADF Pilot more attractive to higher 
volume users during the first six months of ADF Pilot's operation. 
Specifically, the proposed fee structure would provide discounted fees 
for those members that have greater than 2,000 trades per month or for 
those members that have greater than 8,000 chargeable quotes per month. 
The proposed volume discounts would apply to all transaction fees 
incurred under proposed Rule 7010A(a), except the browse/query fee, and 
all quotation update fees incurred under proposed Rule 7010A(b). The 
discounts would apply in the following increments:

------------------------------------------------------------------------
                                    Chargeable quote updates   Discount
         Trades per month                  per month           (percent)
------------------------------------------------------------------------
Up to 2,000......................  Up to 8,000..............           0
2,001 to 4,000...................  8,001 to 15,000..........          10
4,001 to 6,000...................  15,001 to 25,000.........          25
6,001 to 8,000...................  25,001 to 35,000.........          35
8,001 or greater.................  35,001 or greater........          50
------------------------------------------------------------------------

    For example, if a member had 5,000 trades and 16,000 quotation 
updates during a month, the proposed fee structure would apply as 
follows: no discount would apply to the first 2,000 trades; the fees 
imposed on trades 2,001 through 4,000 would be discounted by 10%; and 
the fees imposed on trades 4,001 through 5,000 would be discounted by 
25%. The quotation update charge on 1,000 quotations (those quotations 
that exceed three times the number of trades) would not be discounted 
because it is less than 8,001.
2. Statutory Basis
    The NASD believes that the proposed rule change is consistent with 
section 15A(b)(6) of the Act \16\ in that it is designed to prevent 
fraudulent and manipulative acts and practices, to promote just and 
equitable principles of trade, to foster cooperation and coordination 
among persons engaged in regulating, clearing, settling, processing 
information and facilitating transactions in securities, 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 addition, the NASD believes that this rule proposal 
is consistent with section 15A(b)(6) of the Act \17\ because it does 
not permit unfair discrimination between customers, issuers, brokers, 
or dealers, to fix minimum profits, to impose any schedule or fix rates 
of commissions, allowances, discounts, or other fees to be charged by 
members, or to regulate matters not related to the purposes of the Act 
or the administration of the Association.
---------------------------------------------------------------------------

    \16\ 15 U.S.C. 78o-3(b)(6).
    \17\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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

    The NASD 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 solicited in response to the ADF Proposal. As 
noted above, the proposed rule changes of the ADF Pilot are 
substantially similar to those rule changes proposed in the ADF 
Proposal that are related to the establishment, implementation, and 
operation of the ADF. The NASD has responded to the comments received 
in response to the ADF Proposal. Specifically, the NASD responded to 
the comments received in response to SR-NASD-2001-90 in its Amendment 
No. 2 to that filing submitted to the SEC on May 24, 2002.\18\ The NASD 
responded to the comments received in response to SR-NASD-2002-28 in 
its Amendment

[[Page 49848]]

No. 1 to that filing submitted to the SEC on May 14, 2002.\19\
---------------------------------------------------------------------------

    \18\ See Securities Exchange Act Release No. 45991 (May 28, 
2002), 67 FR 39476 (June 7, 2002).
    \19\ Amendment No. 1 is available for inspection and copying in 
the Commission's Public Reference Room and at the principal office 
of the NASD.
---------------------------------------------------------------------------

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the 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.
    The NASD has requested accelerated approval of the proposed rule 
change pursuant to section 19(b)(2) of the Act,\20\ because the 
proposed rule change proposes implementing ADF rules substantially 
similar to those previously proposed and noticed for comment in the ADF 
Proposal. The NASD requests that the Commission accelerate the 
effectiveness of the proposed rule change prior to the 30th day after 
its publication in the Federal Register.
---------------------------------------------------------------------------

    \20\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

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-2002-97 and 
should be submitted by August 21, 2002.

V. Commission Findings and Order Granting Accelerated Approval of the 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the Act and the rules and regulations promulgated thereunder.\21\ 
Specifically, the Commission finds that approval of the proposed rule 
change is consistent with section 15A(b)(11) of the Act.\22\
---------------------------------------------------------------------------

    \21\ In granting accelerated approval of the proposal, the 
Commission has considered the proposal's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78o-3(b)(11).
---------------------------------------------------------------------------

    Pursuant to section 15A(b)(11) of the Act,\23\ the rules of a 
registered securities association must be designed generally to 
facilitate the orderly collection, distribution, and publication of 
quotations. Moreover, these rules must be designed to produce fair and 
informative quotations and to prevent fictitious or misleading 
quotations. As the NASD has proposed to sever its corporate 
relationship with Nasdaq, it is critical that the ADF (in pilot or 
permanent form) be established, implemented and operating prior to 
Nasdaq being registered as a national securities exchange. Therefore, 
the Commission believes that launching the ADF Pilot furthers the 
public interest by ensuring that continuity in the over-the-counter 
market is maintained and that the NASD satisfies its statutory 
obligation to regulate the over-the-counter market.\24\
---------------------------------------------------------------------------

    \23\ 15 U.S.C. 78o-3(b)(11).
    \24\ The Commission notes that the launch of the ADF Pilot will 
result in a new data feed, the Over-the-Counter Montage Data Feed 
(``OMDF''), being disseminated by the Nasdaq SIP. While the NASD ADF 
Pilot and Nasdaq operate as the same SRO, the submission of multiple 
best bid and offers (``BBOs'') by the NASD to the Nasdaq SIP is 
inconsistent with the OTC-UTP Plan. The Commission has addressed 
this issue in the 13th Amendment to the OTC-UTP Plan. See Securities 
Exchange Act Release No. 46139 (June 28, 2002), 67 FR 44888 (July 5, 
2002). Moreover, the display by market data vendors of either the 
OMDF or the Nasdaq Quotation Dissemination Service (``NQDS'') 
without the other is inconsistent with the Vendor Display Rule, SEC 
Rule 11Ac1-2, 17 CFR 240.11Ac1-2. The Commission has addressed this 
issue in an interpretive guidance letter. See letter to Edward S. 
Knight, Executive Vice President and General Counsel, Nasdaq, from 
Robert L.D. Colby, Deputy Director, Division of Market Regulation, 
Commission, dated July 23, 2002.
---------------------------------------------------------------------------

    In addition, in the SuperMontage approval order,\25\ the Commission 
required the NASD to create a facility that ``permits NASD members to 
comply with their obligations under Commission and NASD rules 
(including Exchange Act Rule 11Ac1-1(c)(5) and Regulation ATS) without 
participating in the Nasdaq execution facility. The facility will 
identify through the central processor the identity of the NASD member 
that is the source of each quote, as is required by Exchange Act Rule 
11Ac1-1(b)(1)(ii).'' Furthermore, the Commission stated that ``[t]he 
facility will provide a market neutral linkage to the Nasdaq and other 
marketplaces, but not an execution service.''
---------------------------------------------------------------------------

    \25\ Securities Exchange Act Release No. 43863 (January 19, 
2001), 66 FR 8020 (January 26, 2001) (File No. SR-NASD-99-53) 
(``SuperMontage Approval Order'').
---------------------------------------------------------------------------

    Thus, approval of the ADF Pilot furthers the obligations of the 
NASD under the Act and as specified by the Commission in the 
SuperMontage Approval Order.\26\ In particular, the ADF Pilot will 
provide the Commission with an opportunity to gauge whether the ADF in 
practice fulfills the NASD's statutory obligations. The Commission 
emphasizes, however, that approval of this ADF Pilot is not a 
determination that the conditions of the SuperMontage Approval Order 
described above have been satisfied.
---------------------------------------------------------------------------

    \26\ Specifically, the Commission conditioned the SuperMontage 
Approval Order upon the following, which must be implemented prior 
to or at the same time as the SuperMontage: ``(1) That the NASD will 
offer a quote and trade reporting alternative that satisfies the 
Order Handling Rules, Regulation ATS, and other regulatory 
requirements for ATSs, ECNs, and market makers; (2) that NASD quotes 
disseminated through the exclusive SIP will identify the ATS, ECN, 
or market maker source of the quote; and (3) that participation in 
SuperMontage will be entirely voluntary, because NASD quotes will be 
included in the Nasdaq quotation management system while Nasdaq is 
the exclusive SIP, but only for display purposes, and the NASD will 
provide access to its quotes on a market-neutral basis.'' Id. at 
8054.
---------------------------------------------------------------------------

    The Commission finds good cause for granting the NASD's request for 
approval of the proposed rule change on a pilot basis prior to the 
thirtieth day after the date of publication in the Federal Register. 
The Commission notes that the substance of the proposal has previously 
been published for notice and comment as part of the ADF Proposal. The 
Commission has received 30 comment letters on the ADF Proposal.\27\
---------------------------------------------------------------------------

    \27\ The Commission received 26 comment letters on SR-NASD-2001-
90. See Letter from Sol Reicher, Co-Chairman, Amex Specialists 
Associations; John Hawkey, Chairman, Amex Floor Brokers Association; 
and James Hyde, Chairman, Amex Options Market Maker Association, 
writing on behalf of The Member Associations of the American Stock 
Exchange, dated January 29, 2002 (``Member Associations of the 
American Stock Exchange Letter''); Letter from Meyer S. Frucher, 
Chairman and Chief Executive Officer, Philadelphia Stock Exchange, 
Inc., dated January 24, 2002 (``PHLX Letter 1''); Letter 
from Meyer S. Frucher, Chairman and Chief Executive Officer, 
Philadelphia Stock Exchange, Inc., dated February 25, 2002 (``PHLX 
Letter 2''); Letter from Marc E. Lackritz, President, 
Securities Industry Association, dated July 24, 2001 (``SIA 
Letter''); Letter from Michael A. Bird, Chairman, and John C. 
Giesea, President and CEO, Security Traders Association, dated July 
1, 2002 (``STA Letter''); Letter from Darla C. Stuckey, Corporate 
Secretary, New York Stock Exchange, Inc., dated February 15, 2002 
(``NYSE Letter 1''); Letter from Robert G. Britz, President 
and Co-Chief Operating Officer, New York Stock Exchange, Inc., dated 
May 21, 2002 (``NYSE Letter 2''); Letter from Darla C. 
Stuckey, Corporate Secretary, New York Stock Exchange, Inc., dated 
July 15, 2002 (``NYSE Letter 3''); Letter from Kevin M. 
Foley, Bloomberg Tradebook LLC, dated February 7, 2002 (``Bloomberg 
Letter 1''); Letter from Kevin M. Foley, Bloomberg 
Tradebook LLC, dated June 28, 2002 (``Bloomberg Letter 
2''); Letter from Michael T. Dorsey, Senior Vice President, 
General Counsel, and Secretary, Knight Trading Group, Inc., dated 
February 6, 2002 (``Knight Letter''); Letter from William O'Brien, 
Senior Vice President & General Counsel, Brut, LLC, dated February 
13, 2002 (``Brut Letter 1''); Letter from William O'Brien, 
Senior Vice President & General Counsel, Brut, LLC, dated March 20, 
2002 (``Brut Letter 2''); Letter from Douglas M. Atkin, 
President and Chief Executive Officer, Instinet, dated February 13, 
2002 (``Instinet Letter 1''); Letter from Jon Kroeper, 
First Vice President and Regulatory Policy/Strategy, Instinet, dated 
July 1, 2002 (``Instinet Letter 2''); Letter from Mark P. 
Barracca, Corporate Counsel, NexTrade, Inc., dated January 18, 2002 
(``NexTrade Letter 1''); Letter from John M. Schaible, 
President, NexTrade, Inc., dated April 8, 2002 (``NexTrade Letter 
2''); Letter from John M. Schaible, President, NexTrade, 
Inc., dated June 9, 2002 (``NexTrade Letter 3''); Letter 
from K. Richard B. Niehoff, Chairman, President, and CEO, 
WEBIXTRADER.COM, dated June 27, 2002 (``Webix Letter''); Letter from 
Amy Montague, dated June 21, 2002 (``Montague Letter''); Letter from 
William Joseph, dated June 25, 2002 (``Joseph Letter''); Letter from 
Jim Hendricks, dated February 21, 2002 (``Hendricks Letter''); 
Letter from Jim Ryan, dated June 20, 2002 (``Ryan Letter''); Letter 
from George A. Robles, dated June 15, 2002 (``Robles Letter''); 
Letter from Ira Rosenbloom, dated June 10, 2002 (``Rosenbloom 
Letter''); and Letter from John Tarleton, dated June 20, 2002 
(``Tarleton Letter''). The Commission received four comment letters 
on SR-NASD-2002-28. See Letter from William O'Brien, Senior Vice 
President and General Counsel, Brut LLC, dated March 20, 2002 
(``Brut Fee Letter''); Letter from Douglas M. Atkin, President, 
Chief Executive Officer, Instinet, dated April 1, 2002 (``Instinet 
Fee Letter''); Letter from Mark P. Barracca, Corporate Counsel, 
NexTrade, dated April 1, 2002 (``NexTrade Fee Letter''); and Letter 
from Kevin M. Foley, Bloomberg Tradebook LLC, dated April 2, 2002 
(``Bloomberg Fee Letter'').

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[[Page 49849]]

    Generally, commenters expressed concern with, among other things, 
(1) the lack of centralized linkage among market participants and an 
order routing and execution facility; \28\ (2) the lack of information 
regarding technological requirements; \29\ (3) whether ITS 
participation for trading in listed stocks should be mandatory or 
voluntary; \30\ (4) the timing of the launch of the ADF, especially 
with respect to Nasdaq's pending registration as an exchange and the 
launch of SuperMontage (several commenters recommended some sort of 
``test'' period before the launch of SuperMontage); \31\ and (5) the 
proposed fees, including the lack of market data revenue rebates.\32\
---------------------------------------------------------------------------

    \28\ See e.g. NexTrade Letters 1, 2, and 3; SIA Letter; 
Phlx Letter 2. The Commission also notes that some 
commenters were not very concerned with the lack of a linkage or 
execution facility. See e.g. Bloomberg Letter 1; BRUT 
Letter 1.
    \29\ See e.g. BRUT Letter 2; NexTrade Letters 
1, 2, and 3; Bloomberg Letter 2; Instinet Letter 
2.
    \30\ See e.g. NYSE Letters 1 and 2; Instinet Letter 
1; Members Association of the American Stock Exchange 
Letter; Bloomberg Letter 2.
    \31\ See e.g. Instinet Letter; SIA Letter; Bloomberg Letter 
2; Instinet Letter 2.
    \32\ See e.g. Brut Fee Letter; Instinet Fee Letter; NexTrade Fee 
Letter; Bloomberg Fee Letter.
---------------------------------------------------------------------------

    A number of commenters criticized the ADF for not providing a 
central linkage facility operated and funded by the NASD. They argued 
that the lack of a core ADF linkage would impede access to the quotes 
displayed in ADF, discouraging ADF participation, and would impose 
access costs on order routing firms. Other commenters, however, stated 
that the approach to access relied upon by the NASD--linkages developed 
by private access providers--encouraged the development of efficient, 
technologically innovative access services.
    After considering the comments, the Commission believes that the 
NASD's rule-based access solution has the potential to provide 
effective market-neutral linkages among ADF market participants and 
between the ADF and other markets. The sharp reduction in communication 
line costs in recent years and the advent of competing access providers 
in the equity markets offer the potential for multiple competitive 
means of access widely available to participants in the market for 
Nasdaq securities. This approach has been advocated in other market 
contexts, and the Commission has previously discussed favorably the 
potential for a private linkage approach.\33\
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    \33\ See Securities Exchange Act Release No. 43084 (July 28, 
2000), 65 FR 48406 (August 8, 2000) (File No. S7-16-00) (proposing 
rules regarding disclosure of order routing and execution 
practices).
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    Moreover, the NASD rules require direct connectivity between ADF 
participants to be in place before the participants begin quoting, and 
the NASD plans to review with each ADF participant the extent that 
other NASD members have connectivity to their quotes Moreover, the 
pilot program will give the Commission and the NASD the opportunity to 
review the practical operation of this access approach and to make 
changes where necessary to improve access capabilities.
    The commenters also raised concerns about the lack of information 
regarding the requirements for the system. Some of these comments were 
in fact criticisms of the communications protocols used by the ADF 
system.
    The Commission notes that the NASD made its technical 
specifications for the ADF available as early as March, 2002. Although 
these specifications were known in March, few market participants have 
familiarized themselves with these requirements. Some commenters 
criticized the ADF for not employing a FIX protocol. It should be noted 
that the FIX protocol is not commonly used by other markets at this 
time. (The NASD has indicated its willingness to develop a FIX 
interface to the ADF if justified by interest from market 
participants.)
    Commenters also wrote at length about the NASD's proposal to allow 
ADF quoting participants in listed stocks to choose whether to 
participate in the Intermarket Trading System. Because the NASD's pilot 
program is limited to Nasdaq securities, these comments are not germane 
to the current filing.
    Several commenters expressed concern about the commencement of ADF 
and the need for potential market participants to program and test with 
the ADF before quoting and trade reporting through the system. The 
Commission recognizes that, as with any other new system, potential ADF 
participants must code to the ADF and test their systems before they 
can begin using the ADF. The Commission notes that the approval of the 
ADF pilot program is not in itself a determination that the conditions 
precedent contained in the SuperMontage approval order have been 
satisfied.
    A number of commenters also criticized the ADF as not offering a 
competitive alternative to Nasdaq because the NASD's fee levels were 
deemed excessive and because the NASD does not share market data 
revenues as do Nasdaq and certain other markets. In response, the NASD 
has proposed a set of fee waivers and discounts to make the ADF more 
attractive financially, and it intends to review its fees on an ongoing 
basis as it gains experience with the costs and revenues from operating 
the ADF. Although the NASD does not intend to share market data 
revenues, it does not believe that it need do so to offer a useful 
alternative quoting and trading venue.
    The Commission believes that the concerns raised by commenters have 
been preliminarily addressed, and that the approval of the ADF Pilot 
will help the Commission evaluate these concerns more fully after 
practical experience with the ADF. Accordingly, the Commission finds 
that good cause exists, consistent with sections 15A(b)(11) of the 
Act,34 and section 19(b)(2) of the Act 35 to 
accelerate approval of the proposed rule change prior to the thirtieth 
day after publication in the Federal Register.
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    \34\ 15 U.S.C. 78o-3(b)(11).
    35 15 U.S.C. 78s(b)(2).

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[[Page 49850]]

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,36 that the proposed rule change (File No. SR-NASD-2002-
97) is approved on a pilot basis to expire at the close of daily 
operation of the ADF Pilot on April 24, 2003.
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    \36\ 15 U.S.C. 78s(b)(2).
    37 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.37
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-19274 Filed 7-30-02; 8:45 am]
BILLING CODE 8010-01-P