[Federal Register Volume 67, Number 157 (Wednesday, August 14, 2002)]
[Notices]
[Pages 53033-53035]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20525]


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

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46320; File No. SR-NASD-2002-84]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto by the National Association of Securities Dealers, Inc. 
Relating to Display Requirements When Using Reserve Size Functionality 
in Nasdaq's Future Order Display and Collector Facility

August 6, 2002.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 18, 2002, the National Association of Securities Dealers, Inc. 
(``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by Nasdaq. On July 25, 
2002, Nasdaq submitted Amendment No. 1 to the proposed rule change.\3\ 
On August 5, 2002, Nasdaq submitted Amendment No. 2 to the proposed 
rule change.\4\ The Commission is publishing this notice to solicit 
comments on the proposed rule change, as amended, from interested 
persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Mary M. Dunbar, Vice President, Nasdaq, to 
Katherine A. England, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated July 24, 2002 
(``Amendment No.1''). Amendment No. 1 replaced in its entirety the 
original rule proposal filed on June 18, 2002. In Amendment No. 1, 
Nasdaq, in part, made a minor technical correction to its rule text 
and clarified that only Nasdaq Quoting Market Participants would be 
permitted to use the reserve size functionality on SuperMontage.
    \4\ See letter from Thomas P. Moran, Associate General Counsel, 
Nasdaq, to Katherine A. England, Assistant Director, Division, 
Commission, dated August 5, 2002 (``Amendment No. 2''). In Amendment 
No. 2, Nasdaq requested that the Commission waive the 30-day waiting 
period for the proposed rule change to become operative, and removed 
a sentence containing an inadvertent error regarding the possibility 
of decrementing a displayed quote to below 100 shares. For purposes 
of determining the effective date and calculating the 60-day period 
within which the Commission may summarily abrogate the proposed rule 
change under Section 19(b)(3)(C) of the Act, the Commission 
considers August 5, 2002 to be the effective date of the proposed 
rule change, the date Nasdaq filed Amendment No. 2. 15 U.S.C. 
78s(b)(3)(C).
---------------------------------------------------------------------------

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

    Nasdaq proposes to alter the display requirement when using the 
reserve size feature in Nasdaq's future Order Display and Collector 
Facility (``SuperMontage'').
    The text of the proposed rule change, as amended, appears below. 
New text is in italics. Deleted text is in brackets.

4710. Participant Obligations in NNMS

    (a) No Change.
     (b)(1)(A) through (b)(1)(D) No Change.
(2) Refresh Functionality
    (A) Reserve Size Refresh--Once a Nasdaq Quoting Market 
Participant's Displayed Quote/Order size on either side of the market 
in the security has been decremented to zero due to NNMS processing 
Nasdaq will refresh the displayed size out of Reserve Size to a size-
level designated by the Nasdaq Quoting Market Participant, or in the 
absence of such size-level designation, to the automatic refresh size. 
To utilize the Reserve Size functionality, a minimum of [1,000] 100 
shares must initially be displayed in the Nasdaq Quoting Market 
Participant's Displayed Quote/Order, and the Displayed Quote/Order must 
be refreshed to at least [1000] 100 shares. This functionality will not 
be available for use by UTP Exchanges.
    (B) No Change.
    (3) through (8) No Change.
    (c) through (e) No Change.

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

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, and discussed any comments it received on the proposed rule 
change. The text of these statements may be examined at the places 
specified in Item IV below. Nasdaq has prepared summaries, set

[[Page 53034]]

forth in Sections A, B, and C below, of the most significant aspects of 
such statements.

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

1. Purpose
    As part of its ongoing preparation for the launch of SuperMontage, 
Nasdaq is engaging in a continuing review of the system's functionality 
and rules with a view to constant improvement. As a result of this 
review, and in consultation with industry professionals, Nasdaq has 
determined to reduce, from 1000 shares to 100 shares, the initial 
display requirement when using the reserve size feature of 
SuperMontage.
Background
    SuperMontage allows Nasdaq Quoting Market Participants to divide 
quoted share amounts submitted to the system between those shares they 
direct to display publicly in the Nasdaq montage and the shares they 
desire to keep in reserve. Known as ``reserve size,'' shares kept in 
reserve are available for execution through SuperMontage but are not 
shown to the marketplace.\5\ Nasdaq asserts that reserve size is an 
important tool for market participants seeking to execute large 
securities transactions while limiting negative market price impacts 
associated with public knowledge of those attempted sales or purchases.
---------------------------------------------------------------------------

    \5\ Under SuperMontage's various execution algorithms, the 
system generally executes against all publicly displayed shares at 
the same price level before executing in time priority against 
reserve size at that same price. Telephone conversation between 
Thomas Moran, Office of General Counsel, Nasdaq, and Terri Evans, 
Assistant Director, and Ira Brandriss, Special Counsel, Division, 
Commission, on July 8, 2002.
---------------------------------------------------------------------------

    Currently, the rules of Nasdaq's SuperMontage system prohibit the 
use of its reserve size functionality unless a Nasdaq Quoting Market 
Participant is displaying at least 1000 shares in its public quote. To 
Nasdaq's knowledge, it is the only market or trading venue that imposes 
such a display obligation. The 1000 share display requirement in 
SuperMontage was initially proposed to be consistent with a similar 
1000 share display obligation applicable to trading in Nasdaq's 
SuperSoes system. Recent experience in the post-decimals SuperSoes 
environment, however, caused Nasdaq to re-examine the 1000 share 
display obligation and file with the Commission a proposal, since 
approved, to reduce, from 1000 to 100 shares, the display amount 
required to use reserve size in SuperSoes.\6\ In this filing, Nasdaq 
seeks to adopt the same 100-share display standard in SuperMontage.
---------------------------------------------------------------------------

    \6\ See Securities Exchange Act Release No. 45998 (May 29, 
2002), 67 FR 39759 (June 10, 2002) (File No. SR-NASD-2001-66).
---------------------------------------------------------------------------

    Under the rule change proposed here, Nasdaq Quoting Market 
Participants would be allowed to use SuperMontage reserve size any time 
they displayed a quote of at least one round lot (100 shares). Nasdaq 
states that the elimination of the 1000-share display requirement makes 
SuperMontage reserve size functionality available to market makers on 
terms similar to the reserve size facilities of competing trading 
systems while continuing to encourage the display of trading interest 
through SuperMontage's ``displayed size first'' execution algorithm.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A of the Act,\7\ in 
general, and Section 15A(b)(6) of the Act,\8\ in particular, in that 
the proposal is designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest.
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78o-3.
    \8\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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

    Nasdaq does not believe that the proposed rule change, as amended, 
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

    Nasdaq neither solicited nor received written comments with respect 
to the proposed rule change, as amended.

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

    Because the foregoing proposed rule change, as amended, does not:
    (1) Significantly affect the protection of investors or the public 
interest;
    (2) Impose any significant burden on competition; and
    (3) Become operative for 30 days after the date of filing, or such 
shorter time as the Commission may designate, it has become effective 
pursuant to Section 19(b)(3)(A) of the Act \9\ and Rule 19b-4(f)(6) 
\10\ thereunder. At any time within 60 days of August 5, 2002, the 
Commission may summarily abrogate such rule change if it appears to the 
Commission that such action is necessary or appropriate in the public 
interest, for the protection of investors, or otherwise in furtherance 
of the purposes of the Act.\11\
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
    \11\ See Section 19(b)(3)(C) of the Act, 15 U.S.C. 78s(b)(3)(C).
---------------------------------------------------------------------------

    Nasdaq requested that the Commission waive the five-day pre-filing 
notice requirement and the 30-day operative delay. The Commission 
believes waiving the 5-day pre-filing notice requirement and the 30-day 
operative delay is consistent with the protection of investors and the 
public interest. The Commission notes that it has already approved a 
reduction of the minimum display size to 100 shares for use of reserve 
size in SuperSOES and believes that the proposal to implement the same 
change in SuperMontage raises no new regulatory issues.\12\ As a 
result, the Commission designates the proposal to be effective and 
operative upon filing with the Commission.\13\
---------------------------------------------------------------------------

    \12\ See Securities Exchange Act Release No. 45998 (May 29, 
2002), 67 FR 39759 (June 10, 2002).
    \13\ For purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rule's 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street NW., Washington DC 
20549-0609. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change, as 
amended, 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

[[Page 53035]]

the Commission's Public Reference Room. Copies of such filings will 
also be available for inspection and copying at the principal office of 
the NASD. All submissions should refer to File No. SR-NASD-2002-84 and 
should be submitted by September 4, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-20525 Filed 8-13-02; 8:45 am]
BILLING CODE 8010-01-P