[Federal Register Volume 67, Number 160 (Monday, August 19, 2002)]
[Notices]
[Pages 53822-53825]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-20976]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46343; File No. SR-NASD-2002-91]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Relating to Voluntary Participation by 
National Securities Exchanges in the Nasdaq Order Collection Facility, 
Commonly Known as ``SuperMontage''

August 13, 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 July 1, 2002, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its subsidiary, the Nasdaq Stock 
Market, Inc. (``Nasdaq''), filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by Nasdaq. The proposed rule change, which Nasdaq filed pursuant to 
Section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ 
would clarify the terms and conditions upon which Nasdaq will grant 
access to SuperMontage to national securities exchanges that trade 
Nasdaq-listed securities on an unlisted trading privileges basis (``UTP 
Exchanges''). Nasdaq will make these rule changes effective upon the 
launch of SuperMontage.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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    The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

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

    Nasdaq is filing a proposed rule change to NASD Rule 4710 regarding 
voluntary participation by national securities exchanges in the Nasdaq

[[Page 53823]]

Order Collection Facility, commonly known as ``SuperMontage.'' The 
proposed rule change would clarify the terms and conditions upon which 
Nasdaq will grant access to SuperMontage to UTP Exchanges.
    Below is the text of the proposed rule change to the SuperMontage 
rules. Proposed new language is italicized; proposed deletions are in 
brackets.
* * * * *
4710. Participant Obligations in NNMS
    (a) No Change.
    (b) Non-Directed Orders.
    (1) General Provisions--A Quoting Market Participant in an NNMS 
Security shall be subject to the following requirements for Non-
Directed Orders:
    (A) No Change.
    (B) Processing of Non-Directed Orders--Upon entry of a Non-Directed 
Order into the system, the NNMS will ascertain who the next Quoting 
Market Participant in queue to receive an order is (based on the 
algorithm selected by the entering participant, as described in 
subparagraph (b)(B)(i)-(iii) of this rule), and shall deliver an 
execution to Quoting Market Participants that participate in the 
automatic-execution functionality of the system, or shall deliver a 
Liability Order to Quoting Market Participants that participate in the 
order-delivery functionality of the system[; provided however, that the 
system always shall deliver an order (in lieu of an execution) to the 
Quoting Market Participant next in queue when the participant that 
entered the Non-Directed Order into the system is a UTP Exchange that 
does not provide automatic execution against its Quotes/Orders for 
Nasdaq Quoting Market Participants and NNMS Order Entry Firms]. Non-
Directed Orders entered into the NNMS system shall be delivered to or 
automatically executed against Quoting Market Participants' Displayed 
Quotes/Orders and Reserve Size in strict price/time priority, as 
described in the algorithm contained in subparagraph (b)(B)(i) of this 
rule. Alternatively, an NNMS Market Participant can designate that its 
Non-Directed Orders be executed based on a price/time priority that 
considers ECN quote-access fees, as described in subparagraphs 
(b)(B)(ii) of this rule, or executed based on price/size/time priority, 
as described in subparagraph (b)(B)(iii) of this rule.
    (i)-(iv) No Change.
    (C) No Change.
    (D) No Change.
    (2) No Change.
    (c)-(e) No Change.
    (f) UTP Exchanges.
    [Participation in the NNMS by UTP Exchanges is voluntary. If a UTP 
Exchange elects to participate in the system, Nasdaq shall endeavor to 
provide fair and equivalent access to the Nasdaq market for UTP 
Exchanges, as a UTP Exchange provides to its market for Nasdaq Quoting 
Market Participants and NNMS Order Entry Firms. The following 
provisions shall apply to UTP Exchanges that choose to participate in 
the NNMS:]
    Participation in the NNMS by UTP Exchanges is voluntary. If a UTP 
Exchange does not participate in the NNMS System, the UTP Exchange's 
quote will not be accessed through the NNMS, and the NNMS will not 
include the UTP Exchange's quotation for order processing and execution 
purposes.
    A UTP Exchange may voluntarily participate in the NNMS System if it 
executes a Nasdaq Workstation Subscriber Agreement, as amended, for UTP 
Exchanges, and complies with the terms of this subparagraph (f) of this 
rule. The terms and conditions of such access and participation, 
including available functionality and applicable rules and fees, shall 
be set forth in and governed by the Nasdaq Workstation Subscriber 
Agreement, as amended for UTP Exchanges. The Nasdaq Workstation 
Subscriber Agreement, as amended for UTP Exchanges may expand but shall 
not contract the rights and obligations set forth in these rules. 
Access to UTP Exchanges may be made available on terms that differ from 
the terms applicable to members but may not unreasonably discriminate 
among similarly-situated UTP Exchanges. The following provisions shall 
apply to UTP Exchanges that choose to participate in the NNMS
    (1) Order Entry--UTP Exchanges that elect to participate in the 
system shall be permitted to enter Directed and Non-Directed Orders 
into the system subject to the conditions and requirements of Rules 
4706. Directed and Non-Directed Orders entered by UTP Exchanges shall 
be processed (unless otherwise specified) as described subparagraphs 
(b) and (c) of this rule.
    (2) Display of UTP Exchange Quotes/Orders in Nasdaq.
    (A) UTP Exchange Principal Orders/Quotes--UTP Exchanges that elect 
to participate in the system shall [be permitted to] transmit to the 
NNMS a single bid Quote/Order and a single offer Quote/Order. Upon 
transmission of the Quote/Order to Nasdaq, the system shall time stamp 
the Quote/Order, which time stamp shall determine the ranking of the 
Quote/Order for purposes of processing Non-Directed Orders. The NNMS 
shall display the best bid and best offer Quote/Order transmitted to 
Nasdaq by a UTP Exchange in the Nasdaq Quotation Montage under the MMID 
for the UTP Exchange, and shall also display such Quote/Order in the 
Nasdaq Order Display Facility as part of the aggregate trading interest 
when the UTP Exchange's best bid/best offer Quote/Order falls within 
the best five price levels in Nasdaq on either side of the market.
    (B) UTP Exchange Agency Quotes/Orders.
    (i) A UTP Exchange that elects to participate in the system may 
transmit to the NNMS Quotes/Orders at a single as well as multiple 
price levels that meet the following requirements: are not for the 
benefit of a broker and/or dealer that is with respect to the UTP 
Exchange a registered or designated market maker, dealer or specialist 
in the security at issue; and are designated as Non-Attributable 
Quotes/Orders (``UTP Agency Order/Quote'').
    (ii) Upon transmission of a UTP Agency Quote/Order to Nasdaq, the 
system shall time stamp the order, which time stamp shall determine the 
ranking of these Quote/Order for purposes of processing Non-Directed 
Orders, as described in subparagraph (b) of this rule. A UTP Agency 
Quote/Order shall not be displayed in the Nasdaq Quotation Montage 
under the MMID for the UTP Exchange. Rather, UTP Agency Quotes/Orders 
shall be reflected in the Nasdaq Order Display Facility and Nasdaq 
Quotation Montage in the same manner in which Non-Attributable Quotes/
Orders from Nasdaq Quoting Market Participants are reflected in Nasdaq, 
as described in Rule 4707(b)(2).
    (3) Non-Directed Order Processing--[(a)] UTP Exchanges that elect 
to participate in the system [and that agree to] shall be required to 
provide automatic execution against their Quotes/Orders for Nasdaq 
Quoting Market Participants and NNMS Order Entry Firms, shall accept an 
execution of an order up to the size of the UTP Exchange's displayed 
Quote/Order, and shall have Non-Directed Orders they enter into the 
system processed as described in subparagraph (b) of this rule.
    [(b) UTP Exchanges that elect to participate in the system but that 
do not provide automatic execution against their Quotes/Orders for 
Nasdaq Quoting Market Participants and NNMS Order Entry Firms, shall 
accept the delivery of an order up to the size of the UTP Exchange's 
Displayed Quote/Order, and shall have Non-Directed Orders they enter 
into the system processed as described in subparagraph (b) of this 
rule. If such a UTP Exchange declines

[[Page 53824]]

or partially fills a Non-Directed Order without immediately 
transmitting to Nasdaq a revised Quote/Order that is at a price 
inferior to the previous price, or if such a UTP Exchange fails to 
respond in any manner within 30 seconds of order delivery, the NNMS 
will send the order (or remaining portion thereof) back into the system 
for delivery to the next Quoting Market Participant in queue. The 
system will then move the side of such UTP Exchange's Quote/Order to 
which the declined or partially-filled order was delivered, to the 
lowest bid or highest offer price in Nasdaq, at a size of 100 shares.]
    (4) Directed Order Processing--UTP Exchanges that elect to 
participate in the system shall participate in the Directed Order 
processing as described in subparagraph (c) of this rule.
    (5) Decrementation--UTP Exchanges shall be subject to the 
decrementation procedures described in subparagraph (b) of this rule.
    (6) Scope of Rules--Nothing in these rules shall apply to UTP 
Exchanges that elect not to participate in the system.
* * * * *

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

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    Nasdaq currently anticipates that on July 29, 2002 it will begin 
operating SuperMontage, a proprietary automatic execution and order 
delivery system that will serve as a single point of entry into the 
Nasdaq market. As an independent market, Nasdaq is not obligated to 
provide UTP Exchanges with access to any of Nasdaq's proprietary 
systems. Therefore, subject to SEC approval where necessary, Nasdaq is 
entitled to condition the manner in which it will voluntarily make its 
proprietary systems, including SuperMontage, available to UTP Exchanges 
that choose to use them. Likewise, participation in SuperMontage by an 
independent UTP Exchange is a voluntary action by that exchange. 
Therefore, each UTP Exchange can effectively negotiate at arms-length 
the terms, if any, according to which it will voluntarily participate 
in SuperMontage. Based upon these precepts, Nasdaq is modifying three 
aspects of its approved rules governing UTP Exchanges' voluntary 
participation in SuperMontage.
1. SuperMontage Will Not Access the Quotations of UTP Exchanges That 
Choose Not To Participate in SuperMontage
    Nasdaq is permanently extending to SuperMontage a pilot rule, which 
specifies that if a UTP Exchange elects not to participate in 
SuperSOES,\5\ SuperSOES will not include the UTP Exchange's quotation 
for order processing and execution purposes. The pilot rule first 
became effective, on October 31, 2001, and the pilot rule was extended 
on March 1, 2002 and May 31, 2002.\6\ The language implementing this 
restriction is set forth in NASD Rule 4710(f) above, and it is 
identical to the current rule.
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    \5\ ``SuperSOES'' is the commonly used term to describe Nasdaq's 
current Nasdaq National Market Execution System (``NNMS''). 
SuperMontage is, in effect, Nasdaq's successor to the NNMS.
    \6\ See Release Nos. 34-45047 (Nov. 8, 2001), 66 FR 57496 (Nov. 
15, 2001); 34-45496 (March 1, 2002), 67 FR 10785 (Mar. 8, 2002); and 
34-46016 (May 31, 2002), 67 FR 39457 (June 7, 2002).
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    Establishing SuperMontage as the primary platform for trading 
Nasdaq-listed securities is a critical step in Nasdaq's long-standing 
goal to improve the quality of its market. Nasdaq believes that 
SuperMontage will dramatically increase the speed and efficiency of 
trading in the Nasdaq market, resulting in extremely fast executions 
and corresponding benefits to investors. If, however, a UTP Exchange 
chose to access Nasdaq but was not accessible for automatic executions 
through SuperMontage, there would be a potential for queuing in the 
system that could disrupt and slow the market. To improve the trading 
environment for all of Nasdaq's valued market participants, and to 
avoid potential significant market disruptions, we are amending 
SuperMontage rules to remove non-participating UTP Exchanges from the 
SuperMontage execution and order processing function.
    UTP Exchanges that choose this option would submit their quotes 
directly to the securities information processor (``SIP''), not 
Nasdaq's market systems, and would be accessible by telephone as 
contemplated in the Nasdaq UTP Plan \7\ or via a mutually agreed-upon 
alternative bilateral link created by the UTP Exchange.\8\ Nasdaq 
welcomes the opportunity to explore the possibility of bilateral 
linkages, which Nasdaq anticipates could be formed via separate 
agreement between Nasdaq and the exchange(s).
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    \7\ This is the method that the Cincinnati Stock Exchange uses 
for trading Nasdaq securities under the Nasdaq UTP Plan.
    \8\ This proposal would not preclude a UTP Exchange from forming 
a link with Nasdaq outside Nasdaq's market system or the parameters 
of a NMS plan.
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2. UTP Exchanges That Wish To Participate in SuperMontage Must Do So 
Via Automatic Execution
    Nasdaq will also continue in a SuperMontage environment the 
requirement that UTP Exchanges that wish to participate in Nasdaq 
execution systems do so via automatic execution. The Commission 
approved this requirement with respect to Nasdaq's current execution 
systems, SuperSOES and the SelectNet Service.\9\ This language 
implementing this requirement is contained in NASD Rule 4710(b)(1)(B) 
and 4710(f)(3). This language differs from the current rule, but the 
requirement will operate in SuperMontage precisely as it does today in 
SuperSOES and SelectNet.
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    \9\ See Release No. 34-45704 (Apr. 8, 2002), 67 FR 18278 (Apr. 
15, 2002).
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    Nasdaq favors this rule for a number of reasons. The volume and 
speed at which trading occurs in Nasdaq demands that all participants' 
quotes/orders be available for automated execution. Market participants 
demand and require the ability to access liquidity at the best prices 
virtually instantaneously. Nasdaq believes that SuperMontage will be a 
significant improvement over prior Nasdaq execution systems, and that 
it will provide market participants faster executions and higher fill 
rates. Although order delivery (previously offered through SelectNet)--
which requires an affirmative response in order to consummate a trade--
was adequate as the primary means of UTP Exchange access in the past, 
Nasdaq can no longer offer this functionality as an option to UTP 
Exchanges. Indeed, automatic execution has become the primary means of 
accessing market makers quotes in Nasdaq.
    Participation in SuperMontage by UTP Exchanges is a voluntary 
action by each exchange. Nasdaq is not obligated to provide UTP 
Exchanges with access to any of Nasdaq's proprietary systems. 
Therefore, it is entirely appropriate for Nasdaq to limit UTP Exchange 
access to

[[Page 53825]]

Nasdaq's most efficient system. Nasdaq's voluntary action, designed to 
improve efficiency and maintain an orderly market, should not become an 
opportunity for a Nasdaq competitor to harm the ability of Nasdaq to 
improve its markets.
3. UTP Exchanges That Choose To Use SuperMontage Must Execute an 
Agreement Governing the Terms of That Usage
    Nasdaq hopes to enter into arms-length agreements with national 
securities exchanges governing their participation in SuperMontage, 
including the functionality and pricing involved. Nasdaq believes it is 
essential that all UTP Exchanges that use Nasdaq proprietary systems 
execute a contract defining the terms and conditions of such use, which 
may be different from the terms and conditions imposed on Nasdaq 
members.\10\ It is essential for preserving the integrity of Nasdaq's 
proprietary systems that those self-regulatory organizations that use 
those systems agree to ensure that their members (over which Nasdaq 
typically has no direct authority) use them in a manner that is 
consistent with Nasdaq's systems requirements.
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    \10\ Nasdaq does not impose a monthly fee for access to the UTP 
Interface. The UTP Interface is installed and maintained by an 
independent vendor.
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    Similarly, Nasdaq will make SuperMontage available to UTP exchanges 
on the basis of contractually agreed charges for such use. Such charges 
may be different than the charges that Nasdaq members pay for 
SuperMontage, exactly as the Commission permitted Nasdaq to charge UTP 
exchanges more for access to ACT than Nasdaq charges its members.\11\ 
Nasdaq participants have paid for the maintenance and development of 
Nasdaq execution systems, such as SuperMontage, over the course of more 
than two decades. Charging UTP exchanges or other non-members a higher 
rate than members for these services reflects the fact that the Nasdaq 
members have already borne the costs to build and enhance those 
services over time.
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    \11\ See Release No. 34-45702 (April 5, 2002); 67 FR 18279 
(April 15, 2002) (approving SR-NASD-2002-35).
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    The fact that the charges are set through arms-length contract 
negotiations with UTP exchanges allows for the flexibility to address 
the myriad ways in which different UTP Exchanges may wish to 
voluntarily participate in SuperMontage. The ability to enter into 
separately negotiated contracts gives UTP Exchanges and Nasdaq the 
ability to tailor contracts to an exchange's specific needs and 
business model. The rule language, contained in NASD Rule 4710(f), is 
intended to expand the scope of functionality available to UTP 
Exchanges beyond that included in the approved rules. NASD Rule 4710(f) 
also sets out the minimum obligations of a UTP Exchange that wishes to 
participate in Nasdaq. The Nasdaq Workstation Subscriber Agreement, as 
amended for UTP Exchanges may expand but shall not contract the rights 
and obligations set forth in these rules. While Nasdaq may make 
SuperMontage access available to UTP Exchanges on terms that differ 
from the terms applicable to members, Nasdaq is aware of its obligation 
to not unreasonably discriminate among similarly situated national 
securities exchanges.
2. Statutory Basis
    Nasdaq believes that the proposed extension of this pilot is 
consistent with the provisions of Section 15A of the Act,\12\ in 
general and with Section 15A(b)(6) of the Act,\13\ in particular, in 
that the proposal is designed to facilitate 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. In particular, Nasdaq believes that 
modifying the manner in which UTP Exchanges voluntarily participate in 
SuperMontage is necessary for the fair and orderly operation of Nasdaq.
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    \12\ 15 U.S.C. 78o-3.
    \13\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

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

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

    Because the foregoing proposed rule change does not (i) 
significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \14\ and Rule 19b-
4(f)(6) thereunder.\15\ At any time within 60 days of the filing of the 
proposed rule change, the Commission may summarily abrogate the 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.
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    \14\ 15 U.S.C. 78s(b)(3)(A).
    \15\ 17 CFR 240.19b-4(f)(6).
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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-2002-91 and 
should be submitted by September 9, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-20976 Filed 8-16-02; 8:45 am]
BILLING CODE 8010-01-P