[Federal Register Volume 67, Number 172 (Thursday, September 5, 2002)]
[Notices]
[Pages 56862-56863]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-22574]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 46429; File No. SR-NASD-99-53]


Order With Respect to the Implementation of NASDAQ'S SuperMontage 
Facility

    On January 19, 2001, the Commission conditionally approved a 
proposed rule change submitted by the National Association of 
Securities Dealers, Inc. (the ``NASD''), on behalf of The Nasdaq Stock 
Market (``Nasdaq''), that would establish a new order display and 
collection facility for Nasdaq-listed securities (``SuperMontage'').\1\ 
To address the concerns expressed by several market participants that 
certain Commission rules would effectively make their participation in 
the SuperMontage mandatory,\2\ the Commission conditioned its approval 
of the SuperMontage on the implementation of an alternative display 
facility (``ADF'') by the NASD.
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    \1\ Exchange Act Release No. 43863 (January 19, 2001), 66 FR 
8020 (January 26, 2001) (File No. SR-NASD-99-53) (the ``SuperMontage 
Approval Order'').
    \2\ Rules 11Ac1-1(c)(5) and 11Ac1-4 under the Securities 
Exchange Act of 1934 (the ``Exchange Act'') permit a market maker or 
specialist to place a better-priced proprietary or customer limit 
order with an electronic communications network (``ECN'') 
anonymously without updating its public quote to reflect the better-
priced order, as long as the ECN displays the order in the public 
market through a self-regulatory organization (``SRO'') and provides 
equivalent access to such order. 17 CFR 240.11Ac1-1(c) and 
240.11Ac1-4 (the ``Order Handling Rules''). Regulation ATS requires 
alternative trading systems (``ATSs''), including ECNs, that trade 
5% or more of the average daily trading volume in an exchange-or 
Nasdaq-listed security to display and provide execution access to 
their quotes through an SRO. 17 CFR 242.301(b).
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    Specifically, the Commission conditioned its approval of the 
SuperMontage on 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 securities 
information processor (``SIP'') for Nasdaq-listed securities will 
identify the ATS, ECN, or market maker source of the quote;\3\ and
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    \3\ The Commission stated in the SuperMontage Approval Order 
that it would require Nasdaq and the exchanges trading Nasdaq 
securities on an unlisted trading privileges (``UTP'') basis to 
renegotiate existing intermarket plans to provide for a new 
exclusive SIP or multiple non-exclusive SIPs for Nasdaq securities. 
The Commission further stated that if the revised plan provided for 
a new exclusive SIP, the operator of the new processor should not be 
a Plan participant except under certain conditions. SuperMontage 
Approval Order, 66 FR at 8052-55.
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    (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.\4\
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    \4\ Id., 66 FR at 8053-54.
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    On July 24, 2002, the Division of Market Regulation approved, 
pursuant to delegated authority, operation of the ADF as a pilot 
program for nine months.\5\ The ADF pilot program permits registered 
market makers and registered ECNs to display their best-priced quotes 
or customer limit orders in Nasdaq-listed securities through the NASD. 
ADF market participants are required to provide other ADF market 
participants with direct electronic access to their quote, and to 
provide all other members of the NASD or a national securities exchange 
with the option to obtain direct electronic access or indirect 
electronic access through private linkages. The ADF also serves as a 
trade reporting and trade comparison facility. The ADF will therefore 
allow market participants to satisfy their order display and execution 
access obligations under the Order Handling Rules and Regulation ATS. 
The NASD staff has indicated that several ECNs have expressed an 
interest in fulfilling their quote display obligations through the ADF 
and are in varying stages of adapting their systems to participate in 
the ADF. \6\
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    \5\ Exchange Act Release No. 46249 (July 24, 2002), 67 FR 49822 
(July 31, 2002). The NASD filed a proposal to establish an ADF on 
December 7, 2001. Exchange Act Release No. 45156 (December 14, 
2001), 67 FR 388 (January 3, 2002). The NASD subsequently filed an 
amendment to the proposal on May 24, 2002, to respond to issues 
raised by commenters. Exchange Act Release No. 45991 (May 28, 2002), 
67 FR 39476 (June 7, 2002).
    \6\ Market Participants are not required to use either the ADF 
or SuperMontage to quote or report trades. For instance, beginning 
the week of August 5, 2002, the Cincinnati Stock Exchange has 
provided Island ECN (``Island'') with the ability to represent 
orders in certain Nasdaq securities in the national best bid or 
offer. As a result, Island has indicated that it may choose not to 
represent customer limit orders in SuperMontage. See Notice to 
Island Subscribers dated August 5, 2002, available at http://island.com/prodserv/developers/resources/emailarchive/20020805.asp.

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[[Page 56863]]

    In addition, on July 1, 2002, Nasdaq launched a new technology 
platform (the ``Internal SIP'') on which Nasdaq will perform its duties 
as the exclusive SIP for the Nasdaq UTP Plan until a new securities 
information processor is chosen.\7\ Quotation information provided by 
ADF market participants will be available through two Internal SIP 
feeds. The Internal SIP will disseminate the consolidated best bid and 
offer of the ADF, along with the best bid and offer of each UTP 
Exchange and Nasdaq market participant, through the UTP Quotation Data 
Feed. In addition, the Internal SIP will disseminate the individual 
quotations of each broker or dealer quoting in the NASD ADF via the OTC 
Montage Data Feed (OMDF).
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    \7\ See Letter from Edward S. Knight, Executive Vice President 
and General Counsel, Nasdaq, to Robert L.D. Colby, Deputy Director, 
Division of Market Regulation, Commission (June 28, 2002).
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    Based on these developments, the Commission believes that 
participation in SuperMontage will be voluntary, because market makers, 
exchange specialists, ECNs and ATSs will have alternative venues in 
which to display their quotes, including the ADF.
    Certain market participants have indicated that they are firmly 
committed to using the ADF as their order collection and display 
facility but require further time to adapt and test their systems to 
participate through the ADF. To prevent any unfairness, the Commission 
believes that SuperMontage should begin operation on October 11, 2002, 
assuming that within five business days from the entry of this Order, 
one or more market participants certifies, under oath, that such entity 
at the time of the oath intends to use ADF as its primary order 
collection and display facility for a significant portion of its 
business in Nasdaq securities, and provides a list of the Nasdaq 
securities for which it currently intends to post quotes on the ADF. In 
the absence of any such certification, SuperMontage shall become 
effective immediately after the fifth business day of the entry of this 
order. Accordingly, subject to the certification process, the 
Commission finds that the implementation of the ADF satisfies the 
conditions stated in the SuperMontage Approval Order. As referenced in 
Amendment No. 5 to the SuperMontage proposal, and consistent with 
subsequent conversations with the Commission staff, we understand that 
the NASD will roll out SuperMontage over a six-week period.
    The Commission continues to review Nasdaq's pending application to 
register as a national securities exchange. The entry of this Order 
does not address or resolve the issues presented in that application, 
does not make any findings with respect thereto, and does not suggest 
what, if any, future actions the Commission may take with regard to 
that application.

    By the Commission.

    Dated: August 29, 2002.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-22574 Filed 9-4-02; 8:45 am]
BILLING CODE 8010-01-P