[Federal Register Volume 67, Number 203 (Monday, October 21, 2002)]
[Notices]
[Pages 64685-64687]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26687]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46645; File No. SR-NASD-2002-144]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by National Association of 
Securities Dealers, Inc. Relating to Directed Orders in the Nasdaq 
Order Collection and Display Facility (``NNMS'' or ``SuperMontage'')

October 10, 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 October 9, 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. Nasdaq filed 
the proposal pursuant to Section 19(b)(3)(A) of the Act \3\ and Rule 
19b-4(f)(6) thereunder,\4\ which renders the proposal effective upon 
filing with the Commission.\5\ The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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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).
    \5\ Nasdaq asked the Commission to waive the 5-day pre-filing 
notice requirement and the 30-day operative delay. See Rule 19b-
4(f)(6)(iii). 17 CFR 240.19b-4(f)(6)(iii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is filing a proposed rule change to modify the Directed 
Order process in Nasdaq's future Order Display and Collector Facility 
(``SuperMontage''). The text of the proposed rule changes follows.
    Proposed new language is underlined; proposed deletions are in 
brackets.
* * * * *

4706. Order Entry Parameters

    (a) No Change.

[[Page 64686]]

    (b) Directed Orders: A participant may enter a Directed Order into 
the NNMS to access a specific Attributable Quote/Order displayed in the 
Nasdaq Quotation Montage, subject to the following conditions and 
requirements:
    (1) Unless the Quoting Market Participant to which a Directed Order 
is being sent has indicated that it wishes to receive Directed Orders 
that are Liability Orders, a Directed Order must be a Non-Liability 
Order, and as such, at the time of entry must be designated as:
    (A) An ``All-or-None'' order (``AON'') that is at least one normal 
unit of trading (e.g. 100 shares) in excess of the Attributable Quote/
Order of the Quoting Market Participant to which the order is directed; 
or
    (B) A ``Minimum Acceptable Quantity'' order (``MAQ''), with a MAQ 
value of at least one normal unit of trading in excess of Attributable 
Quote/Order of the Quoting Market Participant to which the order is 
directed. [Nasdaq will append an indicator to the quote of a Quoting 
Market Participant that has indicated to Nasdaq that it wishes to 
receive Directed Orders that are Liability Orders.]
    (C) A Directed Order that is entered at a price that is inferior to 
the Attributable Quote/Order of the Quoting Market Participant to which 
the order is directed.
    Nasdaq will append an indicator to the quote of a Quoting Market 
Participant that has indicated to Nasdaq that it wishes to receive 
Directed Orders that are Liability Orders.
    (2) No Change.
    (3) No Change.
    (c) through (f) 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 statutory 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 has long intended the SuperMontage Directed Order process to 
perform essentially the same function that SelectNet performs today. 
Accordingly, Nasdaq designed the SuperMontage Directed Order process to 
be a negotiation process primarily for non-liability orders, with the 
exception of Nasdaq market makers that affirmatively opt to accept 
Directed Orders on a liability basis. For example, SuperMontage 
participants will be required to designate Directed Orders as ``All-or-
None'' or Minimum Acceptable Quantity'' and to enter such orders for 
100 shares greater than the receiving Quoting Market Participant's 
displayed quote, just as they must do in SelectNet today. Nasdaq has 
repeatedly stated its intention that SuperMontage Directed Orders 
mirror SelectNet preferenced orders, as evidenced by how closely it 
modeled future NASD Rule 4706(b) governing SuperMontage on current NASD 
Rule 4720(c) governing SelectNet.
    In July of 2001, Nasdaq filed, on an immediately effective basis, a 
proposal that allows for the entry of preferenced SelectNet orders to 
NNMS market makers if such orders are entered containing prices that 
are inferior to the quoted bid and/or offers to which they are 
directed.\6\ For example, in the situation where an NNMS market maker 
is quoting 20.00 bid and 20.03 offer, a market participant would be 
allowed to preference that market maker with either an order to sell at 
20.01 or more, or an order to buy at 20.02 or less. These orders are 
priced at levels that would not obligate the receiving market maker to 
execute them under current firm quote standards. Therefore, NNMS market 
makers may choose to either ignore such orders or negotiate with the 
sending party to reach an agreement that would allow a trade to take 
place.\7\
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    \6\ See Exchange Act Release No. 44506 (July 3, 2001), 66 FR 
36020 (July 10, 2001).
    \7\ Market participants executing transactions as the result of 
such messages remain obligated to protect customer limit orders they 
hold in conformity with NASD IM-2110-2 (Trading Ahead of Customer 
Limit Orders).
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    The concept of entering preferenced orders at prices inferior to 
the recipient's quoted price was not controversial when filed for 
implementation with SuperSOES in July of 2001. Market participants are 
accustomed to this functionality and have used it in compliance with 
current NASD Rule 4720. Nasdaq proposes to incorporate the same 
functionality into the SuperMontage Directed Order process, which will 
essentially mirror the current functionality of SelectNet.
    2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\8\ in general and with 
section 15A(b)(6) of the Act,\9\ in particular, in that 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.
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    \8\ 15 U.S.C. 78o-3.
    \9\ 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

    Written comments were neither solicited nor received.

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)\10\ of the Act and 
Rule 19b-4(f)(6) thereunder.\11\ At any time within 60 days of the 
filing of the proposed rule change, 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,

[[Page 64687]]

or otherwise in furtherance of the purposes of the Act.
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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    Nasdaq has requested that the Commission waive the 5-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. In particular, the proposed rule change provides 
functionality for the SuperMontage Directed Order process that is 
equivalent to functionality currently available in SelectNet. In 
addition, acceleration of the operative date will allow the proposed 
rule change to become operative with Nasdaq's implementation of the 
SuperMontage on October 14, 2002. For these reasons, the Commission 
waives both the 5-day pre-filing requirement and the 30-day operative 
waiting period.\12\
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    \12\ 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).
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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-2002-144 should 
be submitted by November 12, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-26687 Filed 10-18-02; 8:45 am]
BILLING CODE 8010-01-P