[Federal Register Volume 67, Number 212 (Friday, November 1, 2002)]
[Notices]
[Pages 66685-66689]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-27806]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46729; File No. S7-24-89]


Joint Industry Plan; Order Granting Partial Temporary Approval of 
Amendment No. 13 of the Reporting Plan for Nasdaq-Listed Securities 
Traded on Exchanges on an Unlisted Trading Privilege Basis, Submitted 
by the National Association of Securities Dealers, Inc., the Boston 
Stock Exchange, Inc., the Chicago Stock Exchange, Inc., the Cincinnati 
Stock Exchange, Inc., the Pacific Exchange, Inc., the American Stock 
Exchange LLC, and the Philadelphia Stock Exchange, Inc.

October 25, 2002.

I. Introduction

    On May 31, 2002, the Cincinnati Stock Exchange, Inc. (``CSE'') on 
behalf of itself and the National Association of Securities Dealers, 
Inc. (``NASD''), the American Stock Exchange LLC (``Amex''), the Boston 
Stock Exchange, Inc. (``BSE''), the Chicago Stock Exchange, Inc. 
(``CHX''), the Pacific Exchange, Inc. (``PCX''), and the Philadelphia 
Stock Exchange, Inc. (``PHLX'') (hereinafter referred to collectively 
as ``Participants''),\1\ as members of the operating committee 
(``Operating Committee'' or ``Committee'')\2\ of the Plan submitted to 
the Securities and Exchange Commission (``SEC'' or ``Commission'') a 
proposal to amend the Plan, pursuant to Rule 11Aa3-1 and Rule 11Aa3-2 
\3\ under the Securities Exchange Act of 1934 (``Act'' or ``Exchange 
Act''). The proposal represents the 13th amendment (``13th Amendment'') 
made

[[Page 66686]]

to the Plan and reflects changes unanimously adopted by the Committee. 
Notice of the proposed 13th Amendment was published in the Federal 
Register on July 5, 2002.\4\
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    \1\ The CSE was elected chair of the Operating Committee for 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 (``Nasdaq UTP Plan'' or ``Plan'') 
by the Participants.
    \2\ Among other things, the 13th Amendment proposes to add the 
Nasdaq Stock Market, Inc. (``Nasdaq'') as a Participant. The 
Committee is made up of all the Participants. As discussed below, 
the Category 1 amendments of the 13th Amendment propose adding 
Nasdaq as a Participant and this approval order does not take action 
with respect to the Category 1 amendments.
    \3\ 17 CFR 240.11Aa3-1 and 17 CFR 240.11Aa3-2.
    \4\ Securities Exchange Act Release No. 46139 (June 28, 2001 
[sic]), 67 FR 44888 (``13th Amendment Notice'').
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    Through the 13th Amendment Notice, the Commission granted temporary 
summary effectiveness to a portion of the 13th Amendment, granted an 
exemption under Rule 11Aa3-2(f)\5\ from compliance with Section VI.C.1. 
of the Plan as required by Rule 11Aa3-2(d),\6\ and published the 13th 
Amendment Notice to solicit comments from interested persons. The 
Commission received one comment on the proposed 13th Amendment.\7\
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    \5\ 17 CFR 240.11Aa3-2(f).
    \6\ 17 CFR 240.11Aa3-2(d).
    \7\ See letter from Sam Guidetti, Senior Vice President & Chief 
Compliance Officer, BrokerageAmerica, to Jonathan Katz, Secretary, 
Commission, dated September 17, 2002.
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    As discussed in the 13th Amendment Notice, proposed amendments to 
the Plan have been segregated into four categories: (1) Category 1, 
``Effective Upon Nasdaq's Exchange Registration;'' (2) Category 2, 
``Effective Upon Launch of the Internal SIP;'' (3) Category 3, 
``Effective Upon End of Parallel Period--Elimination of the Legacy 
SIP;'' and (4) Category 4, ``Timing Not An Issue.'' The amendments 
detailed in Category 2 were granted summary effectiveness through the 
13th Amendment Notice so as to allow the target launch date for the new 
Internal Securities Information Processor (``SIP'') data feeds to be 
met.\8\ The summary effectiveness expires on October 26, 2002.\9\
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    \8\ In November of 2001, Nasdaq began implementing the 
``Internal SIP'' project. The Internal SIP is a separate technology 
infrastructure within Nasdaq that will perform the functions of the 
SIP for Nasdaq-listed securities. When the Internal SIP is in place, 
Nasdaq will be able to separate its functions as a stock market from 
its functions as a SIP for the Plan.
    \9\ Pursuant to Rule 11Aa3-2(c)(4), 17 CFR 240.11Aa3-2(c)(4), 
summary effectiveness granted to national market system plans (or 
provisions thereof) may not exceed 120 days in length.
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    In addition, the Commission granted partial temporary approval to 
the 13th Amendment only with respect to extension of the expiration 
date of the Plan itself. The partial temporary approval extended the 
expiration date of the Plan through August 19, 2003.\10\ As explicitly 
noted in the Date Extension Approval Order, the Commission was not 
approving the Category 1, 2, 3, or 4 amendments, but would address such 
amendments through separate action.
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    \10\ Securities Exchange Act Release No. 46381 (August 19, 
2002), 67 FR 54687 (August 23, 2002) (``Date Extension Approval 
Order'').
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    This order approves the amendments detailed in Categories 2, 3, and 
4 on a pilot basis through August 19, 2003 to be coterminous with the 
expiration date set by the Date Extension Approval Order. In addition, 
this order continues the exemption under Rule 11Aa3-2(f)\11\ from 
compliance with Section VI.C.1. of the Plan as required by Rule 11Aa3-
2(d),\12\ which exemption was granted through the 13th Amendment 
Notice.
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    \11\ 17 CFR 240.11Aa3-2(f).
    \12\ 17 CFR 240.11Aa3-2(d).
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    This order does not approve those amendments detailed in Category 
1. The Commission intends to address those amendments detailed in 
Category 1 through separate action when the Commission acts on the 
Nasdaq exchange registration application.\13\
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    \13\ Pursuant to Rule 11Aa3-2(c), 17 CFR 240.11Aa3-2(c), the 
Commission must take action within 120 days of the date of 
publication of notice of filing of amendment in the Federal Register 
unless the sponsors of such amendment consent to an extension. The 
Commission notes that the sponsors of the 13th Amendment have given 
such consent with respect to amendment Category 1 based upon the 
Category 1 amendments being contingent upon a subsequent trigger 
event. See letter from Jeffrey T. Brown, Chairman, Operating 
Committee, to Jonathan G. Katz, Secretary, Commission, dated May 30, 
2002 (``13th Amendment Filing'').
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II. Background

    The Plan governs the collection, consolidation, and dissemination 
of quotation and transaction information for Nasdaq/National Market 
(``Nasdaq/NM'') and Nasdaq SmallCap securities listed on Nasdaq and 
traded on an exchange pursuant to unlisted trading privileges 
(``UTP'').\14\ The Plan provides for the collection from Plan 
Participants, and the consolidation and dissemination to vendors, 
subscribers and others, of quotation and transaction information in 
``eligible securities.'' The Plan contains various provisions 
concerning its operation, including: Implementation of the Plan; Manner 
of Collecting, Processing, Sequencing, Making Available and 
Disseminating Last Sale Information; Reporting Requirements (including 
hours of operation); Standards and Methods of Ensuring Promptness, 
Accuracy and Completeness of Transaction Reports; Terms and Conditions 
of Access; Description of Operation of Facility Contemplated by the 
Plan; Method and Frequency of Processor Evaluation; Written 
Understandings of Agreements Relating to Interpretation of, or 
Participation in, the Plan; Calculation of the Best Bid and Offer 
(``BBO''); Dispute Resolution; and Method of Determination and 
Imposition, and Amount of Fees and Charges.
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    \14\ Section 12 of the Act generally requires an exchange to 
trade only those securities that the exchange lists, except that 
Section 12(f) of the Act permits UTP under certain circumstances. 
For example, Section 12(f) of the Act, among other things, permits 
exchanges to trade certain securities that are traded over-the-
counter (``OTC/UTP''), but only pursuant to a Commission order or 
rule. For a more complete discussion of the Section 12(f) 
requirement, see November 1995 Extension Order, infra note 16.
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    The Commission originally approved the Plan on a pilot basis on 
June 26, 1990.\15\ The parties did not begin trading until July 12, 
1993, accordingly, the pilot period commenced on July 12, 1993. The 
Plan has since been in operation on an extended pilot basis.\16\
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    \15\ See Securities Exchange Act Release No. 28146, 55 FR 27917 
(July 6, 1990) (``1990 Plan Approval Order'').
    \16\ See Securities Exchange Act Release Nos. 34371 (July 13, 
1994), 59 FR 37103 (July 20, 1994); 35221 (January 11, 1995), 60 FR 
3886 (January 19, 1995); 36102 (August 14, 1995), 60 FR 43626 
(August 22, 1995); 36226 (September 13, 1995), 60 FR 49029 
(September 21, 1995); 36368 (October 13, 1995), 60 FR 54091 (October 
19, 1995); 36481 (November 13, 1995), 60 FR 58119 (November 24, 
1995) (``November 1995 Extension Order''); 36589 (December 13, 
1995), 60 FR 65696 (December 20, 1995); 36650 (December 28, 1995), 
61 FR 358 (January 4, 1996); 36934 (March 6, 1996), 61 FR 10408 
(March 13, 1996); 36985 (March 18, 1996), 61 FR 12122 (March 25, 
1996); 37689 (September 16, 1996), 61 FR 50058 (September 24, 1996); 
37772 (October 1, 1996), 61 FR 52980 (October 9, 1996); 38457 (March 
31, 1997), 62 FR 16880 (April 8, 1997); 38794 (June 30, 1997), 62 FR 
36586 (July 8, 1997); 39505 (December 31, 1997), 63 FR 1515 (January 
9, 1998); 40151 (July 1, 1998), 63 FR 36979 (July 8, 1998); 40896 
(December 31, 1998), 64 FR 1834 (January 12, 1999); 41392 (May 12, 
1999), 64 FR 27839 (May 21, 1999) (``May 1999 Approval Order''); 
42268 (December 23, 1999), 65 FR 1202 (January 6, 2000); 43005 (June 
30, 2000), 65 FR 42411 (July 10, 2000); 44099 (March 23, 2001), 66 
FR 17457 (March 30, 2001); 44348 (May 24, 2001), 66 FR 29610 (May 
31, 2001); 44552 (July 13, 2001), 66 FR 37712 (July 19, 2001); 44694 
(August 14, 2001), 66 FR 43598 (August 20, 2001); 44804 (September 
17, 2001), 66 FR 48299 (September 19, 2001); 45081 (November 19, 
2001), 66 FR 59273 (November 27, 2001).
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III. Description and Purpose of the Category 2, 3, and 4 Amendments

    The complete text of the Plan, as amended, was published in the 
Federal Register.\17\ The following is a summary of the changes made by 
the 13th Amendment to the Plan by the Category 2, 3, and 4 amendments. 
As discussed above, only those amendments described in Categories 2, 3, 
and 4 are being approved on a pilot basis by this order.
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    \17\ See 13th Amendment Notice, supra note 4.
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Category 2 Amendments: Effective Upon Launch of the Internal SIP

    1. Section III.I. of the Plan, which defines ``UTP Quote Data 
Feed,'' is amended to reflect that the Processor will replace the Level 
1 Service as it currently exists. In its place, the

[[Page 66687]]

Processor will disseminate a data feed containing the National Best Bid 
and Offer quotations, size and market center identifier, as well as the 
Best Bid and Offer quotations, size and market center identifier from 
each individual Participant in Eligible Securities.
    2. Section III.N. of the Plan defines the ``OTC Montage Data 
Feed,'' which will be launched as a new data feed for the dissemination 
of NASD ADF Participant quotations with the launch of the Internal SIP. 
However, as stated above in Category 1.7, NQDS will not be fully 
eliminated as a data feed disseminated by the Processor until Nasdaq is 
registered as an exchange.
    3. Section III.K. of the Plan changes the name of the Nasdaq Last 
Sale Information Service to ``UTP Trade Data Feed,'' but makes no 
changes to the data elements contained in that data feed. While this 
change was effective upon launch of the Internal SIP, the Processor 
continues to disseminate the current Nasdaq Last Sale Information 
Service for a three-month parallel period to enable market data vendors 
to have a smooth transition to the new feed.\18\
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    \18\ See note 24 infra.
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    4. Section III.R. of the Plan, which defines ``Quotation 
Information'' is amended to reflect that the NASD ADF will send 
individual market participant information to the Processor. It is also 
amended to clarify that only displayed quotation sizes are included in 
the definition and that market center identifiers are also included.
    5. Section VI.B. (Collection and Consolidation of Information) has 
been amended to clarify the devices available for sending information 
to the Processor and the data feeds which the Processor shall 
disseminate, for as long as Nasdaq remains the Processor. While this 
change was effective upon launch of the Internal SIP, the Processor 
will continue to disseminate the legacy data feeds for a three-month 
parallel period to enable market data vendors to have a smooth 
transition to the new feed.\19\
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    \19\ Id.
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    6. Section VI.C. (Dissemination of Information) has been amended to 
identify the data feeds that the Processor shall disseminate. While 
this change was effective upon launch of the Internal SIP, the 
Processor continues to disseminate the current data feeds to enable 
market data vendors to have a smooth transition to the new feed.\20\ In 
addition, the Processor will continue to disseminate Nasdaq individual 
market center quotes until Nasdaq registers as an exchange.
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    \20\ Id.
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    7. Section VI.C.1. (Best Bid and Offer) is amended to change the 
method of calculating the national best bid and offer from price/time/
size to price/size/time and to establish a precise methodology for 
calculation.
    8. Section VI.C.3. is renamed ``Quotation Data Stream,'' and 
amended to reflect the change in definition of the UTP Quote Data Feed 
contained in Section III.I. of the Plan. While this change was 
effective upon launch of the Internal SIP, the Processor continues to 
disseminate the current Level 1 service (``Legacy SIP'') to enable 
market data vendors to have a smooth transition to the new feed.\21\
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    \21\ Id.
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    9. Section VI.C.4. (Transaction Reports) is amended to reflect the 
change in name of the UTP Trade Data Feed contained in Section III.K. 
of the Plan.
    10. Section XI (Hours of Operation) has been amended to change the 
reporting procedures for Participants that execute transactions in 
Eligible Securities outside of the normal trading hours of 9:30 a.m. to 
4:00 p.m. EST.

Category 3: Effective Upon End of Parallel Period--Elimination of the 
Legacy SIP

    1. Section VI.C.1. is amended to reflect that the Processor shall 
no longer carry quotation information from one trading day to the next, 
and that the Processor shall not calculate the best bid and offer for 
any individual Participant, including the NASD.
    2. Section VI.C.1. is also amended to reflect that the Processor 
shall disseminate an internally locked or crossed quotation submitted 
by a single Participant.
    3. Section XVIII.D.3, regarding Price Checks, is eliminated to 
reflect the Operating Committee's agreement that the Processor should 
no longer perform these functions.
    4. Plan Exhibit 1, Paragraph 3(d)(5) is eliminated to reflect that 
MarketWatch costs are no longer eligible Processor Operating Costs, 
contingent upon the elimination of the Processor's ability to perform 
price checks on Participant's trade reports.

Category 4: Timing Not an Issue

    1. Section III.S. of the Plan, which defines ``Regulatory Halt,'' 
is amended to include halts that are called for regulatory problems 
relating to an Eligible Security that should be clarified before 
trading therein is permitted to continue.
    2. Section IV.A. (Operating Committee: Composition) has been 
amended to permit entities that are actively pursuing registration as a 
national securities exchange to participate in Operating Committee 
meetings in limited capacities.
    3. Section IV.C. (Operating Committee: Voting) has been amended to 
eliminate references to events and contingencies that occurred when the 
Plan was first adopted. It also is clarified to reflect the 
Participants' agreement that neither the Plan nor the Operating 
Committee shall have authority in any respect over any Participant's 
proprietary systems.
    4. Section IV.D. (Operating Committee: Meetings) will permit the 
Operating Committee to waive the advance notice requirement contained 
therein.
    5. Section IV.E. has been added to establish an Advisory Committee 
and to define its composition and authority.
    6. Section V.A. (Selection and Evaluation of the Processor: 
Generally) has been amended to eliminate references to events and 
contingencies that occurred when the Plan was first adopted.
    7. Section VI.C. is amended to eliminate references to agreements 
between the NASD and certain foreign exchanges.
    8. Section VI.D. (Immediate Hard Copy Confirmations) is eliminated 
and the remaining subsections of Section VI. are re-lettered.
    9. Section VIII.B. (Transaction Reports) is amended to clarify that 
this Section applies only to transactions between Plan Participants 
pursuant to the Plan, and to eliminate reference to shared computer-to-
computer interfaces.
    10. Section X. is amended to include halts that are called for 
regulatory problems relating to an Eligible Security that should be 
clarified before trading therein is permitted to continue and to state 
that during a halt the Processor shall collect and disseminate 
Transaction Information but shall cease collection and dissemination of 
all Quotation Information.
    11. Section XI.C. is amended to reflect that late trades can be 
reported between the hours of 8:00 a.m. and 6:30 p.m. on the same 
trading day that the transaction occurred.
    12. Section XI.E. governing changes to operating hours, is 
eliminated.
    13. Section XIII (Undertakings by NASD) is eliminated, and 
subsequent sections re-numbered.
    14. Section XXI (Depth of Book Display) is added to reflect the 
Operating Committee's determination that the entity that succeeds 
Nasdaq as the Processor, upon certain specific conditions being met 
through a further

[[Page 66688]]

Plan amendment should have the ability to collect, consolidate, and 
disseminate quotations at multiple price levels beyond the best bid and 
best offer from any Participant that voluntarily chooses to submit such 
quotations. Section XXI states that implementing the depth of book 
display functionality will require a plan amendment that addresses all 
pertinent issues.
    15. Within the body of the 13th Amendment, there are numerous 
``house-keeping'' corrections, including punctuation and renumbering 
changes.

IV. Summary of Comments

    The Commission received one comment letter on the 13th Amendment 
from BrokerageAmerica (``BA'').\22\ BA raised several concerns 
regarding the current Plan-mandated access requirements for Nasdaq 
market makers attempting to access the quotes of exchange specialists 
trading Nasdaq securities pursuant to UTP. BA generally stated its 
belief that exchange specialists trading Nasdaq securities pursuant to 
UTP should be required to provide the same level of connectivity as 
that provided among Nasdaq market makers--electronic auto-execution. To 
support that main point, BA noted five reasons why the Plan-mandated 
connectivity dichotomy is deficient.
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    \22\ See note 7 supra.
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    First, BA stated that the connectivity dichotomy between Nasdaq 
market makers and exchange specialists causes fragmentation and 
inefficiencies that conflict with Congress' intent in establishing the 
national market system (``NMS''). Second, BA argued that the dichotomy 
results in unfair and disorderly functioning of the NMS with respect to 
Nasdaq securities. Third, BA averred that the use of multiple execution 
functionalities for the trading of Nasdaq securities (i.e., the Plan-
mandated telephone access and Nasdaq's proprietary system, SuperSOES) 
conflicts with the unification of the NMS as desired by Congress. 
Fourth, BA argued that the human element in the auction market format 
causes delays in quote updating, which increase Nasdaq market makers' 
market exposure. Finally, BA contended that exchange specialists that 
trade pursuant to UTP are not consistently subject to the Firm Quote 
Rule.\23\ Further, BA argued that, because such specialists are not 
subject to automatic execution, they will act in a manner that disrupts 
the fair and orderly market for trading NNM securities by causing 
extended locked and crossed markets. BA generally states that such 
specialists have the capacity to and as a matter of rational market 
behavior will act in such a disruptive manner.
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    \23\ 17 CFR 240.11Ac1-1.
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V. Discussion

    The Commission finds that the Category 2, 3,\24\ and 4 amendments 
of the 13th Amendment are consistent with the requirements of the Act 
and the rules and regulations thereunder, and, in particular, Section 
11A(a)(1) \25\ of the Act and Rules 11Aa3-1 and 11Aa3-2 thereunder.\26\ 
Section 11A of the Act directs the Commission to facilitate the 
development of a national market system for securities, ``having due 
regard for the public interest, the protection of investors, and the 
maintenance of fair and orderly markets,'' and cites as an objective of 
that system the ``fair competition . . . between exchange markets and 
markets other than exchange markets.'' \27\ When the Commission first 
approved of the Plan on a pilot basis, it found that the Plan ``should 
enhance market efficiency and fair competition, avoid investor 
confusion, and facilitate surveillance of concurrent exchange and OTC 
trading.'' \28\
    The Commission finds that amending the Plan to incorporate the 
amendments detailed in Categories 2, 3, and 4 above furthers these 
goals. The Commission believes the Category 2 and 3 amendments should, 
among other things, further the satisfaction of requirements of the 
SuperMontage approval order \29\ by establishing an Internal SIP that 
is distinct from Nasdaq's other proprietary systems.
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    \24\ Nasdaq plans to sunset the current SIP application 
(``Legacy SIP''), which will trigger specific technical changes in 
the operation of the Internal SIP and the resulting data feeds. At 
such time, the Legacy SIP will no longer function and the Internal 
SIP will be the sole remaining SIP. See 13th Amendment Filing. This 
order approves the Category 3 amendments, but such amendments will 
not be effective and operative until such time as the Legacy SIP is 
no longer operative and the Internal SIP becomes the sole remaining 
SIP. The Commission understands that Nasdaq expects to end the 
parallel period no later than January 5, 2003.
    \25\ 15 U.S.C. 78k-1(a)(1).
    \26\ 17 CFR 240.11Aa3-1 and 17 CFR 240.11Aa3-2.
    \27\ 15 U.S.C. 78k-1(a).
    \28\ 1990 Plan Approval Order, see supra note 17.
    \29\ Securities Exchange Act Release No. 43863 (January 19, 
2001), 66 FR 8020 (January 26, 2001) (File No. SR-NASD-99-53) 
(``SuperMontage Approval Order'').
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    The SuperMontage Approval Order imposed certain requirements upon 
the Participants in order for the Commission to extend the Plan. 
Specifically, the Participants were charged with engaging in good faith 
negotiations to revise the Plan to provide for (i) a fully viable 
alternative exclusive SIP for all Nasdaq securities, or (ii) a fully 
viable alternative non-exclusive SIP.
    Moreover, the Commission imposed a presumption that, if the revised 
Plan provided for an exclusive consolidating SIP, such SIP should not 
be a Plan Participant. The Commission stated that, if a Plan 
Participant were selected to operate such exclusive SIP, there should 
be a further presumption that the Participant-operated SIP must operate 
completely separate from any order matching facility operated by that 
Participant. Such an order matching facility must interact with the 
exclusive SIP on the same terms and conditions as any other market 
center trading Nasdaq listed securities.
    The Commission understands that the Participants are negotiating to 
select a non-Participant technology vendor to serve as an alternative 
exclusive SIP. In the event that a non-Participant technology vendor is 
selected, the Commission notes that the Plan may require further 
amendment.
    The Commission also believes that the Category 4 amendments further 
the goals of the Act by making clarifying changes, deleting provisions 
that no longer apply, and making certain ``house-keeping'' corrections. 
Moreover, the Commission believes that the Category 4 amendments should 
further the satisfaction of requirements of the SuperMontage approval 
order by establishing an Advisory Committee. Finally, the Commission 
believes that the Depth of Book Display provision added by the Category 
4 amendments is a beneficial addition to the Plan as it would increase 
the amount of data disseminated by the SIP for the benefit of investors 
generally.
    The Commission has carefully considered all the issues raised by 
the sole commenter, BA, and is not persuaded. BA essentially argued the 
point that there are fundamental differences between the trading of 
Nasdaq securities by Nasdaq market makers and by human exchange 
specialists trading pursuant to UTP in the traditional auction format. 
BA generally argued that exchange specialists trading Nasdaq securities 
pursuant to UTP should be required to provide the same level of 
connectivity as that provided among Nasdaq market makers--electronic 
automatic execution. To support its main argument, BA described why it 
perceives the Plan-mandated telephone connectivity as being deficient 
and detrimental to the operation of the NMS.
    The Commission notes that a market participant providing automatic 
execution against that market

[[Page 66689]]

participant's quote is not (and has never been) a requirement for 
exchanges to trade Nasdaq issues. Moreover, the Commission has not 
required competitors to participate in a Nasdaq trading facility or 
required Nasdaq to provide access to its trading facilities to its 
competitors. Each of the UTP participants has independently decided 
whether to participate in Nasdaq's automatic execution facility. The 
Commission also notes that providing automatic executions--rather than 
operating an auction market--is not a precondition to competing in 
Nasdaq securities. The very essence of UTP is to permit competition 
among markets and market structures. Requiring one market structure for 
trading Nasdaq securities would defeat this purpose.
    BA argued that the trading of Nasdaq securities pursuant to UTP by 
exchange specialists causes inconsistent application of the Firm Quote 
Rule, 11Ac1-1.\30\ While compliance with the Firm Quote Rule is easier 
to monitor in an automatic execution environment, the Firm Quote Rule 
does not require market participants to be subject to automatic 
execution. Indeed, the Firm Quote Rule has always applied to exchange 
trading as well as over-the-counter trading, and exchanges must monitor 
and enforce compliance with the Firm Quote Rule.
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    \30\ 17 CFR 240.11Ac1-1.
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    BA also argued that the delay in updating quotes by human UTP 
exchange specialists causes UTP exchange specialists' quotes to be 
``not real'' when compared to the quotes of Nasdaq market makers that 
are subject to automatic execution and electronic quote updating. The 
Commission notes that UTP exchange specialists must comply with the 
Firm Quote Rule. It may take longer to receive a fill from an exchange 
specialist trading pursuant to UTP and for such specialist's quote to 
be updated than it takes to receive a fill from a Nasdaq member that is 
subject to automatic execution and for the Nasdaq member's quote to be 
updated. This does not, however, make trading pursuant to UTP under the 
Plan impermissible under the Act and the rules and regulations 
thereunder.

VI. Conclusion

    It is therefore ordered, pursuant to Section 11A of the Act \31\ 
and paragraph (c)(2) of Rule 11Aa3-2,\32\ thereunder, that those 
amendments to the Plan detailed in Category 2, Category 3, and Category 
4 above be, and hereby are, approved on a pilot basis until August 19, 
2003. The Commission also has determined to continue the exemption from 
Rule 11Aa3-2,\33\ regarding the dissemination of multiple BBOs from a 
single Plan Participant \34\ until such time as Nasdaq is registered as 
a national securities exchange.\35\
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    \31\ 15 U.S.C. 78k-1.
    \32\ 17 CFR 240.11Aa3-2(c)(2).
    \33\ 17 CFR 240.11Aa3-2.
    \34\ See 13th Amendment Notice for a more detailed discussion of 
the referenced exemption.
    \35\ The Commission notes that it is not continuing the 
exemption provided under Rule 11Ac1-2, 17 CFR 240.11Ac1-2, regarding 
calculation of the BBO in the 12th Amendment approval order because 
the 13th Amendment has converted the method of calculation of the 
BBO by the Plan SIP from price/time/size to price/size/time 
methodology consistent with Rule 11Ac1-2, 17 CFR 240.11Ac1-2.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\36\
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    \36\ 17 CFR 200.30-3(a)(27).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-27806 Filed 10-31-02; 8:45 am]
BILLING CODE 8010-01-P Y