[Federal Register Volume 67, Number 216 (Thursday, November 7, 2002)]
[Notices]
[Pages 67881-67883]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-28329]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46757; File No. SR-NASD-2002-155]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change to Extend a Pilot That Permits SuperSOES to Trade 
Through the Quotations of UTP Exchanges That Do Not Participate in the 
Nasdaq National Market Execution Service

October 31, 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 31, 2002, the National Association of Securities Dealers, 
Inc. (``NASD''), acting 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 and II below, which Items have been prepared by 
the NASD. The NASD filed the proposal pursuant to section 19(b)(3)(A) 
\3\ of the Act, and Rule 19b-4(f)(6) thereunder,\4\ which renders the 
proposal effective on 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

    There is no new language. The pilot rule language is as follows:
4710. Participant Obligations in NNMS
    (a)-(e) No Change.
    (f) UTP Exchanges.
    (i) A UTP Exchange may voluntarily participate in the NNMS System 
according to the approved rules for the

[[Page 67882]]

NNMS System if it executes a Nasdaq Workstation Subscriber Agreement, 
as amended, for UTP Exchanges.
    (ii) 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.
    (iii) For purposes of this rule the term ``UTP Exchange'' shall 
mean any registered national securities exchange that has unlisted 
trading privileges in Nasdaq-listed securities pursuant to the Joint 
Self-Regulatory Organization Plan Governing the Collection, 
Consolidation and Dissemination Of Quotation and Transaction 
Information For Exchange-Listed Nasdaq/National Market System 
Securities Traded On Exchanges On An Unlisted Trading Privilege Basis 
(``Nasdaq UTP Plan'').

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

    In its filing with the Commission, the NASD 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 \6\
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    \6\ The NASD requested that the Commission correct various 
verbiage inconsistencies and delete extraneous purpose language from 
the proposal. Telephone discussion between Jeffrey S. Davis, 
Associate General Counsel, Nasdaq, and Terri Evans, Assistant 
Director, and Christopher Stone, Attorney, Division of Market 
Regulation, Commission (October 31, 2002).
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    Nasdaq is proposing to extend an existing pilot, which specifies 
that if a UTP Exchange elects not to participate in SuperSOES, 
SuperSOES will not include the UTP Exchange's quotation for order 
processing and execution purposes.\7\ Nasdaq believes that this will be 
the final extension of this pilot for the SuperSOES system because 
Nasdaq anticipates completing its transition to the Nasdaq Order 
Display and Collection Facility, commonly known as ``SuperMontage,'' in 
early December of 2002. Nasdaq seeks to extend the pilot until February 
28, 2003, or until Nasdaq completes the transition of its execution 
systems from SuperSOES to SuperMontage whichever is earlier. Rule 
language effectuating this pilot program is already in place for 
SuperMontage.\8\
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    \7\ The temporary approval of the pilot expires October 31, 
2002. See Exchange Act Release No. 46016 (May 31, 2002), 67 FR 39457 
(June 7, 2002).
    \8\ See Securities Exchange Act Release No. 46343 (August 13, 
2002), 67 FR 53822 (August 19, 2002).
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    Background. On January 14, 2000, the Commission approved a rule 
change to establish the Nasdaq National Market Execution System 
(``NNMS'') and to modify Nasdaq's SelectNet Service with respect to 
Nasdaq National Market (``NNM'') securities.\9\ On July 30, 2001, NNMS 
and the changes to SelectNet were implemented for all NNM issues. As 
approved and implemented, Nasdaq market participants can use two 
systems to trade NNM issues: a reconfigured Small Order Execution 
System (``SOES'')--the NNMS--and a reconfigured SelectNet system. 
SuperSOES is an automated execution system that allows the entry of 
orders for up to 999,999 shares.\10\ By removing the size and capacity 
restrictions from its principal automatic execution system, Nasdaq 
intended for most of the orders executed through Nasdaq's systems to 
migrate to SuperSOES. Consistent with that approach, access to 
SelectNet was limited to certain types of non-liability orders that 
require negotiation with the receiving market participant.\11\
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    \9\ See Exchange Act Release No. 42344 (January 14, 2000), 65 FR 
3987 (January 25, 2000).
    \10\ SOES was limited to small agency orders for customers.
    \11\ As originally proposed, market participants were permitted 
to enter into the modified SelectNet only: (1) Those orders that 
specify a minimum acceptable quantity for a size that is at least 
100 shares greater than the posted quote of the receiving market 
participant; or (2) All-or-None orders that are at least 100 shares 
in excess of the displayed bid/offer size. Since the original 
proposal, the SEC has also approved the entry of non-liability, 
inferior-priced orders through SelectNet.
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    As was the case with SOES, Nasdaq market makers are required to 
participate in SuperSOES and, therefore, to accept automatic execution 
against their displayed quotations. However, UTP Exchanges are not 
required to accept automatic executions. Whereas Nasdaq can require, by 
rule, that its member ECNs provide immediate response to an inbound 
SelectNet order, it has no authority to extend that requirement to a 
UTP Exchange. As a result, without the implementation of the instant 
pilot, if a UTP Exchange was alone at the best bid/best offer for a 
particular security, that UTP Exchange could cause SuperSOES to stop 
processing orders in that security and hold those orders in queue for 
up to 90 seconds.
    In such a case, if after 90 seconds, a SuperSOES market participant 
did not join the current best bid/best offer, or the UTP Exchange did 
not move its quote, SuperSOES would return the orders that were in 
queue and the system would shut down for that security. The system 
would only resume once the UTP Exchange moved its quote away from the 
inside. Nasdaq believes that such delays would adversely affect 
Nasdaq's ability to ensure the proper functioning of its market through 
a major Nasdaq market system, and to enable market participants to 
obtain executions for their customers.
    Pilot Description. To address these problems, Nasdaq proposed, and 
the Commission approved, a pilot to amend NASD Rule 4710 to require 
that UTP Exchanges that choose to trade Nasdaq securities through 
Nasdaq market systems either participate fully in the automatic 
executions through SuperSOES, or have their quotations removed from the 
SuperSOES execution and order processing functionality. Specifically, 
if a UTP Exchange elects not to participate in SuperSOES, SuperSOES 
will trade through the UTP Exchange's quote. Nasdaq believes that this 
should prevent a UTP Exchange that is not otherwise accessible via 
SuperSOES from effectively shutting down the market in that security. 
\12\
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    \12\ The Nasdaq UTP Plan governs the trading of Nasdaq-listed 
securities pursuant to unlisted trading privileges. Subsection (b) 
of Section IX of the Nasdaq UTP Plan states, in pertinent part, that 
Plan participants ``shall have direct telephone access to the 
trading desk of each Nasdaq market participant in each [e]ligible 
[s]ecurity in which the [p]articipant displays quotations.'' See 
Section IX, Market Access, of the Nasdaq UTP Plan.
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    UTP Exchanges that choose not to participate in SuperSOES would be 
accessible by telephone as contemplated in the Nasdaq UTP Plan,\13\ or 
via a mutually agreed-upon alternative bilateral link created by the 
UTP Exchange.\14\ 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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    \13\ We note that this currently is the method that the 
Cincinnati Stock Exchange has elected to use for trading Nasdaq 
securities under the Nasdaq UTP Plan.
    \14\ This proposal would not preclude a UTP Exchange from 
forming a link with Nasdaq outside Nasdaq's market system or the 
parameters of an NMS plan.
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    Nasdaq proposed the pilot for a number of reasons. First, 
significant changes in market conditions have resulted in the need for 
Nasdaq, via SuperSOES, to increase the speed of

[[Page 67883]]

executions and improve the access of all market participants to the 
full depth of a security's trading interest. The volume and speed at 
which trading occurs in Nasdaq have increased dramatically since 
SuperSOES was first proposed nearly two and a half years ago. Market 
participants demand and require the ability to access liquidity at the 
best prices instantaneously. SuperSOES is a significant improvement 
over prior Nasdaq execution systems, and has become the backbone of 
Nasdaq's marketplace by providing market participants with a more 
efficient trading platform as evidenced by faster executions, higher 
fill rates, larger orders, and prices at the best bid or best offer.
    Nasdaq wants to ensure that the market in a particular security 
does not shut down--thereby harming investors and the market--if there 
is an unresponsive UTP Exchange setting the current best bid/best offer 
for that security. Nasdaq recognizes the importance of maintaining 
price priority and ensuring that market participants receive the best 
possible price in the market. As such, SuperSOES was originally 
designed not to trade through the best quote that appears in the Nasdaq 
montage. However, that premise assumed all quotes would be immediately 
accessible.\15\ SuperSOES must be able to continue operating when a 
particular quote is not accessible by market participants. To that end, 
if a UTP Exchange chooses not to participate in SuperSOES, and that UTP 
Exchange sets the inside bid or ask, Nasdaq will enable SuperSOES not 
to include that UTP Exchange's quotation for order processing and 
execution.
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    \15\ Order Entry ECNs are not subject to inbound automatic 
executions in SuperSOES. However, as NASD members, Order Entry ECNs 
are subject to NASD Rules and the enforcement and disciplinary 
powers granted therein. As non-members, UTP Exchanges are not 
subject to the same regulatory infrastructure.
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    Participation in SuperSOES by a UTP Exchange is a voluntary action 
by each exchange. Nasdaq is not obligated to provide UTP Exchanges with 
access to any of Nasdaq's proprietary systems. 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.
    Overall, Nasdaq believes it was appropriate to alter the terms 
under which a UTP Exchange participates in The Nasdaq Stock Market to 
address all of the concerns described in this proposal. For the same 
reasons, it is important to continue the pilot program to preserve the 
status quo as additional UTP Exchanges prepare to commence trading 
Nasdaq securities.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A(b)(6) of the Act,\16\ 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 SuperSOES to trade through quotations of non-automatic 
execution UTP Exchanges is necessary for the fair and orderly operation 
of The Nasdaq Stock Market by helping to reduce the potential for order 
queuing or for system stoppages, when a UTP Exchange's quote is 
inaccessible and is alone at the best bid or best offer.
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    \16\ 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, as amended

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) of the Act \17\ and 
Rule 19b-4(f)(6), thereunder.\18\ 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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    \17\ 15 U.S.C. 78s(b)(3)(A).
    \18\ 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 that waiving both the 5-day pre-filing notice requirement and 
the 30-day operative delay is consistent with the protection of 
investors and the public interest. Acceleration of the operative date 
will permit the NASD pilot to continue in operation without 
interruption. Nasdaq states that the pilot reduces the potential for a 
shut down in Nasdaq's automatic execution systems. Nasdaq's inability 
to maintain the status quo during that period would create unnecessary, 
harmful uncertainty. For these reasons, the Commission designates the 
proposal to be effective and operative upon filing with the 
Commission.\19\
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    \19\ 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 proposal 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 the 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-2002-155 and should be 
submitted by November 29, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-28329 Filed 11-6-02; 8:45 am]
BILLING CODE 8010-01-P