[Federal Register Volume 67, Number 247 (Tuesday, December 24, 2002)]
[Notices]
[Pages 78532-78534]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-32312]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47011; File No. SR-NASD-2002-179]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. to Modify the Reserve Size Refresh Functional 
in Nasdaq's SuperMontage System

December 16, 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 December 16, 2002, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') through its subsidiary, The Nasdaq 
Stock Market, Inc. (``Nasdaq''), submitted to the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, and II below, which Items have been prepared by 
Nasdaq. Nasdaq filed the proposal pursuant to section 19(b)(3) of the 
Act,\3\ and rule 19b-4(f)(6) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission. 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).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to modify the way shares are refreshed from reserve 
size into displayed Quotes/Orders in Nasdaq's SuperMontage system. New 
text is italicized.
* * * * *

4710. Participant Obligations in NNMS

    (a) No Change.
    (b) Non Directed Orders.
    (1) No Change.
    (2) Refresh Functionality.
    (A) Reserve Size Refresh--Once a Nasdaq Quoting Market 
Participant's Displayed Quote/Order size on either side of the market 
in the security has been decremented to an amount less than one normal 
unit of trading due to NNMS processing Nasdaq will refresh the 
displayed size out of Reserve Size to a size-level designated by the 
Nasdaq Quoting Market Participant, or in the absence of such size-level 
designation, to the automatic refresh size. The amount of shares taken 
out of reserve to

[[Page 78533]]

refresh display size shall be added to any shares remaining in the 
Displayed Quote/Order and shall be of an amount that when combined with 
the number of shares remaining in the Nasdaq Quoting Market 
Participant's Displayed Quote/Order before it is refreshed will equal 
the displayed size-level designated by the Nasdaq Quoting Market 
Participant or, in the absence of such size-level designation, to the 
automatic refresh size. If there are insufficient shares available to 
produce a Displayable Quote/Order, the Nasdaq Quoting Market 
Participant's Quote/Order, and any odd-lot remainders, will be 
refreshed, updated, or retained, in conformity with NNMS Rules 4707 and 
4710 as appropriate. To utilize the Reserve Size functionality, a 
minimum of 100 shares must initially be displayed in the Nasdaq Quoting 
Market Participant's Displayed Quote/Order, and the Displayed Quote/
Order must be refreshed to at least 100 shares. This functionality will 
not be available for use by UTP Exchanges.
    (B) No Change.
    (3) Through (8) No Change.
    (c) Through (e) 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 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
    Currently, SuperMontage allows Nasdaq Quoting Market Participants 
\5\ to use reserve size and select a round-lot refresh amount that the 
market participant wishes its quote/order to be refreshed to once its 
displayed size is reduced to less than a round-lot. Thus, once a quote 
or an order is decremented by executions to less than 100 shares, the 
system will refresh that quote/order from reserve size by the round-lot 
amount designated by the market participant and combine it with any 
odd-lot share amount still remaining. For example, market maker A 
(``MMA'') is displaying a 1000 share bid quote/order. MMA has 5000 
shares in reserve and has selected a 400-share refresh size. Under 
current processing, Nasdaq states that if SuperMontage executed 925 
shares against MMA's quote/order, the system would automatically take 
400 shares from the 5000 in reserve and add it to the 75 shares 
remaining in MMA's quote/order for a total of 475 shares.\6\
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    \5\ Nasdaq Quoting Market Participants consist of Nasdaq 
National Market System (``NNMS'') Market Makers and NNMS Electronic 
Communication Systems (``ECNs'').
    \6\ While these 475 shares would be treated as displayed trading 
interest for purposes of SuperMontage's execution algorithms, 
SuperMontage, which only displays round-lots, would show 400 shares 
next to MMA's firm identifier in the montage.
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    Recently, Nasdaq states that some SuperMontage participants have 
raised concerns about the impact the above processing can have on their 
ability to manage quotes/orders so as to trade as often as possible in 
round-lot amounts. Because the combination of the odd-lot remainder 
trigger and the round-lot refresh amount almost always results in a new 
mixed-lot quote/order, these market participants generally can only 
return to displaying and having their quote represent an actual round-
lot amount by either: (a) Having their mixed-lot quote/order interact 
with an odd or mixed-lot quote/order containing an odd-lot portion 
equal to that of their new displayed quote/order (e.g., a 475 share 
quote/order interacting with 375 or 75 share quote/order) or, (b) 
immediately canceling the mixed-lot quote/order and replacing it with a 
new round-lot thereby losing time priority for any previous odd-lot 
remainder.
    In response to these concerns, Nasdaq proposes to modify 
SuperMontage's reserve size refresh function. Under the proposal, once 
a displayed quote/order has been reduced by executions to less than 100 
shares, the system will automatically refresh that market participant's 
quote/order to the round-lot amount selected by the firm as its reserve 
size refresh amount. Using the previous example, once MMA's displayed 
size was reduced to 75 shares by the 925 share execution, SuperMontage 
would refresh MMA's quote/order by automatically adding 325 shares to 
create a 400 share round-lot--an amount exactly equal to MMA's selected 
reserve refresh amount.\7\ If the amount of shares in reserve for a 
particular quote/order is insufficient to produce a displayable quote, 
the system will nonetheless combine and retain the reserve size and 
odd-lot remainders at the price level for potential execution in the 
system. If the amount of shares in reserve for a particular Nasdaq 
Quoting Market Participant's quote/order is insufficient to produce a 
displayable quote, the quote (including any reserve size share amounts) 
would be refreshed or updated pursuant to current SuperMontage 
programming and rules.\8\
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    \7\ While displayed as a single round-lot quote, SuperMontage 
will continue to maintain separate time-stamps for the odd-lot 
remainders of the quote/order and the additional share amounts from 
reserve that together comprise the new updated round-lot displayed 
quote/order.
    \8\ See Securities Exchange Act Release No. 46141 (June 28, 
2002), 67 FR 44906 (July 5, 2002); 46369 (August 16, 2002), 67 FR 
54515 (August 22, 2002) (Approving File No. SR-NASD-2002-42).
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    Nasdaq believes that this approach will provide market participants 
with greater flexibility in managing their quotes/orders while 
continuing to ensure that small odd-lot and mixed-lot orders will be 
able to execute.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\9\ in general and with 
section 15A(b)(6) of the Act,\10\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, remove impediments to a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \9\ 15 U.S.C. 78o-3.
    \10\ 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

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A) of the Act \11\ and subparagraph (f)(6) of rule 19b-4 \12\ 
thereunder because it does not: (i) Significantly affect the protection 
of investors or the public interest; (ii) impose any significant burden 
on competition; (iii) become operative for 30 days from the date on

[[Page 78534]]

which it was filed, or such shorter time as the Commission may 
designate. 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, or 
otherwise in furtherance of the purposes of the Act.
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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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    Nasdaq has requested that the Commission waive the 30-day operative 
delay. Under Rule 19-4(f)(6) of the Act, a proposed rule change does 
not become operative for 30 days after the date of filing, unless the 
Commission designates a shorter time. The Commission believes that 
waiving the 30-day operative delay is consistent with the protection of 
investors and the public interest. Acceleration of the operative date 
will allow Nasdaq to respond quickly to the concerns of SuperMontage 
users and allow users to display actual round-lots as their quotes. For 
this reason, the Commission waives the 30-day operative delay and 
designates the proposal to be immediately effective and operative upon 
filing with the Commission.\13\
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    \13\ 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 the filing will also be 
available for inspection and copying at the principal office of the 
Association. All submissions should refer to File No. SR-NASD-2002-179 
and should be submitted by January 14, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-32312 Filed 12-23-02; 8:45 am]
BILLING CODE 8010-01-P