[Federal Register Volume 68, Number 64 (Thursday, April 3, 2003)]
[Notices]
[Pages 16323-16325]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-8034]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47588; File No. SR-NASD-2003-37]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 thereto by the National Association of 
Securities Dealers, Inc. to Permanently Expand Order Entry Firm Access 
to SIZE in Nasdaq's SuperMontage System

March 28, 2003.
    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 March 12, 2003, 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. On March 26, 
2003, Nasdaq filed Amendment No. 1 to the proposed rule change.\3\ The 
Commission is publishing this notice, as amended, 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\ See Letter from Thomas Moran, Office of General Counsel, 
Nasdaq, to Katherine England, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated March 25, 2003 
(``Amendment No. 1''). Nasdaq submitted Amendment No. 1 to reflect 
that File No. NASD-2003-39, relating to anti-internalization 
qualifier values, had become immediately effective, and to delete 
dates in the rule text that are no longer applicable.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to make permanent its current pilot allowing NNMS 
Order Entry Firms (``OE Firms'') to enter non-marketable limit orders 
into SuperMontage using the SIZE Market Maker Identifier (``SIZE MMID'' 
or ``SIZE'').\4\ In addition, this filing also makes permanent a number 
of non-substantive corrections to the written rules of the NNMS. The 
text of the proposed rule change is available at the NASD, the Office 
of the Secretary, and the Commission.
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    \4\ SIZE is an anonymous identifier that represents the 
aggregate size of all Non-Attributable Quotes and Orders entered by 
market participants in Nasdaq at a particular price level. Non-
Attributable Quotes and Orders are not displayed in the Nasdaq 
Quotation Montage using the market participant's MMID. Instead, such 
interest is displayed next to the SIZE MMID.

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[[Page 16324]]

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
    On January 31, 2003, the Commission approved File No. SR-NASD-2002-
173 on a 90-pilot basis, which allowed OE Firms to enter non-marketable 
limit orders into Nasdaq's SuperMontage system using SIZE.\5\ This 
filing seeks to make permanent the ability of OE Firms to enter orders 
into SuperMontage under essentially the same terms and conditions 
approved in the pilot program.\6\
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    \5\ See Securities Exchange Act Release No. 47301 (January 31, 
2003), 68 FR 6236 (February 6, 2003). The 90-day pilot commenced on 
February 10, 2003.
    \6\ Prior to the pilot period, OE Firms were required to 
designate all limit orders they entered into SuperMontage as 
Immediate-or-Cancel (``IOC''). This designation, while allowing such 
orders to potentially execute if marketable when they reached the 
front of the SuperMontage processing queue, also instructed the 
system to return them to the OE Firm if their price precluded an 
immediate execution. In short, OE Firms could enter market orders 
and marketable limit orders, but could not enter non-marketable 
limit orders and have them retained in the system for potential 
display and/or execution.
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    Under the pilot, OE Firms are able to voluntarily enter non-
marketable limit orders into SuperMontage without an IOC designation 
and have them be retained for potential execution \7\ through display 
in SIZE. OE Firms may enter multiple orders (with or without reserve 
size) at single or multiple price levels, use any available execution 
algorithm (price/time, price/time-with-fee-consideration, or price/
size). Non-marketable limit orders entered by OE Firms are subject to 
the automatic execution functionality of the system. Orders of OE Firms 
on opposite sides of the market are not permitted to automatically 
interact, if at the best price level, like those of Nasdaq Quoting 
Market Participants.\8\ If elected by the OE Firm, its quotes/orders on 
opposite sides of the market will match off against each other only if 
such interaction would result based on the execution algorithm 
selected.\9\ Alternatively, OE Firms may elect not to interact with its 
orders on the opposite side of the market.\10\ Quotes/Orders entered by 
OE Firms that create a locked/crossed market, will be processed like 
other locking/crossing quotes/orders as set forth in NASD rule 
4710(b)(3).
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    \7\ NNMS Order Entry Firms will be able to designate orders as 
IOC, ``Good-till-Cancelled,'' or ``Day'' orders.
    \8\ Similarly, OE Firms will not be able to use SuperMontage's 
self-preferencing feature and have buy and sell interest interact on 
a basis other than a natural interaction based solely on the 
selected order execution algorithm.
    \9\ See Securities Exchange Release Act No. 47554 (March 21, 
2003), 68 FR 15024 (March 27, 2003) (Notice of Filing and Immediate 
Effectiveness of SR-NASD-2003-39).
    \10\ Id. Change made pursuant to March 27, 2003, telephone 
conversation between Thomas Moran, Office of General Counsel, 
Nasdaq, and Terri Evans, Assistant Director, Division, Commission.
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    As stated in the filing creating the pilot program, Nasdaq believes 
that the proposal is an important step in Nasdaq's ongoing process to 
make its systems more accessible to all NASD member firms while 
ensuring that market participants who undertake the burdens of 
continuous liquidity provision are provided benefits commensurate with 
their activities. Nasdaq believes that most important, however, are the 
improvements to market quality that can be expected from the proposal's 
permanent approval. Nasdaq believes that in addition to enhanced 
liquidity and informational benefits, retention of non-marketable limit 
orders from OE Firms in SuperMontage, the proposal can be expected to 
reduce fragmentation of trading interest, thereby improving execution 
quality and speed and shrinking the costs market participants now incur 
when searching for trading partners in multiple venues. Finally, to the 
extent that any previously rejected OE Firm order is retained, Nasdaq 
believes the proposal will reduce the potential for locked/crossed 
markets that can occur if such rejected trading interest is 
subsequently displayed in an unlinked market center without the benefit 
of SuperMontage processing to eliminate locks or crosses among all 
quotes and orders residing in the system. Nasdaq notes that the 
permanent change proposed here was originally suggested as part of the 
original public comment process on the SuperMontage proposal, and 
believes its adoption should have the effect of reducing barriers to 
access to the SuperMontage system.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\11\ in general and with 
section 15A(b)(6) of the Act,\12\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, 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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    \11\ 15 U.S.C. 78o-3.
    \12\ 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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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

[[Page 16325]]

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-2003-37, and should be submitted by April 24, 2003.

    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. 03-8034 Filed 4-2-03; 8:45 am]
BILLING CODE 8010-01-P