[Federal Register Volume 68, Number 71 (Monday, April 14, 2003)]
[Notices]
[Pages 17974-17976]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-9037]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47645; File No. SR-NASD-2003-58]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Eliminating Certain Eligibility Requirements 
for Participating in the Primex Auction System as a Primex Auction 
System Market Maker

April 8, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and rule 19b-4 \2\ thereunder, notice is hereby given 
that on March 27, 2003, the National Association of Securities Dealers, 
Inc. (``NASD''), 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, II, 
and III below, which Items have been prepared by Nasdaq. 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is filing this proposed rule change in order to eliminate 
the requirement that Primex Auction System Market Makers (``PAMMs'') 
submit a minimum percentage of certain orders to the Primex Auction 
System (``Primex'' or ``System'') in order to retain their status as 
PAMMs.
    The text of the proposed rule change appears below. Proposed new 
language is underlined; proposed deletions are in brackets.
5010. NASDAQ Application of the Primex Auction System
5011. Definitions
    For purposes of this Rule Series, unless the context requires 
otherwise:
* * * * *
    (a) [``Mandatory Eligible Order'' means a public customer order, as 
more fully defined in rule 5020, that a Primex Auction Market Maker 
must submit to the System for exposure in order for the Primex Auction 
Market Maker to maintain its status as such, subject to any exclusions 
or minimum permissible amount provided therein.] Reserved.
* * * * *
5020. Market Maker Participation \3\
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    \3\ The rule text provided herein includes corrections of 
typographical errors from the rule text that Nasdaq submitted in 
Exhibit 1 of the proposed rule change. Telephone conversation 
between Peter R. Geraghty, Associate Vice President and Associate 
General Counsel, Office of General Counsel, Nasdaq, and Tim Fox, 
Attorney, Division of Market Regulation, Commission on April 7, 
2003.
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    (a) No Changes.
    (b) With respect to each security in which a Participant is 
registered as a Primex Auction Market Maker, the Participant shall:
    (1) if the security is a Nasdaq-listed security, be registered as a 
Nasdaq market maker (1) if the security is a Nasdaq-listed security, be 
registered as a Nasdaq market maker in such security (or become so 
registered), and at all times comply with all applicable NASD rules and 
interpretations relating to Nasdaq market makers, including the 
requirement to enter and maintain two-sided quotations in Nasdaq for 
such security, subject to the excused withdrawal procedures set forth 
in Rule 4619;
    (2) if the security is an ITS/CAES eligible security, be registered 
as an ITS/CAES Market Maker (or become so registered) in such security, 
and at all times comply with all applicable NASD rules and 
interpretations relating to ITS/CAES Market Makers, including the 
requirement to enter and maintain two-sided quotations in CQS for such 
security, subject to the excused withdrawal procedures set forth in 
Rule 6350; and
    [(3) submit to the Application a minimum of 80%\*\ of the number of 
its Mandatory Eligible Orders (including customer orders of another 
broker-dealer that has directed such orders to the Participant) as soon 
as practicable upon receipt by the Participant, for the purpose of 
exposing such orders to the Primex Crowd. Mandatory Eligible Orders do 
not include:
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    \*\ The 80% test will be applied on a quarterly basis, and will 
be phased in as follows: For the calendar quarters commencing on 
October 1, 2001; January 1, 2002; April 1, 2002; July 1, 2002; and 
October 1, 2002; any participant may register in any eligible 
security as a Primex Auction Market Maker and maintain that status 
during such calendar quarters without regard to the percentage of 
its orders it submits to the System for such security during that 
time, provided it also satisfies all other requirements of a Primex 
Auction Market Maker pursuant to these rules.
    Beginning with the calendar quarter that commences on January 1, 
2003, a participant previously registered as a Primex Auction Market 
Maker for a particular security may maintain its status as such 
until March 30, 2003 only if it submitted at least 50% of its 
Mandatory Eligible Orders during the calendar quarter that commences 
on October 1, 2002 (or during such portion of the calendar quarter 
that commences on October 1, 2002 in which the participant was so 
registered if the participant registered in mid quarter), provided 
it also satisfies all other requirements of a Primex Auction Market 
Maker pursuant to these rules. A participant that is newly 
registering as a Primex Auction Market Maker for a particular 
security any time after the start of the calendar quarter that 
commences on January 1, 2003 may maintain its status as such until 
the end of the calendar quarter in which it registered without 
regard to the percentage of its orders it submits to the System for 
such security during that time.
    Beginning with the calendar quarter that commences on April 1, 
2003, and each calendar quarter thereafter, a participant previously 
registered as a Primex Auction Market Maker for a particular 
security may maintain its status as such until the end of that 
calendar quarter only if it submitted at least 80& of its Mandatory 
Eligible Orders during the previous calendar quarter (or during the 
portion of such previous calendar quarter in which it was so 
registered if the participant registered in mid quarter), provided 
it also satisfies all other requirements of a Primex Auction Market 
Maker pursuant to these rules.]
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    (A) Any customer order that is greater than 1099 shares at 
origination, except that nothing in these rules prohibits a Participant 
from submitting orders of greater size at any time;
    (B) Any customer order that, when initially received by the 
Participant, is a Fixed Price Order with a specified price that is not 
eligible for acceptance by the Application because it is priced outside 
the NBBO and is not otherwise marketable pursuant to Rule 5013(a)(2), 
regardless of whether or not the order

[[Page 17975]]

becomes eligible for acceptance and exposure at a subsequent point in 
time;
    (C) Any customer order placed by a customer who authorizes the 
Participant to not expose the order, either at the time the order is 
placed or prior thereto pursuant to an individually negotiated 
agreement with respect to such customer's orders;
    (D) Any customer order that is an odd lot order (e.g., less than 
100 shares);
    (E) Any customer order to be executed outside of the hours of 
operation of the Application; or
    (F) Any other order that would not fall within the definition of 
the term ``covered order'' as defined in Exchange Act Rule 11Ac1-
5(a)(8).]
    (3[4]) not attach a condition for Minimum Relative Price 
Improvement to any order submitted to the Application solely for its 
own principal account and not involving a customer order.
* * * * *

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
    Presently, NASD Rule 5020(b)(3) requires PAMMS to submit 80% of 
their Mandatory Eligible Orders to Primex in order to retain their 
status as PAMMs (``Percentage Test'').\4\ Members registered as PAMMs 
can utilize certain matching features and are eligible for fee sharing, 
which are features not available to members that do not participate as 
PAMMs (i.e., Crowd Participants).\5\
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    \4\ The term ``Mandatory Eligible Order'' is defined in NASD 
Rule 5011(l).
    \5\ PAMMS can enter Clean Cross orders and use the Two Cent 
Match, 50% Match, and Block Facilitation Match features. These 
features are described in NASD Rule 5014. In addition, pursuant to 
NASD Rule 7010(r)(1), a PAMM can share in the Primex fees charged to 
members when the PAMMs order interacts with crowd interest in 
Primex.
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    The purpose of the Percentage Test was to achieve a mix of trading 
interest that would result in retail orders being exposed to other 
market participants that would compete for the orders by providing 
price improvement. Ultimately, the Percentage Test was a balance 
between continuing to provide PAMMs flexibility in how they execute 
their customer orders and the desire to provide a cross section of 
orders that would generate crowd participation and competition for 
orders. However, members have indicated that the Percentage Test 
complicates their order handling decisions, creating a disincentive to 
participating in Primex. Therefore, Nasdaq is proposing to eliminate 
the Percentage Test and allow members to participate as PAMMs 
irrespective of the number of orders they submit to the System.
    The proposal to eliminate the Percentage Test does not modify any 
other aspect of Primex. For example, PAMMs must continue to comply with 
the other requirements of NASD Rule 5020 that govern PAMM eligibility, 
and PAMMs will continue to have the right to use the matching features 
and to participate in the fee sharing arrangements that are not 
available to Crowd Participants.
2. Statutory Basis
    Nasdaq believes the proposed rule change is consistent with section 
15A(b)(6) of the Act,\6\ which requires that NASD's rules be designed, 
among other things, to remove impediments to and perfect the mechanism 
of a free and open market and national market system, and, in general, 
protect investors and the public interest. Nasdaq believes the proposal 
to eliminate the Percentage Test is consistent with NASD's obligations 
under section 15A(b)(6) of the Act because it will remove an impediment 
to using Primex, which should result in greater participation in the 
System and increased liquidity and opportunities for price improvement.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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    When originally implemented, Nasdaq believed the requirement would 
promote liquidity by ensuring a cross section of order flow from each 
PAMM, which in turn would encourage non-market makers to participate in 
Primex and offer opportunities for price improvement. Nasdaq represents 
that promoting liquidity and price improvement opportunities are 
consistent with the protection of investors. However, instead of 
fostering liquidity, members have indicated the requirement is a 
disincentive to using Primex. Members desire flexibility in making 
order routing decisions and the rule complicates these decisions. 
Therefore, Nasdaq staff is proposing to eliminate the Percentage Test, 
which will eliminate an impediment to using Primex. As a result, Nasdaq 
expects that more members will participate in Primex, which should 
increase liquidity and opportunities for price improvement.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will impose 
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

    No written comments were either solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing rule change has been designated by NASD as effecting 
a change in an existing order-entry or trading system of NASD that: (1) 
Does not significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not have the effect of limiting the access to or 
availability of the system. The proposed rule change has therefore 
become effective pursuant to section 19(b)(3)(A) of the Act \7\ and 
Rule 19b-4(f)(5) \8\ thereunder. The Nasdaq believes that the proposal 
to eliminate the Percentage Test complies with the requirements of Rule 
19b-4(f)(5) under the Act because it effects a change in Primex, an 
existing trading system. In addition, the proposal does not modify how 
Primex operates. Therefore, it does not significantly affect the 
protection of investors or the public interest. Instead, the proposal 
eliminates a requirement that is viewed as an impediment to using 
Primex. In this regard, the proposal does not have the effect of 
limiting the access or availability of the System, but instead should 
promote access to it, which should increase participation in the System 
and promote competition for orders exposed in the System.
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    \7\ 15 U.S.C. 78s(b)(3)(A).
    \8\ 17 CFR 240.19b-4(f)(5).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and

[[Page 17976]]

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-2003-58 and 
should be submitted by May 5, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-9037 Filed 4-11-03; 8:45 am]
BILLING CODE 8010-01-P