[Federal Register Volume 68, Number 86 (Monday, May 5, 2003)]
[Notices]
[Pages 23787-23789]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-11014]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47735; File No. SR-NASD-2003-38]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the National Association of Securities Dealers, Inc. Clarifying the 
Operation of the Daily Opening Process in Nasdaq's SuperMontage System

April 24, 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 13, 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 and 
II below, which Items have been prepared by Nasdaq. On April 24, 2003, 
Nasdaq filed Amendment No. 1 to the proposed rule change.\3\ The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 replaced the original Rule 19b-4 filing in 
its entirety. For purposes of determining the effective date of the 
filing and calculating the 60-day abrogation period, the Commission 
considers the period to commence on April 24, 2003, the date that 
Nasdaq filed Amendment No. 1.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to clarify the current operation of the daily 
opening process in Nasdaq's Order Display and Collector Facility 
(``NNMS'' or ``SuperMontage'') when the market is locked and/or crossed 
immediately prior to 9:30 a.m. Eastern Time.
    Below is the text of the proposed rule change, as amended. Proposed 
new language is italicized; proposed deleted language is [bracketed].
* * * * *

4710. Participant Obligations in NNMS

    (a) No Change.
    (b) Non-Directed Orders
    (1) General Provisions--A Quoting Market Participant in an NNMS 
Security, as well as NNMS Order Entry Firms, shall be subject to the 
following requirements for Non-Directed Orders:
    (A) No Change.
    (B) Processing of Non-Directed Orders--Upon entry of a Non-Directed 
Order into the system, the NNMS will ascertain who the next Quoting 
Market Participant or NNMS Order Entry Firm in queue to receive an 
order is (based on the algorithm selected by the entering participant, 
as described in subparagraph (b)(B)(i)--(iii) of this rule), and shall 
deliver an execution to Quoting Market Participants or NNMS Order Entry 
Firms that participate in the automatic-execution functionality of the 
system, or shall deliver a Liability Order to Quoting Market 
Participants that participate in the order-delivery functionality of 
the system. Non-Directed Orders entered into the NNMS system shall be 
delivered to or automatically executed against Quoting Market 
Participants' or NNMS Order Entry Firms' Displayed Quotes/Orders and 
Reserve Size, in strict price/time priority, as described in the 
algorithm contained in subparagraph (b)(B)(i) of this rule. 
Alternatively, an NNMS Market Participant can designate that its Non-
Directed Orders be executed based on a price/time priority that 
considers ECN quote-access fees, as described in subparagraphs 
(b)(B)(ii) of this rule, or executed based on price/size/time priority, 
as described in subparagraph (b)(B)(iii) of this rule. The individual 
time priority of each Quote/Order submitted to NNMS shall be assigned 
by the system based on the date and time such Quote/Order was received. 
Remainders of Quote/Orders reduced by execution, if retained by the 
system, shall retain the time priority of their original entry. For 
purposes of the execution algorithms described in paragraphs (i), (ii) 
and (iii) below, ``Displayed Quotes/Orders'' shall also include any 
odd-lot, odd-lot portion of a mixed-lot, or any odd-lot remainder of a 
round-lot(s) reduced by execution, share amounts that while not 
displayed in the Nasdaq Quotation Montage, remain in system and 
available for execution.
    (i) through (iii) No Change.
    (iv) Exceptions--The following exceptions shall apply to the above 
execution parameters:
    (a) If a Nasdaq Quoting Market Participant enters a Non-Directed 
Order into the system, before sending such Non-Directed Order to the 
next Quoting Market Participants in queue, the NNMS will first attempt 
to match off the order against the Nasdaq Quoting Market Participant's 
own Quote/Order if the participant is at the best bid/best offer in 
Nasdaq. Effective February 10, 2003, until March 17, 2003, this 
processing shall also apply to Non-Directed Orders of NNMS Order Entry 
Firms. Thereafter, this exception shall not apply to Non-Directed 
Orders Entered by NNMS Order Entry Firms. Nasdaq Quoting Market 
Participants may, and NNMS Order Entry Firms must, avoid any attempted 
automatic system matching permitted by this paragraph through the use 
of an anti-internalization qualifier (AIQ) quote/order flag containing 
the following values: ``Y'' or ``I'', subject to the following 
restrictions:
    Y--if the Y value is selected, the system will execute the flagged 
quote/order solely against attributable and non-attributable quotes/
orders (displayed and reserve) of Nasdaq Quoting Market Participants 
and NNMS Order Entry Firms other than the party entering the AIQ ``Y'' 
flagged quote/order. If the only available trading interest is that of 
the same party that entered the AIQ ``Y'' flagged quote/order, the 
system will not execute at an inferior price level, and will instead 
return the latest entered of those interacting quote/orders (or 
unexecuted portions thereof) to the entering party.
    I--if the I value is selected, the system will execute against all 
available trading interest, including the quote/orders of the NNMS 
Order Entry Firm or Nasdaq Quoting Market Participant that entered the 
AIQ ``I'' flagged order, based exclusively on the execution algorithm 
selected when entering the AIQ I flagged quote/order.
    The I value described above shall be available for the use of NNMS 
Order Entry Firms on March 17, 2003, and available for use by Nasdaq 
Quoting Market Participants on May 12, 2003.
    (b) through (c) No Change.
    (C) through (D) No Change.

[[Page 23788]]

    (2) No Change.
    (3) Entry of Locking/Crossing Quotes/Orders The system shall 
process locking/crossing Quotes/Orders as follows:
    (A) No Change.
    (B) Locked/Crossed Quotes/Orders Immediately Before the Open--If 
the market is locked or crossed at 9:29:30 a.m., Eastern Time, the NNMS 
will clear the locked and/or crossed Quotes/Order by executing (or 
delivering for execution) the highest bid against the lowest offer(s) 
against which it is marketable, at the price of the newer in time of 
the two quotes/orders. This process will be repeated until an un-locked 
and un-crossed market condition is achieved. Between 9:29:30 a.m. and 
9:29:59 Eastern Time, once NNMS has cleared a locked or crossed market, 
or if a newly submitted quote/order would create a locked or crossed 
market, NNMS will prevent a locked or crossed market from being created 
by processing such locking or crossing quote/order in a manner 
consistent with subparagraph (b)(3)(a) of this Rule.
    (i) Exception--The following exception shall apply to the above 
locked/crossed processing parameters:
    If a Nasdaq Quoting Market Participant has entered a Locking/
Crossing Quote/Order into the system that would become subject to the 
automated processing described in section (B) above, the system shall, 
before sending the order to any other Quoting Market Participant or 
NNMS Order Entry Firm, first attempt to match off the order against the 
locking/crossing Nasdaq Quoting Market Participant's own Quote/Order if 
that participant's Quote/Order is at the highest bid or lowest offer, 
as appropriate. A Nasdaq Quoting Market Participant may avoid this 
automatic matching through the use of anti-internalization qualifier as 
set forth in Rule 4710 (b) (1)(B)(iv)(a). NNMS Order Entry Firms that 
enter locking/crossing Quotes/Orders shall have those Quotes/Orders 
processed as set forth in paragraph (B) above, unless they voluntarily 
select a ``Y'' AIQ Value as provided for in Rule 4710 (b) 
(1)(B)(iv)(a).
    (4) 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
    On August 23, 2002, the Commission approved SR-NASD-2002-56 
establishing a uniform process for opening daily trading in Nasdaq's 
SuperMontage system.\4\ Part of that filing included a description of 
how SuperMontage would automatically clear locked or crossed markets 
immediately prior to the 9:30 a.m. Eastern Time Nasdaq market open. As 
described, SuperMontage would, commencing at 9:29:30 Eastern Time, 
match off the most aggressively priced locking and crossing quotes/
orders against each other with any price improvement going to the 
oldest of the pair.
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    \4\ See Exchange Act Release No. 46410 (August 23, 2002); 67 FR 
55897 (August 30, 2002).
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    That filing, however, failed to make specific note of 
SuperMontage's present default programming that, prior to other 
processing, first attempts to match off any quote/order entered by a 
Nasdaq Quoting Market Participant against any quotes/order(s) entered 
by that same Nasdaq Quoting Market Participant on the other side of the 
market (if those quote/order(s) on the other side of the market are at 
the best bid or offer). Nasdaq represents that this general default 
preference in SuperMontage execution and delivery processing is 
followed both during normal trading \5\ as well as the pre-open 
unlocking/uncrossing spin. Nasdaq further represents that this filing 
proposes the addition of language to make that fact clear.
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    \5\ See NASD Rule 4710(b)(1)(B)(iv)(a).
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    In addition, Nasdaq represents that this filing clarifies that, 
just like during the normal trading day, the Quotes/Orders of NNMS 
Order Entry Firms that become subject to the pre-opening unlocking/
uncrossing processing will not automatically internalize first against 
best-priced trading interest entered by that same NNMS Order Entry on 
the other side of the market. Instead, such interaction will only take 
place if such Quotes/Orders would match off against each naturally 
during the unlocking/uncrossing process. NNMS Order Entry Firms may 
prevent any interaction between its own buy and sell quotes through the 
use of the ``Y'' anti-internalization qualifier as permitted by NASD 
Rule 4710(b)(1)(B)(iv)(a). Finally, the filing clarifies that the 
Quoting Market Participants referred to in that part of the rule 
related to the Y AIQ value are Nasdaq Quoting Market Participants.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of section 15A of the Act,\6\ in general 
and with section 15A(b)(6) of the Act,\7\ in particular, in that in 
that the proposal is designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
to foster cooperation and coordination with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating 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. The Nasdaq represents that the processing described in this 
filing has been previously approved by the Commission, as noted above, 
and recognizes the liquidity benefits that accrue to all market 
participants by providing incentives for quoting market participants to 
enter an expanded universe of quotes/orders on both sides of the 
market.
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    \6\ 15 U.S.C. 78o-3.
    \7\ 15 U.S.C. 78o-3(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 with respect 
to the proposed rule change.

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

    The foregoing proposed rule change, as amended, has become 
effective on April 24, 2003, the date of filing of Amendment No. 1 to 
the proposed rule change, pursuant to section 19(b)(3)(A) \8\ of the 
Act and Rule 19b-4(f)(6) \9\

[[Page 23789]]

thereunder because the proposal: (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 become operative 
for 30 days from the date of filing, or such shorter time as the 
Commission may designate if consistent with the protection of investors 
and the public interest; provided that the self-regulatory organization 
has given the Commission written notice of its intent to file the 
proposed rule change at least five business days prior to the filing 
date of the proposed rule change.\10\
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6).
    \10\ As required under Rule 19b-4(f)(6)(iii), Nasdaq provided 
the Commission with written notice of its intent to file the 
proposed rule change at least five business days prior to the filing 
date.
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    A proposed rule change filed under Rule 19b-4(f)(6) normally does 
not become operative prior to 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii),\11\ the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and public interest. Nasdaq has requested that 
the Commission waive the 30-day pre-operative waiting period because 
the processing described by this proposal is already operative in 
SuperMontage during the trading day and Nasdaq believes that 
designating the proposal as immediately effective and operative will 
ensure that formal notice of this processing during the SuperMontage 
opening is provided to market participants as soon as practicable.
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    \11\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission, consistent with the protection of investors and the 
public interest, has waived the 30-day operative date requirement for 
this proposed rule change, and has determined to designate the proposed 
rule change as operative on April 24, 2003, the date of filing of 
Amendment No. 1 to the proposed rule change, in order to allow Nasdaq 
to provide notice to its members of this aspect of the Nasdaq opening 
process immediately.\12\ 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.\13\
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    \12\ For the purposes only of accelerating the operative date of 
this proposal, the Commission has considered the proposed rules 
impact on efficiency, competition, and capital formation. 15 U.S.C. 
78c(f)
    \13\ For purposes of determining the effective date of the 
filing and calculating the 60-day abrogation period, the Commission 
considers the period to commence on April 24, 2003, the date that 
Nasdaq filed Amendment No. 1.
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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, 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 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 Amex. All submissions should refer to File No. 
SR-NASD-2003-38 and should be submitted by May 27, 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. 03-11014 Filed 5-2-03; 8:45 am]
BILLING CODE 8010-01-P