[Federal Register Volume 68, Number 96 (Monday, May 19, 2003)]
[Notices]
[Pages 27126-27128]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-12453]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47830; File No. SR-NASD-2003-37]
Self-Regulatory Organizations; Order Granting Approval to
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
May 12, 2003.
I. Introduction
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
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4
thereunder,\2\ a proposed rule change for the permanent approval of a
pilot program which permits NNMS Order Entry Firms (``OE Firms'') to
enter non-marketable limit orders into SuperMontage using the SIZE
Marker Maker Identifier (``SIZE MMID'' or ``SIZE'').\3\ On March 26,
2003, Nasdaq filed Amendment No. 1 to the proposed rule change.\4\ The
proposed rule change, as amended, was published for comment in the
Federal Register on April 3, 2003.\5\ The Commission received three
comment letters regarding the pilot as originally approved,\6\ and the
instant proposal, as amended.\7\ On May, 2, 2003, Nasdaq submitted a
comment response letter.\8\ This order approves the proposed rule
change, as amended.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On January 31, 2003, the Commission approved File No. SR-
NASD-2002-173 on a 90-day pilot basis, which allowed OE Firms to
enter non-marketable limit orders into Nasdaq's SuperMontage system
using SIZE. 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. 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.
\4\ See letter from Thomas Moran, Office of General Counsel,
Nasdaq, to Katherine A. England, Assistant Director, Division of
Market Regulation (``Division''), Commission, dated March 25, 2003.
\5\ See Securities Exchange Act Release No. 47588 (March 28,
2003), 68 FR 16323.
\6\ See Securities Exchange Act Release No. 47301 (January 31,
2003), 68 FR 6236 (February 6, 2003).
\7\ See letters to Jonathan G. Katz, Secretary, Commission, from
S. Jeffrey Martin, President, Automated Trading Desk Financial
Services, LLC, and Steve Swanson, President, Automated Trading
Brokerage Services, LLC, dated February 27, 2003 and March 6, 2003
(``ATD Letter''); from Duncan L. Niederauer, Managing Director and
Co-Chief Executive Officer, Spear, Leeds & Kellogg, L.P., dated May
1, 2003 (``SLK Letter''); and from John Hughes, Chairman, and John
C. Giesea, President and Chief Executive Officer, Security Traders
Association, dated April 9, 2003 (``STA Letter''). The two comment
letters from ATD appear to be identical and, therefore, are being
treated as one comment letter.
\8\ See letter from Thomas P. Moran, Office of General Counsel,
Nasdaq, to Katherine A. England, Assistant Director, Division,
Commission, dated May 1, 2003 (``Response Letter'').
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II. Description of the Proposed Rule Change
As noted above, this filing seeks the permanent approval of the 90-
day pilot program that allows OE Firms \9\ to enter non-marketable
limit orders into SuperMontage using SIZE. Under the proposal, OE Firms
may voluntarily enter non-marketable limit orders into SuperMontage
with a Good-till-Cancelled (``GTC'') or ``Day'' designation for display
or execution through SIZE.\10\ 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 would be subject to the automatic execution functionality of
the system. If elected by the OE Firm, its orders on opposite sides of
the market could match off against each other only if such
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interaction would result based on the execution algorithm selected,
\11\ but such orders would not be permitted to automatically interact,
if at the best price level, like those of Nasdaq Quoting Market
Participants.\12\ Alternatively, OE Firms may elect to completely avoid
interaction with its orders on the opposite side of the market.\13\
Quotes/Orders entered by OE Firms that create a locked/crossed market,
would be processed like other locking/crossing quotes/orders as set
forth in NASD Rule 4710(b)(3).
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\9\ Nasdaq submitted a letter to clarify that it interprets the
term ``NNMS Order Entry Firm'' in a manner that may encompass NNMS
Market Makers that are registered market makers in other stocks. In
the SuperMontage system, such firms are treated the same as other OE
Firms when placing orders into the system for stocks in which they
do not make a market. Nasdaq notes that the provision of order-entry
system access to firms that elect to register as market makers in
less than the total universe of Nasdaq stocks also took place in the
systems preceding SuperMontage--SelectNet and SuperSoes. See letter
from Thomas P. Moran, Office of General Counsel, Nasdaq, to Marc
McKayle, Special Counsel, Division, Commission, dated May 8, 2003.
\10\ Prior to the pilot, OE Firms were limited to the entry of
market orders or limited orders designated as Immediate or Cancel
(``IOC''). OE Firms may continue to submit IOC orders under the
proposal.
\11\ 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).
\12\ Similarly, OE Firms would 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.
\13\ See supra note 11.
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III. Summary of Comments and Nasdaq's Response
As noted above, the Commission received three comment letters
regarding the proposal, as amended.\14\ Two of the commenters strongly
supported the proposed rule change, as amended.\15\ These commenters
believed that allowing OE Firms to participate in SIZE enhances the
liquidity of SuperMontage by promoting the entry and display of market
interest by a greater number of market participants.\16\ In addition,
both of these commenters believe that OE Firms' participation in SIZE
reduces the fragmentation in the Nasdaq market attributable to the
absence of linkages between the NASD Alternative Display Facility, the
regional exchanges trading Nasdaq securities pursuant to unlisted
trading privileges, and SuperMontage. As a result, one of the
commenters believed that the ability of OE Firms to use SIZE could
reduce the existence of locked/crossed markets.\17\ Further, the
commenters stated that providing OE Firms with direct participation in
SIZE decreases the execution times for customer orders by eliminating
the need to interpose an electronic communications network (``ECN'') or
market maker between the OE Firm and SuperMontage,\18\ as well as
credits firms for providing liquidity through SIZE.\19\ Finally, the
two commenters generally believed that the proposed rule change
provides all market participants with a more equal opportunity to
interact with other market participants including market makers and
other agency orders via SIZE.
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\14\ See supra note 7.
\15\ See ATD Letter and SLK Letter.
\16\ See ATD Letter and SLK Letter.
\17\ See ATD Letter.
\18\ See SLK Letter.
\19\ See ATD Letter.
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Another commenter, however, described the proposed rule change as a
significant market structure change, and suggested that Nasdaq's
proposal be subject to additional review.\20\ Specifically, the
commenter opined that because of the complexity of the proposal and the
resources required to implement it, the 90 days for a pilot program of
this nature was too short a period for full evaluation and
implementation by market participants. The commenter recommended that
the pilot program be extended an additional 90 days to give OE Firms
sufficient time and resources to adapt their systems and procedures to
take advantage of the enhanced access provided by the proposed rule
change. The commenter opined that the extension of time would allow the
NASD and the Commission to thoroughly analyze the effect of the
proposed rule change on the marketplace prior to enacting it as a
permanent change to SuperMontage.
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\20\ See STA Letter. The STA also asserted that the pilot should
not have been approved on an accelerated basis.
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Nasdaq disagreed with the STA's characterization that the proposal
was a significant market structure change that warranted additional
consideration by the Commission.\21\ According to Nasdaq, since the
pilot's inception, the use of SIZE for non-marketable limit orders
submitted by pure OE Firms, and by market makers registered in other
stocks, has modestly but steadily increased.\22\ Nasdaq also stated the
expansion has had no apparent negative impact on public investors and
has served to bring increased liquidity to the public Nasdaq market.
Nasdaq believes that these measurable improvements should take
precedence, in the form of a swift and permanent approval of the
proposed rule change, over any potential problems with the pilot that
have yet to become manifest. Nasdaq also noted that the concept of the
proposal is similar to the access granted to registered brokers in
other market centers, whose experience gives no indication that such
access has had an adverse impact on market quality.
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\21\ See Response Letter, supra note .
\22\ Nasdaq represents that a recent internal analysis conducted
by Nasdaq's Economic Research Department on the use of SIZE during
the pilot indicates an increase of approximately 1.5% of total
Nasdaq volume is now being executed through SIZE. OE Firms currently
represent about \1/3\ of the total trading interest being executed
through SIZE. Since the launch of the pilot, the number of OE Firms
participating in SuperMontage via non-marketable limit orders in
SIZE has increased from 0 to roughly 35 firms during the week of
April 7, 2003.
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IV. Discussion
After careful review of the proposed rule change, the comment
letters, and Nasdaq's response to comments, the Commission finds that
the proposed rule change, as amended, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities association.\23\ Specifically, the
Commission finds that the proposed rule change, as amended, is
consistent with the requirements of Section 15A of the Act in
general,\24\ and Section 15A(b)(6) of the Act in particular,\25\ which
provides that the rules of the association be designed to prevent
fraudulent and manipulative acts and practices, to promote just and
equitable principals of trade, to foster cooperation and coordination
with person 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.
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\23\ In approving this proposal, the Commission has considered
the proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
\24\ 15 U.S.C. 78o-3.
\25\ 15 U.S.C. 78o-3(b)(6).
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The Commission believes that it is appropriate to permanently
approve the pilot. As noted by two of the commenters and Nasdaq, the
implementation of the pilot has provided OE Firms with greater access
to the system thereby increasing the liquidity of SuperMontage and
potentially reducing fragmentation. Further, the Commission is not
aware of any problems concerning the pilot since its inception on
February 10, 2003.\26\
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\26\ The STA commented that the NASD was not obligated to modify
SuperMontage to allow expanded OE Firm access until April 28, 2003.
The Commission notes that by April 28, 2003, or an earlier date
determined by Nasdaq with appropriate notice for the Commission and
market participants, Nasdaq was required to have a programming
solution in place to inhibit the automatic matching of an OE Firm
order against its own order on the opposite side of the market. The
pilot allowing OE Firms access to SIZE began on February 10, 2003.
The programming solution to inhibit the automatic matching of OE
Firm orders was implemented on March 17, 2003. See letter from
Jeffrey Davis, Office of General Counsel, Nasdaq, to Katherine A.
England, Assistant Director, Division, Commission, dated February
25, 2003.
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Also, as previously discussed in the pilot approval order, the
Commission believes that the proposal is consistent with the goals of
Section 11A(a)(1)(C), particularly Congress' finding that it is
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in the public interest and appropriate for the protection of investors
and the maintenance of fair and orderly market to assure the
economically efficient execution of securities transactions. The
Commission believes that permanent approval of the proposal would
continue to provide OE Firms with greater flexibility to reflect buying
and selling interest at various price levels by entering Non-
Attributable Orders directly into SuperMontage, instead of relying on
ECNs and NNMS Market Makers to post their trading interest.
The Commission notes that STA suggested that the pilot be extended
for an additional 90 days to provide the Commission as well as other
market participants greater opportunity to study the potential impact
of the pilot. However, Nasdaq represented that there has been no
apparent negative market impact on public investors during the pilot,
and in fact, the pilot has proven to be a catalyst for additional
liquidity in SuperMontage. Further, the Commission notes that the pilot
has been in place since February 10, 2003, that 35 OE Firms are
currently participating in the pilot, and that the Commission is not
aware of any problems with the pilot. Accordingly, the Commission does
not believe that an extension of the pilot program is warranted in lieu
of granting permanent approval.
V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\27\ that the proposed rule change and Amendment No. 1 (SR-NASD-
2003-37) be, and it hereby is, approved.
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\27\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-12453 Filed 5-16-03; 8:45 am]
BILLING CODE 8010-01-P