[Federal Register Volume 68, Number 100 (Friday, May 23, 2003)]
[Notices]
[Pages 28312-28313]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-12939]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47883; File No. SR-NASD-2003-72]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendment No. 1 Thereto by the National Association of 
Securities Dealers, Inc. To Reduce the Non-Directed Order Maximum 
Response Time for Order-Delivery ECNs in Nasdaq's SuperMontage System

May 16, 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 April 14, 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 May 15, 
2003, Nasdaq submitted 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\ See letter from Thomas P. Moran, Associate General Counsel, 
Nasdaq, to Katherine A. England, Assistant Director, Division of 
Market Regulation, Commission, dated May 15, 2003 (``Amendment No. 
1''). Amendment No. 1: (1) Inserts a section I to Exhibit 1 of the 
filing that Nasdaq inadvertently excluded; and (2) clarifies in the 
purpose section of the proposal that Nasdaq believes that commenters 
concerns regarding prior SuperMontage system issues related to the 
delivery of orders to market participants are no longer valid.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to reduce, from 30 seconds to 7 seconds, the 
maximum time allowed for Nasdaq's National Market Execution System 
(``NNMS'') Order-Delivery Electronic Communications Networks (``Order-
Delivery ECNs'') to respond to non-directed orders sent to them by 
Nasdaq's SuperMontage system (``SuperMontage''). Below is the text of 
the proposed rule change. Proposed new language is underlined; proposed 
deletions are in brackets.
* * * * *

4710. Participant Obligations in NNMS

    (a) No Change.
    (b) Non-Directed Orders.
    (1) No Change.
    (A) through (B) No Change.
    (C) Decrementation Procedures--The size of a Quote/Order displayed 
in the Nasdaq Order Display Facility and/or the Nasdaq Quotation 
Montage will be decremented upon the delivery of a Liability Order or 
the delivery of an execution of a Non-Directed Order or Preferenced 
Order in an amount equal to the system-delivered order or execution.
    (i) No Change.
    (ii) If an NNMS Order-Delivery ECN declines or partially fills a 
Non-Directed Order without immediately transmitting to Nasdaq a revised 
Attributable Quote/Order that is at a price inferior to the previous 
price, or if an NNMS Order-Delivery ECN fails to respond in any manner 
within [30] 7 seconds of order delivery, the system will cancel the 
delivered order and send the order (or remaining portion thereof) back 
into the system for immediate delivery to the next Quoting Market 
Participant in queue. The system then will zero out the ECN's Quote/
Orders at that price level on that side of the market, and the ECN's 
quote on that side of the market will remain at zero until the ECN 
transmits to Nasdaq a revised Attributable Quote/Order. If both the

[[Page 28313]]

bid and offer are zeroed out, the ECN will be placed into an excused 
withdrawal state until the ECN transmits to Nasdaq a revised 
Attributable Quote/Order.
    (iii) through (iv) 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, NASD rules regarding Nasdaq's SuperMontage system allow 
NNMS Order-Delivery ECNs a maximum time period of 30 seconds to respond 
to non-directed orders sent to them by the system.\4\ If an Order-
Delivery ECN fails to respond within those 30 seconds, the delivered 
order is canceled by SuperMontage and forwarded to the next NNMS 
Quoting Market Participant in queue for execution. The ECN's quote at 
the price level on the side of the market to which the order was 
delivered is then reduced to zero.\5\ In this filing, Nasdaq proposes 
to reduce that maximum response time from 30 seconds to 7 seconds. 
Other than the reduction in the response-time maximum, Nasdaq 
represents that non-directed orders that time-out in ECNs will continue 
to be processed (e.g., canceled by SuperMontage and forwarded to the 
next party available for execution) in the same manner.
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    \4\ See NASD rule 4710(b)(1)(C)(ii).
    \5\ The ECN's quote on that side of the market will remain at 
zero until the ECN transmits to Nasdaq a revised Attributable Quote/
Order. If both the bid and offer are zeroed out, the ECN will be 
placed into an excused withdrawal state until the ECN transmits to 
Nasdaq a revised Attributable Quote/Order.
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    Nasdaq believes that the current 30-second response time is 
excessive, and can inappropriately delay the processing of orders.\6\ 
According to Nasdaq, this is particularly the case given Nasdaq's 
recent analysis of ECN responsiveness, which indicates that the average 
response-time across all ECNs participating in SuperMontage is less 
than one quarter of a single second. Nasdaq believes that the 7-second 
maximum response time proposed here draws an appropriate balance 
between giving ECNs ample time to execute non-directed orders sent to 
them, and the need of other market participants to more swiftly 
retrieve and execute orders originally dispatched to non-responsive 
ECNs. Nasdaq will continue to monitor ECN responsiveness to delivered 
orders in SuperMontage and propose additional modification to response 
time parameters if warranted.
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    \6\ Nasdaq notes that the 30-second time period contained in the 
current rule resulted, in part, because of concerns raised by 
commenters about past Nasdaq system issues related to the delivery 
of messages to market participants. Nasdaq believes that, based upon 
SuperMontage's performance to date, such concerns are no longer 
valid.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of section 15A of the Act \7\ in 
general, and with section 15A(b)(6) of the Act \8\ 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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    \7\ 15 U.S.C. 78o-3.
    \8\ 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.

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 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-2003-72 should be 
submitted by June 13, 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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 Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-12939 Filed 5-22-03; 8:45 am]
BILLING CODE 8010-01-P