[Federal Register Volume 68, Number 109 (Friday, June 6, 2003)]
[Notices]
[Pages 34017-34021]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14257]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47954; File No. SR-NASD-2003-87]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Regarding the Issuance of Market Participant 
Identifiers

May 30, 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 May 22, 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. The

[[Page 34018]]

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

    The proposed rule would enable members that are registered as 
market makers or electronic communications networks (``ECNs'') to 
request and receive a second market participant identifier (``MMID'') 
with which to enter a second Attributable Quote/Order in the Nasdaq 
Quotation Montage or to enter non-attributable orders into SIZE in 
SuperMontage. The rule change would be established as a two-month pilot 
program currently scheduled to begin on July 1, 2003. Nasdaq will issue 
a Head Trader Alert publicly announcing the precise start and end dates 
of the pilot. The text of the proposed rule change is set forth below. 
Proposed new language is in italics; proposed deletions are in 
[brackets].
* * * * *
4613.Character of Quotations
(a) [Two-Sided] Quotation[s] Requirements and Obligations
    (1) Two-Sided Quote Obligation. For each security in which a member 
is registered as a market maker, the member shall be willing to buy and 
sell such security for its own account on a continuous basis and shall 
enter and maintain a two-sided quotation (``Principal Quote''), which 
is attributed to the market maker by a special maker participant 
identifier (``MMID'') and is displayed in the Nasdaq Quotation Montage 
at all times, subject to the procedures for excused withdrawal set 
forth in Rule 4619.
    (A) No Change.
    (B) No Change.
    (2) For a two-month pilot period, market makers and ECNs may 
request the use of a second MMID. A market maker may request the use of 
a second MMID for displaying Attributable Quotes/Orders in the Nasdaq 
Quotation Montage for any security in which it is registered and meets 
the obligations set forth in subparagraph (1) of this rule. An ECN may 
request the use of a second MMID for displaying Attributable Quotes/
Orders in the Nasdaq Quotation Montage for any security in which it 
meets the obligations set forth in Rule 4623. A market maker or ECN 
that ceases to meet the obligations appurtenant to its first MMID in 
any security shall not be permitted to use the second MMID for any 
purpose in that security.
    (3) Members that are permitted the use of second MMIDs for 
displaying Attributable Quotes/Orders pursuant to subparagraph (2) of 
this rule are subject to the same rules applicable to the members' 
first quotation, with two exceptions: (a) The continuous two-sided 
quote requirement and excused withdrawal procedures described in 
subparagraph (1) above, as well as the procedures described in Rule 
4710(b)(2)(B) and (b)(5), do not apply to market makers' second MMIDs; 
and (b) the second MMID may not be used by market makers to engage in 
passive market making or to enter stabilizing bids pursuant to NASD 
Rules 4614 and 4619.
    (b)-(e) No Change.
* * * * *

IM-4613-1--Procedures For Allocation of Second Displayable MMIDs

    Nasdaq has a technological limitation on the number of displayed, 
attributable quotations in an individual security, although it has not 
reached that maximum to date in any security. Therefore, Nasdaq must 
consider the issuance and display of a second MMID to be a privilege 
and not a right. Nasdaq has developed the following method for 
allocating the privilege of receiving and displaying a second MMID in 
an orderly, predictable, and fair manner on a stock-by-stock basis.
    Nasdaq will automatically designate a market maker's first MMID as 
a ``Primary MMID'' and its second MMID as a ``Secondary MMID.'' Market 
makers are required to use their Primary MMID in accordance with the 
requirements of NASD Rule 4613(a)(1) above, as well as all existing 
requirements for the use of MMIDs in Nasdaq systems. Market makers' use 
of Secondary MMIDs are subject to the requirements set forth in NASD 
Rule 4613(a)(2) and (a)(3) above, including the prohibition on passive 
market making. However, the two-sided quote requirement, and the 
excused withdrawal procedures under NASD Rule 4619, and 4710(b)(2)(B) 
and (b)(5) will not apply to the secondary MMID. Nasdaq will 
automatically designate each ECN's MMIDs as Primary and Secondary. Each 
ECN MMID will be subject to the requirements of NASD Rule 4623 and the 
existing ECN requirements of the NASD Rule 4700 Series. Members may 
also use a Secondary MMID to enter non-attributable orders into SIZE.
    Nasdaq, in conjunction with the NASD, has developed procedures to 
maintain a high level of surveillance and member compliance with its 
rules with respect to members' use of both Primary and Secondary MMIDs 
to display quotations in Nasdaq systems. If it is determined that a 
Secondary MMID is being used improperly, Nasdaq will withdraw its grant 
of the Secondary MMID for all purposes for all securities. In addition, 
if a market maker or ECN no longer fulfills the conditions appurtenant 
to its Primary MMID (e.g., by being placed into an unexcused 
withdrawal), it may not use the Secondary MMID for any purpose in that 
security.
    The first priority of Nasdaq's method for allocating the privilege 
of displaying a second MMID is that each market maker or ECN should be 
permitted to register to display a single quotation in a security under 
its Primary MMID before any is permitted to register to display a 
second quotation under a Secondary MMID. Each market maker or ECN may 
register its Primary MMID to display a quotation in a security, on a 
first-come-first-served basis. After each market maker or ECN has been 
permitted to register its Primary MMID to display quotations in a 
stock, Nasdaq will then register Secondary MMIDs to display Attributed 
Quotes/Orders in that security on a first-come-first-served basis, 
consistent with the procedures listed below. If Nasdaq comes within 
five MMIDs of its maximum in a particular security, Nasdaq will 
temporarily cease registering additional Secondary MMIDs in that 
security and reserve those five remaining MMIDs for members that may 
register their Primary MMID in that stock in the future. If Nasdaq 
allocates those reserved MMIDs to members requesting Primary MMIDs and 
then receives additional requests for Primary MMIDs, it will use the 
procedure described below to reallocate Secondary MMIDs to members 
requesting Primary MMIDs.
    For any stock in which Nasdaq has reached the maximum number of 
members registered to display quotations, once each month, Nasdaq will 
rank each of the market participants that has two MMIDs in the stock 
according to their monthly volume of trading, based on the lower volume 
of that participant's two MMIDs. Nasdaq will withdraw the second MMID 
display privilege of the lowest volume participant in that ranking and 
assign that privilege to the first member that requested the ability to 
display a second quotation. Nasdaq will repeat this process as many 
times as needed to accommodate all pending requests for Primary and 
Secondary MMIDs. The low-ranking member(s) will lose the ability to 
display a second quotation in that security for that month, but will 
still be permitted to use the second MMID to enter non-attributable 
orders into SIZE

[[Page 34019]]

for that security or any other, and to display a second quote in any 
stocks in which it is properly registered to do so, subject to the 
conditions described in the rule and this interpretive material.
* * * * *

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
    An NASD member that registers as a market maker or ECN is permitted 
to enter one two-sided quotation per security in the Nasdaq Quotation 
Montage, and is assigned a unique market participant identifier 
(``MMID'') with which to enter such quotations. The NASD 4600 Rule 
Series governs the character of such quotations and the rights and 
obligations of members that display quotations in the Nasdaq Quotation 
Montage via their MMIDs. The NASD Rule 4700 Series sets forth the 
rights and obligations of members that participate in the Nasdaq 
National Market Execution System (``SuperMontage''), including the 
entry of quotes and orders and the display of quotations. Numerous 
other NASD and Commission rules govern the conduct of members in their 
use of MMIDs to enter and execute orders and display quotes, including, 
for example, NASD IM-2110-2 (the ``Manning Interpretation''), NASD Rule 
6950 (the ``Order Audit Trail System''), and NASD Rule 2320 (the ``Best 
Execution'' rule).
    Nasdaq proposes to amend NASD Rule 4613(a) to permit market makers 
and ECNs to request the use of a second MMID for displaying 
Attributable Quotes/Orders in the Nasdaq Quotation Montage. A market 
maker would be entitled to request the use of a second MMID for 
displaying Attributable Quotes/Orders in any security in which it is 
registered and meets the obligations set forth in NASD Rule 4613(a)(1), 
including the maintenance of a continuous two-sided quotation. An ECN 
would be entitled to request the use of a second MMID for displaying 
Attributable Quotes/Orders in the Nasdaq Quotation Montage for any 
security in which it meets the obligations set forth in Rule 4623.
    Members that are permitted the use of second MMIDs for displaying 
Attributable Quotes/Orders would be subject to the same rules 
applicable to the members' first quotation. In other words, market 
makers that display a second Attributable Quote/Order would be required 
to comply with all rules applicable to market makers that display a 
single Attributable Quote/Order, and ECNs would be required to comply 
with all rules applicable to ECNs in their display of Attributable 
Quotes/Orders. There would be only two exceptions to that general 
principle. First, the continuous two-sided quote requirement and 
excused withdrawal procedures, as well as the procedures described in 
NASD Rule 4710(b)(2)(B) and (b)(5) would not apply to market makers' 
use of second MMIDs. Second, a market maker would be permitted to use 
only one MMID, its Primary MMID, to engage in passive market making or 
to enter stabilizing bids pursuant to NASD Rules 4614 and 4619. In all 
other respects, members would have the same rights and obligations in 
using a second MMID to enter quotes and orders and to display 
quotations as they do today.
    Nasdaq believes that the ability to enter quotes and orders and to 
display quotations under a second MMID would benefit the Nasdaq market 
by enabling members to contribute more liquidity to the market, add to 
the transparency of trading interest, and better serve the needs of 
investors.\3\ Members would use the second MMID to route orders and 
quotes to SuperMontage from different units within their firms, 
including market making, arbitrage, retail, and institutional trading 
desks, among others. Within the same firm, these desks serve a variety 
of functions and investors, often with different needs and goals that 
are accomplished by differing trading strategies or practices. Members 
that, in the past, have specialized in a particular investor type or 
trading practice have expanded and integrated their operations. Nasdaq 
believes that these members require the ability to participate in 
Nasdaq trading in new ways.
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    \3\ Nasdaq will assess no fees for the issuance or use of a 
second MMID, other than the SEC-approved transaction fees set forth 
in NASD Rule 7010.
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    At the same time, Nasdaq believes that it is essential for it to 
maintain its regulation of trading on Nasdaq and the same high level of 
compliance with NASD and Commission rules that it believes it has 
achieved to date. Except as noted in the proposed rule, members that 
use a second MMID would be required to comply with all NASD and 
Commission rules applicable to their current use of a single MMID. 
Members would be prohibited from using a second MMID to accomplish 
indirectly what they are prohibited from doing directly through a 
single MMID. For example, members would not be permitted to use a 
second MMID to avoid their Manning obligations under IM-2110-2, best 
execution obligations under NASD Rule 2320, or their obligations under 
the Commission Order Handling Rules. Members would be required to 
continue to comply with the firm quote rule, the OATS rules, and the 
Commission order routing and execution quality disclosure rules. In 
addition, Rule 4613(a) specifically prohibits firms from displaying a 
second Attributable Quote/Order to engage in passive market making or 
to enter stabilizing bids because this could violate NASD Rules 4614 
and 4619 and Commission Regulation M. To the extent that the allocation 
of second MMIDs were to create regulatory confusion or ambiguity, every 
inference would be drawn against the use of a second MMID in a manner 
that would diminish the quality or rigor of the regulation of the 
Nasdaq market.
    Nasdaq represents that it has a technological limitation on the 
number of displayed, attributable quotations in an individual security, 
although it has not reached that maximum to date in any security. 
Therefore, Nasdaq must consider the issuance and display of a second 
MMID to be a privilege and not a right. Nasdaq has developed the 
following method for allocating the privilege of receiving and 
displaying a second MMID in an orderly, predictable, and fair manner on 
a stock-by-stock basis.
    Nasdaq would automatically designate a market maker's first MMID as 
a Primary MMID and its second MMID as a Secondary MMID. Market makers 
would be required to use their Primary MMID in accordance with the 
requirements of NASD Rule 4613(a)(1), as well as all existing 
requirements for the use of MMIDs in Nasdaq systems. Market makers' use 
of Secondary MMID's would be subject to the requirements set forth in 
NASD Rule 4613(a)(2) and (a)(3), including the prohibition on passive 
market making. However, the two-sided quote requirement, and the 
excused withdrawal procedures under NASD Rule 4619, and 4710(b)(2)(B) 
and (b)(5)

[[Page 34020]]

would not apply to the Secondary MMID. Nasdaq would automatically 
designate each ECN's MMIDs as Primary and Secondary. Each ECN MMID 
would be subject to the requirements of NASD Rule 4623 and the existing 
ECN requirements of the NASD Rule 4700 Series. Members would also be 
permitted to use a Secondary MMID to enter non-attributable orders into 
SIZE.
    Nasdaq represents that it, in conjunction with the NASD, has 
developed procedures to maintain a high level of surveillance and 
member compliance with its rules with respect to members' use of both 
Primary and Secondary MMIDs to display quotations in Nasdaq systems. If 
it were to be determined that a Secondary MMID was being used 
improperly, Nasdaq would withdraw its grant of the Secondary MMID for 
all purposes for all securities. In addition, if a market maker or ECN 
were no longer to fulfill the conditions appurtenant to its Primary 
MMID (e.g., by being placed into an unexcused withdrawal), it would not 
be permitted to use the Secondary MMID for any purpose in that 
security.
    The first priority of Nasdaq's method for allocating the privilege 
of displaying a second MMID is that each market maker or ECN should be 
permitted to register to display a single quotation in a security under 
its Primary MMID before any is permitted to register to display a 
second quotation under a Secondary MMID. Each market maker or ECN would 
register its Primary MMID to display a quotation in a security on a 
first-come-first-served basis. After each market maker or ECN has been 
permitted to register its Primary MMID to display quotations in a 
stock, Nasdaq would then register Secondary MMIDs to display Attributed 
Quotes/Orders in that security on a first-come-first-served basis, 
consistent with the procedures listed below. If Nasdaq were to come 
within five MMIDs of its maximum in a particular security, Nasdaq would 
temporarily cease registering additional Secondary MMIDs in that 
security and reserve those five remaining MMIDs for members that may 
register their Primary MMID in that stock in the future. If Nasdaq were 
to allocate those reserved MMIDs to members requesting Primary MMIDs 
and were then to receive additional requests for Primary MMIDs, it 
would use the procedure described below to reallocate Secondary MMIDs 
to members requesting Primary MMIDs.
    For any stock in which Nasdaq has reached the maximum number of 
members registered to display quotations, once each month, Nasdaq would 
rank each of the market participants that has two MMIDs in the stock 
according to their monthly volume of trading, based on the lower volume 
of that participant's two MMIDs. Nasdaq would withdraw the second MMID 
display privilege of the lowest volume participant in that ranking and 
assign that privilege to the first member that requested the ability to 
display a second quotation. Nasdaq would repeat this process as many 
times as needed to accommodate all pending requests for Primary and 
Secondary MMIDs. The low-ranking member(s) would lose the ability to 
display a second quotation in that security for that month, but would 
still be permitted to use the second MMID to enter non-attributable 
orders into SIZE for that security or any other, and to display a 
second quote in any stocks in which it is properly registered to do so, 
subject to the conditions described in the rule and this interpretive 
material.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) of the Act,\4\ which requires, 
among other things, that a registered national securities association's 
rules must be designed 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 mechanisms of a free and open market and a national 
market system, and to protect investors and the public interest. Nasdaq 
believes that the proposed rule change is consistent with these 
requirements because it will facilitate transactions in securities, 
remove impediments to a free and open market, and protect investors by 
improving the transparency and efficiency of transactions.
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    \4\ 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, as amended.

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

    The foregoing rule change has been filed by Nasdaq as a ``non-
controversial'' rule change pursuant to section 19(b)(3)(A)(i) of the 
Act \5\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\6\ 
Consequently, because the foregoing proposed rule change: (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 on which it 
was filed, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest,\7\ 
and Nasdaq provided the Commission with written notice of its intent to 
file the proposed rule change at least five days prior to the filing 
date, it has become effective pursuant to section 19(b)(3)(A) of the 
Act and Rule 19b-4 thereunder.
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    \5\ 15 U.S.C. 78s(b)(3)(A)(i).
    \6\ 17 CFR 240.19b-4(f)(6).
    \7\ Nasdaq withdrew its request that the Commission waive the 
30-day operative delay in view of the fact that the 30-day operative 
delay will have expired prior to the scheduled start date of the 
pilot program, July 1, 2003. Telephone conversation between Jeffrey 
S. Davis, Associate General Counsel Nasdaq, and Ann E. Leddy, 
Attorney, Division of Market Regulation, Commission (May 30, 2003).
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    At any time within 60 days of the filing of such proposed rule 
change, the Commission may summarily abrogate the 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
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

[[Page 34021]]

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 number SR-NASD-2003-87 and 
should be submitted by June 27, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-14257 Filed 6-5-03; 8:45 am]
BILLING CODE 8010-01-P