[Federal Register Volume 68, Number 113 (Thursday, June 12, 2003)]
[Notices]
[Pages 35246-35248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14830]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47993; File No. SR-NASD-2003-81]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by National Association of 
Securities Dealers, Inc. Relating to Quote Decrementation in 
SuperMontage

June 5, 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 12, 2003, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association''), through its subsidiary the Nasdaq Stock 
Market, Inc. (``Nasdaq''), filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in items I, II, and III below, which items have been prepared 
by Nasdaq. On May 29, 2003, Nasdaq filed Amendment No. 1 to the 
proposal.\3\ The Commission is publishing this notice, as amended, 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.
    \3\ See letter from Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated May 29, 2003 (``Amendment No. 1''). In Amendment No. 1, Nasdaq 
replaced the proposed rule change in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to modify how the quotes of order-delivery 
Electronic Communication Networks (``ECNs'') in Nasdaq's National 
Market Execution System (``NNMS'' or ``SuperMontage'') will be 
decremented after they decline an order shipped to them, or partially 
fill an order sent to them, or fail to respond to the delivery within 
30 seconds.\4\ Under the proposal, order-delivery ECNs that decline an 
order, partially fill an order, or fail to respond within 30 seconds to 
orders sent to them (``time-out'') by SuperMontage will no longer have 
all of their trading interest at or better than the declined price 
level removed from the system. Instead, the system after a decline, 
partial fill, or time-out, will remove the entire amount of each 
individual quote(s)/order(s) to which the orders was delivered to by 
NNMS. The proposed rule text is as follows:
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    \4\ Nasdaq's original target date for implementation of this 
proposal, if approved by the Commission, was June 16, 2003. Nasdaq 
has revised its intended implementation time-frame for mid-July 
2003, and will notify the Commission and market participants when a 
firm date has been set. Telephone conversation between Thomas Moran, 
Associate General Counsel, Nasdaq, and Marc McKayle, Special 
Counsel, Division, Commission on June 5, 2003.
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    Proposed new language is italicized; proposed deletions are in 
[brackets].

4710. Participant Obligations in NNMS

(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) 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) If an NNMS Auto-Ex ECN has its bid or offer Attributable Quote/
Order and Reserve Size decremented to zero without transmission of 
another Attributable Quote/Order to Nasdaq, the system will zero out 
the side of the quote that is exhausted. If both the bid and offer are 
decremented to zero without transmission of a revised Attributable 
Quote/Order, the ECN will be placed into an excused withdrawal state 
until the ECN transmits to Nasdaq a revised Attributable Quote/Order.
    (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 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] eligible Quote/Order in queue. The system then will zero 
out [the] those ECN['s] Quote/Orders to which the Non-Directed Order 
was delivered. [at that price level on that side of the market,] If 
there are no other Quote/Orders at the declined price level, [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 
bid and offer are zeroed out, the ECN will be placed into an excused 
withdrawal state until the

[[Page 35247]]

ECN transmits to Nasdaq a revised Attributable Quote/Order.
    (iii) If an NNMS ECN's Quote/Order has been zeroed out or if the 
ECN has been placed into excused withdrawal as described in 
subparagraphs (b)(1)(C)(i) and (ii) of this rule, the system will 
continue to access the ECN's Non-Attributable Quotes/Orders that are in 
the NNMS, as described in rule 4707 and subparagraph (b) of this rule.
* * * * *

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, the rules of the SuperMontage provide that if an NNMS 
Order Delivery ECN declines,\5\ partially fills, or fails to respond 
within 30 seconds to a non-directed order delivered to it by the 
system, without immediately transmitting a revised Attributable Quote/
Order at an inferior price, NNMS will zero out all the Quotes/Orders of 
that ECN on the same side of the market at the price level of the 
declined order or better.\6\ This processing was incorporated into 
SuperMontage to ameliorate locked or crossed markets \7\ that had 
previously occurred in Nasdaq when ECNs declined to trade with other 
market participants, usually based on a dispute over the imposition, or 
the amount, of an ECN's quote-access fee. The following example 
illustrates how the quote/order reduction process currently operates 
for an ECN alone at the inside that elected to enter three separate bid 
quotes/orders at the same price level in SuperMontage:

    \5\ An ECN's decline to a delivered order must be the result of 
an access fee-dispute, or otherwise be permitted under the SEC Firm 
Quote rule. NASD Regulation surveils for violations of the Firm 
Quote rule.
    \6\ Nasdaq notes that it recently filed a proposed rule change 
to reduce the maximum 30-second response time to a 7 second response 
time. See Securities Exchange Act Release No. 34-47883 (May 16, 
2003), 68 FR 28312 (May 23, 2003) (Notice of File No. NASD-2003-72).
    \7\ See Securities Exchange Act Release No. 34-43863 (January 
19, 2001), 66 FR 8020 (January 26, 2001).

ECN Quote (1)--1000 shares @ 20.00
ECN Order (2)--500 shares @ 20.00
ECN Order (3)--300 shares @ 20.00

The inside aggregated bid shows 1800 shares @ 20.00.
    1. SuperMontage receives an 800 share market sell order.
    2. In response, SuperMontage sends an 800 share order to ECN Quote 
(1). Upon dispatch, SuperMontage decrements ECN Quote 
(1) by the amount of the delivery (800 shares) leaving a 
display quote of 1000 shares (including 200 shares in ECN Quote 
(1)) that remains available for execution.
    3. The ECN declines to execute the 800 share order delivered to ECN 
Quote (1), and does not immediately transmit a revised 
Attributable Quote/Order at an inferior price.
    4. If not yet executed against by a subsequent incoming order, the 
ECN's decline results in the removal of ECN Quote (1) (i.e., 
the 800 shares originally decremented and the 200 share remainder of 
ECN Quote (1)), and Orders (2) and (3) from 
the system.
    5. The inside moves to the next best bid less than 20.00 and the 
system reallocates the 800 shares from the incoming order received in 
Step 1.
    In response to concerns raised by some NNMS Order Delivery ECNs 
that the above quote decrementation method disadvantages Quotes/Orders 
entered by them that would otherwise be executed but for the 
elimination of all the ECN's trading interest on the same side of the 
market at the declined price level, \8\ Nasdaq has determined to modify 
the SuperMontage quote/order reduction process. Under the new approach 
to ECN quote/order decrementation after a decline, partial-fill, or 
time-out, will no longer result in an ECN's entire trading interest at 
the declined price level or better being removed from the system. 
Instead, SuperMontage will only remove the total amount of each 
individual quote(s)/order(s) to which the orders were delivered by 
SuperMontage. That is, SuperMontage will remove in their entirety only 
those Quotes/Orders with which the system attempts to trade with an 
order delivery ECN, but fails to do because of a decline, partial fill, 
or time-out. The following example illustrates how the new quote/order 
reduction process would operate for an ECN alone at the inside that 
elected to enter three separate bid quotes/orders at the same price 
level in SuperMontage:
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    \8\ For example, Nasdaq notes the concern that the removal of 
all the ECN's trading interest at the declined price level may 
prevent other Quotes/Orders that did not specifically decline a 
delivery from SuperMontage from potentially executing with market 
participants that have arrangements with the ECN to pay an access 
fee.

ECN Quote (1)--1000 shares @ 20.00
ECN Order (2)--500 shares @ 20.00
ECN Order (3) 300 shares @ 20.00
The inside aggregated bid shows 1800 shares @ 20.00.

    1. SuperMontage receives an 800 share market sell order.
    2. In response, SuperMontage sends an 800 share delivery to ECN 
Quote (1). Upon dispatch, SuperMontage decrements ECN Quote 
(1) by the amount of the delivery (800 shares) leaving a 
display quote of 1000 shares in ECN Quote (1) that remains 
available for execution.
    3. The ECN declines to execute the 800 share delivery to ECN Quote 
(1).
    4. If not executed against by a subsequent incoming order, the 
ECN's decline results only in the removal of ECN Quote (1), 
i.e., the 800 shares originally decremented and the 200 share remainder 
of ECN Quote (1). Orders (2) and (3) remain 
in the system and continue to be eligible for execution.
    5. The system reallocates the 800 shares from the incoming order in 
Step 1 against ECN orders (2) and (3) before moving, 
if necessary, to the next best bid.
    In short, only individual Quotes/Orders are removed in full by a 
decline, partial-fill, or a time-out where no revised Attributable 
Quote/Order is immediately transmitted at an inferior price; not all 
trading interest at the declined price level or better. Other ECN 
Quotes/Orders at a particular price level that are not part of a 
SuperMontage delivery resulting in a decline or a time-out are retained 
in the system and remain available for execution and are not traded 
through. Nasdaq notes that nothing in this new processing of Order 
Delivery ECN Quotes/Orders after declines, partial-fills, or time-outs 
allows the creation of a locked or crossed market during the trading 
day in SuperMontage. As such, Nasdaq believes that the above approach 
draws an appropriate balance between its need to ensure the smooth 
operation of its market and the desire of NNMS Order Delivery ECNs to 
maximize the potential for execution for Quotes/Orders they submit to 
NNMS.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the

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provisions of section 15A of the Act,\9\ in general and with section 
15A(b)(6) of the Act,\10\ in particular, in that the proposal is 
designed to promote just and equitable principles of trade, 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.
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    \9\ 15 U.S.C. 78o-3.
    \10\ 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-2003-81 and should be submitted by July 3, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-14830 Filed 6-11-03; 8:45 am]
BILLING CODE 8010-01-P