[Federal Register Volume 68, Number 170 (Wednesday, September 3, 2003)]
[Notices]
[Pages 52433-52435]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-22410]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48412; File No. SR-NASD-2003-112]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Locked Markets in the Nasdaq InterMarket

August 26, 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 July 18, 2003 the National Association of Securities Dealers, Inc. 
(``NASD''), through its subsidiary, the Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed a proposed rule change with the Securities and 
Exchange Commission (``Commission''). On August 5, 2003, the NASD filed 
Amendment No. 1 to the proposed rule change.\3\ The proposed rule 
change is described in Items I, II, and III below, which Nasdaq has 
prepared. 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 Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq, to Kathy England, Assistant Director, 
Division of Market Regulation, Commission dated August 4, 2003.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is filing a proposed rule change to amend NASD Rule 5263, 
which addresses locked and crossed markets in exchange-listed 
securities, to conform Nasdaq's rule more closely with the locked 
markets rule contained in the ITS Plan. The text of the proposed rule 
change is below. Proposed new language is italicized; proposed 
deletions are in [brackets].
* * * * *
NASD Rule 5263. Locked or Crossed Markets
    (a) No Change.

[[Page 52434]]

    (b) No Change.
    (c)(1) [(A)] Unless excused by operation of paragraphs [(c)(1)(B)] 
(c)(2) or (d) below an ITS/CAES Market Maker that makes a bid or offer 
and in so doing creates a locked or crossed market with an ITS 
Participant Exchange or another ITS/CAES Market Maker and that receives 
a complaint through ITS/CAES or CAES from the party whose bid (offer) 
was locked or crossed (the ``aggrieved party''), the ITS/CAES Market 
Maker responsible for the locking offer (bid) shall, as specified in 
the complaint, either promptly ``ship'' (i.e., satisfy through ITS/CAES 
or CAES the locked bid (offer) up to the size of his locking offer 
(bid)) or ``unlock'' (i.e., adjust his locking offer (bid) so as not to 
cause a locked market). If the complaint specifies ``unlock,'' it may 
nevertheless ship instead.
    ([B]2) If there is an error in a locking bid or offer that relieves 
the locking ITS/CAES Market Maker from its obligations under paragraph 
(c)(2) of Rule 11Ac1-1 and if the ITS/CAES Market Maker receives a 
``ship'' complaint through ITS/CAES or CAES from the aggrieved party, 
the locking ITS/CAES Market Maker shall promptly cause the quotation to 
be corrected and, except as provided in paragraph (d) below, it shall 
notify the aggrieved party through ITS/CAES or CAES of the error within 
two minutes of receipt of the complaint. If the locking ITS/CAES Market 
Maker fails to so notify the aggrieved party, he shall promptly ship.
    [(2) An ITS/CAES Market Maker that makes a bid or offer and in so 
doing creates a locked or crossed market with another ITS/CAES Market 
Maker shall promptly send to such other ITS/CAES Market Maker an order 
seeking either the bid or offer which was locked or crossed, unless 
excused by operation of paragraph (d) below. Such order shall be for 
either the number of shares he has bid for (offered) or the number of 
shares offered (bid for) by the ITS/CAES Market Maker, whichever is 
less.]
    (d) 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Nasdaq InterMarket is a quotation, communication, and execution 
system that allows NASD members to trade stocks listed on the New York 
Stock Exchange (``NYSE'') and the American Stock Exchange 
(``Amex'').\4\ The InterMarket competes with regional exchanges like 
the Chicago Stock Exchange (``CHX'') and the Cincinnati Stock Exchange 
(``CSE'') for retail order flow in stocks listed on the NYSE and the 
Amex. InterMarket comprises CAES, a system that facilitates the 
execution of trades in listed securities between NASD members that 
participate in InterMarket, and ITS, a system that permits trades 
between NASD members and specialists on the floors of national 
securities exchanges that trade listed securities.
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    \4\ Nasdaq's InterMarket formerly was referred to as Nasdaq's 
Third Market. See Securities Exchange Act Release No. 42907 (June 7, 
2000); 65 FR 37445 (June 14, 2000) (SR-NASD-00-32).
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    The national market system plan governing the Intermarket Trading 
System (``ITS Plan'') requires national securities exchanges and the 
NASD to adopt a model rule governing locked and crossed markets in ITS-
eligible securities. The current wording of the NASD rule differs 
slightly from that required by the ITS Plan, in that it treats locks 
and crosses that occur completely within the Nasdaq InterMarket 
differently than it treats locks and crosses that occur between 
InterMarket participants and ITS participant exchanges. Nasdaq believes 
that this difference increases the regulatory and compliance burdens of 
NASD members that participate in CAES and in ITS, as well as increasing 
the regulatory burdens on the NASD itself, without any offsetting 
benefits to the InterMarket or its members.
    NASD Rule 5263 currently requires ITS/CAES Market Makers that 
create locked or crossed markets with another ITS Participant to comply 
with the precisely defined procedure expressed in the ITS Plan, which 
requires that a locking participant respond only after a locked market 
complaint has been properly registered. In contrast, the rule requires 
that ITS/CAES Market Makers that lock other ITS/CAES Market Makers 
within CAES promptly send the locked or crossed Market Maker an order 
seeking the number of shares of the locked/crossed bid or offer without 
waiting for the locked or crossed Market Maker to complain. Nasdaq 
believes that the more stringent requirement within the InterMarket can 
cause CAES Market Makers to prematurely send an order to trade without 
having the input or an understanding of the locked party's intentions 
to trade. Nasdaq also believes that it forces ITS/CAES Market Makers to 
be familiar with and engage in two different procedures in response to 
the same behavior, creating unnecessary confusion and cost.
    To eliminate this disparity vis-[agrave]-vis other markets, Nasdaq 
proposes to simply mirror the language of the ITS Plan and to remove 
the more restrictive language with respect to locks or crosses that 
occur between ITS/CAES Market Makers. Nasdaq believes that although 
locking and crossing behavior can provide valuable price discovery 
information to market participants, regulatory incentives help minimize 
the extent to which such locks and crosses interfere with the smooth 
operation of the InterMarket and with ITS/CAES Market Makers' internal 
systems.
    According to Nasdaq, applying the same locked and crossed rule to 
both ITS and CAES will also improve Nasdaq's ability to effectively 
enforce Section 8(d) of the ITS Plan. In a June 13, 2003 letter from 
Lori Richards, Director of the Office of Compliance Inspections and 
Examinations to Robert Glauber, Chairman and Chief Executive Officer of 
the NASD, Ms. Richards recommended that the NASD improve its regulatory 
program for detecting and disciplining InterMarket participants that 
violate the lock/cross provisions of the ITS Plan and NASD Rule 5263. 
Nasdaq is working diligently to respond to that recommendation. This 
proposal is one of several steps the NASD and Nasdaq will take in 
response to Ms. Richards' recommendation.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A of the Act,\5\ in general 
and with Section 15A(b)(6) of the Act,\6\ in particular, in that the 
proposal is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
competition 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

[[Page 52435]]

open market and a national market system, and, in general, to protect 
investors and, in general, the public interest.
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    \5\ 15 U.S.C. 78o-3.
    \6\ 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 Exchange 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 at 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 the File 
No. SR-NASD-2003-112 and should be submitted by September 24, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-22410 Filed 9-2-03; 8:45 am]
BILLING CODE 8010-01-P