[Federal Register Volume 68, Number 189 (Tuesday, September 30, 2003)]
[Notices]
[Pages 56358-56361]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24746]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48501; File No. SR-NASD-2003-128]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1 and 2 Thereto by the National Association 
of Securities Dealers, Inc. Relating to Establishing a Maximum ECN 
Access Fees in SuperMontage and Elimination of SuperMontage's Price/
Time With Fee Consideration and Price/Size Execution Algorithms

September 17, 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 August 11, 2003, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its subsidiary, the Nasdaq 
Stock Market, Inc. (``Nasdaq''), submitted to 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 September 10, 2003, Nasdaq filed Amendment 
No. 1 to the proposed rule change.\3\ Nasdaq filed Amendment No. 2 to 
the proposed rule change on September 15, 2003.\4\ 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 Edward S. Knight, Executive Vice President 
and General Counsel, Nasdaq, to Katherine A. England, Assistant 
Director, Division of Market Regulation (``Division''), Commission, 
dated September 9, 2003, replacing Nasdaq's original Form 19b-4 
filing in its entirety (``Amendment No. 1'').
    \4\ See letter from Thomas P. Moran, Associate General Counsel, 
Nasdaq, to Katherine A. England, Assistant Director, Division, 
Commission, dated September 12, 2003 (``Amendment No. 2''). In 
Amendment No. 2, Nasdaq made technical corrections to its rule text.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to amend NASD Rules 4623 and 4710 to: (1) establish 
a maximum level of quote/order access fees for Electronic 
Communications Networks (``ECNs'') that elect to participate in 
Nasdaq's National Market Execution System (``NNMS'' or 
``SuperMontage''); (2) eliminate SuperMontage's Price/Time with access 
fee consideration execution algorithm; and (3) eliminate SuperMontage's 
Price/Size execution algorithm. The text of the proposed rule change is 
below. Proposed new language is italicized; proposed deletions are in 
[brackets].
* * * * *
4623. Alternative Trading Systems
    (a) No Change.
    (b) An ATS or ECN that seeks to utilize the Nasdaq-provided means 
to comply with SEC Rule 301(b)(3), the ECN display alternatives, or to 
provide orders to Nasdaq voluntarily shall:
    (1) through (5) No Change.
    (6) not charge to broker-dealers that access the ATS or ECN through 
The Nasdaq National Market Execution System (SuperMontage) any fee that 
is inconsistent with the requirements of SEC Rule 301(b)(4) or that 
exceeds $0.003 per share.
    (c) No Change.
* * * * *
4701. Definitions
    Unless stated otherwise, the terms described below shall have the 
following meaning:
    (a) through (v) No Change.
    (w) The term ``NNMS Order Entry Firm'' shall mean a member of the 
Association who is registered as an Order Entry Firm for purposes of 
participation in NNMS. This term shall also include any Electronic 
Communications Network or Alternative Trading System that fails to meet 
all the requirements of Rule 4623. NNMS Order Entry Firms shall not 
charge any fee to a broker-dealer that accesses the NNMS Order Entry 
Firm's quote/order through NNMS.
    (x) through (jj) No Change.
* * * * *
4710. Participant Obligations in NNMS
    (a) Registration--Upon the effectiveness of registration as a NNMS 
Market Maker, NNMS ECN, or NNMS Order Entry Firm, the NNMS Participant 
may commence activity within NNMS for exposure to orders or entry of 
orders, as applicable. The operating hours of NNMS may be established 
as appropriate by the Association. The extent of participation in 
Nasdaq by an NNMS Order Entry Firm shall be determined solely by the 
firm in the exercise of its ability to enter orders into Nasdaq.
    (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) Obligations For each NNMS security in which it is registered, a 
Quoting Market Participant must accept and execute individual Non-
Directed Orders against its quotation, in an amount equal to or smaller 
than the combination of the Displayed Quote/Order and Reserve Size (if 
applicable) of such Quote/Order, when the Quoting Market Participant is 
at the best bid/best offer in Nasdaq. This obligation shall also apply 
to the Non-Attributable Quotes/Orders of NNMS Order Entry Firms. 
Quoting Market Participants, and NNMS Order Entry Firms, shall 
participate in the NNMS as follows:
    (i) NNMS Market Makers, NNMS Auto-Ex ECNs, and NNMS Order Entry 
Firms to the extent they enter a Non-Attributable Quote/Order shall 
participate in the automatic-execution functionality of the NNMS, and 
shall accept the delivery of an execution up to the size of the 
participant's Displayed Quote/Order and Reserve Size.
    (ii) NNMS Order-Delivery ECNs shall participate in the order-
delivery functionality of the NNMS, and shall accept the delivery of an 
order up to the size of the NNMS Order-Delivery ECN's Displayed Quote/
Order and Reserve Size. The NNMS Order-Delivery ECN shall be required 
to execute the full size of such order (even if the delivered order is 
a mixed lot or odd lot) unless that interest is no longer available in 
the ECN, in which case the ECN is required to execute in a size equal 
to the remaining amount of trading interest available in the ECN.
    (iii) UTP Exchanges that choose to participate in the NNMS shall do 
so as described in subparagraph (f) of this rule and as otherwise 
described in the NNMS rules and the UTP Plan.
    (B) Processing of Non-Directed Orders--Upon entry of a Non-Directed

[[Page 56359]]

Order into the system, the NNMS will ascertain who the next Quoting 
Market Participant or NNMS Order Entry Firm in queue to receive an 
order [is (based on the algorithm selected by the entering participant, 
as described in subparagraph (b)(B)(i)-(iii) of this rule),] and shall 
deliver an execution to Quoting Market Participants or NNMS Order Entry 
Firms that participate in the automatic-execution functionality of the 
system, or shall deliver a Liability Order to Quoting Market 
Participants that participate in the order-delivery functionality of 
the system. Non-Directed Orders entered into the NNMS system shall be 
delivered to or automatically executed against Quoting Market 
Participants' or NNMS Order Entry Firms' Displayed Quotes/Orders and 
Reserve Size, in strict price/time priority, as described in the 
algorithm contained in subparagraph (b)(B)(i) of this rule. 
[Alternatively, an NNMS Market Participant can designate that its Non-
Directed Orders be executed based on a price/time priority that 
considers ECN quote-access fees, as described in subparagraphs 
(b)(B)(ii) of this rule, or executed based on price/size/time priority, 
as described in subparagraph (b)(B)(iii) of this rule.] The individual 
time priority of each Quote/Order submitted to NNMS shall be assigned 
by the system based on the date and time such Quote/Order was received. 
Remainders of Quote/Orders reduced by execution, if retained by the 
system, shall retain the time priority of their original entry. For 
purposes of the execution algorithm[s] described [in paragraphs (i), 
(ii) and (iii)] below, ``Displayed Quotes/Orders'' shall also include 
any odd-lot, odd-lot portion of a mixed-lot, or any odd-lot remainder 
of a round-lot(s) reduced by execution, share amounts that while not 
displayed in the Nasdaq Quotation Montage, remain in system and 
available for execution.
    (i) [Default] Execution AlgorithmPrice/Time--The system will 
[default to a strict price/time priority within Nasdaq, and will 
attempt to] access interest in the system in the following priority and 
order:
    a. through c. No Change.
    [(ii) Price/Time Priority Considering Quote-Access Fees--If this 
option is chosen, the system will attempt to access interest in the 
system in the following priority and order:
    a. Displayed Quotes/Orders of NNMS Market Makers, displayed Non-
Attributable Quotes/Orders of NNMS Order Entry Firms, displayed Quotes/
Orders of NNMS ECNs that do not charge a separate quote-access fee to 
non-subscribers, and non-attributable agency Quotes/Orders of UTP 
Exchanges (as permitted by subparagraph (f) of this rule), as well as 
Quotes/Orders from NNMS ECNs that charges a separate quote-access fee 
to non-subscribers where the ECN entering such Quote/Order indicates 
that the price improvement offered by the specific Quote/Order is equal 
to or exceeds the separate quote-access fee the ECN charges, in time 
priority between such participants' Quotes/Orders;
    b. Displayed Quotes/Orders of NNMS ECNs that charge a separate 
quote-access fee to non-subscribers, in time priority between such 
participants' Quotes/Orders;
    c. Reserve Size of NNMS Market Makers and NNMS Order Entry Firms, 
and NNMS ECNs that do not charge a separate quote-access fee to non-
subscribers, as well as Reserve Size of Quotes/Orders from NNMS ECNs 
that charges a separate quote-access fee to non-subscribers where the 
ECN entering such Quote/Order has indicated that the price improvement 
offered by the specific Quote/Order is equal to or exceeds the separate 
quote-access fee the ECN charges, in time priority between such 
participants' Quotes/Orders;
    d. Reserve Size of NNMS ECNs that charge a separate quote-access 
fee to non-subscribers, in time priority between such participants' 
Quotes/Orders; and
    e. Principal Quotes/Orders of UTP Exchanges, in time priority 
between such participants' Quotes/Orders.
    (iii) Price/Size Priority--If this option is chosen, Non-Directed 
Orders shall be executed in price/size/time priority against:
    a. Displayed Quotes/Orders of NNMS Market Makers, displayed Non-
Attributable Quotes/Orders of NNMS Order Entry Firms, displayed Quotes/
Orders of NNMS ECNs, and non-attributable agency Quotes/Orders of UTP 
Exchanges (as permitted by subparagraph (f) of this rule), in price/
size/time priority between such participants' Quotes/Orders;
    b. The Reserve Size of Nasdaq Quoting Market Participants and NNMS 
Order Entry Firms, in price/size/time priority between such 
participants' Quotes/Orders, which size priority shall be based on the 
size of the Displayed Quote/Order, and not on the amount held in 
Reserve Size; and
    c. Principal Quotes/Orders of UTP Exchanges, in price/size/time 
priority between such participants' Quotes/Orders.]
    [(iv)] (ii) Exceptions--The following exceptions shall apply to the 
above execution parameters:
    (a) If a Nasdaq Quoting Market Participant enters a Non-Directed 
Order into the system, before sending such Non-Directed Order to the 
next Quoting Market Participants in queue, the NNMS will first attempt 
to match off the order against the Nasdaq Quoting Market Participant's 
own Quote/Order if the participant is at the best bid/best offer in 
Nasdaq. This exception shall not apply to Non-Directed Orders entered 
by NNMS Order Entry Firms. Nasdaq Quoting Market Participants may, and 
NNMS Order Entry Firms must, avoid any attempted automatic system 
matching permitted by this paragraph through the use of an anti-
internalization qualifier (AIQ) quote/order flag containing the 
following values: ``Y'' or ``I'', subject to the following 
restrictions:
    Y--if the Y value is selected, the system will execute the flagged 
quote/order solely against attributable and non-attributable quotes/
orders (displayed and reserve) of Quoting Market Participants and NNMS 
Order Entry Firms other than the party entering the AIQ ``Y'' flagged 
quote/order. If the only available trading interest is that of the same 
party that entered the AIQ ``Y'' flagged quote/order, the system will 
not execute at an inferior price level, and will instead return the 
latest entered of those interacting quote/orders (or unexecuted 
portions thereof) to the entering party.
    I--if the I value is selected, the system will execute against all 
available trading interest, including the quote/orders of the NNMS 
Order Entry Firm or Nasdaq Quoting Market Participant that entered the 
AIQ ``I'' flagged order[, based exclusively on the execution algorithm 
selected when entering the AIQ I flagged quote/order] in price/time 
priority. The I value described above shall be available for the use of 
Nasdaq Quoting Market Participants on May 12, 2003.
    b. through c. No Change.
    (C) through (D) No Change.
    (2) through (8) No Change.
    (c) through (e) 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, as 
amended. The text of these statements may be examined at

[[Page 56360]]

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
    The rules of Nasdaq's SuperMontage system allow the participation 
of ECNs. Many of these ECNs charge, as permitted by the Securities and 
Exchange Commission, a separate fee to other market participants that 
access the ECN's quote/order. There is, however, substantial disparity 
in the level of these fees among ECNs participating in SuperMontage, 
with some ECNs charging access fees, in some instances, three times as 
high as other participating ECNs.
    Nasdaq believes that these gross fee disparities are of particular 
concern in a system like SuperMontage that extensively automates the 
matching of buy and sell trading interest using neutral execution 
algorithms that limit the ability of users to select or anticipate 
exactly who their counter-party, or counter-parties, to particular 
trade will be. The result is that users enter orders into SuperMontage 
and end up executing against a variety of market participants 
including, in some cases, ECNs that charge access fees significantly 
higher than others. In turn, Nasdaq believes that the inability of 
system users to reasonably anticipate their trading costs, due to these 
large access fee disparities, discourages those users from entering 
their quote/orders into the SuperMontage system thereby depriving all 
SuperMontage participants of beneficial liquidity.
    In response to the above, Nasdaq has determined to establish, as 
explicitly permitted by Rule 301(b)(4) of Regulation ATS,\5\ a maximum 
permissible quote/order access fee amount for ECNs that elect to 
participate and execute transactions in the SuperMontage system. Nasdaq 
proposes to establish the maximum SuperMontage ECN access fee amount at 
$0.003 (three mils) per share. Participating ECNs will be free to 
charge quote/order access fees less than the $0.003 maximum. Nasdaq 
notes that the $0.003 maximum proposed here is equivalent to the 
execution fee Nasdaq imposes on parties automatically executing against 
quotes/orders through SuperMontage. Nasdaq believes that this access 
fee level is also generally in keeping with the level of access fee 
imposed by most ECNs today. In addition, Nasdaq believes that the 
$0.003 access fee cap retains transparency in the system by maintaining 
a reasonable nexus between displayed prices in the montage and actual 
execution prices obtained by market participants that interact with 
fee-charging ECNs. As such, Nasdaq believes that $0.003 maximum access 
fee is designed to maintain consistency in Nasdaq's market and provide 
equivalent and fair access to available quotes/orders.
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    \5\ 17 CFR 242.301(b)(4).
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    ECNs that desire to charge more than $0.003 amount for access to 
its quote/orders will not be permitted to post liquidity in 
SuperMontage as an NNMS ECN. They will, however, be permitted to 
continue to participate in SuperMontage as NNMS Order Entry Firms as a 
method to access or post liquidity in the system. As NNMS Order Entry 
Firms, those ECNs will have any quotes/orders entered into the system 
displayed and processed in the same manner as other NNMS Order Entry 
Firms. This will include having such quote/orders be represented only 
via the SIZE MMID and also making them subject to automatic execution. 
As NNMS Order Entry Firms, these ECNs will not be allowed to impose any 
fee on a broker-dealer that accesses them through the SuperMontage 
system. As NNMS Order Entry Firms, such ECNs will be eligible for 
Nasdaq's liquidity provider rebate.
    In concert with establishing a maximum ECN quote access fee amount, 
Nasdaq has also determined to eliminate the Price/Time with fee 
consideration execution algorithm currently available in SuperMontage. 
Nasdaq believes that, having rationalized ECN access fees through the 
establishment of a maximum fee amount, it is also now appropriate to 
eliminate the Price/Time with fee consideration execution algorithm 
within the system for all ECNs that have agreed to participate in 
SuperMontage and comply with the ECN $0.003 maximum fee standard. 
Nasdaq views the proposals to establish a maximum ECN quote/order 
access fee in SuperMontage and to eliminate the above execution 
algorithm as linked and will implement them at the same time.
    Finally, Nasdaq has also determined to eliminate SuperMontage's 
Price/Size execution algorithm. This algorithm is rarely used in 
SuperMontage, with a recent analysis indicating that it accounts for 
less than 7% of orders entered into the system. In addition, 
elimination of the Price/Size algorithm reduces system complexity 
within SuperMontage. In order to efficiently manage Nasdaq programming 
resources, elimination of the Price/Size execution algorithm will take 
place on the same date as the elimination of the Price/Time with fee 
consideration algorithm.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A of the Act,\6\ in 
general, and with Section 15A(b)(6) of the Act,\7\ in particular, in 
that the proposed rule change is designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principals 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 mechanism of a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest. Nasdaq believes that the 
creation of a maximum ECN access fee put forth in this proposal is 
explicitly permitted by Regulation ATS' Rule 301(b)(4) which provides 
in relevant part ``* * * if the national securities exchange or 
national securities association to which an alternative trading system 
provides the prices and sizes of orders * * * establishes rules 
designed to ensure consistency with standards for access to the 
quotations displayed on such national securities exchange, or the 
market operated by such national securities association, the 
alternative trading system shall not charge any fee to members that is 
contrary to, that is not disclosed in the manner required by, or that 
is inconsistent with any standard of equivalent access established by 
such rules.''
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    \6\ 15 U.S.C. 78o-3.
    \7\ 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, as amended, 
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

    The Exchange neither solicited nor received written comments with 
respect to the proposed rule change, as amended.

[[Page 56361]]

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 
number SR-NASD-2003-128 and should be submitted by October 21, 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).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-24746 Filed 9-29-03; 8:45 am]
BILLING CODE 8010-01-P