[Federal Register Volume 68, Number 200 (Thursday, October 16, 2003)]
[Notices]
[Pages 59659-59661]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26099]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48606; File No. SR-NASD-2003-134]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the National Association of 
Securities Dealers, Inc. To Amend Rule 4710 To Allow Nasdaq National 
Market Execution System Order Entry Firms To Automatically Internalize 
in SuperMontage

October 8, 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 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. On September 
26, 2003, Nasdaq amended 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 (``Division''), Commission, dated September 25, 
2003 (``Amendment No. 1''). In Amendment No. 1, Nasdaq expands upon 
the purpose of the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to amend Rule 4710 to allow the Nasdaq National 
Market Execution System (``NNMS'' or ``SuperMontage'') to automatically

[[Page 59660]]

match any non-directed buy and sell quotes/orders entered by an NNMS 
Order Entry Firm against the quotes/orders of that same NNMS Order 
Entry Firm on the other side of the market if such a quote/order on the 
other side of the market is at the best bid/offer in Nasdaq. Nasdaq 
expects to implement the proposed rule change within 60 days after 
approval by the Commission. The text of the proposed rule change is set 
forth below. Proposed new language is in italic; proposed deletions are 
in [brackets].
4710. Participant Obligations in NNMS
    (a) No change.
    (b) Non-Directed Orders
    (1) No change.
    (A) No change.
    (B) No change.
    (i) through (iii) No change.
    (iv) Exceptions--The following exceptions shall apply to the above 
execution parameters:
    (a) If a Nasdaq Quoting Market Participant or NNMS Order Entry Firm 
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 or NNMS Order Entry Firm'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 and NNMS Order Entry 
Firms 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.

[The I value described above shall be available for the use of Nasdaq 
Quoting Market Participants on May 12, 2003.]

    (b) 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, as 
amended, 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, SuperMontage rules provide a general exception to the 
system's execution algorithms that allow non-directed orders entered by 
NNMS Market Makers and NNMS ECNs to first match off against any quotes/
order previously entered by that same party on the opposite side of the 
market if that previously entered quote/order is at the best bid/offer 
in Nasdaq.\4\ Market participants can voluntarily avoid or control this 
automatic matching functionality through use of anti-internalization 
qualifiers that will either skip quotes/orders entered by them on the 
opposite side of the market or execute against them based solely on the 
execution algorithm selected.
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    \4\ Nasdaq clarified that the rules governing UTP Exchanges do 
not explicitly permit this function, although NASD Rule 4710(e) 
contemplates that such a function may be provided by Nasdaq to a UTP 
Exchange pursuant to contract. Consequently, at the request of 
Nasdaq, Commission staff has removed a reference to UTP Exchanges 
contained in the original filing. Telephone conversation between 
Thomas P. Moran, Associate General Counsel, Nasdaq, and Ann E. 
Leddy, Attorney, Division, Commission (October 8, 2003).
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    NNMS Order Entry Firms are currently prohibited from using this 
automatic matching functionality and are instead required to enter all 
non-directed orders with an anti-internalization qualifier that 
prevents an automatic match. Nasdaq represents that, in response to 
requests from NNMS Order Entry Firms, it seeks to give NNMS Order Entry 
Firms the same capability as all other NNMS users to have their non-
directed orders match off against quote/orders previously entered by 
them on the opposite side of the market if those previously entered 
quotes/orders are at the best bid or offer price in Nasdaq, as 
appropriate. Like all other system users, NNMS Order Entry Firms would 
have the voluntary ability to prohibit or control any automatic 
matching through the use of an anti-internalization qualifier. Nasdaq 
believes that providing NNMS Order Entry Firms with the opportunity to 
have their quotes/orders on opposite sides of the market match off 
against each other will provide an additional incentive for such firms 
to post increased liquidity in the SuperMontage system, thereby 
benefiting all users.\5\
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    \5\ See Amendment No. 1, supra note 3.
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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,\6\ in 
general, and with Section 15A(b)(6) of the Act,\7\ in particular, 
because it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with person 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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    \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

    Written comments were neither solicited nor received.

[[Page 59661]]

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, as amended, or
    B. Institute proceedings to determine whether the proposed rule 
change, as amended, 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-2003-134 and should be submitted by November 6, 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. 03-26099 Filed 10-15-03; 8:45 am]
BILLING CODE 8010-01-P