[Federal Register Volume 68, Number 201 (Friday, October 17, 2003)]
[Notices]
[Pages 59832-59834]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-26257]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48619; File No. SR-NASD-2003-137]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change and Amendment No. 
1 thereto by the National Association of Securities Dealers, Inc. To 
Extend a Pilot Relating to the Issuance of Market Participant 
Identifiers

October 9, 2003.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on August 28, 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 and II below, which Items have been prepared by Nasdaq. On 
September 29, 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 and to 
approve the proposed rule change, as amended, on an accelerated basis.
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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 England, Assistant Director, 
Division of Market Regulation, Commission, dated September 29, 2003 
(``Amendment No. 1''). Amendment No. 1 replaces the proposed rule 
change in its entirety. In Amendment No. 1, Nasdaq corrected a 
statement in its initial proposal regarding the use of second MMIDs 
by market participants. Because Amendment No. 1 was filed after the 
pilot program had lapsed, Amendment No. 1 also revised the proposed 
rule change to convert it from a filing pursuant to Rule 19(b)(3)(A) 
under the Act to a filing pursuant to Rule 19(b)(2) under the Act, 
with a request for retroactive effectiveness.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is proposing to extend retroactively to September 1, 2003, 
and prospectively to March 1, 2004, a pilot program that enables 
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.\4\ The text 
of the proposed rule change is set forth below. Proposed deletions are 
in [brackets]; proposed new language is in italics.
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    \4\ Nasdaq originally filed the proposed rule change on August 
28, 2003, designating it as a non-controversial proposed rule change 
suitable for immediate effectiveness pursuant to Section 19(b)(3) of 
the Act and Rule 19b-4(f)(6) thereunder. 15 U.S.C. 78s(b)(3)(A); 17 
CFR 240.19b-4(f)(6). On September 29, 2003, Nasdaq submitted 
Amendment No. 1, which replaces the original proposed rule change in 
its entirety, and requested that the proposed rule change be 
approved retroactive to September 1, 2003.
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* * * * *

4613.Character of Quotations

(a) Quotation Requirements and Obligations
    (1) No Change.
    (2) For a [two] six-month pilot period beginning September 1, 2003, 
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) No Change.
    (b)-(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 III 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

[[Page 59833]]

Montage, and is assigned a unique 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).
    Effective July 1, 2003, Nasdaq amended NASD Rule 4613(a) for a two-
month pilot period to permit market makers and ECNs to request the use 
of a second MMID for displaying Attributable Quotes/Orders in the 
Nasdaq Quotation Montage (the ``Pilot'').\5\ Under the Pilot, a market 
maker may 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. The Pilot also 
provides that 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 NASD 
Rule 4623.
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    \5\ For a more detailed explanation of the Pilot, see Securities 
Exchange Act Release No. 47954 (May 30, 2003), 68 FR 34017 (June 6, 
2003) (File No. SR-NASD-2003-87).
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    Through this rule filing, Nasdaq is proposing to extend the Pilot 
retroactively to September 1, 2003, and prospectively to March 1, 2004. 
Since the Pilot began, Nasdaq has granted two market makers' 
applications for second MMIDs for displaying additional Attributable 
Quotes/Orders. As of the date of this filing, Nasdaq represents that 
neither market maker has begun displaying additional Attributable 
Quotes/Orders under the Pilot. In addition, three ECNs are authorized 
to use second MMIDs for displaying additional Attributable Quotes/
Orders in SuperMontage. Nasdaq represents that those ECNs were 
authorized to use second MMIDs prior to the launch of the Pilot. 
However, Nasdaq believes that their continued use of the second MMIDs 
is subsumed within the later-filed Pilot. According to Nasdaq, two of 
those three ECNs are currently using second MMIDs for displaying 
additional Attributable Quotes/Orders in SuperMontage.
    Nasdaq believes the Pilot, though not yet widely used by NASD 
members, will prove to be an important step in the evolution of its 
marketplace. Nasdaq represents that trading of Nasdaq securities has 
changed rapidly and dramatically due to increasingly sophisticated 
routing and linkage systems that are available to public investors, 
institutions, broker/dealers and vendors. Nasdaq believes that the 
ability to enter quotes and orders and to display quotations under a 
second MMID would help it keep pace with recent changes and allow it to 
offer functionality that market participants already find elsewhere 
today. Nasdaq believes that the Pilot should also improve the quality 
of executions within Nasdaq by enabling members to contribute more 
liquidity to the market and add to the transparency of trading 
interest. Due to the surveillance procedures described below, Nasdaq 
believes that the Pilot should also improve the regulation of trading 
in Nasdaq securities to the extent members consolidate more of their 
trading activity in Nasdaq.
    Nasdaq believes that it is essential to maintain its regulation of 
trading on Nasdaq at 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 NASD IM-2110-2, best execution obligations under NASD 
Rule 2320, or their obligations under the Commission's 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, NASD 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 Regulation 
M under the Act. 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, in conjunction with 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. Nasdaq and 
NASD have implemented a review process to ensure that firms utilizing 
second MMIDs under the Pilot do so in accordance with the terms under 
which use of the second MMID was granted.
    Further, Nasdaq represents that new, fully automated surveillance 
technology has been developed to enable NASD systems to analyze trading 
and generate alerts at the firm level (i.e., aggregating activity 
across all MMIDs for a firm into one primary MMID) or the individual 
MMID level (i.e., treating each MMID separately), depending on the 
particular surveillance requirements. Nasdaq believes that the use of 
firm-level information is essential to detecting market participants 
that may exceed certain surveillance thresholds at the firm level, but 
would otherwise go undetected at the individual MMID level. Further, 
Nasdaq believes that the ability to aggregate data and analyze data at 
the firm level is critical to identifying instances where a firm is 
using different MMIDs to engage in conduct such as marking-the-close 
and trading ahead, among other things.\6\ Conversely, Nasdaq believes 
that the use of specific MMID information is critical for the 
surveillance of individual quotes, trades and orders for compliance 
with firm quote obligations, among other things.
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    \6\ Nasdaq represents that it has had no occasion to withdraw 
the grant of a Secondary MMID due to improper usage under the Pilot.
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    If it were to be determined that a Secondary MMID issued under the 
Pilot 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 to no longer 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.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the Act, including section 15A(b)(6) of the Act,\7\ 
which requires,

[[Page 59834]]

among other things, that a registered national securities association's 
rules must be designed to promote just and equitable principles of 
trades, 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, in general, to protect investors and the public 
interest. Nasdaq believes that the proposed rule change, as amended, is 
consistent with these requirements because it would 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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    \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, 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. 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 the 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-
2003-137 and should be submitted by November 7, 2003.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
association.\8\ In particular, the Commission finds that the proposed 
rule change is consistent with section 15A(b)(6) of the Act, in that it 
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.\9\
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    \8\ In approving this proposal, as amended, the Commission has 
considered its impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
    \9\ 15 U.S.C. 78o-3(b)(6).
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    The Commission believes that an extension of the Pilot for an 
additional six months, retroactive to September 1, 2003, may allow 
market participants more time to utilize the Pilot. The Commission 
believes that the continued Pilot may benefit investors by increasing 
transparency and liquidity of trading interest in SuperMontage. The 
Commission also believes that the extension of the Pilot should enable 
Nasdaq to further evaluate the Pilot.
    The Commission notes that Nasdaq has represented that it, in 
conjunction with NASD, has developed procedures to maintain 
surveillance and member compliance with NASD and Commission rules. 
Furthermore, the Commission notes that Nasdaq represents that a firm's 
Secondary MMID would be withdrawn for all purposes and for all 
securities if it were to be determined that the firm was using the 
Secondary MMID improperly.
    Nasdaq has requested that the Commission find good cause for 
approving the proposed rule change and Amendment No. 1 thereto prior to 
the thirtieth day after publication of notice thereof in the Federal 
Register. The Commission believes that granting accelerated approval to 
extend the Pilot for an additional six months, and making such 
extension retroactive to September 1, 2003, will allow Nasdaq to 
continue, without interruption, the existing operation of the Pilot. 
Accordingly, the Commission finds good cause, pursuant to section 
19(b)(2) of the Act,\10\ for approving the proposed rule change, as 
amended, prior to the thirtieth day after the date of publication of 
notice thereof in the Federal Register.
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    \10\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\11\ that the proposed rule change (SR-NASD-2003-137), and 
Amendment No. 1 thereto, are hereby approved on an accelerated basis.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-26257 Filed 10-16-03; 8:45 am]
BILLING CODE 8010-01-P