[Federal Register Volume 68, Number 208 (Tuesday, October 28, 2003)]
[Notices]
[Pages 61508-61524]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-27089]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48674; File No. SR-NASD-2003-149]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to SuperMontage and ITS Securities

October 21, 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 October 6, 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. The Commission 
is publishing this notice 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.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is proposing to enhance the Nasdaq National Market Execution 
System (``NNMS'' or ``SuperMontage''). Nasdaq proposes to trade via 
SuperMontage all securities that are eligible for trading via the 
Intermarket Trading System (``ITS Securities''). Under the proposal, 
NASD members will trade ITS Securities using the SuperMontage 
functionality that the Commission has previously approved for the 
trading of Nasdaq-listed securities, with certain modifications needed 
to ensure that NASD members continue to comply with all pre-existing 
NASD and Commission rules governing the trading of ITS Securities. 
Nasdaq will publish a phase-in process for the trading of ITS 
Securities on the SuperMontage platform after approval by the 
Commission. The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in [brackets].
* * * * *

4700. Nasdaq National Market Execution System (NNMS)

4701. Definitions

    Unless stated otherwise, the terms described below shall have the 
following meaning:
    (a) The term active NNMS securities shall mean those NNMS eligible 
securities in which at least one NNMS Market Maker or ITS/CAES Market 
Maker is currently active in NNMS.
    (b) Reserved
    (c) The term Attributable Quote/Order shall have the following 
meaning:
    (1) For NNMS Market Makers and NNMS ECNs, a bid or offer Quote/
Order that is designated for display (price and size) next to the 
participant's [MMID] MPID in the Nasdaq Quotation Montage once such 
Quote/Order becomes the participant's best attributable bid or offer.
    (2) For ITS/CAES Market Makers, a bid or offer Quote/Order that is 
designated for display (price and size) next to the participant's MPID 
once such Quote/Order becomes the participant's best attributable bid 
or offer.
    [(2)](3) For UTP Exchanges, the best bid and best offer quotation 
with price and size that is transmitted to Nasdaq by the UTP Exchange, 
which is displayed next to the UTP Exchange's [MMID] MPID in the Nasdaq 
Quotation Montage.
    (d) The term Automated Confirmation Transaction service or ACT 
shall mean the automated system owned and operated by The Nasdaq Stock 
Market, Inc., which compares trade information entered by ACT 
Participants and submits ``locked-in'' trades to clearing.
    (e) The term automatic refresh size shall mean the default size to 
which an NNMS Market Maker's quote will be refreshed pursuant to NASD 
Rule 4710(b)(2), if the market maker elects to utilize the Quote 
Refresh Functionality and does not designate to Nasdaq an alternative 
refresh size, which must be at least one normal unit of trading. The 
automatic refresh size default amount shall be 1,000 shares.
    (f) The term Directed Order shall mean an order in a Nasdaq-listed 
security that is entered into the system by an NNMS participant that is 
directed to a particular Quoting Market Participant at any price, 
through the Directed Order process described in Rule 4710(c). This term 
shall not include the ``Preferenced Order'' described in subparagraph 
(aa) of this rule. Directed Orders shall not be available for ITS 
Securities.
    (g) The term Displayed Quote/Order shall mean both Attributable and 
Non-Attributable (as applicable) Quotes/Orders transmitted to Nasdaq by 
Quoting Market Participants or NNMS Order Entry Firms.
    (h) The term Firm Quote Rule shall mean SEC Rule 11Ac1-1.
    (i) The term Immediate or Cancel shall mean, for limit orders so 
designated, that if after entry into the NNMS a marketable limit order 
(or unexecuted portion thereof) becomes non-marketable, the order (or 
unexecuted portion thereof) shall be canceled and returned to the 
entering participant.
    (j) The term Liability Order shall mean an order that when 
delivered to a Quoting Market Participant imposes an obligation to 
respond to such order in a manner consistent with the Firm Quote Rule.
    (k) The term limit order shall mean an order to buy or sell a stock 
at a specified price or better.
    (l) The term market order shall mean an unpriced order to buy or 
sell a stock at the market's current best price.
    (m) The term marketable limit order shall mean a limit order to buy 
that, at the time it is entered into the NNMS, is priced at the current 
inside offer or higher, or a limit order to sell that, at the time it 
is entered into the NNMS, is priced at the inside bid or lower.
    (n) The term mixed lot shall mean an order that is for more than a 
normal unit of trading but not a multiple thereof.
    (o) The term Non-Attributable Quote/Order shall mean:

[[Page 61509]]

    (1) for orders in Nasdaq-listed securities, a bid or offer Quote/
Order that is entered by a Nasdaq Quoting Market Participant or NNMS 
Order Entry Firm and is designated for display (price and size) on an 
anonymous basis in the Nasdaq Order Display Facility. UTP Exchanges may 
submit Non-Attributable Quote/Order(s) in conformity with Rule 4710(e).
    (2) for orders in ITS Securities, a bid or offer Quote/Order that 
is entered by an ITS/CAES Market Maker and is designated for display 
(price and size) and/or execution on an anonymous basis in the Nasdaq 
Order Display Facility. NNMS Order Entry Firms shall be eligible to 
enter Non-Attributable orders in ITS Securities only if they are 
designated as Immediate or Cancel.
    (p) The term Non-Directed Order shall mean an order that is entered 
into the system by an NNMS Participant and is not directed to any 
particular Quoting Market Participant or ITS Exchange, and shall also 
include Preferenced Orders as described in subparagraph (aa) of this 
rule.
    (q) The term Non-Liability Order shall mean for Nasdaq listed 
securities an order that when delivered to a Quoting Market Participant 
imposes no obligation to respond to such order under the Firm Quote 
Rule. For ITS Securities, only orders preferenced to an ITS exchange 
can be non-liability orders.
    (r) The term Nasdaq National Market Execution System, NNMS, or 
system shall mean the automated system owned and operated by The Nasdaq 
Stock Market, Inc. which enables NNMS Participants to execute 
transactions in active NNMS authorized securities; to have reports of 
the transactions automatically forwarded to the appropriate National 
Market Trade Reporting System, if required, for dissemination to the 
public and the industry, and to ``lock in'' these trades by sending 
both sides to the applicable clearing corporation(s) designated by the 
NNMS Participant(s) for clearance and settlement; and to provide NNMS 
Participants with sufficient monitoring and updating capability to 
participate in an automated execution environment.
    (s) The term NNMS eligible securities shall mean designated Nasdaq-
listed equity securities and ITS Securities as that term is defined in 
NASD Rule 5210(c).
    (t) The term NNMS ECN shall mean a member of the Association that 
meets all of the requirements of NASD Rule 4623, and that participates 
in the NNMS with respect to one or more Nasdaq listed [NNMS eligible] 
securities.
    (1) The term NNMS Auto-Ex ECN shall mean an NNMS ECN that 
participates in the automatic-execution functionality of the NNMS 
system, and accordingly executes Non-Directed Orders via automatic 
execution for the purchase or sale of an active Nasdaq listed [NNMS] 
security at the Nasdaq inside bid and/or offer price.
    (2) The term NNMS Order-Delivery ECN shall mean an NNMS ECN that 
participates in the order-delivery functionality of the NNMS system, 
accepts delivery of Non-Directed Orders that are Liability Orders, and 
provides an automated execution of Non-Directed Orders (or an automated 
rejection of such orders if the price is no longer available) for the 
purchase or sale of an active Nasdaq listed [NNMS] security at the 
Nasdaq inside bid and/or offer price.
    (u) The term NNMS Market Maker shall mean a member of the 
Association that is registered as a Nasdaq Market Maker and as a Market 
Maker for purposes of participation in NNMS with respect to one or more 
Nasdaq listed [NNMS eligible] securities, and is currently active in 
NNMS and obligated to execute orders through the automatic-execution 
functionality of the NNMS system for the purchase or sale of an active 
Nasdaq listed [NNMS] security at the Nasdaq inside bid and/or offer 
price.
    (v) The term NNMS Participant shall mean an NNMS Market Maker, NNMS 
ECN, UTP Exchange, [or] ITS/CAES Market Maker, or NNMS Order Entry Firm 
registered as such with the Association for participation in NNMS.
    (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 
entering orders in NNMS Securities into NNMS [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) The term Nasdaq Quotation Montage shall mean the portion of the 
Nasdaq WorkStation presentation that displays for a particular stock 
two columns (one for bid, one for offer), under which is listed in 
price/time priority the [MMID] MPIDs for each NNMS Market Maker, NNMS 
ECN, and UTP Exchange registered in the stock and the corresponding 
quote (price and size) next to the related [MMID] MPID.
    (y) The term Nasdaq Quoting Market Participant shall include only 
the following: (1) NNMS Market Makers; [or] (2) NNMS ECNs[.] and (3) 
ITS/CAES Market Makers.
    (z) The term odd-lot order shall mean an order that is for less 
than a normal unit of trading.
    (aa) The term Preferenced Order shall mean an order that is entered 
into the Non-Directed Order Process and is designated to be delivered 
to or executed against a particular Quoting Market Participant's 
Attributable Quote/Order if the Quoting Market Participant is at the 
best bid/best offer when the Preferenced Order is the next in line to 
be executed or delivered. Preferenced Orders shall be executed subject 
to the conditions set out in Rule 4710(b).
    (bb) The term Quote/Order shall mean a single quotation or shall 
mean an order or multiple orders at the same price submitted to Nasdaq 
by a Nasdaq Quoting Market Participant or NNMS Order Entry Firm that is 
displayed in the form of a single quotation. Unless specifically 
referring to a UTP Exchange's agency Quote/Order (as set out in Rule 
4710([f]e)(2)(b)), when this term is used in connection with a UTP 
Exchange, it shall mean the best bid and/or the best offer quotation 
transmitted to Nasdaq by the UTP Exchange.
    (cc) The term Quoting Market Participant shall include any of the 
following: (1) NNMS Market Makers; (2) NNMS ECNs; [and] (3) UTP 
Exchange Specialists, and ITS/CAES Market Makers.
    (dd) The term Reserve Size shall mean the system-provided 
functionality that permits a Nasdaq Quoting Market Participant or NNMS 
Order Entry Firm to display in its Displayed Quote/Order part of the 
full size of a proprietary or agency order, with the remainder held in 
reserve on an undisplayed basis to be displayed in whole or in part 
after the displayed part is reduced by executions to less than a normal 
unit of trading.
    (ee) The term Nasdaq Order Display Facility shall mean the portion 
of the Nasdaq WorkStation presentation that displays, without 
attribution to a particular Quoting Market Participant's [MMID] MPID, 
the five best price levels in Nasdaq on both the bid and offer side of 
the market and the aggregate size of Attributable and Non-Attributable 
Quotes/Orders at each price level.
    (ff) The term UTP Exchange shall mean any registered national 
securities exchange that elects to participate in the NNMS and that has 
unlisted trading privileges in Nasdaq National Market securities 
pursuant to the Joint Self-Regulatory Organization Plan Governing the 
Collection, Consolidation and Dissemination Of Quotation and 
Transaction Information For Exchange-

[[Page 61510]]

Listed Nasdaq/National Market System Securities Traded On Exchanges On 
An Unlisted Trading Privilege Basis (``Nasdaq UTP Plan'').
    (gg) The term Legacy Quote shall mean the quotation mechanism that 
existed in Nasdaq on or before July 1, 2002, and that does not permit 
the entry of Quotes/Orders at multiple price levels in the NNMS.
    (hh) The term Day shall mean, for orders so designated, that if 
after entry into the NNMS, the order is not fully executed, the order 
(or unexecuted portion thereof) shall remain available for potential 
display and/or execution until market close (4 p.m. Eastern Time), 
after which it shall be returned to the entering party.
    (ii) The term Good-till-Cancelled shall mean, for orders so 
designated, that if after entry into NNMS, the order is not fully 
executed, the order (or unexecuted portion thereof) shall remain 
available for potential display and/or execution until cancelled by the 
entering party, or until 1 year after entry, whichever comes first.
    (jj) The term End-of-Day shall mean, for orders so designated, that 
if after entry into the NNMS, the order is not fully executed, the 
order (or unexecuted portion thereof) shall remain available for 
potential execution and/or display until market close (4 p.m. Eastern 
Time), and thereafter for potential execution until 6:30 p.m. Eastern 
Time, after which it shall be returned to the entering party. End-of-
Day orders shall not be available for ITS Securities.
    (kk) The term Auto Ex shall mean for orders in Nasdaq listed 
securities so designated, an order that will execute solely against the 
Quotes/Orders of NNMS Participants that participate in the automatic 
execution functionality of the NNMS and that do not charge a separate 
quote-access fee to NNMS Participants accessing their Quotes/Orders 
through the NNMS.
    (ll) The term Fill or Return shall mean for orders in ITS 
Securities so designated, an order that is to be delivered to or 
executed by NNMS Participants without delivering the order to an ITS 
Exchange and without trading through the quotations of ITS Exchanges.
    [(ll)] (mm) The term Pegged shall mean, for orders so designated, 
that after entry into the NNMS, the price of the order is automatically 
adjusted by NNMS in response to changes in the Nasdaq inside bid or 
offer, as appropriate. The price of a Pegged Order may be equal to the 
inside quote on the same side of the market (a Regular Pegged Order) or 
may be equal to a specified amount better than the inside quote on the 
contra side of the market (a Reverse Pegged Order). The market 
participant entering a Pegged Order may (but is not required to) 
specify a cap price, to define a price at which pegging of the order 
will stop and the order will be converted into an un-pegged limit 
order. Pegged Orders shall not be available for ITS Securities.
    (nn) The term Discretionary shall men:
    (1) for orders in Nasdaq listed securities so designated, an order 
that when entered into NNMS has both a displayed bid or offer price, as 
well as a non-displayed discretionary price range in which the 
participant is also willing to buy or sell, if necessary. The display 
price may be fixed, or pegged to the inside quote on the same side of 
the market (or a specified amount better than the inside quote on the 
contra side of the market if designated as a short sale order), and the 
pegging of the discretionary order may be capped in the same manner as 
a pegged order.
    (2) for orders in ITS Securities so designated, an order that when 
entered into NNMS has both a displayed bid or offer price, as well as a 
non-displayed discretionary price range in which the participant is 
also willing to buy or sell, if necessary. The display price must be 
fixed. A Discretionary Order in an ITS Security may not result in a 
quote that locks or crosses the national best bid and offer and shall 
not be executed at a price that trades through the quotation of an ITS 
Exchange unless it is designated as a Sweep Order.
    (oo) The term Summary shall mean, for orders so designated, an 
order that if marketable upon entry and receipt by NNMS, shall be 
rejected and returned to the entering party.
    (pp) The term ITS/CAES Market Maker shall mean a member of the 
Association that is registered as an ITS/CAES Market Maker as defined 
in NASD Rule 5210(e) and as a Market Maker for purposes of 
participation in NNMS with respect to one or more ITS Securities, and 
is currently active in NNMS. ITS/CAES Market Makers shall be permitted 
to execute orders in ITS Securities through the automatic execution or 
order delivery functionality of the NNMS system for the purchase or 
sale of active ITS Securities.
    (qq) The term ITS Exchange shall mean a national securities 
exchange that participates in the ITS system as defined in Rule 
5210(a). ITS Exchanges shall not be eligible to participate in the 
NNMS. ITS Commitments sent by ITS Exchanges shall be processed by the 
system in accordance with the ITS Plan and all applicable NASD rules 
governing the participation in ITS. Quotes/Orders that are eligible for 
ITS will be processed by the system and delivered to the appropriate 
ITS Exchange as an ITS Commitment in accordance with the requirements 
of the ITS Plan and all applicable NASD rules.
    (rr) The term Sweep Order shall mean, for orders in ITS Securities 
so designated, an order that may be delivered to or executed by NNMS 
Participants at multiple price levels.
    (ss) The term Total Day shall mean, for orders so designated, that 
if after entry into the NNMS, the order is not fully executed, the 
order (or unexecuted portion thereof) shall remain available for 
potential display between 7:30 a.m. and 6:30 p.m. and for potential 
execution between market open. and 6:30 p.m., after which it shall be 
returned to the entering party.
    (tt) The term Total Good-till-Cancelled shall mean, for orders so 
designated, that if after entry into NNMS, the order is not fully 
executed, the order (or unexecuted portion thereof) shall remain 
available for potential display between 7:30 a.m. and 6:30 p.m. and for 
potential execution between market open and 6:30 p.m., until cancelled 
by the entering party, or until 1 year after entry, whichever comes 
first.
    (uu) The term Total Immediate or Cancel shall mean, for limit 
orders so designated, that if after entry into the NNMS a marketable 
limit order (or unexecuted portion thereof) becomes non-marketable, the 
order (or unexecuted portion thereof) shall be canceled and returned to 
the entering participant. Such orders are available for potential 
execution between 9:30 a.m. and 6:30 p.m.

4705. NNMS Participant Registration

    (a) Participation in NNMS as an NNMS Market Maker requires current 
registration as such with the Association. Such registration shall be 
conditioned upon the NNMS Market Maker's initial and continuing 
compliance with the following requirements:
    (1) Execution of an NNMS Participant application agreement with the 
Association;
    (2) Membership in, or access arrangement with a participant of a 
clearing agency registered with the Commission that maintains 
facilities through which NNMS compared trades may be settled;
    (3) Registration as a market maker in The Nasdaq Stock Market 
pursuant to the Rule 4600 Series and compliance with all applicable 
rules and operating procedures of the Association and the Commission;

[[Page 61511]]

    (4) Maintenance of the physical security of the equipment located 
on the premises of the NNMS Market Maker or to prevent the improper use 
or access to Nasdaq systems, including unauthorized entry of 
information into NNMS; and
    (5) Acceptance and settlement of each NNMS trade that NNMS 
identifies as having been effected by such NNMS Market Maker, or if 
settlement is to be made through another clearing member, guarantee of 
the acceptance and settlement of such identified NNMS trade by the 
clearing member on the regularly scheduled settlement date.
    (b) Pursuant to Rule 4611(f), participation as an NNMS Market Maker 
is required for any Nasdaq market maker registered to make a market in 
an NNMS security.
    (c) Participation in NNMS as an NNMS Order Entry Firm requires 
current registration as such with the Association. Such registration 
shall be conditioned upon the NNMS Order Entry Firm's initial and 
continuing compliance with the following requirements:
    (1) Execution of an NNMS Participant application agreement with the 
Association;
    (2) Membership in, or access arrangement with a participant of, a 
clearing agency registered with the Commission that maintains 
facilities through which NNMS compared trades may be settled;
    (3) Compliance with all applicable rules and operating procedures 
of the Association and the Securities and Exchange Commission;
    (4) Maintenance of the physical security of the equipment located 
on the premises of the NNMS Order Entry Firm to prevent the improper 
use or access to Nasdaq systems, including unauthorized entry of 
information into NNMS; and
    (5) Acceptance and settlement of each NNMS trade that NNMS 
identifies as having been effected by such NNMS Order Entry Firm or if 
settlement is to be made through another clearing member, guarantee of 
the acceptance and settlement of such identified NNMS trade by the 
clearing member on the regularly scheduled settlement date.
    (d) Participation in NNMS as an NNMS ECN requires current 
registration as an NASD member and shall be conditioned upon the 
following:
    (1) The execution of an NNMS Participant application agreement with 
the Association;
    (2) Membership in, or access arrangement with a participant of, a 
clearing agency registered with the Commission that maintains 
facilities through which NNMS compared trades may be settled;
    (3) Membership in, or access arrangement with, a clearing agency 
registered with the Commission which maintains facilities through which 
NNMS-compared trades may be settled;
    (4) Maintenance of the physical security of the equipment located 
on the premises of the NNMS ECN to prevent the improper use or access 
to Nasdaq systems, including unauthorized entry of information into 
NNMS; and
    (5) Acceptance and settlement of each trade that is executed 
through the facilities of the NNMS, or if settlement is to be made 
through another clearing member, guarantee of the acceptance and 
settlement of such identified NNMS trade by the clearing member on the 
regularly scheduled settlement date.
    (e) Participation in NNMS as an ITS/CAES Market Maker shall be 
conditioned upon the ITS/CAES Market Maker's initial and continuing 
compliance with the requirements set forth in NASD Rule 5220.
    ([e]f) The registration required hereunder will apply solely to the 
qualification of an NNMS Participant to participate in NNMS. Such 
registration shall not be conditioned upon registration in any 
particular eligible or active NNMS securities.
    ([f]g) Each NNMS Participant shall be under a continuing obligation 
to inform the Association of noncompliance with any of the registration 
requirements set forth above.
    ([g]h) The Association and its subsidiaries shall not be liable for 
any losses, damages, or other claims arising out of the NNMS or its 
use. Any losses, damages, or other claims, related to a failure of the 
NNMS to deliver, display, transmit, execute, compare, submit for 
clearance and settlement, adjust, retain priority for, or otherwise 
correctly process an order, Quote/Order, message, or other data entered 
into, or created by, the NNMS shall be absorbed by the member, or the 
member sponsoring the customer, that entered the order, Quote/Order, 
message, or other data into the NNMS.

4706. Order Entry Parameters

    (a) Non-Directed Orders--
    (1) General. The following requirements shall apply to Non-Directed 
Orders Entered by NNMS Market Participants:
    (A) An NNMS Participant may enter into the NNMS a Non-Directed 
Order in order to access the best bid/best offer as displayed in 
Nasdaq.
    (B) A Non-Directed Order must be a market or limit order, must 
indicate whether it is a buy, short sale, short-sale exempt, or long 
sale, and may be designated as ``Immediate or Cancel'', [or as a] 
``Day'', [or a] ``Good-till-Cancelled'', ``Auto-Ex'', ``Fill or 
Return'', ``Pegged'', ``Discretionary'', ``Summary'', ``Sweep'', 
``Total Day'', ``Total Good till Cancelled'', or ``Total Immediate or 
Cancel'' [order].
    (1) If a priced order designated as ``Immediate or Cancel'' 
(``IOC'') is not immediately executable, the unexecuted order (or 
portion thereof) shall be returned to the sender.
    (2) If a priced order designated as a ``Day'' order is not 
immediately executable, the unexecuted order (or portion thereof) shall 
be retained by NNMS and remain available for potential display/
execution until it is cancelled by the entering party, or until 4 p.m. 
Eastern Time on the day such order was submitted, whichever comes 
first, whereupon it will be returned to the sender.
    (3) If the order is designated as ``Good-till-Cancelled'' 
(``GTC''), the order (or unexecuted portion thereof) will be retained 
by NNMS and remain available for potential display/execution until 
cancelled by the entering party, or until 1 year after entry, whichever 
comes first.
    (4) Starting at 7:30 a.m., until the 4 p.m. market close, IOC and 
Day Non-Directed Orders may be entered into NNMS (or previously entered 
orders cancelled), but such orders entered prior to market open will 
not become available for execution until 9:30 a.m. Eastern Time. GTC 
orders may be entered (or previously entered GTC orders cancelled) 
between the hours 7:30 a.m. to 6:30 p.m. Eastern Time, but such orders 
entered prior to market open, or GTC orders carried over from previous 
trading days, will not become available for execution until 9:30 a.m. 
Eastern Time. Exception: For Nasdaq listed securities only, Non-
Directed Day and GTC orders may be executed prior to market open if 
required under Rule 4710(b)(3)(B).
    (5) for Nasdaq listed securities, [A]an order may be designated as 
``Auto-Ex,'' in which case the order will also automatically be 
designated as IOC. An Auto-Ex Order will execute solely against the 
Quotes/Orders of NNMS Participants at the best bid/best offer that 
participate in the automatic execution functionality of the NNMS and 
that do not charge a separate quote-access fee to NNMS Participants 
accessing their Quotes/Orders through the NNMS.
    (6) for ITS Securities, an order may be designated as ``Fill or 
Return,'' in which case it shall be executed solely against the Quotes/
Orders of NNMS

[[Page 61512]]

Participants at the best bid/best offer within NNMS. A Fill or Return 
order entered by an ITS/CAES Market Maker may trade through the 
quotation of an ITS Exchange if it is also designated as a Sweep Order.
    (7) [In addition, an order may be assigned the designations 
described below.] If the order is designated as ``Pegged'', the order 
(or unexecuted portion thereof) will be retained by NNMS and its price 
adjusted in response to changes in the Nasdaq inside market as directed 
by the entering party. Pegged orders may only be entered as ``Day'' 
orders. A Pegged Order will be cancelled if there is no displayable 
Quote/Order to which its price can be pegged. To maintain the capacity 
and performance of the NNMS, Nasdaq may at any time suspend the entry 
of Pegged Orders for all securities or for any security. Pegged orders 
that are in the NNMS at the time of such suspension will continue to be 
available for adjustment and execution. Pegged Orders shall not be 
available for ITS Securities.
    (8) If the order is designated as ``Discretionary'', the order (or 
unexecuted portion thereof) shall be displayed in system, if 
appropriate, using the displayed price selected by the entering party, 
with the system also retaining a non-displayed discretionary price 
range within which the entering party is also willing to execute if 
necessary. A Discretionary Order may only be entered as a ``Day'' 
order. A Discretionary Order in an ITS Security may not be preferenced 
to an ITS/CAES Market Maker or ITS Exchange, shall not result in a 
quote that locks or crosses the national best bid and offer and shall 
not be executed at a price that trades through the quotation of an ITS 
Exchange unless it is also designated as a Sweep Order.
    (9) If the order is designated as ``Summary'', the order, if 
marketable at the time of entry and receipt by NNMS, shall be rejected 
and returned to the entering party.
    (10) An order in an ITS Security may be designated as a ``Sweep 
Order.'' A Sweep Order may be delivered to or executed by NNMS 
Participants at multiple price levels.
    (i) A Sweep Order entered by an NNMS Order Entry Firm shall not 
trade through the quotation of an ITS Exchange. The system shall 
execute all shares available within the NNMS without trading through 
the quotation of an ITS Exchange, and shall reject the unexecuted 
portion of the Sweep Order back to the entering party.
    (ii) A Sweep Order entered by an NNMS Quoting Market Participant 
may trade through the quotation of an ITS Exchange. The system shall 
execute only against NNMS Participants.
    (11) An order in an ITS Security may be designated as ``Total Day'' 
(``X'') and may be entered between the hours 7:30 a.m. to 6:30 p.m. 
Eastern Time. If a priced X order is not immediately executable, the 
unexecuted order (or portion thereof) shall be retained by NNMS and 
remain available for potential display/execution until it is cancelled 
by the entering party, or until 6:30 p.m. Eastern Time on the day such 
order was submitted, whichever comes first, whereupon it will be 
returned to the sender.
    (12) An order in an ITS Security may be designated as ``Total Good-
till-Cancelled'' (``GTX''). If a GTX order (or unexecuted portion 
thereof) shall be retained by NNMS and remain available for potential 
display/execution until cancelled by the entering party, or until 1 
year after entry, whichever comes first. GTX orders may be entered (or 
previously entered GTX orders cancelled) between the hours 7:30 a.m. to 
6:30 p.m. Eastern Time.
    (13) An order in an ITS Security may be designated as ``Total 
Immediate or Cancel'' (``IOX''). If a priced order designated as IOX is 
not immediately executable, the unexecuted order (or portion thereof) 
shall be returned to the sender. IOX orders may be entered beginning at 
7:30 a.m. Eastern Time and are available for potential execution 
throughout any trading day (9:30 a.m. through 6:30 p.m. Eastern Time).
    (C) The system will not process a Non-Directed Order to sell short 
if the execution of such order would violate NASD Rule 3350 or, in the 
case of ITS Securities, SEC Rule 10a-1.
    (D) Non-Directed Orders will be processed as described in Rule 
4710.
    (E) The NNMS shall not accept Non-Directed Orders that are All-or-
None, or have a minimum size of execution.
    (F) A NNMS Market Participant may enter a Non-Directed Order that 
is either a market order or a limit order prior to the market's open. 
Market orders and limit orders designated as Immediate or Cancel and 
limit orders designated as Total Immediate or Cancel orders shall be 
held in a time-priority queue that will begin to be processed by NNMS 
at market open. If an Immediate or Cancel limit order is unmarketable 
at the time it reaches the front of time-priority processing queue, it 
will be returned to the entering market participant. Limit orders that 
are not designated as Immediate or Cancel orders shall be retained by 
NNMS for potential display in conformity with Rule 4707(b) and/or 
potential execution in conformity with Rule 4710(b)(1)(B).
    (2) Entry of Non-Directed Orders by NNMS Order Entry Firms--In 
addition to the requirements in paragraph (a)(1) of this rule, the 
following conditions shall apply to Non-Directed Orders entered by NNMS 
Order-Entry Firms:
    (A)(i) All Non-Directed orders in Nasdaq listed securities shall be 
designated as Immediate or Cancel, GTC or Day but shall be required to 
be entered as Non-Attributable if not entered as IOC. NNMS Order Entry 
Firms may also assign the order designations described in subparagraph 
(a)(1)(B). For IOC orders, if after entry into the NNMS of a Non-
Directed Order that is marketable, the order (or the unexecuted portion 
thereof) becomes non-marketable, the system will return the order (or 
unexecuted portion thereof) to the entering participant.
    (ii) In ITS Securities, all Non-Directed orders shall be designated 
as Immediate or Cancel, GTC, Day, Total Immediate or Cancel, Total Day, 
or Total GTC but shall be required to be entered as Non-attributable if 
not entered as IOC or IOX. NNMS Order Entry Firms may also assign the 
order designations described in subparagraph (a)(1)(B). For IOC and IOX 
orders, if after entry into the NNMS of a Non-Directed Order that is 
marketable, the order (or the unexecuted portion thereof) becomes non-
marketable, the system will return the order (or unexecuted portion 
thereof) to the entering participant.
    (B) A Non-Directed Order that is either a market or limit order may 
be entered prior to the market's open. Such limit and market orders 
will be held in a time-priority queue that will begin to be processed 
at market open. A limit order that is designated as IOC or, in the case 
of ITS Securities, IOX and is not marketable at the time it reaches the 
front of the time-priority processing queue will be returned to the 
entering participant.
    (b) Directed Orders in Nasdaq-listed Securities. A participant may 
enter a Directed Order in a Nasdaq-listed security into the NNMS to 
access a specific Attributable Quote/Order displayed in the Nasdaq 
Quotation Montage, subject to the following conditions and 
requirements:
    (1) Unless the Quoting Market Participant to which a Directed Order 
is being sent has indicated that it wishes to receive Directed Orders 
that are Liability Orders, a Directed Order must be a Non-Liability 
Order, and as such, at the time of entry must be designated as:
    (A) An ``All-or-None'' order (``AON'') that is at least one normal 
unit of

[[Page 61513]]

trading (e.g. 100 shares) in excess of the Attributable Quote/Order of 
the Quoting Market Participant to which the order is directed; or
    (B) A ``Minimum Acceptable Quantity'' order (``MAQ''), with a MAQ 
value of at least one normal unit of trading in excess of Attributable 
Quote/Order of the Quoting Market Participant to which the order is 
directed. Nasdaq will append an indicator to the quote of a Quoting 
Market Participant that has indicated to Nasdaq that it wishes to 
receive Directed Orders that are Liability Orders.
    (C) A Directed Order that is entered at a price that is inferior to 
the Attributable Quote/Order of the Quoting Market Participant to which 
the order is directed.

Nasdaq will append an indicator to the quote of a Quoting Market 
Participant that has indicated to Nasdaq that it wishes to receive 
Directed Orders that are Liability Orders.
    (2) A Directed Order may have a time in force of 3 to 99 minutes, 
or may be designated as ``Day'' order, or an ``End of Day'' order.
    (3) Directed Orders shall be processed pursuant to Rule 4710(c).
    (4) A Directed Order entered into the system may not be cancelled 
until a minimum of five seconds has elapsed after the time of entry. 
This five-second time period shall be measured by NNMS.
    (5) Directed Orders shall not be entered in ITS Securities.
    (c) Entry of Agency and Principal Orders--NNMS Participants are 
permitted to enter into the NNMS both agency and principal orders for 
delivery and execution processing.
    (d) Order Size--
    (1) In Nasdaq-listed securities, [A]any order in whole shares up to 
999,999 shares may be entered into the NNMS for normal execution 
processing.
    (2) Orders in ITS Securities must be entered for a minimum of one 
round lot, or in round lot multiples, or in mixed lots. Orders in ITS 
Securities will be delivered to ITS Exchanges in round lots only.
    (e) Open Quotes--The NNMS will only deliver an order or an 
execution to a Quoting Market Participant if that participant has an 
open quote.

4707. Entry and Display of Quotes/Orders

    (a) Entry of Quotes/Orders--Nasdaq Quoting Market Participants may 
enter Quotes/Orders into the NNMS, and NNMS Order Entry Firms may enter 
Non-Attributable Orders into the NNMS, subject to the following 
requirements and conditions:
    (1) Nasdaq Quoting Market Participants shall be permitted to 
transmit to the NNMS multiple Quotes/Orders at a single as well as 
multiple price levels. Such Quote/Order shall indicate whether it is an 
``Attributable Quote/Order'' or ``Non-Attributable Quote/Order,'' and 
the amount of Reserve Size (if applicable). NNMS Order Entry Firms 
shall be permitted to transmit to NNMS multiple Non-Attributable 
Quotes/Orders at a single as well as multiple price levels and the 
amount of Reserve Size (if applicable).
    (2) Upon entry of a Quote/Order into the system, the NNMS shall 
time-stamp it, which time-stamp shall determine the ranking of the 
Quote/Order for purposes of processing Non-Directed Orders as described 
in Rule 4710(b). For each subsequent size increase received for an 
existing quote at a given price, the system will maintain the original 
time-stamp for the original quantity of the quote and assign a separate 
time-stamp to that size increase.
    (3) Consistent with Rule 4613, an NNMS Market Maker is obligated to 
maintain a two-sided Attributable Quote/Order at all times, for at 
least one normal unit of trading.
    (4) Nasdaq Quoting Market Participants may continue to transmit to 
the NNMS only their best bid and best offer Attributable Quotes/Orders. 
Notwithstanding NASD Rule 4613 and subparagraph (a)(1) of this rule, 
nothing in these rules shall require a Nasdaq Quoting Market 
Participant to transmit to the NNMS multiple Quotes/Orders.
    (b) Display of Quotes/Orders in Nasdaq--The NNMS will display 
Quotes/Orders submitted to the system as follows:
    (1) Attributable Quotes/Orders--The price and size of a Nasdaq 
Quoting Market Participant's best priced Attributable Quote/Order on 
both the bid and offer side of the market will be displayed in the 
Nasdaq Quotation Montage under the Nasdaq Quoting Market Participant's 
[MMID] MPID, and also will be displayed in the Nasdaq Order Display 
Facility as part of the aggregate trading interest at a particular 
price when the price of such Attributable Quote/Order falls within the 
number of price levels authorized for aggregation and display pursuant 
to Rule 4701(ee) on either side of the market. Upon execution or 
cancellation of the Nasdaq Quoting Market Participant's best-priced 
Attributable Quote/Order on a particular side of the market, the NNMS 
will automatically display the participant's next best Attributable 
Quote/Order on that side of the market.
    (2) Non-Attributable Quotes/Orders--The price and size of a Nasdaq 
Quoting Market Participant's and NNMS Order Entry Firm's Non-
Attributable Quote/Order on both the bid and offer side of the market 
will be displayed in the Nasdaq Order Display Facility as part of the 
aggregate trading interest at a particular price when the price of such 
Non-Attributable Quote/Order falls within the number of price levels 
authorized for aggregation and display pursuant to Rule 4701(ee) on 
either side of the market. A Non-Attributable Quote/Order will not be 
displayed in the Nasdaq Quotation Montage under the Nasdaq Quoting 
Market Participant's [MMID] MPID. Non-Attributable Quotes/Orders that 
are the best priced Non-Attributable bids or offers in the system will 
be displayed in the Nasdaq Quotation Montage under an anonymous [MMID] 
MPID, which shall represent and reflect the aggregate size of all Non-
Attributable Quotes/Orders in Nasdaq at that price level. Upon 
execution or cancellation of a Nasdaq Quoting Market Participant's or 
NNMS Order Entry Firm's Non-Attributable Quote/Order, the NNMS will 
automatically display a Non-Attributable Quote/Order in the Nasdaq 
Order Display Facility (consistent with the parameters described above) 
if it falls within the number of price levels authorized for 
aggregation and display pursuant to Rule 4701(ee) on either side of the 
market.
    (3) Exceptions--The following exceptions shall apply to the display 
parameters set forth in paragraphs (1) and (2) above:
    (A) Odd-lots, Mixed Lots, and Rounding--The ]Nasdaq system] NNMS 
(and all accompanying data feeds) shall be capable of displaying 
trading interest in round lot amounts. For quote display purposes, 
[Nasdaq] NNMS will aggregate all shares, including odd-lot share 
amounts, entered by a Quoting Market Participant and NNMS Order Entry 
Firm at a single price level and then round that total share amount 
down to the nearest round-lot amount for display and dissemination, 
consistent with subparagraphs (b)(1) and (b)(2) of this rule. Though 
rounded, any odd-lot portion of a Quote/Order that is not displayed as 
a result of this rounding process will remain in the system, with the 
time-priority of their original entry, and be continuously available 
for execution. Round-lots that are subsequently reduced by executions 
to a mixed lot amount will likewise be rounded for display purposes by 
the system to the nearest round-lot amount at that same price level. 
Any odd-lot number of shares that do not get

[[Page 61514]]

displayed as a result of this rounding will remain in the system with 
the time-priority of their original entry and thus be continuously 
available for execution. If executions against an Attributable Quote/
Order result in there being an insufficient (odd-lot) amount of shares 
at a price level to display an Attributable Quote/Order for one round-
lot, the system will display the Quoting Market Participant's next best 
priced Attributable Quote/Order consistent with Rule 4710(b)(2). If all 
Attributable Quotes/Orders on the bid and/or offer side of the market 
are exhausted so that there are no longer any Attributable Quotes/
Orders, the system may refresh a market maker's exhausted bid or offer 
quote using the process set forth in Rule 4710(b)(5). With the 
exception of Legacy Quotes, odd-lot remainders that are not displayed 
will remain in the system at their original price levels and continue 
to be available for execution.
    (B) Aggregation and Display of Odd-lots Bettering the Inside 
Price--Except as provided in Subsection (C) below, odd-lot share 
amounts that remain in system at prices that improve the best bid/offer 
in Nasdaq shall be subject to aggregation for display purposes, via the 
SIZE [MMID] MPID, with the odd-lot share amounts of other NNMS Quoting 
Market Participants and NNMS Order Entry Firms at those same price 
level(s). Such odd-lots will be displayed via SIZE if 1) the 
combination of all such odd-lots at a particular price level is equal 
to, or more than, a round-lot and 2) that the price level represents 
either the highest bid or lowest offer price within the system. This 
aggregation shall display only the maximum round-lot portion of the 
total combined shares available at that best-priced level. This 
aggregation shall be for display purposes only and all individual odd-
lot share amounts that are part of any such aggregation shall continue 
to be processed by the system based on the time-priority of their 
original entry.
    (C) In the case of ITS Securities, odd lot share amounts of each 
individual ITS/CAES Market Maker shall be aggregated separately and 
shall be displayed next to that ITS/CAES Market Maker's MPID for a 
minimum of one round lot or for round lot multiples. Odd lot share 
amounts will be cancelled at the end of the day.
    (c) Reserve Size--Reserve Size shall not be displayed in Nasdaq, 
but shall be electronically accessible as described in Rule 4710(b).
    (d) Summary Scan--The ``Summary Scan'' functionality, [which] is a 
query-only non-dynamic functionality for Nasdaq listed securities only. 
It [that] displays without attribution to Quoting Market Participants' 
[MMIDs] MPIDs the aggregate size of Attributable and Non-Attributable 
Quotes/Orders for all levels (on both the bid and offer side of the 
market) below the number of price levels authorized for aggregation and 
display pursuant to Rule 4701 (ee).
    (e) NQDS Prime--''NQDS Prime'' is a separate data feed for Nasdaq-
listed securities that Nasdaq will make available for a fee that is 
approved by the Securities and Exchange Commission. This separate data 
feed will display with attribution to Quoting Market Participants' 
[MMIDs] MPIDs all Attributable Quotes/Orders on both the bid and offer 
side of the market for the price levels that are disseminated in the 
Nasdaq Order Display Facility.
    (f) IM Prime--``IM Prime'' is a separate data feed that Nasdaq will 
make available for a fee that is approved by the Securities and 
Exchange Commission. This separate data feed will display with 
attribution to ITS/CAES Market Makers' MPIDs all Attributable Quotes/
Orders on both the bid and offer side of the market for the price 
levels that are disseminated in the Nasdaq Order Display Facility for 
ITS Securities

4708. ITS Commitments

    (a) Compliance with Rule 5200 Series.
    (1) Pre Opening Application. ITS/CAES Market Makers may use NNMS to 
participate in the Pre Opening Application accordance with Rules 5240 
and 5250. NNMS Order Entry Firms may not participate in the Pre Opening 
Application.
    (2) Trade throughs. ITS/CAES Market Makers must use NNMS to comply 
with the trade through obligations set forth in Rules 5262 and 5264. 
The NNMS will reject any order of an NNMS Order Entry Firm that, if 
executed, would trade through an ITS Exchange
    (3) Locked and Crossed Markets. ITS/CAES Market Makers must use 
NNMS to comply with the locked and crossed markets obligations set 
forth in Rules 5263. Any order or portion thereof entered by an NNMS 
Order Entry Firm that would create a locked/crossed market with an ITS 
Exchange will be rejected.
    (b) Inbound ITS Commitments
    (1) If the ITS Commitment contains an obvious error as described in 
Rule 5265(b), the NNMS will decline it.
    (2) If the ITS Commitment, if executed, would result in a violation 
of SEC Rule 10a-1, the NNMS will decline it.
    (3) If the conditions described in subparagraphs (1) and (2) above 
do not apply, the NNMS will execute or deliver an inbound ITS 
Commitment in accordance with applicable provisions of the Rule 5200 
Series and the ITS Plan.

4710. Participant Obligations in NNMS

    (a) Registration Upon the effectiveness of registration as a NNMS 
Market Maker, NNMS ECN, ITS/CAES Market Maker 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) ITS/CAES Market Makers may elect to participate in the order 
delivery or the automatic execution functionality of the NNMS. ITS/CAES 
Market Makers that elect automatic execution shall accept the delivery 
of an execution up to the size of the participant's Displayed Quote/
Order and Reserve Size. ITS/CAES Market Makers that elect order 
delivery shall accept the delivery of an order up to the size of the 
ITS/CAES Market Maker's Displayed Quote/Order and Reserve Size. ITS/
CAES Market Maker that elect order delivery 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 ITS/CAES Market Maker's system, in which case

[[Page 61515]]

the ITS/CAES Market Maker is required to execute in a size equal to the 
remaining amount of trading interest available in the ITS/CAES Market 
Maker's system.
    [(ii)] (iii) 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)] (iv) 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 
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 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. 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 described 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) Execution Algorithm--Price/Time--The system will access 
interest in the system in the following priority and order:
    a. Displayed Quotes/Orders of NNMS Market Makers, ITS/CAES Market 
Makers, and NNMS ECNs, displayed Non-Attributable Quotes/Orders of NNMS 
Order Entry Firms, and displayed non-attributable agency Quotes/Orders 
of UTP Exchanges (as permitted by subparagraph (f) of this rule), in 
time priority between such participants' Quotes/Orders;
    b. Reserve Size of Nasdaq Quoting Market Participants and NNMS 
Order Entry Firms, in time priority between such participants' Quotes/
Orders; and
    c. Principal Quotes/Orders of UTP Exchanges, in time priority 
between such participants' Quotes/Orders.
    (ii) 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. Nasdaq 
Quoting Market Participants and NNMS Order Entry Firms may 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 Nasdaq 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, in price/time priority.

    b. If an NNMS Market Participant enters a Preferenced Order, the 
order shall be executed against (or delivered in an amount equal to) 
both the Displayed Quote/Order and Reserve Size of the Quoting Market 
Participant to which the order is being directed, if that Quoting 
Market Participant is at the best bid/best offer when the Preferenced 
Order is next in line to be delivered (or executed). Any unexecuted 
portion of a Preferenced Order shall be returned to the entering NNMS 
Market Participant. If the Quoting Market Participant is not at the 
best bid/best offer when the Preferenced Order is next in line to be 
delivered (or executed), the Preferenced Order shall be returned to the 
entering NNMS Market Participant.
    c. If an NNMS Market Participant enters a Quote or Non-Directed 
Order that would result in NNMS either: (1) delivering an execution to 
a Quoting Market Participant(s) or an NNMS Order Entry Firm that 
participates in the automatic-execution functionality of the system at 
a price substantially away from the current inside bid/offer in that 
security; or (2) delivering a Liability Order to a Quoting Market 
Participant(s) that participates in the order-delivery functionality of 
the system at a price substantially away from the current inside bid/
offer in that security, the system shall instead process only those 
portions of the order that will not result in either an execution or 
delivery at a price substantially away from the current inside best 
bid/offer in the security and return the remainder to the entering 
party. For purposes of this subsection only, an execution or delivery 
based on a sell order shall be deemed to be substantially away from the 
current inside bid if it is to be done at a price lower than a break-
price established by taking the inside bid, reducing it by 10% of the 
bid's value, and then subtracting $0.01. For example, in a stock with a 
current inside bid of $10.00, the maximum price at which a single sell 
order could be executed would be $8.99 calculated as follows: ($10.00 - 
($10.00 x .10 e.g. $1) - $.01 = $8.99). For offers, an execution or 
delivery based on a buy order shall be deemed to be substantially away 
from the current inside offer if it is done a price higher than a 
break-price established by taking the inside offer, adding 10% of the 
offer's value to it, and then adding $0.01. For example, in a stock 
with a current inside offer of $10.00, the highest price at which a 
single sell order could be executed would be $11.01 calculated as 
follows: ($10.00 + ($10.00 x .10 e.g. $1) + $.01 = $11.01. This 
subsection shall not apply to ITS commitments received from ITS 
Exchanges or to orders based on such ITS commitments.
    (d) An Auto-Ex order in a Nasdaq listed security will execute 
solely

[[Page 61516]]

against the Quotes/Orders of NNMS Participants at the best bid/best 
offer that participate in the automatic execution functionality of the 
NNMS and that do not charge a separate quote-access fee to NNMS 
Participants accessing their Quotes/Orders through the NNMS. An Auto-Ex 
order (or an unexecuted portion thereof) will be cancelled if it cannot 
be immediately executed.
    (e) A Fill or Return order in an ITS Security will be executed 
solely by the NNMS at the best bid/best offer, without delivering the 
order to an ITS Exchange. A Fill or Return order entered by an ITS/CAES 
Market Maker may trade through the quotation of an ITS Exchange if it 
is also designated as a Sweep Order.
    ([e]f) If an NNMS Market Participant enters a Discretionary Order, 
the order shall be first executed against (or delivered in an amount 
equal to) the Displayed Quote/Order and Reserve Size of available 
market participants in conformity with this rule based on the algorithm 
selected and the displayed price of the Discretionary Order, subject to 
the foregoing exceptions. In the event that the full size of the 
incoming order cannot be executed at the displayed price, the order may 
also be executed against (or delivered in an amount equal to) the 
Displayed Quote/Order and Reserve Size of market participants with 
Quotes/Orders within the discretionary price range (including 
discretionary orders on the contra side), in conformity with this Rule 
based on the algorithm selected (subject to any applicable exception). 
The unexecuted portion of a Discretionary Order will then be retained 
by NNMS for potential display in conformity with Rule 4707(b). When a 
Discretionary Order is displayed as a Quote/Order, it will be available 
for execution against (or delivery to) market participants entering 
orders or Quotes/Orders at the display price (including market orders, 
when the display price is at the inside, and other discretionary 
orders), and will then be available for execution against (but not 
delivery to) market participants entering orders or Quotes/Orders at 
prices within the discretionary price range (including other 
discretionary orders), at the price of the incoming order.
    (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 in queue. The system then will zero out the ECN's Quote/
Orders at that price level on that side of the market, 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 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.
    (iv) If an NNMS ECN regularly fails to meet a 5-second response 
time (as measured by the ECN's Service Delivery Platform) over a period 
of orders, such that the failure endangers the maintenance of a fair 
and orderly market, Nasdaq will place that ECN's quote in a closed-
quote state. Nasdaq will lift the closed-quote state when the NNMS ECN 
certifies that it can meet the 5-second response time requirement with 
regularity sufficient to maintain a fair and orderly market.
    (v) ITS/CAES Market Makers
    a. If an ITS/CAES Market Maker 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 that ITS/CAES Market Maker fails to respond in any manner 
within 5 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 in queue.
    b. If the bid side of the ITS/CAES Market Maker's Quote/Order is 
zeroed out, the system then will automatically establish a bid of $0.01 
for 100 shares. If the offer side of the ITS/CAES Market Maker's Quote/
Order is zeroed out, the system then will automatically establish an 
offer of two times the system best bid plus $0.01 and offer for 100 
shares.
    c. If an ITS/CAES Market Maker regularly fails to meet a 5-second 
response time (as measured by the ITS/CAES Market Maker's Service 
Delivery Platform) over a period of orders, such that the failure 
endangers the maintenance of a fair and orderly market, Nasdaq will 
place that ITS/CAES Market Maker's quote in a closed-quote state. 
Nasdaq will lift the closed-quote state when the ITS/CAES Market Maker 
certifies that it can meet the 5-second response time requirement with 
regularity sufficient to maintain a fair and orderly market
    (D) All entries in NNMS shall be made in accordance with the 
requirements set forth in the NNMS User Guide, as published from time 
to time by Nasdaq.
    (2) Refresh Functionality.
    (A) Reserve Size Refresh--Once a Nasdaq Quoting Market 
Participant's or NNMS Order Entry Firm's Displayed Quote/Order size on 
either side of the market in the security has been decremented to an 
amount less than one normal unit of trading due to NNMS processing 
Nasdaq will refresh the displayed size out of Reserve Size to a size-
level designated by the Nasdaq Quoting Market Participant or NNMS Order 
Entry Firm, or in the absence of such size-level designation, to the 
automatic refresh size. The amount of shares taken out of reserve to 
refresh display size shall be added to any shares remaining in the 
Displayed Quote/Order and shall be of an amount that when combined with 
the number of shares remaining in the Nasdaq Quoting Market 
Participant's Displayed Quote/Order before it is refreshed will equal 
the displayed size-level designated by the Nasdaq Quoting Market 
Participant or, in the absence of such size-level designation, to the 
automatic refresh size. If there are insufficient shares available to 
produce a Displayable Quote/Order, the Nasdaq Quoting Market 
Participant's Quote/Order, and any odd-lot remainders, will be 
refreshed, updated, or retained, in conformity with NNMS Rules 4707 and

[[Page 61517]]

4710 as appropriate. To utilize the Reserve Size functionality, a 
minimum of 100 shares must initially be displayed in the Nasdaq Quoting 
Market Participant's or NNMS Order Entry Firm's Displayed Quote/Order, 
and the Displayed Quote/Order must be refreshed to at least 100 shares. 
This functionality will not be available for use by UTP Exchanges.
    (B) Auto Quote Refresh (``AQR'')--Once an NNMS Market Maker's 
Displayed Quote/Order size and Reserve Size on either side of the 
market in the security has been decremented to an amount less than one 
normal unit of trading due to NNMS executions, the NNMS Market Maker 
may elect to have The Nasdaq Stock Market refresh the market maker's 
quotation as follows:
    (i) Nasdaq will refresh the market maker's quotation price on the 
bid or offer side of the market, whichever is decremented to an amount 
less than a normal unit of trading, by a price interval designated by 
the NNMS Market Maker; and
    (ii) Nasdaq will refresh the market maker's displayed size to a 
level designated by the NNMS Market Maker, or in the absence of such 
size level designation, to the automatic refresh size.
    (iii) This functionality shall produce an Attributable Quote/Order.
    (iv) The AQR functionality described in this subparagraph shall 
only be available for use in connection with a NNMS Market Maker's 
``Legacy Quote.'' This functionality shall be available only to NNMS 
Market Makers.
    (v) The AQR functionality shall not be available to any participant 
for any ITS Security.
    (3) Entry of Locking/Crossing Quotes/Orders The system shall 
process locking/crossing Quotes/Orders as follows:
    (A) Locked/Crossed Quotes/Orders During Market Hours--If during 
market hours, a participant enters into the NNMS a Quote/Order that 
will lock/cross the market (as defined in NASD Rule 4613(e) or in NASD 
Rule 5263(a) or (b)), the system will not display the Quote/Order as a 
quote in Nasdaq; instead the system will treat the Quote/Order as a 
marketable limit order and enter it into the system as a Non-Directed 
Order for processing (consistent with subparagraph (b) of this rule) as 
follows:
    (i) For locked-market situations, the order will be routed to the 
Quoting Market Participant or NNMS Order Entry Firm next in queue who 
would be locked, and the order will be executed (or delivered for 
execution) at the lock price;
    (ii) For crossed-market situations, the order will be entered into 
the system and routed to the next Quoting Market Participants or NNMS 
Order Entry Firms in queue who would be crossed, and the order will be 
executed (or delivered for execution) at the price of the Displayed 
Quote/Order that would have been crossed. Once the lock/cross is 
cleared, if the participant's order is not completely filled, the 
system may [will], if consistent with the parameters of the Quote/
Order, reformat the order and display it in Nasdaq [(consistent with 
the parameters of the Quote/Order)] as a Quote/Order on behalf of the 
entering Quoting Market Participant or Order Entry Firm. If an order is 
not eligible to be reformatted, the NNMS will reject the remainder of 
the order back to the entering participant.
    (B) Locked/Crossed Quotes/Orders Immediately Before the Open--If 
the market in a Nasdaq-listed security is locked or crossed at 9:29:30 
a.m., Eastern Time, the NNMS will clear the locked and/or crossed 
Quotes/Order by executing (or delivering for execution) the highest bid 
against the lowest offer(s) against which it is marketable, at the 
price of the newer in time of the two quotes/orders. This process will 
be repeated until an un-locked and un-crossed market condition is 
achieved. Between 9:29:30 a.m. and 9:29:59 Eastern Time, once NNMS has 
cleared a locked or crossed market, or if a newly submitted quote/order 
would create a locked or crossed market, NNMS will prevent a locked or 
crossed market from being created by processing such locking or 
crossing quote/order in a manner consistent with subparagraph (b)(3)(a) 
of this Rule.
    (i) Exception--The following exception shall apply to the above 
locked/crossed processing parameters: If a Nasdaq Quoting Market 
Participant has entered a Locking/Crossing Quote/Order into the system 
that would become subject to the automated processing described in 
section (B) above, the system shall, before sending the order to any 
other Quoting Market Participant or NNMS Order Entry Firm, first 
attempt to match off the order against the locking/crossing Nasdaq 
Quoting Market Participant's own Quote/Order if that participant's 
Quote/Order is at the highest bid or lowest offer, as appropriate. A 
Nasdaq Quoting Market Participant may avoid this automatic matching 
through the use of anti-internalization qualifier as set forth in Rule 
4710 (b) (1)(B)([iv]ii)(a). NNMS Order Entry Firms that enter locking/
crossing Quotes/Orders shall have those Quotes/Orders processed as set 
forth in paragraph (B) above, unless they voluntarily select a ``Y'' 
AIQ Value as provided for in Rule 4710 (b)(1)(B)([iv]ii)(a).
    (C) Locked/Crossed Quotes/Orders in ITS Securities Immediately 
Before the Open--If the market in an ITS Security is locked or crossed 
at 9:29:55 a.m., Eastern Time, the NNMS will clear the locked and/or 
crossed Quotes/Order by executing (or delivering for execution) the 
highest bid against the lowest offer(s) against which it is marketable, 
at the price of the newer in time of the two quotes/orders. This 
process will be repeated until an un-locked and un-crossed market 
condition is achieved. Between 9:29:55 a.m. and 9:29:59 Eastern Time, 
once the NNMS has cleared a locked or crossed market, or if a newly 
submitted Quote/Order would create a locked or crossed market, NNMS 
will prevent a locked or crossed market from being created by holding 
such Quotes/Orders in queue.
    (i) Exception--The following exception shall apply to the above 
locked/crossed processing parameters: If an ITS/CAES Market Maker has 
entered a Locking/Crossing Quote/Order into the system that would 
become subject to the automated processing described in section (B) 
above, the system shall, before sending the order to any other ITS/CAES 
Market Maker or NNMS Order Entry Firm, first attempt to match off the 
order against the locking/crossing ITS/CAES Market Maker's own Quote/
Order if that participant's Quote/Order is at the highest bid or lowest 
offer, as appropriate. An ITS/CAES Market Maker may avoid this 
automatic matching through the use of anti-internalization qualifier as 
set forth in Rule 4710 (b) (1)(B)(ii)(a). NNMS Order Entry Firms that 
enter locking/crossing Quotes/Orders shall have those Quotes/Orders 
processed as set forth in paragraph (B) above, unless they voluntarily 
select a ``Y'' AIQ Value as provided for in Rule 4710 (b)(1)(B)(ii)(a).
    (4) An NNMS Market Maker may terminate its obligation by keyboard 
withdrawal (or its equivalent) from NNMS at any time. However, the 
market maker has the specific obligation to monitor its status in NNMS 
to assure that a withdrawal has in fact occurred. Any transaction 
occurring prior to the effectiveness of the withdrawal shall remain the 
responsibility of the market maker.
    (5) If an NNMS Market Maker's Attributable Quote/Order is reduced 
to less than a round-lot amount on one side of the market due to NNMS 
executions, the NNMS will close the Market Maker's quote in the NNMS on 
that side of the market, and the NNMS Market Maker will be permitted a 
grace

[[Page 61518]]

period of 30 seconds within which to take action to restore its 
Attributable Quote/Order, if the market maker has not authorized use of 
the AQR functionality or does not otherwise have an Attributable Quote/
Order on both sides of the market in the system. An NNMS Market Maker 
that fails to transmit an Attributable Quote/Order in a security within 
the allotted time will have the exhausted side of its quotation 
restored by the system at a price $0.01 inferior to the lowest 
displayed bid price or the highest displayed offer price in that 
security as appropriate. If all bids and/or offers are exhausted so 
that there are no longer any Quote/Orders displayed on the bid and/or 
offer side of the market, the system will refresh a market maker's 
exhausted bid or offer quote to a normal unit of trading priced $0.01 
inferior to the lesser of either: (a) the last valid displayed inside 
bid/offer in the security before all such bids/offers were exhausted; 
or (b) the market maker's last displayed bid/offer before exhaustion. 
If the resulting bid/offer quote would create a locked or crossed 
market, NNMS will instead re-open the exhausted market maker's bid/
offer quote at a price $0.01 inferior to the unexhausted inside bid/
offer in that security. If at any time this automatic quote restoration 
process would result in the creation of a bid/offer of less than $0.01, 
the system will refresh that bid/offer to a price of $0.01. Except as 
provided in subparagraph (b)(6) of this rule, an NNMS Market Maker that 
withdraws from a security may not re-register in the system as a market 
maker in that security for twenty (20) business days.
    (6) Notwithstanding the provisions of subparagraph (5) above:
    (A) an NNMS Market Maker that obtains an excused withdrawal 
pursuant to Rule 4619 or an ITS/CAES Market Maker that obtains an 
excused withdrawal pursuant to Rule 6350 prior to withdrawing from NNMS 
may reenter NNMS according to the conditions of its withdrawal; and
    (B) an NNMS Market Maker or ITS/CAES Market Maker that fails to 
maintain a clearing arrangement with a registered clearing agency or 
with a member of such an agency, and is thereby withdrawn from 
participation in ACT and NNMS for NNMS securities, may reenter NNMS 
after a clearing arrangement has been reestablished and the market 
maker has compiled with ACT participant requirements. Provided however, 
that if the Association finds that the ACT market maker's failure to 
maintain a clearing arrangement is voluntary, the withdrawal of 
quotations will be considered voluntary and unexcused.
    (7) The Market Operations Review Committee shall have jurisdiction 
over proceedings brought by market makers seeking review of their 
removal from NNMS pursuant to subparagraph (b)(5) of this rule.
    (8) In the event that a malfunction in the Quoting Market 
Participant's equipment occurs, rendering communications with NNMS 
inoperable, the Quoting Market Participant is obligated to immediately 
contact Nasdaq Market Operations by telephone to request withdrawal 
from NNMS and a closed-quote status, and if the Quoting Market 
Participants is an NNMS Market Maker an excused withdrawal from Nasdaq 
pursuant to Rule 4619 or an ITS/CAES Market Maker an excused withdrawal 
pursuant to Rule 6350. If withdrawal is granted, Nasdaq Market 
Operations personnel will enter the withdrawal notification into NNMS 
from a supervisory terminal and shall close the quote. Such manual 
intervention, however, will take a certain period of time for 
completion and, unless otherwise permitted by the Association pursuant 
to its authority under Rule 11890, the Quoting Market Participants will 
continue to be obligated for any transaction executed prior to the 
effectiveness of the withdrawal and closed-quote status.
    (c) Directed Order Processing--A participant may enter a Directed 
Order in Nasdaq-listed securities into the NNMS to access a specific 
Quote/Order in the Nasdaq Quotation Montage and to begin the 
negotiation process with a particular Quoting Market Participant. The 
system will deliver an order (not an execution) to the Quoting Market 
Participant designated as the recipient of the order. Upon delivery, 
the Quoting Market Participant shall owe no liability under the Firm 
Quote Rule to that order, unless the Quoting Market Participant to 
which a Directed Order is being sent has indicated that it wishes to 
receive Directed Orders that are Liability Orders (as described in Rule 
4706(b)). Additionally, upon delivery, the system will not decrement 
the receiving Quoting Market Participant's Quote/Order. This provision 
shall not apply to Preferenced Orders.
    (d) NNMS Order Entry Firms. All entries in NNMS shall be made in 
accordance with the procedures and requirements set forth in the NNMS 
User Guide and these rules. Orders may be entered in NNMS by the NNMS 
Order Entry Firm through either its Nasdaq terminal or computer 
interface. The system will transmit to the firm on the terminal screen 
and printer, if requested, or through the computer interface, as 
applicable, an execution report generated immediately following the 
execution.
    (e) UTP Exchanges. Participation in the NNMS by UTP Exchanges is 
voluntary. If a UTP Exchange does not participate in the NNMS System, 
the UTP Exchange's quote will not be accessed through the NNMS, and the 
NNMS will not include the UTP Exchange's quotation for order processing 
and execution purposesA UTP Exchange may voluntarily participate in the 
NNMS System if it executes a Nasdaq Workstation Subscriber Agreement, 
as amended, for UTP Exchanges, and complies with the terms of this 
subparagraph (f) of this rule. The terms and conditions of such access 
and participation, including available functionality and applicable 
rules and fees, shall be set forth in and governed by the Nasdaq 
Workstation Subscriber Agreement, as amended for UTP Exchanges. The 
Nasdaq Workstation Subscriber Agreement, as amended for UTP Exchanges 
may expand but shall not contract the rights and obligations set forth 
in these rules. Access to UTP Exchanges may be made available on terms 
that differ from the terms applicable to members but may not 
unreasonably discriminate among similarly situated UTP Exchanges. The 
following provisions shall apply to UTP Exchanges that choose to 
participate in the NNMS.
    (1) Order Entry--UTP Exchanges that elect to participate in the 
system shall be permitted to enter Directed and Non-Directed Orders 
into the system subject to the conditions and requirements of Rules 
4706. Directed and Non-Directed Orders entered by UTP Exchanges shall 
be processed (unless otherwise specified) as described subparagraphs 
(b) and (c) of this rule.
    (2) Display of UTP Exchange Quotes/Orders in Nasdaq.
    (A) UTP Exchange Principal Orders/Quotes--UTP Exchanges that elect 
to participate in the system shall transmit to the NNMS a single bid 
Quote/Order and a single offer Quote/Order. Upon transmission of the 
Quote/Order to Nasdaq, the system shall time stamp the Quote/Order, 
which time stamp shall determine the ranking of the Quote/Order for 
purposes of processing Non-Directed Orders. The NNMS shall display the 
best bid and best offer Quote/Order transmitted to Nasdaq by a UTP 
Exchange in the Nasdaq Quotation Montage under the [MMID] MPID for the 
UTP Exchange, and shall also display such Quote/Order in the Nasdaq 
Order Display Facility as part of the aggregate trading interest when 
the UTP

[[Page 61519]]

Exchange's best bid/best offer Quote/Order falls within the number of 
price levels authorized for aggregation and display pursuant to Rule 
4701(ee).
    (B) UTP Exchange Agency Quotes/Orders.
    (i) A UTP Exchange that elect to participate in the system may 
transmit to the NNMS Quotes/Orders at a single as well as multiple 
price levels that meet the following requirements: are not for the 
benefit of a broker and/or dealer that is with respect to the UTP 
Exchange a registered or designated market maker, dealer or specialist 
in the security at issue; and are designated as Non-Attributable 
Quotes/Orders (``UTP Agency Order/Quote'').
    (ii) Upon transmission of a UTP Agency Quote/Order to Nasdaq, the 
system shall time stamp the order, which time stamp shall determine the 
ranking of these Quote/Order for purposes of processing Non-Directed 
Orders, as described in subparagraph (b) of this rule. A UTP Agency 
Quote/Order shall not be displayed in the Nasdaq Quotation Montage 
under the [MMID] MPID for the UTP Exchange. Rather, UTP Agency Quotes/
Orders shall be reflected in the Nasdaq Order Display Facility and 
Nasdaq Quotation Montage in the same manner in which Non-Attributable 
Quotes/Orders from Nasdaq Quoting Market Participants are reflected in 
Nasdaq, as described in Rule 4707(b)(2).
    (3) Non-Directed Order Processing--UTP Exchanges that elect to 
participate in the system shall be required to provide automatic 
execution against their Quotes/Orders for Nasdaq Quoting Market 
Participants and NNMS Order Entry Firms, shall accept an execution of 
an order up to the size of the UTP Exchange's displayed Quote/Order, 
and shall have Non-Directed Orders they enter into the system processed 
as described in subparagraph (b) of this rule.
    (4) Directed Order Processing--UTP Exchanges that elect to 
participate in the system shall participate in the Directed Order 
processing as described in subparagraph (c) of this rule.
    (5) Decrementation--UTP Exchanges shall be subject to the 
decrementation procedures described in subparagraph (b) of this rule.
    (6) Scope of Rules--Nothing in these rules shall apply to UTP 
Exchanges that elect not to participate in the system.

4711. Clearance and Settlement

    All transactions executed in NNMS shall be cleared and settled 
through a registered clearing agency using a continuous net settlement 
system.

4712. Obligation To Honor System Trades

    (a) If an NNMS Participant, or clearing member acting on his 
behalf, is reported by NNMS to clearing, or shown by the activity 
reports generated by NNMS as constituting a side of a System trade, 
such NNMS Participant, or clearing member acting on his behalf, shall 
honor such trade on the scheduled settlement date.
    (b) Nasdaq shall have no liability if an NNMS Participant, or a 
clearing member acting on his behalf, fails to satisfy the obligations 
in paragraph (a).

4713. Compliance With Rules and Registration Requirements

    (a) Failure by an NNMS Participant to comply with any of the rules 
or registration requirements applicable to NNMS identified herein shall 
subject such NNMS Participant to censure, fine, suspension or 
revocation of its registration as an NNMS Market Maker, ITS/CAES Market 
Maker, Order Entry Firm, and/or NNMS ECN or any other fitting penalty 
under the Rules of the Association.
    (b)(1) If an NNMS Participant fails to maintain a clearing 
relationship as required under paragraphs (a)(2), (c)(2), or (d)(3) of 
Rule 4705, it shall be removed from NNMS until such time as a clearing 
arrangement is reestablished.
    (2) An NNMS Participant that is not in compliance with its 
obligations under paragraphs (a)(2), (c)(2), or (d)(3) of Rule 4705 
shall be notified when Nasdaq exercises it authority under paragraph 
(b)(1) of Rule 4713.
    (3) The authority and procedures contained in paragraph (b) do not 
otherwise limit the Association's authority, contained in other 
provisions of the Associations rules, to enforce its rules or impose 
any fitting sanction.

4715. Adjustment of Open Quotes and/or Orders

    NNMS will automatically adjust the price and/or size of open quotes 
and/or orders in all NNMS securities (unless otherwise noted) resident 
in the system in response to issuer corporate actions related to a 
dividend, payment or distribution, on the ex-date of such actions, 
except where a cash dividend or distribution is less than one cent 
($0.01), as follows:
    (a) Quotes--All bid and offer side quotes shall be purged from the 
system.
    (b) Sell Orders--Sell side orders in Nasdaq-listed and NYSE-listed 
securities shall not be adjusted by the system and must be modified, if 
desired, by the entering party, except for reverse splits where such 
sell side orders shall be purged from the system. Sell side orders in 
Amex-listed securities shall be adjusted in accordance with the 
procedures set forth below for Buy Orders in the event of a Stock 
Dividend or Stock Split.
    (c) Buy Orders--Buy side orders shall be adjusted by the system 
based on the particular corporate action impacting the security (i.e. 
cash dividend, stock dividend, both, stock split, reverse split) as set 
forth below:
    (1) Odd lot orders in ITS Securities that result from partial 
execution rather than order entry shall be canceled rather than 
adjusted.
    [(1)] (2) Cash Dividends: Buy side order prices shall be first 
reduced by the dividend amount and the resulting price will then be 
rounded down to the nearest penny unless marked ``Do Not Reduce''.
    [(2)] (3) Stock Dividends and Stock Splits: Buy side order prices 
shall be determined by first rounding up the dollar value of the stock 
dividend or split to the nearest penny. The resulting amount shall then 
be subtracted from the price of the buy order. Unless marked ``Do Not 
Increase'', the size of the order shall be increased by first, (A) 
multiplying the size of the original order by the numerator of the 
ratio of the dividend or split, then (B) dividing that result by the 
denominator of the ratio of the dividend or split, then (C) rounding 
that result to the next lowest share.
    [(3)] (4) Dividends Payable in Either Cash or Securities at the 
Option of the Stockholder: Buy side order prices shall be reduced by 
the dollar value of either the cash or securities, whichever is 
greater. The dollar value of the cash shall be determined using the 
formula in paragraph (1) above, while the dollar value of the 
securities shall be determined using the formula in paragraph (2) 
above. If the stockholder opts to receive securities, the size of the 
order shall be increased pursuant to the formula in subparagraph (2) 
above.
    [(4)] (5) Combined Cash and Stock Dividends/Split: In the case of a 
combined cash dividend and stock split/dividend, the cash dividend 
portion shall be calculated first as per section (1) above, and stock 
portion thereafter pursuant to sections (2) and/or (3) above.
    [(5)] (6) Reverse Splits: All orders (buy and sell) shall be 
cancelled and returned to the entering firm.
    (d) Open buy and sell orders that are adjusted by the system 
pursuant to the above rules, and that thereafter continuously remain in 
the system, shall retain the time priority of their original entry.

[[Page 61520]]

4719. Anonymity

    (a) Transactions in executed in NNMS in which at least one member 
submits a Non-Attributable Quote/Order will be processed anonymously. 
The transaction reports will indicate the details of the transactions, 
but will not reveal contra party identities.
    (b)(1) The processing described in paragraph (a) shall not apply to 
transactions executed in NNMS when the member whose Quote/Order is 
decremented is an Order-Delivery ECN that charges an access fee.
    (2) Except as required to comply with the request of a regulator, 
or as ordered by a court or arbitrator, Order-Delivery ECNs ECN shall 
not disclose the identity of the member that submitted a Non-
Attributable Quote/Order that decremented the Order-Delivery ECN's 
Quote/Order.
    (c) The Association will reveal a member's identity in the 
following circumstances:
    (1) When the National Securities Clearing Corporation (``NSCC'') 
ceases to act for a member, or the member's clearing firm, and NSCC 
determines not to guarantee the settlement of the member's trades;
    (2) For regulatory purposes or to comply with an order of an 
arbitrator or court; or
    (3) On risk management reports provided to the member's contra 
parties each day after 4 p.m., which disclose trading activity on an 
aggregate dollar value basis.
    (d) The Association will reveal to a member, no later than the end 
of the day on the date an anonymous trade was executed, when the 
member's Quote/Order has been decremented by another Quote/Order 
submitted by that same member.
* * * * *

5200. Intermarket Trading System/Computer Assisted Execution System

5210. Definitions

    (a)-(h) No Change.
    (i) ``CAES'' means the ``Computer Assisted Execution System'', the 
computerized order routing and execution facility for ITS Securities, 
as from time to time modified or supplemented, that is operated by The 
Nasdaq Stock Market, Inc. and made available to NASD members. CAES 
functionality is offered through the ``Nasdaq National Market Execution 
System'' or ``NNMS'' which operates pursuant to the Rule 4700 Series.

5220. ITS/CAES Registration

    In order to participate in ITS, a market maker must be registered 
with the Association as an ITS/CAES Market Maker in each security in 
which a market will be made in ITS. Such registration shall be 
conditioned upon the ITS/CAES Market Maker's continuing compliance with 
the following requirements:
    (a) registration as a CQS market maker pursuant to Rule 6320 and 
compliance with the Rule 6300 Series;
    (b) execution of an ITS/CAES Market Maker application agreement 
with the Association at least two days prior to the requested date of 
registration;
    (c) participation in NNMS in accordance with the Rule 4700 and 5200 
Series;
    ([c]d) compliance with SEC Rule 15c3-1;
    ([d]e) compliance with the ITS Plan, SEC Rule 11Ac1-1 and all 
applicable Rules of the Association;
    ([e]f) the maintenance of continuous two-sided quotations in the 
absence of the grant of an excused withdrawal or a functional excused 
withdrawal by the Association;
    ([f]g) maintenance of the physical security of the equipment used 
to interface with the ITS System located on the premises of the ITS/
CAES Market Makers to prevent the unauthorized entry of communications 
into the ITS System; and
    ([g]h) acceptance and settlement of each ITS System trade that the 
ITS System identifies as effected by such ITS/CAES Market Maker, or if 
settlement is to be made through another clearing member, guarantee of 
the acceptance of settlement of such identified ITS System trade by the 
clearing member on the regularly scheduled settlement date.

5221. Suspension or Revocation of ITS/CAES Registration

    No Change.

5230. ITS Operations

    No Change.

5240. Pre-Opening Application--Opening by ITS/CAES Market Maker

    No Change.

5250. Pre-Opening Application--Openings on Other Participant Markets

    No Change.

5260. System Trade and Quotations

5261. Obligation to Honor System Trades

    No Change.

5262. Trade-Throughs

    No Change.

5263. Locked or Crossed Markets

    No Change.

5264. Block Transactions

    No Change.

5265. Authority To Cancel or Adjust Transactions

    No Change.

6300. Consolidated Quotations Service (CQS)

    No Change.

6400. Reporting Transactions in Listed Securities

    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
    NASD members currently use CAES to trade ITS Securities with other 
NASD members and also with the securities exchanges that participate in 
ITS. Nasdaq has decided to enhance the trading of ITS Securities by 
offering the superior functionality of SuperMontage, Nasdaq's fully 
integrated order display and execution system currently used for 
trading Nasdaq securities. SuperMontage allows market participants to 
enter unlimited quotes and orders at multiple price levels. The system 
displays aggregate interest five price levels deep on each side of the 
market and permits users to access that aggregated trading interest via 
a variety of order types. In addition, SuperMontage offers pre- and 
post-trade anonymity.
    Trading of ITS Securities is affected by three national market 
system plans that are established jointly by the markets and approved 
by the Commission. Nasdaq collects quotations and trade reports from 
NASD members and provides such quotations to the Consolidated Quotation 
System (``CQ Plan'') and the Consolidated Tape Association (``CT 
Plan'') for dissemination to the public. The ITS Plan governs the 
manner in which

[[Page 61521]]

NASD members participate in the ITS, an electronic linkage between 
markets that trade exchange listed securities. In addition, the NASD 
adopted the NASD Rule 5200 and 6300 Series to ensure that NASD members 
comply with the obligations imposed by the CT, CQ, and ITS Plans.
    Nasdaq proposes no changes to the obligations imposed by the Plans 
or by the NASD Rule 5200 and 6300 Series. Thus, for example, members 
must continue to comply with the trade through restrictions in NASD 
Rule 5262, the locked and crossed markets restrictions in NASD Rule 
5263, the block trade requirements in NASD Rule 5264, and the Pre-
Opening Application procedures set forth in NASD Rules 5240 and 5250. 
Members that wish to make markets in ITS Securities must continue to 
register as ITS/CAES and CQS Market Makers pursuant to NASD Rules 5220 
and NASD Rule 6320 and comply with the obligations imposed under NASD 
Rule 6330.\3\ They must also continue to clear and settle trades under 
NASD Rule 5261 and properly report transactions pursuant to the NASD 
Rule 6400 Series.
---------------------------------------------------------------------------

    \3\ The NASD Rules will continue to refer to CAES and to ITS/
CAES Market Makers in order to maintain consistency with the 
language of the ITS Plan. To accomplish the name change from CAES to 
NNMS, Proposed NASD Rule 5210(i) incorporates the ITS Plan 
definition of CAES and then provides that CAES functionality will 
now be provided by SuperMontage. In addition, Proposed NASD Rule 
5220(c) requires ITS/CAES Market Makers to participate in the NNMS.
---------------------------------------------------------------------------

    To ensure that SuperMontage will enable NASD members trading ITS 
Securities to continue to comply with applicable NASD and Commission 
rules, Nasdaq is proposing certain modifications to the existing 
SuperMontage functionality. These modifications apply to ITS Securities 
only; they do not affect the trading of Nasdaq-listed securities:
    1. Define two participant types: ITS/CAES market makers and order 
entry firms.
    2. Enable ITS/CAES market makers to participate in the Pre-Opening 
Application in accordance with NASD Rules 5240 and 5250.
    3. Enable ITS/CAES market makers to comply with the locked/crossed 
obligations imposed by NASD Rule 5263.
    4. Enable ITS/CAES market makers to comply with the trade through 
and block trade obligations imposed by NASD Rules 5262 and 5264.
    5. Disable Directed, Pegged and End of Day Orders, modify the 
Discretionary Order, and add four order types to facilitate ITS 
trading.
    6. Remove the Auto-Quote Refresh functionality, modify the 
decrementation process, and apply the excused withdrawal provisions of 
NASD Rule 6350, rather than NASD Rule 4619.
    7. Prohibit SuperMontage from executing trades in violation of Rule 
10a-1 of the Act \4\ or of the obvious error provisions of the ITS 
Plan.
---------------------------------------------------------------------------

    \4\ 17 CFR 240.10a-1.
---------------------------------------------------------------------------

    8. Modify the system to comply with the round lot requirements of 
the ITS Plan.
    9. Modify the adjustment of open buy and sell orders in ITS 
Securities to conform closely to the practice of the listing exchange.
    Set forth below is a description of the proposed modifications.
1. Define Participant Types
    NASD members will trade ITS Securities in two ways: as ITS/CAES 
Market Makers or as NNMS Order Entry Firms.\5\ Proposed NASD Rule 
4701(pp) defines ITS/CAES Market Makers by incorporating the definition 
already contained in NASD Rule 5210(e), which includes both market 
makers and electronic communications networks (``ECNs''). The 
definition distinguishes ITS/CAES Market Makers, which make markets in 
ITS Securities from NNMS Market Makers, which make markets in Nasdaq 
securities.\6\ ITS/CAES Market Makers will be permitted to choose 
between the automatic execution and the order delivery functionality of 
the NNMS system, unlike NNMS Market Makers, which are required to 
accept automatic executions. Nasdaq believes that this will permit ITS/
CAES Market Makers to better manage their interaction with ITS 
Exchanges either through the NNMS or through their direct connections 
to those exchanges' systems.
---------------------------------------------------------------------------

    \5\ NASD Rule 4710(qq) defines ITS Exchanges as national 
securities exchanges that participates in the ITS system as defined 
in NASD Rule 5210(a). ITS Exchanges are not eligible to participate 
in the NNMS but are defined because the system will send ITS 
Commitments to and receive them from ITS Exchanges.
    \6\ Nasdaq reinforces this distinction by modifying the 
definition of NNMS Market Maker. See Proposed NASD Rule 4710(u).
---------------------------------------------------------------------------

    NASD members may also trade ITS Securities through the NNMS as 
Order Entry Firms, using the same registration process as NNMS Order 
Entry Firms in Nasdaq securities. Nasdaq is proposing simply to modify 
the existing definition of NNMS Order Entry Firm, contained in NASD 
Rule 4710(w), to include both Nasdaq and ITS Securities. Therefore, 
references to NNMS Order Entry Firms throughout the 4700 Series should 
be understood to include Order Entry Firms participating in either 
Nasdaq or ITS Securities unless otherwise indicated.\7\
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    \7\ The definitions of ITS/CAES Market Makers and NNMS Order 
Entry Firms are carried forward into other definitions that 
establish system entitlements. For example, ITS/CAES Market Makers 
are included in the definitions of NNMS Participants (NASD Rule 
4710(v)), Nasdaq Quoting Market Participants (NASD Rule 4710(y)), 
and Quoting Market Participant (NASD Rule 4710(cc)). Since ECNs may 
trade ITS Securities only as ITS/CAES Market Makers or as NNMS Order 
Entry Firms, they are excluded from the definition of NNMS ECNs 
(NASD Rule 4710(t)).
---------------------------------------------------------------------------

    Nasdaq's proposal is dominated by one simple difference between 
NASD members that trade ITS Securities as ITS/CAES Market Makers and 
those that trade as NNMS Order Entry Firms: ITS/CAES Market Makers can 
participate in ITS and NNMS Order Entry Firms cannot. Nasdaq has 
systematically eliminated any possibility that order entry firms would 
interact with ITS, by eliminating order entry firms' ability to place 
liquidity on the SuperMontage book, \8\ to precluding their 
participation in the Pre-Opening Application, to preventing order entry 
firms from trading through or locking/crossing the quotations of ITS 
Exchanges. As a result of Nasdaq's tailoring, Nasdaq is proposing no 
changes to the NASD rules that implement the ITS Plan, and ITS 
Exchanges will experience no impact from Nasdaq's decision to replace 
CAES with SuperMontage.
---------------------------------------------------------------------------

    \8\ See Proposed NASD Rule 4701(o) (``NNMS Order Entry Firms 
shall be eligible to enter Non-Attributable orders in ITS Securities 
only if they are designated as Immediate or Cancel''). The ability 
to enter Non-Attributable Orders in Nasdaq listed securities for 
display would enable order entry firms to place liquidity in the 
Nasdaq book under the anonymous acronym ``SIZE'' and to gain 
standing in the execution algorithm. Nasdaq is eliminating this 
feature in order to fully comply with the ITS Plan, although Nasdaq 
believes that this functionality is consistent with the Exchange Act 
and is beneficial to investors and market participants alike. As a 
further result, NNMS Order Entry Firms will not have quotations 
disseminated via the proposed IM Prime Data Feed. See Proposed NASD 
Rule 4707(f).
---------------------------------------------------------------------------

2. Pre-Opening Application
    The NNMS would be modified to permit ITS/CAES Market Makers to 
participate in the Pre-Opening Application for ITS Securities that is 
established in the ITS Plan and incorporated in NASD Rules 5240 and 
5250. The NNMS system will receive all Pre-Opening Administrative 
(``POA'') Messages, Second Look Messages (``SLM''), and One-Sided 
Responses (``OSRs'') that the ITS Exchanges issue. The NNMS will also 
disseminate those messages to ITS/CAES Market Makers. Market makers 
that opt to participate in the Pre-Opening Application may do so by 
entering Pre-Opening Responses

[[Page 61522]]

(``PORs'') in response to a POA or SLM. In addition, NNMS will receive 
and process OSRs from the opening ITS Exchange in accordance with NASD 
Rules 5240 and 5250. NNMS Order Entry Firms are not eligible to 
participate in the Pre-Opening Application, and the system will not 
accept PORs that are entered by an Order Entry Firm.
3. Locked and Crossed Markets Processing
    The NNMS would process locked or crossed markets between and among 
ITS/CAES Market Makers largely as it does for Nasdaq securities. A 
quote/order that would create a locked or crossed market, if entered 
into the NNMS during normal market hours, will be processed exactly as 
locks and crosses in Nasdaq securities are processed under existing 
NASD Rule 4710(b)(3)(A). Rather than display the quote/order at the 
locking/crossing price, the system will treat the quote/order as a 
marketable limit order and enter it into the system as a Non-Directed 
Order. A locking quote/order will be executed at the locking price 
against the order next in line for execution, and a crossing quote/
order will be executed at the displayed price of the order next in line 
for execution. Once the lock or cross is cleared, any remaining shares 
will be displayed in the NNMS, if eligible for display.
    A quote/order that would create a locked or crossed market between 
and among ITS/CAES Market Makers prior to normal market hours will be 
processed exactly as are Nasdaq securities today, except that the NNMS 
automated unlocking/uncrossing spin will occur at 9:29:55 a.m. for ITS 
Securities rather than at 9:29:30 a.m. as it does for Nasdaq listed 
securities.\9\ Quotes/Orders that would create a locked/crossed market 
after the unlocking/uncrossing spin occurs will be held in queue until 
9:30 a.m. Due to the cumbersome structure of the Pre-Opening 
Application of the ITS Plan, fewer NASD members participate in the pre-
market for ITS Securities than for Nasdaq securities. Therefore, a 
shorter processing window is appropriate.
---------------------------------------------------------------------------

    \9\ See Proposed NASD Rule 4710(b)(3)(c).
---------------------------------------------------------------------------

    Nasdaq would program the NNMS to accommodate different processing 
for locked or crossed markets involving ITS Exchanges. First, if an 
Order Entry Firm enters an order that would lock or cross an ITS 
Exchange, the NNMS will execute the order against all Quotes/Orders 
currently in the system and reject any remaining portion of the order 
that would create a locked/crossed market with an ITS Exchange. If an 
ITS/CAES Market Maker enters a quote/order that would lock or cross an 
ITS Exchange, the system will process the quote/order in accordance 
with its designation and automatically generate and send an ITS 
Commitment to any ITS Exchange that is locked or crossed.\10\
---------------------------------------------------------------------------

    \10\ See Proposed NASD Rule 4708(a)(3).
---------------------------------------------------------------------------

    If an ITS Exchange has created a locked/crossed market with Nasdaq, 
the NNMS will notify any ITS/CAES Market Maker whose market was locked/
crossed. If Nasdaq receives an ITS Commitment when a locked/crossed 
condition is pending, Nasdaq will send the ITS Commitment to the ITS/
CAES Market Maker(s) at the pending inside price.
4. ITS Trade Through Rule
    Nasdaq would modify the NNMS processing to enable ITS/CAES Market 
Makers to comply with their trade through obligations under NASD Rules 
5262 and 5264. The NNMS would reject any order of an NNMS Order Entry 
Firm that, if executed, would trade through an ITS Exchange. If Nasdaq 
receives an administrative complaint from an ITS Exchange in response 
to a potential trade through, Nasdaq will send that complaint to the 
ITS/CAES Market Maker responsible for the potential trade through, as 
it does today.\11\ ITS/CAES Market Makers will respond to 
administrative complaints by entering into the NNMS a preferenced order 
to the complaining ITS Participant. The NNMS will then generate and 
send a properly formatted ITS Commitment to the appropriate ITS 
Exchange.
---------------------------------------------------------------------------

    \11\ See Proposed NASD Rule 4708(a)(2).
---------------------------------------------------------------------------

    The NNMS would also monitor for trade-throughs by ITS Exchanges as 
called for by the ITS Plan and NASD Rules 5262 and 5264. If the system 
detects a trade through by an ITS Exchange, it will notify the ITS/CAES 
Market Makers that was traded through.\12\ ITS/CAES Market Makers may 
elect to send administrative complaints on their own behalf. If an 
inbound ITS Commitment is received, the NNMS will automatically send a 
preferenced Order at the price of the ITS Commitment to the Nasdaq 
Quoting Market Participant(s) at that price level, as Nasdaq does 
today.\13\
---------------------------------------------------------------------------

    \12\ Due to technology latencies, rapid quote updates, and a 
variety of other factors, not all apparent trade throughs violate 
the ITS Plan. To avoid needless false positives, Nasdaq will program 
the system, as CAES is programmed today, to provide a trade through 
``grace period'' before issuing an administrative complaint. The 
system will not detect a trade through unless a particular Nasdaq 
quote has been in place for the duration of the grace period. The 
current grace period ranges between five and 17 seconds, depending 
upon, among others, the level of automation at a particular 
exchange.
    \13\ The ITS Operating Committee has discussed a proposal to add 
a resolution indicator to ITS Commitments that are intended to 
respond to an administrative complaint. Nasdaq strongly favors that 
proposal because it will decrease the difficulty and expense of 
determining the proper recipient of an inbound ITS Commitment. 
Nasdaq urges the ITS Operating Committee and the Commission to move 
quickly to implement that proposal.
---------------------------------------------------------------------------

5. Modify Available Order Types
    Nasdaq is proposing to disable Directed, Pegged and End of Day 
Orders, modify Discretionary Orders, and add new order types to 
accommodate the characteristics unique to ITS Securities. Nasdaq, in 
consultation with current ITS participants, has determined not to offer 
Directed, Pegged and End of Day Orders for ITS Securities.\14\ The 
processing of orders in ITS Securities is more complex than for Nasdaq 
securities due to both the presence of ITS and the ability for ITS/CAES 
Market Makers to accept order delivery rather than automatic 
executions. The possibility of receiving Directed Orders, in addition 
to Non-Directed and Preferenced Orders and ITS Commitments, seems 
needlessly complicated. Nasdaq decided not to offer Pegged Orders at 
this time to hasten its development efforts, and it may file a separate 
proposal to add that functionality at a later date.
---------------------------------------------------------------------------

    \14\ See Proposed NASD Rule 4710(f), (jj), and (mm).
---------------------------------------------------------------------------

    Nasdaq is proposing to modify the characteristics of a 
Discretionary Order for ITS Securities.\15\ Like the current 
Discretionary Order for Nasdaq Securities, it will have both a 
displayed bid or offer price, as well as a non-displayed discretionary 
price range in which the participant is also willing to buy or sell, if 
necessary. Rather than being fixed or pegged to the Nasdaq best bid and 
offer, the modified order type must be fixed. Nasdaq will 
systematically prohibit Discretionary Orders in ITS Securities from 
creating a quote that locks or crosses the national best bid and offer 
and from executing at a price that trades through the quotation of an 
ITS Exchange unless it is designated as a Sweep Order.
---------------------------------------------------------------------------

    \15\ See Proposed NASD Rule 4710(nn)(2).
---------------------------------------------------------------------------

    Nasdaq is also proposing to create a Fill or Return Order for ITS 
Securities.\16\ Fill or Return Orders will be delivered to or executed 
by NNMS Participants in ITS Securities through multiple price levels 
without delivering the order to an ITS Exchange. Unlike the Auto-Ex 
Order for Nasdaq securities, the Fill or Return Order will execute 
against ECNs that are

[[Page 61523]]

registered as ITS/CAES Market Makers, but it will not generate an ITS 
Commitment to an ITS Exchange. In addition, ITS/CAES Market Makers will 
use this order without trading through the quotations of ITS Exchanges.
---------------------------------------------------------------------------

    \16\ See Proposed NASD Rule 4710(ll).
---------------------------------------------------------------------------

    An ITS/CAES Market Maker that wishes to trade through multiple 
price levels and to avoid generating an ITS Commitment, but is willing 
to trade through those ITS Exchanges, can use the newly proposed 
``Sweep Order.'' \17\ Nasdaq believes it is consistent with the ITS 
Plan to offer ITS/CAES Market Makers this functionality because there 
are many circumstances where an ITS/CAES Market Maker is permitted to 
trade through an ITS Exchange quotation without violating the ITS Plan. 
ITS/CAES Market Makers must decide for themselves when the use of such 
functionality is permitted by the rules, and they will be subject to 
continuous, rigorous surveillance to ensure proper compliance. On the 
other hand, Nasdaq will systematically prevent an Order Entry Firm from 
using the system to trade through the quotations of ITS Exchanges. If 
an Order Entry Firm enters a Sweep Order, the system will execute all 
shares available within the NNMS without trading through the quotation 
of an ITS Exchange, and will reject the unexecuted portion of the Sweep 
Order to be sent back to the entering party.
---------------------------------------------------------------------------

    \17\ See Proposed NASD Rule 4710(pp).
---------------------------------------------------------------------------

    Finally, Nasdaq proposes to create three new order types that will 
participate in after hours trading of ITS Securities between 4:00 and 
6:30 p.m. These orders--the ``Total Day'', Total Good-till-Canceled'', 
and ``Total Immediate or Cancel''--differ from the existing Day, Good 
till Canceled, and Immediate or Cancel orders only in their ability to 
participate in the pre-opening spin and after-hours sessions.\18\ A 
Total Day Order, if not fully executed at entry, remains available for 
display between 7:30 a.m. and 6:30 p.m. and for execution between 
9:29:55 a.m. and 6:30 p.m., after which it is returned to the entering 
party. A Total Good-till-Cancelled Order, if not fully executed at 
entry remains available for display between 7:30 a.m. and 6:30 p.m. and 
for execution between 9:29:55 a.m. and 6:30 p.m., until cancelled by 
the entering party, or until 1 year after entry, whichever comes first. 
A Total Immediate or Cancel Order is a limit order that, upon becoming 
non-marketable, is canceled and returned to the entering participant. 
Such orders are available for potential execution between 9:29:55 a.m. 
and 6:30 p.m.
---------------------------------------------------------------------------

    \18\ See Proposed NASD Rule 4710(ss `` uu).
---------------------------------------------------------------------------

6. Quotation Updates
    The manner in which ITS/CAES Market Makers update their quotations 
would differ in certain respects from NNMS Market Makers. First, if the 
bid side of an ITS/CAES Market Maker's quote/order is exhausted, the 
system then will automatically establish a bid of $0.01 for 100 shares. 
If the offer side of the ITS/CAES Market Maker's quote/order is 
exhausted, the system will then automatically establish an offer of two 
times the system best bid plus $0.01 and offer for 100 shares.\19\ This 
modification will ensure that ITS/CAES Market Makers maintain 
continuous two-sided quotations whenever they are active in the NNMS.
---------------------------------------------------------------------------

    \19\ See Proposed NASD Rule 4710(b)(1)(C)(v)(b).
---------------------------------------------------------------------------

    To preserve a fair and orderly market, Nasdaq would close the 
quotation of any ITS/CAES Market Maker that regularly exceeds the 
standard five-second response time. Specifically, if an ITS/CAES Market 
Maker regularly fails to meet a five-second response time (as measured 
by the ITS/CAES Market Maker's Service Delivery Platform) over a period 
of orders, such that the failure endangers the maintenance of a fair 
and orderly market, Nasdaq will place that ITS/CAES Market Maker's 
quote in a closed-quote state. Nasdaq will lift the closed-quote state 
when the ITS/CAES Market Maker certifies that it can meet the five-
second response time requirement with regularity sufficient to maintain 
a fair and orderly market.\20\
---------------------------------------------------------------------------

    \20\ See Proposed NASD Rule 4710(b)(i)(c)(v)(c).
---------------------------------------------------------------------------

    The Auto-Quote Refresh (``AQR'') functionality described in NASD 
Rule 4710(b)(2)(B) is designed to assist market participants in 
maintaining a continuous two-sided quotation. Because the system will 
automatically enter a quotation for an ITS/CAES Market Maker whose 
quotation has been decremented to zero, Nasdaq does not believe it is 
necessary to provide ITS/CAES Market Makers with that AQR 
functionality.\21\ Likewise, an ITS/CAES Market Maker that experience 
difficulty maintaining proper quotations may request an excused 
withdrawal pursuant to NASD Rule 6350, rather than utilizing the 
procedures set forth in NASD Rule 4619 for Nasdaq securities.\22\
---------------------------------------------------------------------------

    \21\ See Proposed NASD Rule 4710(b)(3)(B)(v).
    \22\ See Proposed NASD Rule 4710(b)(6).
---------------------------------------------------------------------------

7. System Validations
    Nasdaq would program SuperMontage to validate ITS Commitments to 
ensure that they comply with the formatting requirements set forth in 
NASD Rule 5230. In addition, the system will screen ITS Commitments and 
reject any ITS Commitment that, if executed, would violate Rule 10a-1 
of the Act \23\ governing the execution of short sale orders or that 
would constitute an obvious error as set forth in NASD Rule 5265.\24\
---------------------------------------------------------------------------

    \23\ 17 CFR 240.10a-1.
    \24\ See Proposed NASD Rule 4708(b)(1-2).
---------------------------------------------------------------------------

8. Odd-Lot Processing
    Nasdaq is proposing to modify two aspects of the odd-lot processing 
of ITS Securities. This is necessary to accommodate the ITS Plan 
requirement that ITS Commitments be for a minimum of one round lot or 
for round lot multiples. This requirement is incorporated in Proposed 
NASD Rule 4706(d)(2), which requires that orders in ITS Securities must 
be entered for a minimum of one round lot, or in round lot multiples, 
or in mixed lots. This proposed rule also establishes that orders in 
ITS Securities will be delivered to ITS Exchanges in round lots only.
    In addition, Nasdaq proposes to modify the aggregation of odd lots 
set forth in NASD Rule 4707. Specifically, in the case of ITS 
Securities, odd lot share amounts of each individual NNMS Participant 
will be aggregated separately and shall be displayed next to that NNMS 
Participant's MPID for a minimum of one round lot or for round lot 
multiples. Odd lot share amounts will be cancelled at the end of the 
day.\25\ Nasdaq is modifying the processing of Nasdaq securities, which 
permits the aggregation of all market participants' orders together, to 
ensure that all ITS Commitments are for a minimum of one round lot.
---------------------------------------------------------------------------

    \25\ See Proposed NASD Rule 4708(b)(3)(C).
---------------------------------------------------------------------------

9. Adjustment of Open Orders
    Nasdaq is proposing to modify the adjustment of open buy and sell 
orders to more closely conform that process to the practice of the 
listing exchange. Sell orders in Nasdaq-listed and NYSE-listed 
securities will not be adjusted by the system, except for reverse 
splits where sell orders will be purged from the system. In the event 
of a Stock Dividend or Stock Split, sell orders in Amex-listed 
securities will be adjusted differently, in accordance with the 
procedures set forth for buy orders. In such cases, sell orders, like 
buy orders in all securities, prices will be determined by first 
rounding up the dollar value of the stock dividend or split to the 
nearest penny. The resulting amount will then be subtracted from the

[[Page 61524]]

price of the buy order. Unless marked ``Do Not Increase'', the size of 
the order will be increased by first, (A) multiplying the size of the 
original order by the numerator of the ratio of the dividend or split, 
then (B) dividing that result by the denominator of the ratio of the 
dividend or split, then (C) rounding that result to the next lowest 
share.\26\ Finally, odd lot orders in ITS Securities that result from 
partial execution rather than order entry will be canceled rather than 
adjusted.
---------------------------------------------------------------------------

    \26\ See Proposed NASD Rule 4715(b and c).
---------------------------------------------------------------------------

Implementation
    When the proposed enhancements to SuperMontage are approved, Nasdaq 
proposes to set and publish a phase-in schedule for transitioning from 
CAES to SuperMontage. When an ITS Security begins trading through 
SuperMontage, it will simultaneously cease trading through CAES. When 
all ITS Securities are trading through SuperMontage, no stocks will be 
trading through CAES and CAES will be retired.
2. Statutory Basis
    Nasdaq believes the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\27\ which requires that the 
rules of the NASD be 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. In addition, the rules cannot be designed to permit unfair 
discrimination between customers, issuers, brokers, or dealers. Nasdaq 
believes that improvements to SuperMontage are designed to increase the 
liquidity and opportunities for price improvement in SuperMontage by 
facilitating greater participation and trading interest interaction.
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 70o-3(b)(6).
---------------------------------------------------------------------------

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 NASD 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 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-2003-149 and 
should be submitted by November 18, 2003.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\28\
---------------------------------------------------------------------------

    \28\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-27089 Filed 10-27-03; 8:45 am]
BILLING CODE 8010-01-P