[Federal Register Volume 68, Number 227 (Tuesday, November 25, 2003)]
[Notices]
[Pages 66147-66150]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-29412]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48798; File No. SR-NASD-2003-150]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. To Establish a ``Pegged'' Order in Nasdaq's 
SuperMontage System

November 17, 2003.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on November 7, 2003, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association'') through its subsidiary, The Nasdaq 
Stock Market, Inc. (``Nasdaq''), submitted to the Securities and 
Exchange Commission (``Commission'') the proposed rule change as 
described in Items I and II below, which Items have been prepared by 
Nasdaq. Nasdaq filed the proposal pursuant to Section 19(b)(3)(A) of 
the Act,\3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the 
proposal effective upon filing with the Commission. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to establish a new voluntary order type, known as 
pegged orders, for use within the Nasdaq National Market Execution 
System (``NNMS'' or ``SuperMontage''). Nasdaq proposes to implement 
this new order type on or about December 8, 2003, and will inform 
market participants of the exact implementation date via a Head Trader 
Alert on http://www.nasdaqtrader.com.
    The text of the proposed rule change appears below. New text is 
italicized.\5\
---------------------------------------------------------------------------

    \5\ The Commission recently published for notice and public 
comment proposed rule changes filed by Nasdaq that propose to modify 
the rules governing the operation of SuperMontage. See Securities 
Exchange Act Release Nos. 48501 (September 17, 2003), 68 FR 56358 
(September 30, 2003) (Notice of Filing of SR-NASD-2003-128); 48606 
(October 8, 2003), 68 FR 59659 (October 16, 2003) (Notice of Filing 
of SR-NASD-2003-134); 48671 (October 21, 2003), 68 FR 61531 (October 
28, 2003) (Notice of Filing of SR-NASD-2003-135); 48674 (October 21, 
2003), 68 FR 61508 (October 28, 2003) (Notice of Filing of SR-NASD-
2003-149); 48675 (October 21, 2003), 68 FR 61528 (October 28, 2003) 
(Notice of Filing of SR-NASD-2003-143). See also File No. SR-NASD-
2003-165. The text of the proposed rule change is shown as marked 
against the text of the SuperMontage rules as currently in effect, 
rather than as they are proposed to be amended. Nasdaq represents 
that it will file such amendments to pending filings as Commission 
staff may request to reflect the approval, disapproval, immediate 
effectiveness, or withdrawal of filings.
---------------------------------------------------------------------------

* * * * *
    4700. NASDAQ NATIONAL MARKET EXECUTION SYSTEM (NNMS)
    4701. Definitions
    Unless stated otherwise, the terms described below shall have the 
following meaning:
    (a)-(jj) No Change.
    (kk)-(ll) Reserved.
    (mm) The term ``Pegged'' shall mean, for priced limit 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 NNMS Participant entering a 
Pegged Order may specify that the price of the order will either equal 
the inside quote on the same side of the market (a ``Regular Pegged 
Order'') or equal a price that deviates from the inside quote on the 
contra side of the market by $0.01 (i.e., $0.01 less than the inside 
offer or $0.01 more than the inside bid) (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

[[Page 66148]]

permanently converted into an unpegged limit order.
* * * * *
    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 an ``Immediate or Cancel'', or as a 
``Day'' or a ``Good-till-Cancelled'' order. 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. 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. 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. 
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: Non-Directed Day (other than Pegged Orders) and GTC 
orders may be executed prior to market open if required under Rule 
4710(b)(3)(B).
    In addition, an order may be assigned the designations described 
below. An order may be designated as ``Pegged,'' in which case the 
order will also automatically be designated as Day. A Pegged Order may 
not be designated as a Preferenced Order. A Pegged Order (or unexecuted 
portion thereof) will be retained by NNMS and its price adjusted in 
response to changes in the Nasdaq inside market. A Pegged Order will be 
cancelled if there is no displayable Quote/Order to which its price can 
be pegged. Starting at 7:30 a.m., until the 4 p.m. market close, Pegged 
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. The 
initial price of Pegged Orders entered prior to market open will be 
established at 9:30 a.m. based on the Nasdaq inside bid or offer at 
that time.
    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.
    (C)-(F) No Change.
    (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) All Non-Directed orders 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 
designate orders as ``Pegged,'' in which case the order will also 
automatically be designated as Day. 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.
    (B) No change.
    (b)-(e) No change.
    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 Quotes/Orders into the NNMS, subject to the following 
requirements and conditions:
    (1) No change.
    (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. When a Pegged Order is displayed as a 
Quote/Order, its time-stamp will be updated whenever its price is 
adjusted.
    (3)-(4) No change.
    (b)-(e) No change.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    In order to provide increased functionality to system users, Nasdaq 
proposes to adopt a new order type, the pegged order, for use in 
SuperMontage. A pegged order is a limit order, the price of which is 
automatically adjusted to follow the price movements of the Nasdaq 
inside market. A ``regular'' pegged order would peg to the same side of 
the market it is entered on. Thus, the price of a regular pegged buy 
order would always equal the best inside bid in Nasdaq, and the price 
of a regular pegged sell order would always equal the best inside offer 
in Nasdaq. By entering a regular pegged order, a market participant 
indicates its willingness to provide liquidity at the best inside price 
set by other market participants.
    A ``reverse'' pegged order would peg to the opposite side of the 
market. Specifically, it would peg at a price that deviates from the 
opposite side of the market by $0.01.\6\ Thus, a reverse pegged buy 
order would be priced at $0.01 less than the inside offer, and a 
reverse pegged sell order would be priced at $0.01 more than the inside 
bid. By entering a reverse pegged order, a market participant indicates 
its willingness to provide liquidity at a price as close as possible to 
the opposite

[[Page 66149]]

side of the market. As a result, in circumstances where the bid/ask 
spread is greater than $0.01, the entry of a reverse pegged order would 
establish a new inside price. A pegged order may not be pegged to 
prices away from the inside market. Like any other order whose price is 
changed, a pegged order would be given a new time-priority stamp 
whenever a change to the inside bid/offer results in an adjustment of 
the price of a pegged order.
---------------------------------------------------------------------------

    \6\ Nasdaq states that requiring the price of a reverse pegged 
order to deviate from the opposite side of the market would ensure 
that the price of the reverse pegged order would not lock or cross 
the Quote/Order to which it is pegged.
---------------------------------------------------------------------------

    Users may voluntarily select a price execution cap beyond which a 
pegged order would not be executed. Once a price cap is reached, the 
pegged/reverse pegged order would be permanently converted to an 
unpegged limit order at the cap price and would be retained by the 
system for display and potential execution solely at that price or 
better; the price of a pegged order that is converted into an unpegged 
limit order would not thereafter be adjusted, even if the inside bid/
offer is later in the range where pegging had previously been 
occurring. If no execution cap price amount is selected, SuperMontage 
would continue to adjust the price of the pegged order to follow the 
inside bid or offer to which it is pegged.
    Pegged orders may only be entered as DAY orders. Pegged orders may 
be entered (but not displayed or executed) prior to market open. 
Because a pegged order reflects a NNMS participant's willingness to 
provide liquidity, pegged orders entered before market open would be 
added to the book and become available for interaction with other 
orders at 9:30 a.m. The price of pegged orders would be established at 
9:30 a.m., based on the inside market at the open. Pegged orders may 
not be preferenced or directed to another market participant.
    A regular pegged order may not itself establish the inside bid or 
offer. Therefore, if all non-pegged displayable interest at the inside 
is exhausted, the new inside would be established at the next best 
price level where displayable non-pegged quotes/orders exist, and the 
price of pegged orders would be adjusted accordingly. If there are no 
other market participants on the same side of the market, a regular 
pegged order would be cancelled and sent back to the entering party.
    Because the price of a reverse pegged order is based on changes on 
the opposite side of the market (e.g., a reverse pegged buy order's 
price is adjusted based on changes in the offer), such an order may 
remain alone at the inside. If there are no participants on the contra-
side of the market, however, a reverse pegged order would be cancelled 
and sent back to the entering party.
    Because pegged orders would not allow a market participant to 
maintain a price that is away from the inside market, they are 
consistent with Nasdaq's ``Autoquote Policy'' reflected in NASD IM-
4613. Pegged orders would allow all market participants to adjust the 
prices of orders in a manner similar to the practice of computer 
generated quoting described in NASD IM-4613(c), which is currently 
permitted on a case-by-case basis. Because of the potential negative 
impact that the automatic adjustment of quotes/orders can have on 
system capacity and performance, however, Nasdaq proposes to 
specifically retain the right to restrict or prohibit the entry of any 
type of pegged order entirely, or in a particular issue(s), at any time 
when SuperMontage is operational or available for the entry of such 
orders. Pegged or reverse pegged orders that are in the system at the 
time Nasdaq determines not to accept further such orders would continue 
to be normally adjusted and executed.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\7\ in general and with 
Section 15A(b)(6) of the Act,\8\ in particular, in that the proposal is 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Nasdaq 
believes the proposed rule change would provide market participants 
with a voluntary tool to use to offer liquidity at the inside market. 
Nasdaq notes that the Commission has found similar orders offered by at 
least one other market center to be consistent with the Act.\9\
---------------------------------------------------------------------------

    \7\ 15 U.S.C. 78o-3.
    \8\ 15 U.S.C. 78o-3(b)(6).
    \9\ See Securities Exchange Act Release No. 47467 (March 7, 
2003), 68 FR 12134 (March 13, 2003) (SR-PCX-2002-75). According to 
Nasdaq, the Pegged Order proposed in this filing is almost identical 
in function to the Pacfic Exchange Equities, Inc. (``PCXE'') Pegged 
Order approved by the Commission.
---------------------------------------------------------------------------

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

    The foregoing rule change has become effective pursuant to Section 
19(b)(3)(A) of the Act,\10\ and subparagraph (f)(6) of Rule 19b-4,\11\ 
thereunder because it does not: (i) Significantly affect the protection 
of investors or the public interest; (ii) impose any significant burden 
on competition; (iii) become operative for 30 days from the date on 
which it was filed, or such shorter time as the Commission may 
designate. At any time within 60 days of the filing of the proposed 
rule change, the Commission may summarily abrogate such rule change if 
it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
---------------------------------------------------------------------------

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 in the 
Commission's Public Reference Room. Copies of the filing will also be 
available for inspection and copying at the principal office of the 
Association.

[[Page 66150]]

All submissions should refer to File No. SR-NASD-2003-150 and should be 
submitted by December 16, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
---------------------------------------------------------------------------

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

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-29412 Filed 11-24-03; 8:45 am]
BILLING CODE 8010-01-P