[Federal Register Volume 68, Number 236 (Tuesday, December 9, 2003)]
[Notices]
[Pages 68677-68682]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-30500]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48868; File No. SR-NASD-2003-165]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1, 2, and 3 Thereto by the National 
Association of Securities Dealers, Inc. To Establish a New 
``Discretionary'' Order in Nasdaq's SuperMontage System

December 3, 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''), 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

[[Page 68678]]

prepared by Nasdaq. Nasdaq filed Amendment Nos. 1, 2, and 3 to the 
proposal on November 14, 2003,\3\ November 21, 2003,\4\ and November 
28, 2003, respectively.\5\ The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from John M. Yetter, Associate General Counsel, 
Nasdaq, to Katherine A. England, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated November 14, 
2003 (``Amendment No. 1''). In Amendment No. 1, Nasdaq clarified 
that discretionary orders entered by a market maker with an anti-
internalization qualifier value of ``Y'' (i.e., that may not be 
internalized) would be cancelled if the only available trading 
interest is a bid/offer from the same market maker entered 
automatically by the system under NASD Rule 4710(b)(5). In Amendment 
No. 1, Nasdaq also clarified the order execution priority for 
discretionary orders resting on the book.
    \4\ See letter from John M. Yetter, Associate General Counsel, 
Nasdaq, to Katherine A. England, Assistant Director, Division, 
Commission, dated November 20, 2003 (``Amendment No. 2''). In 
Amendment No. 2, Nasdaq reiterated its request for accelerated 
approval of the proposed rule change pursuant to section 19(b)(2) of 
the Act.
    \5\ See letter from John M. Yetter, Associate General Counsel, 
Nasdaq, to Katherine A. England, Assistant Director, Division, 
Commission, dated November 26, 2003 (``Amendment No. 3''). In 
Amendment No. 3, Nasdaq amended the description of the proposal to, 
among other things, explain the treatment of discretionary orders at 
the opening and DAY order only designation. Nasdaq also amended the 
proposed rule text to clarify the conditions under which a resting 
discretionary order would execute at a discretionary price and the 
price priority of discretionary orders, to replace the phrase 
``order or Quote/Order'' with ``Non-Directed Order or Quote/Order,'' 
and to reflect the Commission's approval of SR-NASD-2003-134. See 
Securities Exchange Act Release No. 48821 (November 20, 2003) (Order 
granting approval of SR-NASD-2003-134).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to adopt a new order type, the discretionary order 
(``DO''), in Nasdaq's National Market Execution System (``NNMS'' or 
``SuperMontage''). Subject to Commission approval, Nasdaq intends to 
implement the proposed rule change shortly after December 8, 2003, and 
will inform market participants of the exact implementation date via a 
Head Trader alert on www.nasdaqtrader.com. The text of the proposed 
rule change appears below. New text is in italics. Deleted text is in 
brackets.\6\
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    \6\ The Commission recently published for notice and public 
comment proposed rule changes filed by Nasdaq that proposes 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); 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); and 48798 (November 17, 2003) (Notice 
of Filing and Immediate Effectiveness of SR-NASD-2003-150). The text 
of the proposed rule change is shown as marked against the text of 
the SuperMontage rules as currently in effect, and therefore 
reflects the immediate effectiveness of SR-NASD-2003-150, but does 
not reflect proposed rule changes that are not yet effective. Nasdaq 
represents that it will file such amendments to SR-NASD-2003-165 or 
other pending filings as Commission staff may request to reflect the 
approval, disapproval, immediate effectiveness, or withdrawal of 
other filings.
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* * * * *

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) No change.
    (nn) The term ``Discretionary'' shall mean, for priced limit orders 
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 displayed price may be fixed or may be pegged to equal 
the inside quote on the same side of the market. The pegging of the 
Discretionary Order may be capped in the same manner as that of a 
Pegged Order. The discretionary price range of a Discretionary Order 
that is pegged will be adjusted to follow the pegged displayed price.
* * * * *

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 and Discretionary 
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 ``Discretionary'', in which case the 
order will also automatically be designated as Day. A Discretionary 
Order may not be designated as a Preferenced Order. The order (or 
unexecuted portion thereof) shall be displayed in the 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. If a Discretionary Order is pegged, its displayed price will 
be adjusted in response to changes in the Nasdaq inside market. 
Starting at 7:30 a.m., until the 4 p.m. market close, Discretionary 
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. 
Discretionary Orders whose displayed price or discretionary price range 
does not lock or cross another Quote/Order will be available for 
execution at 9:30 a.m. All other Discretionary Orders will be added to 
the time-priority queue described in Rule 4706(a)(1)(F) and (a)(2)(B) 
and processed by NNMS at market open.
    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

[[Page 68679]]

(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 (including a Discretionary Order that is pegged) 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 (including Discretionary Orders that are 
pegged) 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 (including Discretionary Orders that are 
pegged) 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)-(E) No Change.
    (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 orders 
and Discretionary Orders whose displayed price or discretionary price 
range would lock or cross another Quote/Order if they were displayed 
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) 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[,]'' or ``Discretionary,'' 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) A Non-Directed Order that is either a market or limit order may 
be entered prior to the market's open. [Such limit] Limit and market 
orders designated as Immediate or Cancel and Discretionary Orders whose 
displayed price or discretionary price range would lock or cross 
another Quote/Order if they were displayed 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 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)-(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 (including a 
Discretionary Order that is pegged) 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.

4710. Participant Obligations in NNMS

    (a) No change.
    (b) Non-Directed Orders
    (1) No change.
    (A) No change.
    (B) No change.
    (i)-(iii) No change.
    (iv) Exceptions.--The following exceptions shall apply to the above 
execution parameters:
    a. If a Nasdaq Quoting Market Participant or NNMS Order Entry Firm 
enters a Non-Directed Order into the system, before sending such Non-
Directed Order to the next Quoting Market Participants in queue, the 
NNMS will first attempt to match off the order against the Nasdaq 
Quoting Market Participant's or NNMS Order Entry Firm's own Quote/Order 
if the participant is at the best bid/best offer in Nasdaq. 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 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; provided, however, that in the 
case of a Discretionary Order interacting with a bid/offer entered by 
the system pursuant to Rule 4710(b)(5), the Discretionary Order (or 
unexecuted portions thereof) will be returned.
    I--if the I value is selected, the system will execute against all 
available trading interest, including the quote/orders of the NNMS 
Order Entry Firm or Nasdaq Quoting Market Participant that entered the 
AIQ ``I'' flagged order, based exclusively on the execution algorithm 
selected when entering the AIQ I flagged quote/order.
    b.-c. No change.
    d. Reserved.
    e. If an NNMS Market Participant enters a Discretionary Order, the 
Discretionary Order shall first be executed against (or delivered in an 
amount equal to) the Quotes/Orders and Reserve Size of NNMS Market 
Participants (including displayed Discretionary Orders at their 
displayed prices) in conformity with this rule and subject to any 
applicable exceptions. If the full size of the incoming Discretionary 
Order cannot be executed at its displayed price, the order may also be 
executed against (or delivered in an amount equal to) the Quotes/Orders 
and Reserve Size of NNMS Market Participants within the incoming 
Discretionary Order's discretionary price range (including displayed 
Discretionary Orders at their displayed prices), in conformity with 
this rule and subject to any applicable exception. If the full size of 
the incoming Discretionary Order cannot be executed

[[Page 68680]]

in this manner, the order may also be executed by (or receive delivery 
of) displayed Discretionary Orders with discretionary price ranges that 
overlap with the incoming Discretionary Order's discretionary price 
range, in conformity with this rule and 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, Non-
Directed Orders or Quotes/Orders entered at the displayed price 
(including incoming Discretionary Orders with a displayed or 
discretionary price equal to the displayed Discretionary Order's 
displayed price) may be executed against (or delivered to) the 
displayed Discretionary Order, and market orders may be executed 
against (or delivered to) the displayed Discretionary Order when its 
displayed price is at the inside. Non-Directed Orders or Quotes/Orders 
(other than Discretionary Orders) entered at a price within the 
displayed Discretionary Order's discretionary price range may be 
executed by (or receive delivery of) the displayed Discretionary Order 
at the price of the incoming Non-Directed Order or Quote/Order if there 
are no displayed Quotes/Orders at that price or better. Incoming 
Discretionary Orders with a discretionary price range that overlaps 
with the displayed Discretionary Order's discretionary price range may 
be executed by (or receive delivery of) the displayed Discretionary 
Order at the overlapping price most favorable to the displayed 
Discretionary Order. A displayed Discretionary Order that may be 
executed at a price in its discretionary price range will execute 
against Non-Directed Orders and Quotes/Orders entered by NNMS 
Participants in the automatic execution functionality of the NNMS, and 
will be delivered to Non-Directed Orders and Quotes/Orders entered by 
NNMS Order-Delivery ECNs.
    For purposes of determining execution priority, the price priority 
of a displayed Discretionary Order will be based on its displayed price 
when it may be executed at its displayed price. When displayed 
Discretionary Orders may be executed at prices within their 
discretionary price ranges, their price priority vis-[agrave]-vis one 
another will be based on their most aggressive discretionary prices, 
and their price priority vis-[agrave]-vis Quotes/Orders that are not 
Discretionary Orders will be based upon the price at which they are 
executable.
    (C)-(D) No change.
    (2)-(8) No change.
    (c)-(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
    To provide increased functionality to system users, Nasdaq proposes 
to adopt a new order type, DO, for use in SuperMontage. A DO would 
allow market participants to enter an order that has both a displayed 
bid or offer price and a non-displayed discretionary price range within 
which the participant is also willing to buy or sell, if necessary. For 
example, a market participant may enter a DO to buy at $20.00, with a 
discretionary price range of $0.05, thereby indicating that the market 
participant wishes to buy at $20.00, but is also willing to pay up to 
$20.05, if necessary. If the $20.00 price matches the best offer (i.e., 
if the $20.00 price is marketable), the DO would first execute against 
Quotes/Orders and reserve size at that price. If the $20.00 price is 
not marketable, or if size available at that price is exhausted, the DO 
would next execute against Quotes/Orders (including DOs at their 
displayed prices) and reserve size at successively higher prices, up to 
$20.05, and then interact with displayed DOs with overlapping 
discretionary price ranges. If the incoming DO is not filled through 
this process, it would be displayed on the book at $20.00 along with 
other quotes/orders at that price.
    DOs on the book would interact with incoming orders in the 
following manner. Market orders would execute against or be delivered 
to a DO's displayed price if it is at the inside market, with the DO's 
discretionary price range not taken into consideration. Incoming limit 
orders and DOs that are marketable against the best bid/best offer 
would likewise execute against or be delivered to a DO with a displayed 
price at the inside market. Incoming limit orders with prices that fall 
within the discretionary ranges of DOs may be executed by DOs, with the 
execution occurring at the price of the incoming order, if there are no 
displayed Quotes/Orders at that price or better.\7\ Similarly, incoming 
DOs whose discretionary price ranges overlap with the discretionary 
price ranges of resting DOs would execute at the price most beneficial 
to the resting order. Thus, if the best bid was $20.00, and a DO to buy 
at $20.00 with discretion up to $20.02 was on the book, the DO could 
interact with (i) a market order (at $20.00), (ii) a marketable limit 
order or DO (at $20.00), (iii) a limit order priced at $20.01 or $20.02 
(at the price of the limit order), or (iv) a DO with a discretionary 
price of $20.01 and/or $20.02, at the lowest overlapping price. For 
purposes of determining execution priority, the price priority of a 
displayed DO would be based on its displayed price when it may be 
executed at its displayed price.\8\ When displayed DOs may be executed 
at prices within their discretionary price ranges, their price priority 
vis-[agrave]-vis one another would be based on their most aggressive 
discretionary prices, and their price priority vis-[agrave]-vis Quotes/
Orders that are not DOs will be based upon the price at which they are 
executable.\9\
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    \7\ See Amendment No. 3, supra note 5.
    \8\ See Amendment No. 1, supra note 3.
    \9\ See Amendment No. 3, supra note 5.
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    If a new quote/order would interact with a resting DO's 
discretionary price(s), SuperMontage would immediately execute the 
overlapping portion of the newly-entered quote/order. Thus, if the best 
bid was $20.00, the best offer was $20.08, and a DO to buy at $20.00 
with discretion up to $20.04 was on the book, a new offer at $20.03 
would be immediately executed against by the resting DO. If the new 
quote/order is entered by an NNMS Order-Delivery ECN, however, 
SuperMontage will instead deliver an order to the ECN for its 
acceptance.\10\
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    \10\ Id.
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    It should be noted that when SuperMontage matches an incoming Non-
Directed Order or Quote/Order against a price in the discretionary 
price range of a DO submitted by an NNMS Order-Delivery ECN residing in 
the SuperMontage book, the resting DO would: (i) Automatically execute 
if the incoming order has been entered by an NNMS automatic execution 
participant, or (ii) be delivered if the incoming order has been 
entered by an NNMS Order-Delivery ECN. This is the case because the 
participant entering the incoming order would have no awareness of the

[[Page 68681]]

discretionary price range reflected in the resting DO, and would 
therefore expect its order to be displayed and provide liquidity, 
rather than to execute. By contrast, the participant entering the 
resting DO has, by that fact, expressed a willingness to buy (sell) at 
prices higher (lower) than its displayed price, but not a willingness 
to make its potential interest at other price levels known to other 
market participants. Accordingly, Nasdaq believes that it is more in 
keeping with the parties' expectations, and therefore fairer, to base 
the determination of whether the interacting orders should be delivered 
or automatically executed on the status of the party entering the 
incoming order, rather than the status of the party that originally 
entered the DO. When an incoming order is matched against a resting DO 
entered by an Order-Delivery ECN at the displayed price of the resting 
DO, however, the incoming order would be delivered to the Order-
Delivery ECN.
    DOs may only be entered as DAY orders (reflecting Nasdaq's 
expectation that market participants would not generally seek to 
reflect discretionary trading interest at multiple price points on an 
inter-day basis). DOs may be entered (but not displayed or executed) 
prior to market open. Accordingly, DOs entered before market open that 
do not lock or cross other Quotes/Orders will be available for 
interaction with other orders at 9:30 a.m. DOs that would lock or cross 
another Quote/Order if they were displayed will be held in a time-
priority queue (along with IOC orders) and processed by the NNMS at 
9:30 a.m. Since a market participant entering a DO would prefer the 
order to execute at its displayed price (but is also willing to accept 
executions within its discretionary price range), Nasdaq believes it is 
appropriate to prevent executions of DOs prior to 9:30 a.m., since the 
comparatively scattered nature of trading before the market open makes 
it more likely that the DO would execute at a discretionary price. This 
is particularly the case during the ``opening spin'' described in NASD 
Rule 4710(b)(3)(B), where DOs would have a marked tendency to execute 
at prices away from their displayed price. For example, if a DO to buy 
at 10 with a discretionary price range of up to 10.05 was processed 
through the opening spin, and was entered in time after a Quote/Order 
to sell with a price of 10.02, the DO could execute at 10.05, since 
Quotes/Orders in the opening spin are executed at the price of the more 
recent Quote/Order.\11\
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    \11\ Id.
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    DOs may not be preferenced or directed to another market 
participant. In conformity with NASD Rule 4706(a)(1)(C), the system 
will not allow a DO to sell short to be executed if its execution would 
violate the short sale rule. DOs entered by a market maker with an 
anti-internalization qualifier value of ``Y'' (i.e., that may not be 
internalized) will be cancelled if the only available trading interest 
is a bid/offer entered automatically by the system under NASD Rule 
4710(b)(5) after the market maker's quote has been closed.\12\
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    \12\ Id.
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    Market participants may peg the displayed price of a DO in a manner 
similar to that of a pegged order.\13\ Thus, a market participant can 
elect to enter a pegged-discretionary order that has its displayed 
price pegged to equal the Nasdaq inside on the same side of the market 
as the DO. The discretionary price range of the DO would, in turn, move 
along with the displayed pegged price. As with a regular pegged order, 
the market participant entering the order can specify a price cap, so 
that the displayed price of the order will become permanently fixed if 
the Nasdaq inside equals the price cap. A DO cannot be designated as a 
reverse pegged order, however, since its discretionary price range 
would then lock or cross the price to which the order would be pegged. 
If Nasdaq suspends the entry of pegged orders during a period when they 
are negatively impacting system capacity and performance, as permitted 
by NASD Rule 4706(a)(1)(B), the suspension would apply to pegged-
discretionary orders as well.
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    \13\ See Securities Exchange Act Release No. 48798 (November 17, 
2003) (Notice of Filing and Immediate Effectiveness of SR-NASD-2003-
150).
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\14\ in general, and with 
section 15A(b)(6) of the Act,\15\ in particular, in that it is designed 
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 express potential trading 
interest at multiple price levels. Nasdaq notes that the Commission has 
found a similar order offered by at least one other market center to be 
consistent with the Act.\16\
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    \14\ 15 U.S.C. 78o-3.
    \15\ 15 U.S.C. 78o-3(b)(6).
    \16\ See Securities Exchange Act Release No. 44983 (October 25, 
2001), 66 FR 55225 (November 1, 2001) (SR-PCX-00-25).
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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, as amended.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. 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, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Comments may also be submitted electronically at the 
following e-mail address: [email protected]. All comment letters 
should refer to File No. SR-NASD-2003-165. This file number should be 
included on the subject line if e-mail is used. To help us process and 
review comments more efficiently, comments should be sent in hardcopy 
or by e-mail but not by both methods. 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

[[Page 68682]]

communications relating to the proposed rule change between the 
Commission and any person, other than those that may be withheld from 
the public in accordance with the provisions of 5 U.S.C. 552, will be 
available for inspection and copying in the Commission's Public 
Reference Room. Copies of such filings will also be available for 
inspection and copying at the principal office of the Association. All 
submissions should refer to File No. SR-NASD-2003-165 and should be 
submitted by December 30, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-30500 Filed 12-8-03; 8:45 am]
BILLING CODE 8010-01-P