[Federal Register Volume 69, Number 17 (Tuesday, January 27, 2004)]
[Notices]
[Pages 3970-3972]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-1663]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49106; File No. SR-NASD-2004-06]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by National Association of 
Securities Dealers, Inc. Related to the Entry of Locking or Crossing 
Bids or Offers by ECNs Participating in Nasdaq's SuperMontage System

January 20, 2004.
    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 January 13, 2004, 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'' or ``SEC'') 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 the 
Substance of the Proposed Rule Change

    Nasdaq proposes to allow Electronic Communications Networks 
(``ECNs'') voluntarily participating in the Nasdaq National Market 
Execution System (``NNMS'' or ``SuperMontage'') to post locking or 
crossing bids, or locking or crossing offers, in other display venues 
for Nasdaq securities operated by self-regulatory organizations 
(``SROs''). Nasdaq will implement the proposed rule change immediately.
    Below is the text of the proposed rule change. Proposed new 
language is italicized.
* * * * *
4623. Alternative Trading Systems
    (a) The Association may provide a means to permit alternative 
trading systems (``ATSs''), as such term is defined in Regulation ATS, 
and electronic communications networks (``ECNs''), as such term is 
defined in SEC Rule 11Ac1-1(a)(8),
    (1) to comply with SEC Rule 301(b)(3);
    (2) to comply with the terms of the ECN display alternative 
provided for in SEC Rule 11Ac1-1(c)(5)(ii)(A) and (B) (``ECN display 
alternatives''); or

[[Page 3971]]

    (3) to provide orders to Nasdaq voluntarily.
    In providing any such means, the Association shall establish a 
mechanism that permits the ATS or ECN to display the best prices and 
sizes of orders entered into the ATS or ECN by Nasdaq market makers 
(and other subscribers of the ATS or ECN, if the ECN or ATS so chooses 
or is required by SEC Rule 301(b)(3) to display a subscriber's order in 
Nasdaq), and allows any NASD member the electronic ability to effect a 
transaction with such priced orders that is equivalent to the ability 
to effect a transaction with a Nasdaq market maker quotation in Nasdaq 
operated systems.
    (b) An ATS or ECN that seeks to utilize the Nasdaq-provided means 
to comply with SEC Rule 301(b)(3), the ECN display alternatives, or to 
provide orders to Nasdaq voluntarily shall:
    (1) demonstrate to the Association that that it is in compliance 
with Regulation ATS or it qualifies as an ECN meeting the definition in 
the SEC Rule;
    (2) be registered as a NASD member;
    (3) enter into and comply with the terms of a Nasdaq Workstation 
Subscriber Agreement, as amended for ATSs and ECNs;
    (4) agree to provide for Nasdaq's dissemination in the quotation 
data made available to quotation vendors the prices and sizes of Nasdaq 
market maker orders (and orders from other subscribers of the ATS or 
ECN, if the ATS or ECN so chooses or is required by SEC Rule 301(b)(3) 
to display a subscriber's order in Nasdaq), at the highest buy price 
and the lowest sell price for each Nasdaq security entered in and 
widely disseminated by the ATS or ECN, and prior to entering such 
prices and sizes, register with Nasdaq Market Operations as an ATS or 
ECN;
    (5) provide an automated execution or, if the price is no longer 
available, an automated rejection of any order routed to the ATS or ECN 
through the Nasdaq-provided display alternative.
    (6) not charge to broker-dealers that access the ATS or ECN through 
Nasdaq any fee that is inconsistent with the requirements of SEC Rule 
301(b)(4).
    (c) When a NASD member attempts to electronically access through a 
Nasdaq-provided system an ATS or ECN-displayed order by sending an 
order that is larger than the ATS's or ECN's Nasdaq-displayed size and 
the ATS or ECN is displaying the order in Nasdaq on a reserved size 
basis, the NASD member that operates the ATS or ECN shall execute such 
Nasdaq-delivered order:
    (1) up to the size of the Nasdaq-delivered order, if the ATS or ECN 
order (including the reserved size and displayed portions) is the same 
size or larger than the Nasdaq-delivered order; or
    (2) up to the size of the ATS or ECN order (including the reserved 
size and displayed portions), if the Nasdaq-delivered order is the same 
size or larger than the ATS or ECN order (including the reserved size 
and displayed portions).
    No ATS or ECN operating in Nasdaq pursuant to this rule is 
permitted to provide a reserved-size function unless the size of the 
order displayed in Nasdaq is 100 shares or greater. For purposes of 
this rule, the term ``reserved size'' shall mean that a customer 
entering an order into an ATS or ECN has authorized the ATS or ECN to 
display publicly part of the full size of the customer's order with the 
remainder held in reserve on an undisplayed basis to be displayed in 
whole or in part as the displayed part is executed.
    Nothing in this Rule shall require the provision to Nasdaq of a 
locking or crossing bid or offer, if such locking or crossing bid or 
offer is instead provided to another display alternative operated by a 
national securities exchange or national securities association.

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
    NASD Rule 4623 requires ECNs quoting a security in Nasdaq to 
provide to Nasdaq their best-priced buy and sell prices in that 
security for dissemination to data vendors. This obligation creates 
issues for ECNs when those best prices would lock or cross either the 
inside bid or inside offer then being displayed in Nasdaq. In that 
situation, an ECN's re-entry of the locking or crossing quote/order 
subjects it to special SuperMontage processing that makes the ECN's 
quote/order eligible for automatic execution to ensure that a locked or 
crossed market in the Nasdaq system does not occur. Such processing 
contrasts with NNMS' normal method of interacting with ECNs in which 
Nasdaq delivers orders to the ECN for execution. The change in order 
processing to automatic execution from order delivery also impacts 
access fee and rebate arrangements between the submitting ECN and its 
subscribers as well as complicating the ECN's ability to avoid dual 
liability for executions simultaneously taking place in Nasdaq and the 
ECN's internal systems.
    The above combination of the Nasdaq best-price rule requirement and 
the NNMS system's locked and crossed processing provides a disincentive 
to non-NNMS ECNs or ATSs to participate in the system and unduly 
restricts the ability of participating ECNs to manage their most 
aggressively priced subscriber orders. In response, Nasdaq is proposing 
a modification to its best-price rule requirement to provide ECNs with 
a limited exception that gives ECNs the option of posting locking or 
crossing trading interest (individual bids or offers) in other display 
trading venues operated by either a national securities association or 
a national securities exchange.\3\ This modification will provide ECNs 
greater flexibility and choice in managing subscriber orders and 
enhance the voluntary nature of the SuperMontage system, while ensuring 
that the system continues to operate without locked or crossed markets. 
In addition, this limited exception to the best price requirement is 
consistent with other SuperMontage participants' ability to place 
locking or crossing quotes/orders in other display venues and Nasdaq's 
planned approach to linkage agreements with other markets that trade 
Nasdaq securities. As such, the proposal will increase competition 
among association and exchange quote display venues. Finally, Nasdaq 
notes that the requirement to display any locking or crossing bid or 
offer in a display venue for Nasdaq securities operated by an 
association or exchange will ensure that such bids or offers continue 
to be widely disseminated to data vendors.
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    \3\ Nasdaq will continue to require the submission of best-
priced bids and offers that do not lock or cross the Nasdaq inside. 
It will be the obligation of an ECN electing to post a locking or 
crossing bid or offer in another venue to ensure that its activities 
are consistent with its obligations to display orders under 
Regulation ATS, SEC Rule 11Ac1-1, and any SEC no-action letter the 
ECN operates under.
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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,\4\ in

[[Page 3972]]

general and with section 15A(b)(6) of the Act,\5\ in particular, in 
that it is designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, remove 
impediments to a free and open market and a national market system, 
and, in general, to protect investors and the public interest.
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    \4\ 15 U.S.C. 78o-3.
    \5\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change 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

    The foregoing rule change has been filed by Nasdaq as a ``non-
controversial'' rule change pursuant to section 19(b)(3)(A) of the Act 
\6\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\7\ Consequently, 
because the foregoing rule change: (a) Does not significantly affect 
the protection of investors or the public interest; (b) does not impose 
any significant burden on competition; and (c) does not become 
operative for thirty days from the date on which it was filed, or such 
shorter time as the Commission may designate if consistent with the 
protection of investors and the public interest, it has become 
effective pursuant to section 19(b)(3)(A) of the Act and Rule 19b-4 
thereunder.
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    \6\ 15 U.S.C. 78s(b)(3)(A).
    \7\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \8\ normally 
does not become operative prior to thirty days after the date of 
filing. However, pursuant to Rule 19b-4(f)(6)(iii),\9\ the Commission 
may designate a shorter operative date if such action is consistent 
with the protection of investors and the public interest. In addition, 
Rule 19b-4(f)(6)(iii) requires Nasdaq to provide the Commission written 
notice of its intent to file the proposed rule change, along with a 
brief description and text of the proposed rule change, at least five 
business days prior to the date of filing of the proposed rule change, 
or such shorter time as designated by the Commission. Nasdaq seeks to 
have the proposed rule change become immediately operative and to waive 
the pre-filing notice requirement.
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    \8\ 17 CFR 240.19b-4(f)(6).
    \9\ 17 CFR 240.19b-4(f)(6).
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    The Commission, consistent with the protection of investors and the 
public interest, has determined to waive the 30 day operative date.\10\ 
As the entry of quotes that lock or cross another market already takes 
place in several venues that trade Nasdaq securities, the proposal does 
not significantly affect current levels of investor protection or harm 
the public interest. The proposal may also increase competition among 
market centers by allowing ECNs to choose among competing venues, 
including Nasdaq, to display bids or offers. The Commission also waives 
the requirement that Nasdaq provide the Commission written notice of 
its intent to file the proposed rule change at least five business days 
prior to the date of filing of the proposed rule change.
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    \10\ For purposes of accelerating the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of a rule change the 
Commission may summarily abrogate the 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.

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. 
Comments may also be submitted electronically at the following e-mail 
address: [email protected]. All comment letters should refer to 
File No. SR-NASD-04-006. This file number should be included on the 
subject line if e-mail is used. To help the Commission process and 
review your 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 communications relating to the proposed rule change 
between the Commission and any person, other than those that may be 
withheld from the public in accordance with the provisions of 5 U.S.C. 
552, will be available for inspection and copying in the Commission's 
Public Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of Nasdaq. All 
submissions should refer to file number SR-NASD-2004-06 and should be 
submitted by February 17, 2004.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-1663 Filed 1-26-04; 8:45 am]
BILLING CODE 8010-01-P