[Federal Register Volume 69, Number 24 (Thursday, February 5, 2004)]
[Notices]
[Pages 5632-5633]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-2361]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49152; File No. SR-NASD-2003-175]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. To 
Repeal Rule 4613A(e)(1) Requiring Same-Priced Quotations on Multiple 
Markets

January 29, 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 November 26, 2003, the National Association of Securities Dealers, 
Inc. (``NASD''), 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 the NASD. 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

    NASD is proposing to repeal NASD Rule 4613A(e)(1), which requires 
members that display priced quotations for a Nasdaq security on 
multiple market centers to display the same-priced quotations on each 
market center. Below is the text of the proposed rule change. Proposed 
deletions are in brackets.
* * * * *

4613A. Character of Quotations

    (a) through (d) No change.
(e) Other Quotation Obligations
    [(1) Members that display priced quotations on a real-time basis 
for Nasdaq securities in two or more market centers that permit 
quotation updates on a real-time basis must display the same priced 
quotations for the security in each market center.]
    [(2)] As required by Rule 11Ac1-2(e) under the Exchange Act, a 
member that uses an ADF terminal or other approved ADF electronic 
interface shall be obligated to have available in close proximity to 
the ADF terminal or interface a quotation service that disseminates the 
bid price and offer price from all markets trading that Nasdaq 
security.
* * * * *

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

    In its filing with the Commission, NASD 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. NASD 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 is proposing to repeal NASD Rule 4613A(e)(1), which requires 
members that display priced quotations for a Nasdaq security in two or 
more market centers to display the same priced quotations for that 
security in each market center. Pursuant to this rule, members that 
choose to quote in multiple market centers are not permitted to display 
an inferior quote in any of those market centers. NASD Rule 4613A(e)(1) 
was proposed as part of the Alternative Display Facility (``ADF'') 
pilot rules \3\ because NASD believed it important to prevent 
fragmentation of quotations by a member (which might serve to undermine 
the transparency of the best quotes in the market), given the increased 
potential that members might choose to dual quote on several market 
centers, including ADF. This provision was modeled closely after NASD 
Rule 2320(g)(2), which applies to over-the-counter (``OTC'') 
securities, such as those securities quoted through the OTC Bulletin 
Board and the Electronic Pink Sheets.
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    \3\ Securities Exchange Act Release No. 46249 (July 24, 2002), 
67 FR 49822 (July 31, 2002). Subsequent to the initial approval of 
the ADF rules, the Commission approved an extension of the pilot 
until January 26, 2004. Securities Exchange Act Release No. 47633 
(April 10, 2003), 68 FR 19043 (April 17, 2003).
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    Since its adoption, NASD has monitored the impact of NASD Rule 
4613A(e)(1) and believes that the benefits of the same-priced quotation 
requirement to the trading in Nasdaq securities have been difficult to 
quantify. As an initial matter, NASD believes that the Commission's 
vendor display rule (Rule 11Ac1-2 under the Act) makes NASD Rule 
4613A(e)(1) less critical to preserving transparency in the market. 
NASD also believes that by generally requiring that vendors provide a 
consolidated display of quotation information for Nasdaq securities 
from all reporting market centers, the vendor display rule ensures that 
quotations from each market center are visible, thereby facilitating 
transparency in the market and best execution. However, since a similar 
vendor display provision does not apply to the OTC market, NASD 
believes that it is more important to require that members display the 
same priced quotation in multiple markets to preserve transparency in 
that marketplace.
    Further, NASD believes that NASD Rule 4613A(e)(1) has resulted in 
problems given recent market structure developments. For example, a 
member now may have several completely distinct business units, such as 
a market making unit and an electronic communications network 
(``ECN''), which are used by different types of clients and, therefore, 
represent separate

[[Page 5633]]

pools of liquidity. A member may choose to display quotations relating 
to its market-making unit on Nasdaq and its ECN on ADF. Under such 
circumstances, NASD believes that compliance with NASD Rule 4613A(e)(1) 
would, in effect, require the member to consolidate these distinct 
business units for purposes of displaying quotations on each market, 
which would be contrary to the business model of the firm since these 
quotes represent separate liquidity pools. As an alternative, the 
member could establish separate broker/dealers for each business unit, 
which NASD believes is overly burdensome for members given the marginal 
benefits associated with NASD Rule 4613A(e)(1).
    For the reasons discussed above, the proposed rule change would 
repeal NASD Rule 4613A(e)(1). However, NASD represents that it will 
continue, as it currently does today, to monitor and surveil for any 
potentially collusive or manipulative conduct relating to quotation 
activity on markets under its regulatory authority.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\4\ which requires, among 
other things, that NASD's rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. NASD believes that the proposed rule change 
accomplishes these ends. In light of the Commission's vendor display 
rule, NASD believes NASD Rule 4316A(e)(1) does not serve any additional 
beneficial purposes and may, in fact, interfere with competition and 
certain member's business models.
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    \4\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD 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 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. In particular, the Commission 
solicits comment on (i) whether the proposed rule change will 
facilitate multiple quotations that erode SEC Rule 11Ac1-1 and (ii) 
whether the proposed rule change will facilitate locking or crossing 
the quotes of other market centers. 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-2003-175. 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 hard 
copy 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 NASD.
    All submissions should refer to File No. SR-NASD-2003-175 and 
should be submitted by February 26, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 04-2361 Filed 2-4-04; 8:45 am]
BILLING CODE 8010-01-P