[Federal Register Volume 69, Number 36 (Tuesday, February 24, 2004)]
[Notices]
[Pages 8503-8504]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3882]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49266; File No. SR-NASD-2004-015]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the National Association of Securities Dealers, Inc. To Restore the 
Pre-Trade Only Anonymity Function for SuperMontage

February 17, 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 27, 2004, the National Association of Securities Dealers, 
Inc. (``NASD''), 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, II, 
and III below, which Items have been prepared by Nasdaq. On February 5, 
2004, Nasdaq filed Amendment No. 1 to the proposal.\3\ 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 Peter Geraghty, Associate Vice President and 
Associate General Counsel, Nasdaq, to Marc McKayle, Special Counsel, 
Division of Market Regulation (``Division''), Commission, dated 
February 4, 2004 (``Amendment No. 1''). In Amendment No. 1, Nasdaq 
amended the proposal rule change for consideration under Section 
19(b)(3)(A) of the Act, and Rule 19b-4(f)(6) thereunder, as opposed 
to Rule 19b-4(f)(5).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq is proposing to restore the pre-trade only anonymity option 
for orders submitted to the Nasdaq National Market Execution System 
(commonly known as SuperMontage).
    The text of the proposed rule change is below. Proposed new 
language is italicized; deleted language is bracketed.
* * * * *
4719. Anonymity
    (a) Pre-Trade Anonymity.
    (1) With the exception of those transactions described in paragraph 
(a)(2) below, the identity of the member submitting a Non-Attributable 
Quote/Orders seeking pre-trade anonymity will remain anonymous until 
execution, at which time the member's identity will be revealed to its 
contra party.
    (2) A Non-Attributable Quote/Order seeking pre-trade anonymity will 
be processed on a fully anonymous basis in accordance with paragraph 
(b) below when it matches and executes against a Non-Attributable 
Quote/Order seeking full anonymity.
    (b) Full Anonymity.
    [(a)](1) Transactions executed in NNMS in which at least one member 
submits a Non-Attributable Quote/Order seeking full anonymity will be 
processed anonymously. The transaction reports will indicate the 
details of the transactions, but will not reveal contra party 
identities.
    [(b)(1)](2)(A) The processing described in paragraph [(a)](b)(1) 
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)](B) Except as required to comply with the request of a 
regulator, or as ordered by a court or arbitrator, Order-Delivery ECNs 
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)](3) The Association will reveal a member's identity in the 
following circumstances:
    [(1)](A) 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)](B) for regulatory purposes or to comply with an order of an 
arbitrator or court; or
    [(3)](C) on risk management reports provided to the member's contra 
parties each day after 4:00 p.m., which disclose trading activity on an 
aggregate dollar value basis.
    [(d)](4) 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.
    [(e)(i)](5)(A) In order to satisfy members' record keeping 
obligations under SEC Rules 17a-3(a)(1) and 17a-4(a), Nasdaq shall, 
with the exception of those circumstances described in subparagraph 
[(ii)](B) below, retain for the period specified in Rule 17a-4(a) the 
identity of each member that executes [an] a fully anonymous 
transaction described in paragraph [(a)](b) of Rule 4719. The 
information shall be retained in its original form or a form approved 
under Rule 17a-6.
    [(ii)](B) In the situations described in paragraphs [(b)(1)](b)(2) 
or [(d)](b)(4) of Rule 4719, and solely with respect to the member that 
submits, and receives an execution of, a fully anonymous Non-
Attributable Quote/Order that is a Preferenced Order, the member 
retains the obligation to comply with Rules 17a-3(a)(1) and 17a-4(a) 
because it possesses the identity of its contra party.

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 response to requests from members, Nasdaq is proposing to 
restore the pre-trade only anonymity option for orders submitted to 
SuperMontage. Pre-trade anonymity will be an option in addition to the 
full anonymity feature.\4\ With respect to anonymity, members will now 
have the choice to submit orders that will preserve their anonymity on 
a pre-trade basis only or through

[[Page 8504]]

settlement (i.e., full anonymity). Pre-trade anonymity is the 
functionality that existed in SuperMontage prior to the Commission 
approving the full anonymity feature on September 23, 2003.\5\
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    \4\ An attributable Quote/Order is the default for a market 
maker or Electronic Communication Network (``ECN''). If a market 
maker or ECN wants to trade in anonymous fashion (i.e., a non-
attributable Quote/Order), it must indicate either pre-trade 
anonymity or full anonymity. The default for Order Entry (``OE'') 
Firms is different because an OE Firm is not allowed to display 
Quote/Orders under its own market participant identification. If an 
OE Firm submits an Immediate or Cancel (``IOC'') order (i.e., no 
chance of the order being displayed on the book), the default is no 
anonymity. However, if the OE Firm submits something other than an 
IOC order, the default is full anonymity. An OE Firm must 
affirmatively choose pre-trade anonymity. See e-mails from Peter 
Geraghty, Associate Vice President and Associate General Counsel, 
Nasdaq, to Marc McKayle, Special Counsel, Division, Commission, 
dated February 4 and February 12, 2004.
    \5\ See Securities Exchange Act Release No. 48527 (September 23, 
2003), 68 FR 56361 (September 30, 2003).
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    Pre-trade only anonymity will function in the same manner as it did 
prior to full anonymity becoming available, with one exception 
discussed below. A member seeking pre-trade anonymity will submit a 
Non-Attributable Quote/Order indicating it is seeking pre-trade 
anonymity. If the order is not marketable immediately, the order will 
be placed in the SuperMontage book and reside under the SIZE acronym. 
Once the order is executed, whether immediately upon submission to 
SuperMontage or when an incoming order matches against the anonymous 
order as it resides in SIZE, the identity of the member that submitted 
the order will be revealed to its contra party on the SuperMontage and 
Automated Confirmation Transaction Service (``ACT'') reports.\6\ Both 
members that are a party to the trade will know the identity of their 
contra party.\7\ In addition, the members' identities will be revealed 
on the contract sheets issued by the National Securities Clearing 
Corporation.
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    \6\ Presently, anonymous orders submitted to SuperMontage can 
reside on the book under SIZE, however, with certain exceptions 
described in NASD Rule 4719, the identities of the members who 
executed the anonymous order are not revealed. Similarly, the 
members remain anonymous today when an anonymous order is executed 
immediately upon submission to SuperMontage.
    \7\ Because members will know the identities of their contra-
parties when a pre-trade only anonymity order is executed, members 
must comply with the recordkeeping obligations under SEC Rules 17a-
3(a)(1) and 17a-4(a) to record and maintain the identities of their 
contra-parties. See NASD Rule 4719.
    Similarly, the exemption the Commission issued with respect to 
SEC Rule 10b-10 relieving members of their obligation to provide 
customers with the identities of their contra-parties is not 
available because members will know the identities of their contra-
parties. See letter from Brian A. Bussey, Assistant Chief Counsel, 
Division of Market Regulation, Commission, to Edward S. Knight, 
Executive Vice President and General Counsel, Nasdaq, dated 
September 23, 2003.
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    The one difference between how pre-trade only anonymous orders will 
be processed under this proposal, compared to the processing that 
occurred prior to full anonymity being implemented, occurs when a order 
seeking pre-trade only anonymity matches against an order seeking full 
anonymity. In such instances, the trade will be processed on a fully 
anonymous basis consistent with NASD Rule 4719(b), as amended.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\8\ in general, and with 
Section 15A(b)(6) of the Act,\9\ in particular, in that it is designed 
to foster coordination and cooperation with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities. The proposal is consistent 
with this obligation because it provides members an additional option 
for submitting anonymous orders and it is functionality that previously 
existed in SuperMontage.
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    \8\ 15 U.S.C. 78o-3.
    \9\ 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 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.\12\
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    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
    \12\ The pre-trade only anonymity feature will be available on 
or after April 19, 2004; the exact date of implementation has not 
been finalized. Nasdaq will issue a Head Trader Alert informing 
members of the exact date when this feature will be available again. 
For the purposes of determining the effective date and calculating 
the 60-day abrogation period, the Commission considers the proposed 
rule change to have been filed on February 5, 2004, the date Nasdaq 
filed Amendment No. 1.
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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-2004-015. 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 the NASD. All 
submissions should refer to file number SR-NASD-2004-015 should be 
submitted by March 16, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-3882 Filed 2-23-04; 8:45 am]
BILLING CODE 8010-01-P