[Federal Register Volume 69, Number 36 (Tuesday, February 24, 2004)]
[Notices]
[Pages 8506-8509]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-3887]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49265; File No. SR-NASD-2004-019]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendments No. 1 and 2 
Thereto by the National Association of Securities Dealers, Inc. To 
Clarify the Application of SuperMontage Pricing to Discretionary Orders

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 February 2, 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 6, 
2004, Nasdaq submitted Amendment No. 1 to the proposal.\3\ On February 
10, 2004, Nasdaq filed Amendment No. 2 to the proposal.\4\ 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 February 5, 2004 
(``Amendment No. 1''). In Amendment No. 1, Nasdaq amended the 
proposed rule text to clarify that a resting discretionary order 
that executes within its discretionary price range is deemed to be 
the liquidity accessor, unless the incoming order against which it 
executes is designated ``immediate-or-cancel,'' in which case the 
incoming order is the liquidity accessor. Nasdaq also clarified the 
manner that it intends to implement discretionary orders.
    \4\ See letter from John M. Yetter, Associate General Counsel, 
Nasdaq, to Katherine A. England, Assistant Director, Division, 
Commission, dated February 9, 2004 (``Amendment No. 2''). In 
Amendment No. 2, Nasdaq made a technical amendment to the proposed 
rule text.

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[[Page 8507]]

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

    Nasdaq proposes to clarify the application of Nasdaq's pricing 
schedule for the Nasdaq National Market Execution System (``NNMS'' or 
``SuperMontage'') to discretionary orders. Nasdaq will implement the 
proposed rule change in conjunction with the introduction of the 
discretionary order in SuperMontage.\5\
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    \5\ The discretionary order had previously been scheduled for 
introduction within three weeks of its date of approval by the 
Commission. See Securities Exchange Act Release No. 49085 (January 
15, 2004), 69 FR 3412 n.8 (January 23, 2004) (SR-NASD-2003-165). As 
a matter of operational efficiency, however, Nasdaq has determined 
that it would be preferable to coordinate implementation of the 
order with the elimination of certain order execution algorithms 
proposed in Securities Exchange Act Release No. 48501 (September 17, 
2003), 68 FR 56358 (September 30, 2003) (SR-NASD-2003-128). 
Accordingly, Nasdaq will defer introduction of the discretionary 
order for a few additional weeks, and will inform market 
participants of the exact implementation date via a Head Trader 
Alert on www.nasdaqtrader.com. If the Commission disapproves SR-
NASD-2003-128 or if approval of SR-NASD-2003-128 is significantly 
delayed, Nasdaq will introduce the discretionary order separately, 
and will inform market participants of the exact implementation date 
via a Head Trader Alert on www.nasdaqtrader.com. See Amendment No. 
2, supra note 4.
    The Commission notes that it approved File No. NASD-2003-128 on 
February 11, 2004. See Securities Exchange Act Release No. 49220.
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    The text of the proposed rule change is below. Proposed new 
language is in italics.

Rule 7010. System Services

    (a)-(h) No change.
    (i) Nasdaq National Market Execution System (SuperMontage).
    (1) The following charges shall apply to the use of the Nasdaq 
National Market Execution System (commonly known as SuperMontage) by 
members:

 
 
 
 
                                 Order Entry
------------------------------------------------------------------------------
Non-Directed Orders  No charge.
 (excluding
 Preferenced
   Orders)
Preferenced Orders:
    Preferenced      No charge.
     Orders that
     access a Quote/
     Order of the
     member that
     entered the
     Preferenced
     Order).
    Other            $0.02 per order entry.
     Preferenced
     Orders.
Directed Orders      $0.10 per order entry.
--------------------
                               Order Execution
------------------------------------------------------------------------------
Non-Directed or
 Preferenced Order
 that accesses the
 Quote/Order of a
 market participant
 that does not
 charge an access
 fee to market
 participants
 accessing its
 Quotes/Orders
 through the NNMS:
    Charge to
     member
     entering
     order:
        Average
         daily
         shares of
         liquidity
         provided
         through
         the NNMS
         by the
         member
         during the
         month:
            400,000  $0.003 per share executed (but no more than $120 per
             or       trade for trades in securities executed at $1.00 or
             less.    less per share).
            400,001  $0.0027 per share executed (but no more than $108 per
             to       trade for trades in securities executed at $1.00 or
             5,000,   less per share).
             000.
            5,000,0  $0.0025 per share executed (but no more than $100 per
             01 or    trade for trades in securities executed at $1.00 or
             more.    less per share).
    Credit to        $0.002 per share executed (but no more than $80 per
     member           trade for trades in securities executed at $1.00 or
     providing        less per share).
     liquidity.
Non-Directed or
 Preferenced Order
 that accesses the
 Quote/Order of a
 market participant
 that charges an
 access fee to
 market
 participants
 accessing its
 Quotes/Orders
 through the NNMS:
    Charge to
     member
     entering
     order:
        Average
         daily
         shares of
         liquidity
         provided
         through
         the NNMS
         by the
         member
         during the
         month:
            400,000  $0.001 per share executed (but no more than $40 per
             or       trade for trades in securities executed at $1.00 or
             less.    less per share).
            400,001  $0.001 per share executed (but no more than $40 per
             or       trade for trades in securities executed at $1.00 or
             more.    less per share, and no more than $10,000 per month).
Directed Order       $0.003 per share executed.
Non-Directed or      No charge.
 Preferenced Order
 entered by a
 member that
 accesses its own
 Quote/Order
 submitted under
 the same or a
 different market
 participant
 identifier of the
    member
--------------------
                              Order Cancellation
------------------------------------------------------------------------------
Non-Directed and     No charge.
 Preferenced Orders
Directed Orders      $0.10 per order cancelled.
 

    (2) For purposes of assessing NNMS fees and credits hereunder, (A) 
a Discretionary Order that executes prior to being displayed as a 
Quote/Order will always be deemed to be accessing liquidity unless it 
is executed by (or receives delivery of) a displayed Discretionary 
Order at a price in the discretionary price range of the

[[Page 8508]]

displayed Discretionary Order, and (B) a Discretionary Order that 
executes after being displayed as a Quote/Order will always be deemed 
to be providing liquidity, unless the displayed Discretionary Order 
executes against (or is delivered to) a Quote/Order or Non-Directed 
Order that has not been designated ``Immediate or Cancel,'' at a price 
in its discretionary price range.
    (j)-(u) 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
    The Commission recently approved the introduction of the 
discretionary order as a new order type for use in SuperMontage.\6\ As 
described more fully in Nasdaq's filing to establish the discretionary 
order,\7\ a discretionary order may execute either at its displayed bid 
or offer price or at non-displayed discretionary price(s) at which the 
participant is also willing to buy or sell, if necessary. For example, 
a market participant may enter a discretionary order 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. An incoming discretionary order will attempt to execute 
at its displayed price and then at successively higher prices, up to 
its highest discretionary price. If an incoming discretionary order is 
not filled through interaction with Quotes/Orders on the SuperMontage 
book, the discretionary order will be posted and available for 
interaction with incoming orders, either at its displayed price or at 
discretionary price(s).
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    \6\ See Securities Exchange Act Release No. 49085 (January 15, 
2004), 69 FR 3412 (January 23, 2004) (Order approving File No. SR-
NASD-2003-165).
    \7\ See Securities Exchange Act Release No. 48868 (December 3, 
2003), 68 FR 68677 (December 9, 2003) (Notice for File No. SR-NASD-
2003-165).
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    Nasdaq's current fee schedule for SuperMontage features a per share 
charge for the execution of Non-Directed or Preferenced Orders that 
access liquidity provided by Quotes/Orders resting on the SuperMontage 
book, as well as a per share credit to a member that provides the 
liquidity for an execution and does not charge an access fee. The 
purpose of this rule change is to clarify the conditions under which a 
discretionary order is deemed to access liquidity (and is therefore 
assessed an execution charge) and the conditions under which it is 
deemed to provide liquidity (and is therefore eligible for a liquidity 
provider credit).
    An incoming discretionary order that executes against a Quote/Order 
on the SuperMontage book is always considered the liquidity accessor 
and is charged accordingly, unless it is executed by (or receives 
delivery of) a displayed discretionary order at a price in the 
discretionary price range of the displayed discretionary order. A 
resting discretionary order that executes at its displayed price is 
always deemed to be the liquidity provider. A resting discretionary 
order that executes within its discretionary price range is deemed to 
be the liquidity accessor, unless the incoming order against which it 
executes is designated ``immediate-or-cancel,'' in which case the 
incoming order is the liquidity accessor.
    Nasdaq believes that designating the liquidity provider and 
accessor in this manner will ensure that fees and credits for order 
executions are assigned in accordance with the reasonable expectations 
of the parties to transactions involving discretionary orders. 
Specifically, because discretionary prices are not displayed, market 
participants entering orders will not be able to base their 
expectations about whether their orders will execute or be displayed on 
knowledge about available discretionary prices. Moreover, although a 
participant entering a discretionary order is willing to trade at 
discretionary prices if necessary, it is not willing to advertise these 
prices to the market. Thus, if the best bid of $20.00 was set by a 
discretionary order with discretion up to $20.04 and the best offer was 
$20.05, a market participant entering a ``Day'' limit order to sell at 
$20.04 would expect the order to establish a new best offer, but the 
order would instead be executed by (or receive delivery of) the 
discretionary order at $20.04. Under these circumstances, Nasdaq 
believes that the participant entering the Day limit order should be 
treated as the liquidity provider, while the participant with the 
discretionary order should be treated as the liquidity accessor. This 
principal would apply if the incoming limit order was itself a 
discretionary order that was executed by (or received delivery of) a 
resting discretionary order at its discretionary price, since the 
participant entering the incoming discretionary would not be aware of 
the discretionary prices of the resting order.\8\ Moreover, since the 
two interacting discretionary orders would execute at the price most 
favorable to the resting order, it is reasonable to treat the incoming 
discretionary order as the provider of liquidity to the price sought by 
the resting order. When an incoming order is designated ``Immediate or 
Cancel,'' however, a resting discretionary order with which the IOC 
order interacts would be deemed the liquidity provider, since a 
participant entering an IOC order would never expect the order to post 
on the SuperMontage book, and would therefore be deemed the liquidity 
accessor in all circumstances.
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    \8\ Telephone conversation between John M. Yetter, Associate 
General Counsel, Nasdaq and Marc McKayle, Special Counsel, Division, 
Commission on February 17, 2004.
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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,\9\ in general, and with 
Section 15A(b)(5) of the Act,\10\ in particular, in that it provides 
for the equitable allocation of reasonable dues, fees and other charges 
among members and issuers, and other persons using any facility or 
system which the NASD operates or controls. The proposed rule change 
clarifies the circumstances under which a discretionary order is deemed 
to provide liquidity or access liquidity for purposes of assessment of 
execution fees and credits, based upon the reasonable expectations of 
parties to transactions involving discretionary orders.
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    \9\ 15 U.S.C. 78o-3.
    \10\ 15 U.S.C. 78o-3(b)(5).
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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.

[[Page 8509]]

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)(ii) of the Act,\11\ and subparagraph (f)(2) of Rule 19b-4 
thereunder,\12\ because it establishes or changes a due, fee, or other 
charge imposed by the self-regulatory organization. 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.\13\
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    \11\ 15 U.S.C. 78s(b)(3)(A)(ii).
    \12\ 17 CFR 240.19b-4(f)(2).
    \13\ For the purpose of calculating the 60-day abrogation 
period, and the date that the proposed rule change is immediately 
effective, the Commission considers the proposed rule change to have 
been filed on February 10, 2004; the date Nasdaq filed Amendment No. 
2.
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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 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-2004-019. 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 No. SR-NASD-2004-019 and should be 
submitted by March 16, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-3887 Filed 2-23-04; 8:45 am]
BILLING CODE 8010-01-P