[Federal Register Volume 69, Number 45 (Monday, March 8, 2004)]
[Notices]
[Pages 10775-10789]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-5114]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49349; File No. SR-NASD-2003-149]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Notice of Filing and Order Granting Accelerated Approval to 
Amendment No. 1 to the Proposed Rule Change by the National Association 
of Securities Dealers, Inc. Relating to SuperMontage and ITS Securities

March 2, 2004.

I. Introduction

    On October 6, 2003, 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''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to enhance the Nasdaq National Market Execution 
System (``NNMS'' or ``SuperMontage'') to enable Nasdaq to trade via 
SuperMontage, all securities that are eligible for trading via the 
Intermarket Trading System (``ITS Securities''). The proposed rule 
change was published for comment in the Federal Register on October 28, 
2003.\3\ The Commission received no comment letters with respect to the 
proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 48674 (October 21, 
2003), 68 FR 61508.
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    On February 13, 2004, Nasdaq amended the proposed rule change.\4\ 
This order approves the proposed rule change, solicits comments on 
Amendment No. 1 to the proposed rule change, and grants accelerated 
approval to Amendment No. 1 to the proposed rule change.
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    \4\ See letter from Jeff Davis, Office of General Counsel, 
Nasdaq, to Katherine England, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated February 12, 2004 
(``Amendment No. 1''). In Amendment No. 1, Nasdaq addressed staff 
comments relating to the implementation and procedures of the 
proposal. See Section II infra.
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II. Description of the Proposal and Amendment No. 1 Thereto

    Nasdaq submitted the proposed rule change to replace its current 
Computer Assisted Execution System (``CAES'') with SuperMontage for the 
trading of all ITS Securities on Nasdaq. Under the proposal, NASD 
members will trade ITS Securities using the SuperMontage functionality 
that the Commission has previously approved for the trading of Nasdaq-
listed securities, with certain modifications needed to ensure that 
NASD members continue to comply with all pre-existing NASD and 
Commission rules governing the trading of ITS Securities.
    After the proposed rule change was published for comment in the 
Federal Register, Nasdaq submitted Amendment No. 1 to the proposed rule 
change, in order to address informal feedback from participants in the 
ITS Plan and comments from Division staff. Specifically, Amendment No. 
1: (1) Clarifies that an odd-lot share amount will be cancelled if it 
represents the only interest for an ITS Market Maker at a given price 
level; (2) establishes that Nasdaq would begin processing locked/
crossed markets at 9:30 a.m.; (3) describes how SuperMontage processing 
in ITS Securities will occur between 4 and 6:30 p.m.; (4) describes how 
Nasdaq will surveil for compliance with the ITS Plan and the NASD's 
rule against locked and crossed markets; (5) clarifies which order 
types will be functional in the proposed rule change; (6) increases 
from five seconds to seven seconds, the time for an ITS/CAES Market 
Maker to respond to a delivered order before that delivery will be 
canceled; (7) further specifies the functionality of IM Prime, the 
data-feed that Nasdaq proposes to use for the dissemination of 
information about quotes and orders for ITS Securities in SuperMontage; 
(8) identifies the measures Nasdaq has instituted to assure proper 
surveillance and compliance with ITS rules; and (9) provides further 
detail on Nasdaq's planned implementation schedule. The language of the 
proposed rule text, as amended, is attached as Exhibit A.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning Amendment No. 1 to the proposed rule change, 
including whether Amendment No. 1 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 should be submitted electronically 
at the following e-mail address: [email protected]. All comment 
letters should refer to File No. SR-NASD-2003-149. 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-2003-149 and 
should be submitted by March 29, 2004.

IV. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules

[[Page 10776]]

and regulations thereunder applicable to a national securities 
association.\5\ In particular, the Commission believes that the 
proposed rule change is consistent with section 15A(b)(6) of the 
Act,\6\ which requires, among other things, that the NASD's rules 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. Specifically, the Commission 
believes that replacing CAES with the SuperMontage functionality, 
Nasdaq's integrated execution system, should enhance the trading of ITS 
Securities trading on Nasdaq.
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    \5\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78o-3(b)(6).
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    The Commission finds good cause for approving Amendment No. 1 to 
the proposed rule change prior to the thirtieth day after the amendment 
is published for comment in the Federal Register pursuant to section 
19(b)(2) of the Act.\7\ In Amendment No. 1, Nasdaq further clarified 
the proposal by addressing substantive concerns raised by the ITS 
Participants and procedural concerns raised by Division staff. Granting 
accelerated approval to the filing as amended, will enable the NASD to 
provide the SuperMontage functionality without further delay. The 
Commission believes that there is no reason to delay implementation of 
these changes.
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    \7\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities association, and, in 
particular, section 15A(b)(6) of the Act.\8\
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    \8\ 15 U.S.C. 78o-3(b)(6).
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    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\9\ that the proposed rule change (SR-NASD-2003-149) be approved, 
and that Amendment No. 1 be approved on an accelerated basis.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
    Proposed new language is italicized; proposed deletions are in 
[brackets].

Exhibit A

4700. NASDAQ National Market Execution System (NNMS)

4701. Definitions

    Unless stated otherwise, the terms described below shall have the 
following meaning:
    (a) The term ``active NNMS securities'' shall mean those NNMS 
eligible securities in which at least one NNMS Market Maker or ITS/CAES 
Market Maker is currently active in NNMS.
    (b) Reserved.
    (c) The term ``Attributable Quote/Order'' shall have the following 
meaning:
    (1) For NNMS Market Makers and NNMS ECNs, a bid or offer Quote/
Order that is designated for display (price and size) next to the 
participant's [MMID] MPID in the Nasdaq Quotation Montage once such 
Quote/Order becomes the participant's best attributable bid or offer.
    (2) For ITS/CAES Market Makers, a bid or offer Quote/Order that is 
designated for display (price and size) next to the participant's MPID 
once such Quote/Order becomes the participant's best attributable bid 
or offer.
    [(2)](3) For UTP Exchanges, the best bid and best offer quotation 
with price and size that is transmitted to Nasdaq by the UTP Exchange, 
which is displayed next to the UTP Exchange's [MMID] MPID in the Nasdaq 
Quotation Montage.
    (d) The term ``Automated Confirmation Transaction'' service or 
``ACT'' shall mean the automated system owned and operated by The 
Nasdaq Stock Market, Inc., which compares trade information entered by 
ACT Participants and submits ``locked-in'' trades to clearing.
    (e) The term ``automatic refresh size'' shall mean the default size 
to which an NNMS Market Maker's quote will be refreshed pursuant to 
NASD Rule 4710(b)(2), if the market maker elects to utilize the Quote 
Refresh Functionality and does not designate to Nasdaq an alternative 
refresh size, which must be at least one normal unit of trading. The 
automatic refresh size default amount shall be 1,000 shares.
    (f) The term ``Directed Order'' shall mean an order in a Nasdaq-
listed security that is entered into the system by an NNMS participant 
that is directed to a particular Quoting Market Participant at any 
price, through the Directed Order process described in Rule 4710(c). 
This term shall not include the ``Preferenced Order'' described in 
subparagraph (aa) of this rule. Directed Orders shall not be available 
for ITS Securities.
    (g) The term ``Displayed Quote/Order'' shall mean both Attributable 
and Non-Attributable (as applicable) Quotes/Orders transmitted to 
Nasdaq by Quoting Market Participants or NNMS Order Entry Firms. NNMS 
Order Entry firms are not permitted to enter Displayed Quotes/Orders in 
ITS Securities.
    (h) The term ``Firm Quote Rule'' shall mean SEC Rule 11Ac1-1.
    (i) The term ``Immediate or Cancel'' shall mean, for limit orders 
so designated, that if after entry into the NNMS a marketable limit 
order (or unexecuted portion thereof) becomes non-marketable, the order 
(or unexecuted portion thereof) shall be canceled and returned to the 
entering participant.
    (j) The term ``Liability Order'' shall mean an order that when 
delivered to a Quoting Market Participant imposes an obligation to 
respond to such order in a manner consistent with the Firm Quote Rule.
    (k) The term ``limit order'' shall mean an order to buy or sell a 
stock at a specified price or better.
    (l) The term ``market order'' shall mean an unpriced order to buy 
or sell a stock at the market's current best price.
    (m) The term ``marketable limit order'' shall mean a limit order to 
buy that, at the time it is entered into the NNMS, is priced at the 
current inside offer or higher, or a limit order to sell that, at the 
time it is entered into the NNMS, is priced at the inside bid or lower.
    (n) The term ``mixed lot'' shall mean an order that is for more 
than a normal unit of trading but not a multiple thereof.
    (o) The term ``Non-Attributable Quote/Order'' shall mean:
    (1) for orders in Nasdaq-listed securities, a bid or offer Quote/
Order that is entered by a Nasdaq Quoting Market Participant or NNMS 
Order Entry Firm and is designated for display (price and size) on an 
anonymous basis in the Nasdaq Order Display Facility. UTP Exchanges may 
submit Non-Attributable Quote/Order(s) in conformity with Rule 4710(e).
    (2) for orders in ITS Securities, a bid or offer Quote/Order that 
is entered by an ITS/CAES Market Maker and is designated for display 
(price and size) and/or execution on an anonymous basis. NNMS Order 
Entry Firms shall be eligible to enter Non-Attributable orders in ITS 
Securities only if they are designated as Immediate or Cancel or Total 
Immediate or Cancel.

[[Page 10777]]

    (p) The term ``Non-Directed Order'' shall mean an order that is 
entered into the system by an NNMS Participant and is not directed to 
any particular Quoting Market Participant or ITS Exchange, and shall 
also include Preferenced Orders as described in subparagraph (aa) of 
this rule.
    (q) The term ``Non-Liability Order'' shall mean for Nasdaq listed 
securities an order that when delivered to a Quoting Market Participant 
imposes no obligation to respond to such order under the Firm Quote 
Rule.
    (r) The term ``Nasdaq National Market Execution System,'' ``NNMS,'' 
or ``system'' shall mean the automated system owned and operated by The 
Nasdaq Stock Market, Inc. which enables NNMS Participants to execute 
transactions in active NNMS authorized securities; to have reports of 
the transactions automatically forwarded to the appropriate National 
Market Trade Reporting System, if required, for dissemination to the 
public and the industry, and to ``lock in'' these trades by sending 
both sides to the applicable clearing corporation(s) designated by the 
NNMS Participant(s) for clearance and settlement; and to provide NNMS 
Participants with sufficient monitoring and updating capability to 
participate in an automated execution environment.
    (s) The term ``NNMS eligible securities'' shall mean designated 
Nasdaq-listed equity securities and ITS Securities. ITS Securities 
shall include all securities included in NASD Rule 5210(c) and NASD 
Rule 6410(d).
    (t) The term ``NNMS ECN'' shall mean a member of the Association 
that meets all of the requirements of NASD Rule 4623, and that 
participates in the NNMS with respect to one or more Nasdaq listed 
[NNMS eligible] securities.
    (1) The term ``NNMS Auto-Ex ECN'' shall mean an NNMS ECN that 
participates in the automatic-execution functionality of the NNMS 
system, and accordingly executes Non-Directed Orders via automatic 
execution for the purchase or sale of an active Nasdaq listed [NNMS] 
security at the Nasdaq inside bid and/or offer price.
    (2) The term ``NNMS Order-Delivery ECN'' shall mean an NNMS ECN 
that participates in the order-delivery functionality of the NNMS 
system, accepts delivery of Non-Directed Orders that are Liability 
Orders, and provides an automated execution of Non-Directed Orders (or 
an automated rejection of such orders if the price is no longer 
available) for the purchase or sale of an active Nasdaq listed [NNMS] 
security at the Nasdaq inside bid and/or offer price.
    (u) The term ``NNMS Market Maker'' shall mean a member of the 
Association that is registered as a Nasdaq Market Maker and as a Market 
Maker for purposes of participation in NNMS with respect to one or more 
Nasdaq listed [NNMS eligible] securities, and is currently active in 
NNMS and obligated to execute orders through the automatic-execution 
functionality of the NNMS system for the purchase or sale of an active 
Nasdaq listed [NNMS] security at the Nasdaq inside bid and/or offer 
price.
    (v) The term ``NNMS Participant'' shall mean an NNMS Market Maker, 
NNMS ECN, UTP Exchange, [or] ITS/CAES Market Maker, or NNMS Order Entry 
Firm registered as such with the Association for participation in NNMS.
    (w) The term ``NNMS Order Entry Firm'' shall mean a member of the 
Association who is registered as an Order Entry Firm for purposes of 
entering orders in NNMS Securities into NNMS [participation in NNMS]. 
This term shall also include any Electronic Communications Network or 
Alternative Trading System that fails to meet all the requirements of 
Rule 4623. NNMS Order Entry Firms shall not charge any fee to a broker-
dealer that accesses the NNMS Order Entry Firm's quote/order through 
NNMS.
    (x) The term ``Nasdaq Quotation Montage'' shall mean the portion of 
the Nasdaq WorkStation presentation that displays for a particular 
stock two columns (one for bid, one for offer), under which is listed 
in price/time priority the [MMID] MPIDs for each NNMS Market Maker, 
NNMS ECN, and UTP Exchange registered in the stock and the 
corresponding quote (price and size) next to the related [MMID] MPID.
    (y) The term ``Nasdaq Quoting Market Participant'' shall include 
only the following: (1) NNMS Market Makers; [or] (2) NNMS ECNs;[.] and 
(3) ITS/CAES Market Makers.
    (z) The term ``odd-lot order'' shall mean an order that is for less 
than a normal unit of trading.
    (aa) The term ``Preferenced Order'' shall mean an order that is 
entered into the Non-Directed Order Process and is designated to be 
delivered to or executed against a particular Quoting Market 
Participant's Attributable Quote/Order if the Quoting Market 
Participant is at the best bid/best offer when the Preferenced Order is 
the next in line to be executed or delivered. Preferenced Orders shall 
be executed subject to the conditions set out in Rule 4710(b).
    (bb) The term ``Quote/Order'' shall mean a single quotation or 
shall mean an order or multiple orders at the same price submitted to 
Nasdaq by a Nasdaq Quoting Market Participant or, for Nasdaq 
securities, NNMS Order Entry Firm that is displayed in the form of a 
single quotation. For ITS Securities, orders entered by NNMS Order 
Entry Firms are not displayed. Unless specifically referring to a UTP 
Exchange's agency Quote/Order (as set out in Rule 4710([f]e)(2)(b)), 
when this term is used in connection with a UTP Exchange, it shall mean 
the best bid and/or the best offer quotation transmitted to Nasdaq by 
the UTP Exchange.
    (cc) The term ``Quoting Market Participant'' shall include any of 
the following: (1) NNMS Market Makers; (2) NNMS ECNs; [and] (3) UTP 
Exchange Specialists, and (4) ITS/CAES Market Makers.
    (dd) The term ``Reserve Size'' shall mean the system-provided 
functionality that permits a Nasdaq Quoting Market Participant or NNMS 
Order Entry Firm to display in its Displayed Quote/Order part of the 
full size of a proprietary or agency order, with the remainder held in 
reserve on an undisplayed basis to be displayed in whole or in part 
after the displayed part is reduced by executions to less than a normal 
unit of trading.
    (ee) The term ``Nasdaq Order Display Facility'' shall mean, in 
Nasdaq listed securities, the portion of the Nasdaq WorkStation 
presentation that displays, without attribution to a particular Quoting 
Market Participant's [MMID] MPID, the five best price levels in Nasdaq 
on both the bid and offer side of the market and the aggregate size of 
Attributable and Non-Attributable Quotes/Orders at each price level.
    (ff) The term ``UTP Exchange'' shall mean any registered national 
securities exchange that elects to participate in the NNMS and that has 
unlisted trading privileges in Nasdaq National Market securities 
pursuant to the Joint Self-Regulatory Organization Plan Governing the 
Collection, Consolidation and Dissemination Of Quotation and 
Transaction Information For [Exchange-Listed] Nasdaq/National Market 
System Securities Traded On Exchanges On An Unlisted Trading Privilege 
Basis (``Nasdaq UTP Plan'').
    (gg) The term ``Legacy Quote'' shall mean the quotation mechanism 
that existed in Nasdaq on or before July 1, 2002, and that does not 
permit the entry of Quotes/Orders at multiple price levels in the NNMS.
    (hh) The term ``Day'' shall mean, for orders so designated, that if 
after entry into the NNMS, the order is not fully executed, the order 
(or unexecuted portion thereof) shall remain available for potential 
display and/or execution until market close (4 p.m. Eastern Time), 
after which it shall be returned to the entering party.

[[Page 10778]]

    (ii) The term ``Good-till-Cancelled'' shall mean, for orders so 
designated, that if after entry into NNMS, the order is not fully 
executed, the order (or unexecuted portion thereof) shall remain 
available for potential display and/or execution until cancelled by the 
entering party, or until 1 year after entry, whichever comes first.
    (jj) The term ``End-of-Day'' shall mean, for orders so designated, 
that if after entry into the NNMS, the order is not fully executed, the 
order (or unexecuted portion thereof) shall remain available for 
potential execution and/or display until market close (4 p.m. Eastern 
Time), and thereafter for potential execution until 6:30 p.m. Eastern 
Time, after which it shall be returned to the entering party. End-of-
Day orders shall not be available for ITS Securities.
    (kk) The term ``Auto Ex'' shall mean for orders in Nasdaq listed 
securities so designated, an order that will execute solely against the 
Quotes/Orders of NNMS Participants that participate in the automatic 
execution functionality of the NNMS and that do not charge a separate 
quote-access fee to NNMS Participants accessing their Quotes/Orders 
through the NNMS.
    (ll) The term ``Fill or Return'' shall mean for orders in ITS 
Securities so designated, an order that is entered by an ITS/CAES 
Market Maker and delivered to or executed by NNMS Participants without 
delivering the order to an ITS Exchange and without trading through the 
quotations of ITS Exchanges. The System will, if necessary, execute 
against interest at successive price levels.
    (mm) The term ``Pegged'' shall mean, for orders so designated, that 
after entry into the NNMS, the price of the order is automatically 
adjusted by NNMS in response to changes in the Nasdaq inside bid or 
offer, as appropriate. The price of a Pegged Order may be equal to the 
inside quote on the same side of the market (a Regular Pegged Order) or 
may be equal to a specified amount better than the inside quote on the 
contra side of the market (a Reverse Pegged Order). The market 
participant entering a Pegged Order may (but is not required to) 
specify a cap price, to define a price at which pegging of the order 
will stop and the order will be converted into an un-pegged limit 
order. Pegged Orders shall not be available for ITS Securities.
    (nn) (1) The term ``Discretionary'' shall mean, for priced limit 
orders in Nasdaq listed securities 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.
    (2) for orders in ITS Securities 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 display price must be 
fixed. A Discretionary Order in an ITS Security may not result in a 
quote that locks or crosses the national best bid and offer and shall 
not be executed at a price that trades through the quotation of an ITS 
Exchange unless it is designated as a Sweep Order.
    (oo) Reserved.
    (pp) The term ``ITS/CAES Market Maker'' shall mean a member of the 
Association that is registered as an ITS/CAES Market Maker as defined 
in NASD Rule 5210(e) or as a CQS Market Maker as defined in NASD Rule 
6320 and as a Market Maker for purposes of participation in NNMS with 
respect to one or more ITS Securities, and is currently active in NNMS. 
ITS/CAES Market Makers shall be permitted to execute orders in ITS 
Securities through the automatic execution or order delivery 
functionality of the NNMS system for the purchase or sale of active ITS 
Securities.
    (qq) The term ``ITS Exchange'' shall mean a national securities 
exchange that participates in the ITS system as defined in Rule 
5210(a). ITS Exchanges shall not be eligible to participate in the 
NNMS. ITS Commitments sent by ITS Exchanges shall be processed by the 
system in accordance with the ITS Plan and all applicable NASD rules 
governing the participation in ITS. Quotes/Orders that are eligible for 
ITS will be processed by the system and delivered to the appropriate 
ITS Exchange as an ITS Commitment in accordance with the requirements 
of the ITS Plan and all applicable NASD rules.
    (rr) The term ``Sweep Order'' shall mean, for orders in ITS 
Securities so designated, an order that may be entered only by ITS/CAES 
Market Makers and that may be delivered to or executed only by NNMS 
Participants at multiple price levels and that may trade through ITS 
Exchanges' quotations.
    (ss) The term ``Total Day'' shall mean, for orders in ITS 
Securities so designated, that if after entry into the NNMS, the order 
is not fully executed, the order (or unexecuted portion thereof) shall 
remain available for potential display between 7:30 a.m. and 6:30 p.m. 
and for potential execution between 9:30 a.m. and 6:30 p.m., after 
which it shall be returned to the entering party.
    (tt) The term ``Total Good-till-Cancelled'' shall mean, for orders 
in ITS Securities so designated, that if after entry into NNMS, the 
order is not fully executed, the order (or unexecuted portion thereof) 
shall remain available for potential display between 7:30 a.m. and 6:30 
p.m. and for potential execution between 9:30 a.m. and 6:30 p.m., until 
cancelled by the entering party, or until 1 year after entry, whichever 
comes first.
    (uu) The term ``Total Immediate or Cancel'' shall mean, for limit 
orders in ITS Securities so designated, that if after entry into the 
NNMS a marketable limit order (or unexecuted portion thereof) becomes 
non-marketable, the order (or unexecuted portion thereof) shall be 
canceled and returned to the entering participant. Such orders may be 
entered between 7:30 a.m. and 6:30 p.m. and are available for potential 
execution between 9:30 a.m. and 6:30 p.m.

4705. NNMS Participant Registration

    (a) Participation in NNMS as an NNMS Market Maker requires current 
registration as such with the Association. Such registration shall be 
conditioned upon the NNMS Market Maker's initial and continuing 
compliance with the following requirements:
    (1) execution of an NNMS Participant application agreement with the 
Association;
    (2) membership in, or access arrangement with a participant of a 
clearing agency registered with the Commission that maintains 
facilities through which NNMS compared trades may be settled;
    (3) registration as a market maker in The Nasdaq Stock Market 
pursuant to the Rule 4600 Series and compliance with all applicable 
rules and operating procedures of the Association and the Commission;
    (4) maintenance of the physical security of the equipment located 
on the premises of the NNMS Market Maker or to prevent the improper use 
or access to Nasdaq systems, including unauthorized entry of 
information into NNMS; and
    (5) acceptance and settlement of each NNMS trade that NNMS 
identifies as having been effected by such NNMS Market Maker, or if 
settlement is to be made through another clearing member, guarantee of 
the acceptance and

[[Page 10779]]

settlement of such identified NNMS trade by the clearing member on the 
regularly scheduled settlement date.
    (b) Pursuant to Rule 4611(f), participation as an NNMS Market Maker 
is required for any Nasdaq market maker registered to make a market in 
an NNMS security.
    (c) Participation in NNMS as an NNMS Order Entry Firm requires 
current registration as such with the Association. Such registration 
shall be conditioned upon the NNMS Order Entry Firm's initial and 
continuing compliance with the following requirements:
    (1) execution of an NNMS Participant application agreement with the 
Association;
    (2) membership in, or access arrangement with a participant of, a 
clearing agency registered with the Commission that maintains 
facilities through which NNMS compared trades may be settled;
    (3) compliance with all applicable rules and operating procedures 
of the Association and the Securities and Exchange Commission;
    (4) maintenance of the physical security of the equipment located 
on the premises of the NNMS Order Entry Firm to prevent the improper 
use or access to Nasdaq systems, including unauthorized entry of 
information into NNMS; and
    (5) acceptance and settlement of each NNMS trade that NNMS 
identifies as having been effected by such NNMS Order Entry Firm or if 
settlement is to be made through another clearing member, guarantee of 
the acceptance and settlement of such identified NNMS trade by the 
clearing member on the regularly scheduled settlement date.
    (d) Participation in NNMS as an NNMS ECN requires current 
registration as an NASD member and shall be conditioned upon the 
following:
    (1) the execution of an NNMS Participant application agreement with 
the Association;
    (2) compliance with all requirements in NASD Rule 4623 and all 
other applicable rules and operating procedures of the Association and 
the Securities and Exchange Commission;
    (3) membership in, or access arrangement with, a clearing agency 
registered with the Commission which maintains facilities through which 
NNMS-compared trades may be settled;
    (4) maintenance of the physical security of the equipment located 
on the premises of the NNMS ECN to prevent the improper use or access 
to Nasdaq systems, including unauthorized entry of information into 
NNMS; and
    (5) acceptance and settlement of each trade that is executed 
through the facilities of the NNMS, or if settlement is to be made 
through another clearing member, guarantee of the acceptance and 
settlement of such identified NNMS trade by the clearing member on the 
regularly scheduled settlement date.
    (e) Participation in NNMS as an ITS/CAES Market Maker shall be 
conditioned upon the ITS/CAES Market Maker's initial and continuing 
compliance with the requirements set forth in NASD Rule 5220.
    ([e]f) The registration required hereunder will apply solely to the 
qualification of an NNMS Participant to participate in NNMS. Such 
registration shall not be conditioned upon registration in any 
particular eligible or active NNMS securities.
    ([f]g) Each NNMS Participant shall be under a continuing obligation 
to inform the Association of noncompliance with any of the registration 
requirements set forth above.
    ([g]h) The Association and its subsidiaries shall not be liable for 
any losses, damages, or other claims arising out of the NNMS or its 
use. Any losses, damages, or other claims, related to a failure of the 
NNMS to deliver, display, transmit, execute, compare, submit for 
clearance and settlement, adjust, retain priority for, or otherwise 
correctly process an order, Quote/Order, message, or other data entered 
into, or created by, the NNMS shall be absorbed by the member, or the 
member sponsoring the customer, that entered the order, Quote/Order, 
message, or other data into the NNMS.

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 ``Immediate or Cancel'', [or as a] 
``Day'', [or a] ``Good-till-Cancelled'', ``Auto-Ex'', ``Fill or 
Return'', ``Pegged'', ``Discretionary'', ``Sweep'', ``Total Day'', 
``Total Good till Cancelled'', or ``Total Immediate or Cancel'' 
[order].
    (1) 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.
    (2) 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.
    (3) 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.
    (4) 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: For Nasdaq listed securities only, 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).
    (5) for Nasdaq listed securities, [A]an order may be designated as 
``Auto-Ex,'' in which case the order will also automatically be 
designated as IOC. An Auto-Ex Order will execute solely against the 
Quotes/Orders of NNMS Participants at the best bid/best offer that 
participate in the automatic execution functionality of the NNMS and 
that do not charge a separate quote-access fee to NNMS Participants 
accessing their Quotes/Orders through the NNMS.
    (6) for ITS Securities, an order may be designated as ``Fill or 
Return,'' in which case it shall be executed solely against the Quotes/
Orders of NNMS Participants at the best bid/best offer within NNMS. The 
NNMS will, if necessary, execute against interest at successive price 
levels. A Fill or Return Order will not trade through the quotation of 
an ITS Exchange.
    (7) [In addition, an order may be assigned the designations 
described below.] 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

[[Page 10780]]

as a Preferenced Order. A Pegged Order (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. Pegged Orders shall not be available for ITS Securities.
    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.
    (8)(A) 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.
    (B) A Discretionary Order in an ITS Security may not be preferenced 
to an ITS/CAES Market Maker or ITS Exchange, shall not result in a 
quote that locks or crosses the national best bid and offer and shall 
not be executed at a price that trades through the quotation of an ITS 
Exchange unless it is also designated as a Sweep Order. Starting at 
7:30 a.m., until the 4 p.m. market close, Discretionary Orders in ITS 
Securities 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.
    (9) An order in an ITS Security may be designated as a ``Sweep 
Order.'' A Sweep Order may be entered only by an ITS/CAES Market Maker. 
A Sweep Order may trade through the quotations of ITS Exchanges, and it 
will be delivered to or executed only by NNMS Participants at multiple 
price levels.
    (10) An order in an ITS Security may be designated as ``Total Day'' 
(``X'') and may be entered between the hours 7:30 a.m. to 6:30 p.m. 
Eastern Time and are available for potential execution beginning at 
9:30 a.m. If a priced X 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 6:30 p.m. Eastern Time on the day such 
order was submitted, whichever comes first, whereupon it will be 
returned to the sender.
    (11) An order in an ITS Security may be designated as ``Total Good-
till-Cancelled'' (``GTX''). A GTX order (or unexecuted portion thereof) 
shall 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. GTX orders may be entered (or previously 
entered GTX orders cancelled) between the hours 7:30 a.m. to 6:30 p.m. 
Eastern Time and are available for potential execution beginning at 
9:30 a.m.
    (12) An order in an ITS Security may be designated as ``Total 
Immediate or Cancel'' (``IOX''). IOX orders may be entered beginning at 
7:30 a.m. until 6:30 p.m. and are available for potential execution 
throughout the trading day beginning at 9:30 a.m. If a priced order 
designated as IOX and entered prior to 9:30 a.m. is not immediately 
executable at 9:30 a.m., the unexecuted order (or portion thereof) 
shall be returned to the sender. If a priced order designated as IOX 
and entered between 9:30 a.m. and 6:30 p.m. is not immediately 
executable, the unexecuted order (or portion thereof) shall be returned 
to the sender.
    (C) The system will not process a Non-Directed Order to sell short 
if the execution of such order would violate NASD Rule 3350 or, in the 
case of ITS Securities, SEC Rule 10a-1.
    (D) Non-Directed Orders will be processed as described in Rule 
4710.
    (E) The NNMS shall not accept Non-Directed Orders that are All-or-
None, or have a minimum size of execution.
    (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 and 
limit orders designated as Total Immediate or Cancel and Discretionary 
Orders whose displayed price or discretionary price range would lock or 
cross another Quote/Order if they were displayed orders 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)
    (i) All Non-Directed orders in Nasdaq listed securities 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.
    (ii) In ITS Securities, all Non-Directed orders shall be designated 
as Immediate or Cancel, GTC, Day, Total Immediate or Cancel, Total Day, 
or Total GTC but shall be required to be entered as Non-attributable if 
not entered as IOC or IOX. NNMS Order Entry Firms may only assign the 
IOC, IOX, and Fill or Return and Discretionary order designations

[[Page 10781]]

described in subparagraph (a)(1)(B). For IOC and IOX 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. Limit and market orders 
designated as Immediate or Cancel and Discretionary Orders or, in the 
case of ITS Securities, IOX, 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 or, 
in the case of ITS Securities, IOX 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) Directed Orders in Nasdaq-listed Securities. A participant may 
enter a Directed Order in a Nasdaq-listed security into the NNMS to 
access a specific Attributable Quote/Order displayed in the Nasdaq 
Quotation Montage, subject to the following conditions and 
requirements:
    (1) Unless the Quoting Market Participant to which a Directed Order 
is being sent has indicated that it wishes to receive Directed Orders 
that are Liability Orders, a Directed Order must be a Non-Liability 
Order, and as such, at the time of entry must be designated as:
    (A) an ``All-or-None'' order (``AON'') that is at least one normal 
unit of trading (e.g. 100 shares) in excess of the Attributable Quote/
Order of the Quoting Market Participant to which the order is directed; 
or
    (B) a ``Minimum Acceptable Quantity'' order (``MAQ''), with a MAQ 
value of at least one normal unit of trading in excess of Attributable 
Quote/Order of the Quoting Market Participant to which the order is 
directed. Nasdaq will append an indicator to the quote of a Quoting 
Market Participant that has indicated to Nasdaq that it wishes to 
receive Directed Orders that are Liability Orders.
    (C) a Directed Order that is entered at a price that is inferior to 
the Attributable Quote/Order of the Quoting Market Participant to which 
the order is directed. Nasdaq will append an indicator to the quote of 
a Quoting Market Participant that has indicated to Nasdaq that it 
wishes to receive Directed Orders that are Liability Orders.
    (2) A Directed Order may have a time in force of 3 to 99 minutes, 
or may be designated as ``Day'' order, or an ``End of Day'' order.
    (3) Directed Orders shall be processed pursuant to Rule 4710(c).
    (4) A Directed Order entered into the system may not be cancelled 
until a minimum of five seconds has elapsed after the time of entry. 
This five-second time period shall be measured by NNMS.
    (5) Directed Orders shall not be entered in ITS Securities.
    (c) Entry of Agency and Principal Orders--NNMS Participants are 
permitted to enter into the NNMS both agency and principal orders for 
delivery and execution processing.
    (d) Order Size--
    (1) In Nasdaq-listed securities, [A]any order in whole shares up to 
999,999 shares may be entered into the NNMS for normal execution 
processing.
    (2) Orders in ITS Securities must be entered for a minimum of one 
round lot, or in round lot multiples, or in mixed lots. Orders in ITS 
Securities will be delivered to ITS Exchanges in round lots only.
    (e) Open Quotes--The NNMS will only deliver an order or an 
execution to a Quoting Market Participant if that participant has an 
open quote.

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 Orders into the NNMS, subject to the following 
requirements and conditions:
    (1) Nasdaq Quoting Market Participants shall be permitted to 
transmit to the NNMS multiple Quotes/Orders at a single as well as 
multiple price levels. Such Quote/Order shall indicate whether it is an 
``Attributable Quote/Order'' or ``Non-Attributable Quote/Order,'' and 
the amount of Reserve Size (if applicable). NNMS Order Entry Firms 
shall be permitted to transmit to NNMS multiple Non-Attributable 
Quotes/Orders at a single as well as multiple price levels and the 
amount of Reserve Size (if applicable).
    (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) Consistent with Rule 4613, an NNMS Market Maker is obligated to 
maintain a two-sided Attributable Quote/Order at all times, for at 
least one normal unit of trading.
    (4) Nasdaq Quoting Market Participants may continue to transmit to 
the NNMS only their best bid and best offer Attributable Quotes/Orders. 
Notwithstanding NASD Rule 4613 and subparagraph (a)(1) of this rule, 
nothing in these rules shall require a Nasdaq Quoting Market 
Participant to transmit to the NNMS multiple Quotes/Orders.
    (b) Display of Quotes/Orders in Nasdaq--The NNMS will display 
Quotes/Orders submitted to the system as follows:
    (1) Attributable Quotes/Orders--The price and size of a Nasdaq 
Quoting Market Participant's best priced Attributable Quote/Order on 
both the bid and offer side of the market will be displayed in the 
Nasdaq Quotation Montage under the Nasdaq Quoting Market Participant's 
[MMID] MPID, and also will be displayed in the Nasdaq Order Display 
Facility as part of the aggregate trading interest at a particular 
price when the price of such Attributable Quote/Order falls within the 
number of price levels authorized for aggregation and display pursuant 
to Rule 4701(ee) on either side of the market. Upon execution or 
cancellation of the Nasdaq Quoting Market Participant's best-priced 
Attributable Quote/Order on a particular side of the market, the NNMS 
will automatically display the participant's next best Attributable 
Quote/Order on that side of the market.
    (2) Non-Attributable Quotes/Orders--The price and size of a Nasdaq 
Quoting Market Participant's and NNMS Order Entry Firm's Non-
Attributable Quote/Order on both the bid and offer side of the market 
will be displayed in the Nasdaq Order Display Facility as part of the 
aggregate trading interest at a particular price when the price of such 
Non-Attributable Quote/Order falls within the number of price levels 
authorized for aggregation and display pursuant to Rule 4701(ee) on 
either side of the market. A Non-Attributable Quote/Order will not be 
displayed in the Nasdaq Quotation Montage under the Nasdaq Quoting 
Market Participant's [MMID] MPID. Non-Attributable Quotes/Orders that 
are the best priced Non-Attributable bids or offers in the system will 
be displayed in the Nasdaq Quotation Montage under an

[[Page 10782]]

anonymous [MMID] MPID, which shall represent and reflect the aggregate 
size of all Non-Attributable Quotes/Orders in Nasdaq at that price 
level. Upon execution or cancellation of a Nasdaq Quoting Market 
Participant's or NNMS Order Entry Firm's Non-Attributable Quote/Order, 
the NNMS will automatically display a Non-Attributable Quote/Order in 
the Nasdaq Order Display Facility (consistent with the parameters 
described above) if it falls within the number of price levels 
authorized for aggregation and display pursuant to Rule 4701(ee) on 
either side of the market.
    (3) Exceptions--The following exceptions shall apply to the display 
parameters set forth in paragraphs (1) and (2) above:
    (A) Odd-lots, Mixed Lots, and Rounding--The [Nasdaq system] NNMS 
(and all accompanying data feeds) shall be capable of displaying 
trading interest in round lot amounts. For quote display purposes, 
[Nasdaq] NNMS will aggregate all shares, including odd-lot share 
amounts, entered by a Quoting Market Participant and NNMS Order Entry 
Firm at a single price level and then round that total share amount 
down to the nearest round-lot amount for display and dissemination, 
consistent with subparagraphs (b)(1) and (b)(2) of this rule. Though 
rounded, any odd-lot portion of a Quote/Order that is not displayed as 
a result of this rounding process will remain in the system, with the 
time-priority of their original entry, and be continuously available 
for execution. Round-lots that are subsequently reduced by executions 
to a mixed lot amount will likewise be rounded for display purposes by 
the system to the nearest round-lot amount at that same price level. 
Any odd-lot number of shares that do not get displayed as a result of 
this rounding will remain in the system with the time-priority of their 
original entry and thus be continuously available for execution. If 
executions against an Attributable Quote/Order result in there being an 
insufficient (odd-lot) amount of shares at a price level to display an 
Attributable Quote/Order for one round-lot, the system will display the 
Quoting Market Participant's next best priced Attributable Quote/Order 
consistent with Rule 4710(b)(2). If all Attributable Quotes/Orders on 
the bid and/or offer side of the market are exhausted so that there are 
no longer any Attributable Quotes/Orders, the system may refresh a 
market maker's exhausted bid or offer quote using the process set forth 
in Rule 4710(b)(5). With the exception of Legacy Quotes, odd-lot 
remainders that are not displayed will remain in the system at their 
original price levels and continue to be available for execution.
    (B) Aggregation and Display of Odd-lots Bettering the Inside 
Price--Except as provided in Subsection (C) below, odd-lot share 
amounts that remain in system at prices that improve the best bid/offer 
in Nasdaq shall be subject to aggregation for display purposes, via the 
SIZE [MMID] MPID, with the odd-lot share amounts of other NNMS Quoting 
Market Participants and NNMS Order Entry Firms at those same price 
level(s). Such odd-lots will be displayed via SIZE if (1) the 
combination of all such odd-lots at a particular price level is equal 
to, or more than, a round-lot and (2) that the price level represents 
either the highest bid or lowest offer price within the system. This 
aggregation shall display only the maximum round-lot portion of the 
total combined shares available at that best-priced level. This 
aggregation shall be for display purposes only and all individual odd-
lot share amounts that are part of any such aggregation shall continue 
to processed by the system based on the time-priority of their original 
entry.
    (C) In the case of ITS Securities, odd lot share amounts of each 
individual ITS/CAES Market Maker shall be aggregated and shall be 
displayed next to that ITS/CAES Market Maker's MPID for a minimum of 
one round lot or for round lot multiples. An odd lot share amount will 
be cancelled if it represents an ITS/CAES Market Maker's best priced 
quote or order within SuperMontage. Odd lot share amounts will be 
cancelled at the end of the day.
    (c) Reserve Size--Reserve Size shall not be displayed in Nasdaq, 
but shall be electronically accessible as described in Rule 4710(b).
    (d) Summary Scan--The ``Summary Scan'' functionality, [which] is a 
query-only non-dynamic functionality for Nasdaq listed securities only. 
It [that] displays without attribution to Quoting Market Participants' 
[MMIDs] MPIDs the aggregate size of Attributable and Non-Attributable 
Quotes/Orders for all levels (on both the bid and offer side of the 
market) below the number of price levels authorized for aggregation and 
display pursuant to Rule 4701(ee).
    (e) NQDS Prime--``NQDS Prime'' is a separate data feed for Nasdaq-
listed securities that Nasdaq will make available for a fee that is 
approved by the Securities and Exchange Commission. This separate data 
feed will display with attribution to Quoting Market Participants' 
[MMIDs] MPIDs all Attributable Quotes/Orders on both the bid and offer 
side of the market for the price levels that are disseminated in the 
Nasdaq Order Display Facility.
    (f) IM Prime--``IM Prime'' is a separate data feed that Nasdaq will 
make available for a fee that is approved by the Securities and 
Exchange Commission. This separate data feed will display with 
attribution to ITS/CAES Market Makers' MPIDs all Attributable Quotes/
Orders on both the bid and offer side of the market for all price 
levels within SuperMontage for ITS Securities

4708 ITS Commitments

    (a) Compliance with Rule 5200 Series.
    (1) Pre Opening Application. ITS/CAES Market Makers may use NNMS to 
participate in the Pre Opening Application in accordance with Rule 
5250. NNMS Order Entry Firms may not participate in the Pre Opening 
Application.
    (2) Trade throughs. ITS/CAES Market Makers must use NNMS to comply 
with the trade through obligations set forth in Rules 5262 and 5264. 
The NNMS will reject any order of an NNMS Order Entry Firm that, if 
executed, would trade through an ITS Exchange.
    (3) Locked and Crossed Markets. ITS/CAES Market Makers must use 
NNMS to comply with the locked and crossed markets obligations set 
forth in Rules 5263. Any order or portion thereof entered by an NNMS 
Order Entry Firm that would create a locked/crossed market with an ITS 
Exchange will be rejected.
    (b) Inbound ITS Commitments.
    (1) If the ITS Commitment contains an obvious error as described in 
Rule 5265(b), the NNMS will decline it.
    (2) If the ITS Commitment, if executed, would result in a violation 
of SEC Rule 10a-1, the NNMS will decline it.
    (3) If the conditions described in subparagraphs (1) and (2) above 
do not apply, the NNMS will execute or deliver an inbound ITS 
Commitment in accordance with applicable provisions of the Rule 5200 
Series and the ITS Plan.

4710. Participant Obligations in NNMS

    (a) Registration Upon the effectiveness of registration as a NNMS 
Market Maker, NNMS ECN, ITS/CAES Market Maker or NNMS Order Entry Firm, 
the NNMS Participant may commence activity within NNMS for exposure to 
orders or entry of orders, as applicable. The operating hours of NNMS 
may be established as appropriate by the Association. The extent of 
participation in Nasdaq by an NNMS Order Entry Firm shall be determined 
solely by the firm in the exercise of its ability to enter orders into 
Nasdaq.

[[Page 10783]]

(b) Non-Directed Orders
    (1) General Provisions--A Quoting Market Participant in an NNMS 
Security, as well as NNMS Order Entry Firms, shall be subject to the 
following requirements for Non-Directed Orders:
    (A) Obligations [F]for each NNMS security in which it is 
registered, a Quoting Market Participant must accept and execute 
individual Non-Directed Orders against its quotation, in an amount 
equal to or smaller than the combination of the Displayed Quote/Order 
and Reserve Size (if applicable) of such Quote/Order, when the Quoting 
Market Participant is at the best bid/best offer in Nasdaq. This 
obligation shall also apply to the Non-Attributable Quotes/Orders of 
NNMS Order Entry Firms. Quoting Market Participants, and NNMS Order 
Entry Firms, shall participate in the NNMS as follows:
    (i) NNMS Market Makers, NNMS Auto-Ex ECNs, and NNMS Order Entry 
Firms to the extent they enter a Non-Attributable Quote/Order shall 
participate in the automatic-execution functionality of the NNMS, and 
shall accept the delivery of an execution up to the size of the 
participant's Displayed Quote/Order and Reserve Size.
    (ii) ITS/CAES Market Makers may elect to participate in the order 
delivery or the automatic execution functionality of the NNMS. ITS/CAES 
Market Makers that elect automatic execution shall accept the delivery 
of an execution up to the size of the participant's Displayed Quote/
Order and Reserve Size. ITS/CAES Market Makers that elect order 
delivery shall accept the delivery of an order up to the size of the 
ITS/CAES Market Maker's Displayed Quote/Order and Reserve Size. ITS/
CAES Market Maker that elect order delivery shall be required to 
execute the full size of such order (even if the delivered order is a 
mixed lot or odd lot) unless that interest is no longer available in 
the ITS/CAES Market Maker's system, in which case the ITS/CAES Market 
Maker is required to execute in a size equal to the remaining amount of 
trading interest available in the ITS/CAES Market Maker's system.
    [(ii)] (iii) NNMS Order-Delivery ECNs shall participate in the 
order-delivery functionality of the NNMS, and shall accept the delivery 
of an order up to the size of the NNMS Order-Delivery ECN's Displayed 
Quote/Order and Reserve Size. The NNMS Order-Delivery ECN shall be 
required to execute the full size of such order (even if the delivered 
order is a mixed lot or odd lot) unless that interest is no longer 
available in the ECN, in which case the ECN is required to execute in a 
size equal to the remaining amount of trading interest available in the 
ECN.
    [(iii)] (iv) UTP Exchanges that choose to participate in the NNMS 
shall do so as described in subparagraph (f) of this rule and as 
otherwise described in the NNMS rules and the UTP Plan.
    (B) Processing of Non-Directed Orders--Upon entry of a Non-Directed 
Order into the system, the NNMS will ascertain who the next Quoting 
Market Participant or NNMS Order Entry Firm in queue to receive an 
order and shall deliver an execution to Quoting Market Participants or 
NNMS Order Entry Firms that participate in the automatic-execution 
functionality of the system, or shall deliver a Liability Order to 
Quoting Market Participants that participate in the order-delivery 
functionality of the system. Non-Directed Orders entered into the NNMS 
system shall be delivered to or automatically executed against Quoting 
Market Participants' or NNMS Order Entry Firms' Displayed Quotes/Orders 
and Reserve Size, in strict price/time priority, as described in the 
algorithm contained in subparagraph (b)(B)(i) of this rule. The 
individual time priority of each Quote/Order submitted to NNMS shall be 
assigned by the system based on the date and time such Quote/Order was 
received. Remainders of Quote/Orders reduced by execution, if retained 
by the system, shall retain the time priority of their original entry. 
For purposes of the execution algorithm described below, ``Displayed 
Quotes/Orders'' shall also include any odd-lot, odd-lot portion of a 
mixed-lot, or any odd-lot remainder of a round-lot(s) reduced by 
execution, share amounts that while not displayed in the Nasdaq 
Quotation Montage, remain in system and available for execution.
    (i) Execution Algorithm--Price/Time--The system will access 
interest in the system in the following priority and order:
    a. Displayed Quotes/Orders of NNMS Market Makers, ITS/CAES Market 
Makers, and NNMS ECNs, displayed Non-Attributable Quotes/Orders of NNMS 
Order Entry Firms, and displayed non-attributable agency Quotes/Orders 
of UTP Exchanges (as permitted by subparagraph (e[f]) of this rule), in 
time priority between such participants' Quotes/Orders;
    b. Reserve Size of Nasdaq Quoting Market Participants and NNMS 
Order Entry Firms, in time priority between such participants' Quotes/
Orders; and
    c. Principal Quotes/Orders of UTP Exchanges, in time priority 
between such participants' Quotes/Orders.
    (ii) 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 that 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 in price/time priority.
    b. If an NNMS Market Participant enters a Preferenced Order, the 
order shall be executed against (or delivered in an amount equal to) 
both the Displayed Quote/Order and Reserve Size of the Quoting Market 
Participant to which the order is being directed, if that Quoting 
Market Participant is at the best bid/best offer when the Preferenced 
Order is next in line to be delivered (or executed). Any unexecuted 
portion of a Preferenced Order shall be returned to the entering NNMS 
Market Participant. If the Quoting Market Participant is not at the 
best bid/best offer when the Preferenced Order is next in line to be 
delivered (or executed), the Preferenced

[[Page 10784]]

Order shall be returned to the entering NNMS Market Participant.
    c. If an NNMS Market Participant enters a Quote or Non-Directed 
Order that would result in NNMS either: (1) delivering an execution to 
a Quoting Market Participant(s) or an NNMS Order Entry Firm that 
participates in the automatic-execution functionality of the system at 
a price substantially away from the current inside bid/offer in that 
security; or (2) delivering a Liability Order to a Quoting Market 
Participant(s) that participates in the order-delivery functionality of 
the system at a price substantially away from the current inside bid/
offer in that security, the system shall instead process only those 
portions of the order that will not result in either an execution or 
delivery at a price substantially away from the current inside best 
bid/offer in the security and return the remainder to the entering 
party. For purposes of this subsection only, an execution or delivery 
based on a sell order shall be deemed to be substantially away from the 
current inside bid if it is to be done at a price lower than a break-
price established by taking the inside bid, reducing it by 10% of the 
bid's value, and then subtracting $0.01. For example, in a stock with a 
current inside bid of $10.00, the maximum price at which a single sell 
order could be executed would be $8.99 calculated as follows: ($10.00--
($10.00 x .10 e.g. $1)--$.01 = $8.99). For offers, an execution or 
delivery based on a buy order shall be deemed to be substantially away 
from the current inside offer if it is done a price higher than a 
break-price established by taking the inside offer, adding 10% of the 
offer's value to it, and then adding $0.01. For example, in a stock 
with a current inside offer of $10.00, the highest price at which a 
single sell order could be executed would be $11.01 calculated as 
follows: ($10.00 + ($10.00 x .10 e.g. $1) + $.01 = $11.01. This 
subsection shall not apply to ITS commitments received from ITS 
Exchanges or to orders based on such ITS commitments.
    (d) An Auto-Ex order in a Nasdaq listed security will execute 
solely against the Quotes/Orders of NNMS Participants at the best bid/
best offer that participate in the automatic execution functionality of 
the NNMS and that do not charge a separate quote-access fee to NNMS 
Participants accessing their Quotes/Orders through the NNMS. An Auto-Ex 
order (or an unexecuted portion thereof) will be cancelled if it cannot 
be immediately executed.
    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 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-a-vis one another 
will be based on their most aggressive discretionary prices, and their 
price priority vis-a-vis Quotes/Orders that are not Discretionary 
Orders will be based upon the price at which they are executable.
    (f) A Fill or Return order in an ITS Security will be executed 
solely by the NNMS at the best bid/best offer, without delivering the 
order to an ITS Exchange. The NNMS will, if necessary, execute against 
interest at successive price levels.
    (C) Decrementation Procedures--The size of a Quote/Order displayed 
in the Nasdaq Order Display Facility and/or the Nasdaq Quotation 
Montage will be decremented upon the delivery of a Liability Order or 
the delivery of an execution of a Non-Directed Order or Preferenced 
Order in an amount equal to the system-delivered order or execution.
    (i) If an NNMS Auto-Ex ECN has its bid or offer Attributable Quote/
Order and Reserve Size decremented to zero without transmission of 
another Attributable Quote/Order to Nasdaq, the system will zero out 
the side of the quote that is exhausted. If both the bid and offer are 
decremented to zero without transmission of a revised Attributable 
Quote/Order, the ECN will be placed into an excused withdrawal state 
until the ECN transmits to Nasdaq a revised Attributable Quote/Order.
    (ii) If an NNMS Order-Delivery ECN declines or partially fills a 
Non-Directed Order without immediately transmitting to Nasdaq a revised 
Attributable Quote/Order that is at a price inferior to the previous 
price, or if an NNMS Order-Delivery ECN fails to respond in any manner 
within 30 seconds of order delivery, the system will cancel the 
delivered order and send the order (or remaining portion thereof) back 
into the system for immediate delivery to the next Quoting Market 
Participant in queue.

[[Page 10785]]

    The system then will zero out the ECN's Quote/Orders at that price 
level on that side of the market, and the ECN's quote on that side of 
the market will remain at zero until the ECN transmits to Nasdaq a 
revised Attributable Quote/Order. If both the bid and offer are zeroed 
out, the ECN will be placed into an excused withdrawal state until the 
ECN transmits to Nasdaq a revised Attributable Quote/Order.
    (iii) If an NNMS ECN's Quote/Order has been zeroed out or if the 
ECN has been placed into excused withdrawal as described in 
subparagraphs (b)(1)(C)(i) and (ii) of this rule, the system will 
continue to access the ECN's Non-Attributable Quotes/Orders that are in 
the NNMS, as described in Rule 4707 and subparagraph (b) of this rule.
    (iv) If an NNMS ECN regularly fails to meet a 5-second response 
time (as measured by the ECN's Service Delivery Platform) over a period 
of orders, such that the failure endangers the maintenance of a fair 
and orderly market, Nasdaq will place that ECN's quote in a closed-
quote state. Nasdaq will lift the closed-quote state when the NNMS ECN 
certifies that it can meet the 5-second response time requirement with 
regularity sufficient to maintain a fair and orderly market.
    (v) ITS/CAES Market Makers
    a. If an ITS/CAES Market Maker declines or partially fills a Non-
Directed Order without immediately transmitting to Nasdaq a revised 
Attributable Quote/Order that is at a price inferior to the previous 
price, or if that ITS/CAES Market Maker fails to respond in any manner 
within 7 seconds of order delivery, the system will cancel the 
delivered order and send the order (or remaining portion thereof) back 
into the system for immediate delivery to the next Quoting Market 
Participant in queue.
    b. If the bid side of the ITS/CAES Market Maker's Quote/Order is 
zeroed out, the system then will automatically establish a bid of $0.01 
for 100 shares. If the offer side of the ITS/CAES Market Maker's Quote/
Order is zeroed out, the system then will automatically establish an 
offer of two times the system best offer plus $0.01 and offer for 100 
shares.
    c. If an ITS/CAES Market Maker regularly fails to meet a 5-second 
response time (as measured by the ITS/CAES Market Maker's Service 
Delivery Platform) over a period of orders, such that the failure 
endangers the maintenance of a fair and orderly market, Nasdaq will 
place that ITS/CAES Market Maker's quote in a closed-quote state. 
Nasdaq will lift the closed-quote state when the ITS/CAES Market Maker 
certifies that it can meet the 5-second response time requirement with 
regularity sufficient to maintain a fair and orderly market.
    (D) All entries in NNMS shall be made in accordance with the 
requirements set forth in the NNMS User Guide, as published from time 
to time by Nasdaq.
(2) Refresh Functionality
    (A) Reserve Size Refresh--Once a Nasdaq Quoting Market 
Participant's or NNMS Order Entry Firm's Displayed Quote/Order size on 
either side of the market in the security has been decremented to an 
amount less than one normal unit of trading due to NNMS processing 
Nasdaq will refresh the displayed size out of Reserve Size to a size-
level designated by the Nasdaq Quoting Market Participant or NNMS Order 
Entry Firm, or in the absence of such size-level designation, to the 
automatic refresh size. The amount of shares taken out of reserve to 
refresh display size shall be added to any shares remaining in the 
Displayed Quote/Order and shall be of an amount that when combined with 
the number of shares remaining in the Nasdaq Quoting Market 
Participant's Displayed Quote/Order before it is refreshed will equal 
the displayed size-level designated by the Nasdaq Quoting Market 
Participant or, in the absence of such size-level designation, to the 
automatic refresh size. If there are insufficient shares available to 
produce a Displayable Quote/Order, the Nasdaq Quoting Market 
Participant's Quote/Order, and any odd-lot remainders, will be 
refreshed, updated, or retained, in conformity with NNMS Rules 4707 and 
4710 as appropriate. To utilize the Reserve Size functionality, a 
minimum of 100 shares must initially be displayed in the Nasdaq Quoting 
Market Participant's or NNMS Order Entry Firm's Displayed Quote/Order, 
and the Displayed Quote/Order must be refreshed to at least 100 shares. 
This functionality will not be available for use by UTP Exchanges.
    (B) Auto Quote Refresh (``AQR'')--Once an NNMS Market Maker's 
Displayed Quote/Order size and Reserve Size on either side of the 
market in the security has been decremented to an amount less than one 
normal unit of trading due to NNMS executions, the NNMS Market Maker 
may elect to have The Nasdaq Stock Market refresh the market maker's 
quotation as follows:
    (i) Nasdaq will refresh the market maker's quotation price on the 
bid or offer side of the market, whichever is decremented to an amount 
less than a normal unit of trading, by a price interval designated by 
the NNMS Market Maker; and
    (ii) Nasdaq will refresh the market maker's displayed size to a 
level designated by the NNMS Market Maker, or in the absence of such 
size level designation, to the automatic refresh size.
    (iii) This functionality shall produce an Attributable Quote/Order.
    (iv) The AQR functionality described in this subparagraph shall 
only be available for use in connection with a NNMS Market Maker's 
``Legacy Quote.'' This functionality shall be available only to NNMS 
Market Makers.
    (v) The AQR functionality shall not be available to any participant 
for any ITS Security.
    (3) Entry of Locking/Crossing Quotes/Orders--The system shall 
process locking/crossing Quotes/Orders as follows:
    (A) Locked/Crossed Quotes/Orders During Market Hours--If during 
market hours, a participant enters into the NNMS a Quote/Order that 
will lock/cross the market (as defined in NASD Rule 4613(e) or in NASD 
Rule 5263(a) or (b)), the system will not display the Quote/Order as a 
quote in Nasdaq; instead the system will treat the Quote/Order as a 
marketable limit order and enter it into the system as a Non-Directed 
Order for processing (consistent with subparagraph (b) of this rule) as 
follows:
    (i) For locked-market situations, the order will be routed to the 
Quoting Market Participant or NNMS Order Entry Firm next in queue who 
would be locked, and the order will be executed (or delivered for 
execution) at the lock price;
    (ii) For crossed-market situations, the order will be entered into 
the system and routed to the next Quoting Market Participants or NNMS 
Order Entry Firms in queue who would be crossed, and the order will be 
executed (or delivered for execution) at the price of the Displayed 
Quote/Order that would have been crossed.
    Once the lock/cross is cleared, if the participant's order is not 
completely filled, the system may [will], if consistent with the 
parameters of the Quote/Order, reformat the order and display it in 
Nasdaq [(consistent with the parameters of the Quote/Order)] as a 
Quote/Order on behalf of the entering Quoting Market Participant or 
Order Entry Firm. If an order is not eligible to be reformatted and 
displayed, the NNMS will reject the remainder of the order back to the 
entering participant. In ITS Securities, orders entered by NNMS Order 
Entry Firms are not eligible to be reformatted and displayed.

[[Page 10786]]

    (B) Locked/Crossed Quotes/Orders Immediately Before the Open--If 
the market in a Nasdaq-listed security is locked or crossed at 9:29:30 
a.m., Eastern Time, the NNMS will clear the locked and/or crossed 
Quotes/Order by executing (or delivering for execution) the highest bid 
against the lowest offer(s) against which it is marketable, at the 
price of the newer in time of the two quotes/orders. This process will 
be repeated until an un-locked and un-crossed market condition is 
achieved. Between 9:29:30 a.m. and 9:29:59 Eastern Time, once NNMS has 
cleared a locked or crossed market, or if a newly submitted quote/order 
would create a locked or crossed market, NNMS will prevent a locked or 
crossed market from being created by processing such locking or 
crossing quote/order in a manner consistent with subparagraph (b)(3)(a) 
of this Rule.
    (i) Exception--The following exception shall apply to the above 
locked/crossed processing parameters:
    If a Nasdaq Quoting Market Participant has entered a Locking/
Crossing Quote/Order into the system that would become subject to the 
automated processing described in section (B) above, the system shall, 
before sending the order to any other Quoting Market Participant or 
NNMS Order Entry Firm, first attempt to match off the order against the 
locking/crossing Nasdaq Quoting Market Participant's own Quote/Order if 
that participant's Quote/Order is at the highest bid or lowest offer, 
as appropriate. A Nasdaq Quoting Market Participant may avoid this 
automatic matching through the use of anti-internalization qualifier as 
set forth in Rule 4710(b) (1)(B)(ii)(a). NNMS Order Entry Firms that 
enter locking/crossing Quotes/Orders shall have those Quotes/Orders 
processed as set forth in paragraph (B) above, unless they voluntarily 
select a ``Y'' AIQ Value as provided for in Rule 4710 (b)(1)(B)(ii)(a).
    (C) Locked/Crossed Quotes/Orders in ITS Securities at the Open--If 
the market in an ITS Security is locked or crossed at 9:30 a.m., 
Eastern Time, the NNMS will clear the locked and/or crossed Quotes/
Order by executing (or delivering for execution) the highest bid 
against the lowest offer(s) against which it is marketable, at the 
price of the newer in time of the two quotes/orders. This process will 
be repeated until an un-locked and un-crossed market condition is 
achieved. While the NNMS is clearing a locked or crossed market, if a 
newly submitted Quote/Order would create a locked or crossed market, 
NNMS will prevent a locked or crossed market from being created by 
holding such Quotes/Orders in queue.
    (i) Exception--The following exception shall apply to the above 
locked/crossed processing parameters:
    If an ITS/CAES Market Maker has entered a Locking/Crossing Quote/
Order into the system that would become subject to the automated 
processing described in section (C) above, the system shall, before 
sending the order to any other ITS/CAES Market Maker or NNMS Order 
Entry Firm, first attempt to match off the order against the locking/
crossing ITS/CAES Market Maker's own Quote/Order if that participant's 
Quote/Order is at the highest bid or lowest offer, as appropriate. An 
ITS/CAES Market Maker may avoid this automatic matching through the use 
of anti-internalization qualifier as set forth in Rule 
4710(b)(1)(B)(ii)(a). NNMS Order Entry Firms that enter locking/
crossing Quotes/Orders shall have those Quotes/Orders processed as set 
forth in paragraph (B) above, unless they voluntarily select a ``Y'' 
AIQ Value as provided for in Rule 4710 (b)(1)(B)(ii)(a).
    (4) An NNMS Market Maker may terminate its obligation by keyboard 
withdrawal (or its equivalent) from NNMS at any time. However, the 
market maker has the specific obligation to monitor its status in NNMS 
to assure that a withdrawal has in fact occurred. Any transaction 
occurring prior to the effectiveness of the withdrawal shall remain the 
responsibility of the market maker.
    (5) If an NNMS Market Maker's Attributable Quote/Order is reduced 
to less than a round-lot amount on one side of the market due to NNMS 
executions, the NNMS will close the Market Maker's quote in the NNMS on 
that side of the market, and the NNMS Market Maker will be permitted a 
grace period of 30 seconds within which to take action to restore its 
Attributable Quote/Order, if the market maker has not authorized use of 
the AQR functionality or does not otherwise have an Attributable Quote/
Order on both sides of the market in the system. An NNMS Market Maker 
that fails to transmit an Attributable Quote/Order in a security within 
the allotted time will have the exhausted side of its quotation 
restored by the system at a price $0.01 inferior to the lowest 
displayed bid price or the highest displayed offer price in that 
security as appropriate. If all bids and/or offers are exhausted so 
that there are no longer any Quote/Orders displayed on the bid and/or 
offer side of the market, the system will refresh a market maker's 
exhausted bid or offer quote to a normal unit of trading priced $0.01 
inferior to the lesser of either: (a) the last valid displayed inside 
bid/offer in the security before all such bids/offers were exhausted; 
or (b) the market maker's last displayed bid/offer before exhaustion. 
If the resulting bid/offer quote would create a locked or crossed 
market, NNMS will instead re-open the exhausted market maker's bid/
offer quote at a price $0.01 inferior to the unexhausted inside bid/
offer in that security. If at any time this automatic quote restoration 
process would result in the creation of a bid/offer of less than $0.01, 
the system will refresh that bid/offer to a price of $0.01. Except as 
provided in subparagraph (b)(6) of this rule, an NNMS Market Maker that 
withdraws from a security may not re-register in the system as a market 
maker in that security for twenty (20) business days.
    (6) Notwithstanding the provisions of subparagraph (5) above:
    (A) an NNMS Market Maker that obtains an excused withdrawal 
pursuant to Rule 4619 or an ITS/CAES Market Maker that obtains an 
excused withdrawal pursuant to Rule 6350 prior to withdrawing from NNMS 
may reenter NNMS according to the conditions of its withdrawal; and
    (B) an NNMS Market Maker or ITS/CAES Market Maker that fails to 
maintain a clearing arrangement with a registered clearing agency or 
with a member of such an agency, and is thereby withdrawn from 
participation in ACT and NNMS for NNMS securities, may reenter NNMS 
after a clearing arrangement has been reestablished and the market 
maker has compiled with ACT participant requirements. Provided however, 
that if the Association finds that the ACT market maker's failure to 
maintain a clearing arrangement is voluntary, the withdrawal of 
quotations will be considered voluntary and unexcused.
    (7) The Market Operations Review Committee shall have jurisdiction 
over proceedings brought by market makers seeking review of their 
removal from NNMS pursuant to subparagraph (b)(5) of this rule.
    (8) In the event that a malfunction in the Quoting Market 
Participant's equipment occurs, rendering communications with NNMS 
inoperable, the Quoting Market Participant is obligated to immediately 
contact Nasdaq Market Operations by telephone to request withdrawal 
from NNMS and a closed-quote status, and if the Quoting Market 
Participants is an NNMS Market Maker an excused withdrawal from Nasdaq 
pursuant to Rule 4619 or an ITS/CAES Market Maker an excused withdrawal 
pursuant to Rule 6350. If withdrawal is granted,

[[Page 10787]]

Nasdaq Market Operations personnel will enter the withdrawal 
notification into NNMS from a supervisory terminal and shall close the 
quote. Such manual intervention, however, will take a certain period of 
time for completion and, unless otherwise permitted by the Association 
pursuant to its authority under Rule 11890, the Quoting Market 
Participants will continue to be obligated for any transaction executed 
prior to the effectiveness of the withdrawal and closed-quote status.
    (c) Directed Order Processing--A participant may enter a Directed 
Order in Nasdaq-listed securities into the NNMS to access a specific 
Quote/Order in the Nasdaq Quotation Montage and to begin the 
negotiation process with a particular Quoting Market Participant. The 
system will deliver an order (not an execution) to the Quoting Market 
Participant designated as the recipient of the order. Upon delivery, 
the Quoting Market Participant shall owe no liability under the Firm 
Quote Rule to that order, unless the Quoting Market Participant to 
which a Directed Order is being sent has indicated that it wishes to 
receive Directed Orders that are Liability Orders (as described in Rule 
4706(b)). Additionally, upon delivery, the system will not decrement 
the receiving Quoting Market Participant's Quote/Order. This provision 
shall not apply to Preferenced Orders.
    (d) NNMS Order Entry Firms. All entries in NNMS shall be made in 
accordance with the procedures and requirements set forth in the NNMS 
User Guide and these rules. Orders may be entered in NNMS by the NNMS 
Order Entry Firm through either its Nasdaq terminal or computer 
interface. The system will transmit to the firm on the terminal screen 
and printer, if requested, or through the computer interface, as 
applicable, an execution report generated immediately following the 
execution.
    (e) UTP Exchanges. Participation in the NNMS by UTP Exchanges is 
voluntary. If a UTP Exchange does not participate in the NNMS System, 
the UTP Exchange's quote will not be accessed through the NNMS, and the 
NNMS will not include the UTP Exchange's quotation for order processing 
and execution purposes.
    A UTP Exchange may voluntarily participate in the NNMS System if it 
executes a Nasdaq Workstation Subscriber Agreement, as amended, for UTP 
Exchanges, and complies with the terms of this subparagraph (e[f]) of 
this rule. The terms and conditions of such access and participation, 
including available functionality and applicable rules and fees, shall 
be set forth in and governed by the Nasdaq Workstation Subscriber 
Agreement, as amended for UTP Exchanges. The Nasdaq Workstation 
Subscriber Agreement, as amended for UTP Exchanges may expand but shall 
not contract the rights and obligations set forth in these rules. 
Access to UTP Exchanges may be made available on terms that differ from 
the terms applicable to members but may not unreasonably discriminate 
among similarly situated UTP Exchanges. The following provisions shall 
apply to UTP Exchanges that choose to participate in the NNMS
    (1) Order Entry--UTP Exchanges that elect to participate in the 
system shall be permitted to enter Directed and Non-Directed Orders 
into the system subject to the conditions and requirements of Rule 
4706. Directed and Non-Directed Orders entered by UTP Exchanges shall 
be processed (unless otherwise specified) as described in subparagraphs 
(b) and (c) of this rule.
    (2) Display of UTP Exchange Quotes/Orders in Nasdaq.
    (A) UTP Exchange Principal Orders/Quotes--UTP Exchanges that elect 
to participate in the system shall transmit to the NNMS a single bid 
Quote/Order and a single offer Quote/Order. Upon transmission of the 
Quote/Order to Nasdaq, the system shall time stamp the Quote/Order, 
which time stamp shall determine the ranking of the Quote/Order for 
purposes of processing Non-Directed Orders. The NNMS shall display the 
best bid and best offer Quote/Order transmitted to Nasdaq by a UTP 
Exchange in the Nasdaq Quotation Montage under the [MMID] MPID for the 
UTP Exchange, and shall also display such Quote/Order in the Nasdaq 
Order Display Facility as part of the aggregate trading interest when 
the UTP Exchange's best bid/best offer Quote/Order falls within the 
number of price levels authorized for aggregation and display pursuant 
to Rule 4701(ee).
(B) UTP Exchange Agency Quotes/Orders
    (i) A UTP Exchange that elect to participate in the system may 
transmit to the NNMS Quotes/Orders at a single as well as multiple 
price levels that meet the following requirements: are not for the 
benefit of a broker and/or dealer that is with respect to the UTP 
Exchange a registered or designated market maker, dealer or specialist 
in the security at issue; and are designated as Non-Attributable 
Quotes/Orders (``UTP Agency Order/Quote'').
    (ii) Upon transmission of a UTP Agency Quote/Order to Nasdaq, the 
system shall time stamp the order, which time stamp shall determine the 
ranking of these Quote/Order for purposes of processing Non-Directed 
Orders, as described in subparagraph (b) of this rule. A UTP Agency 
Quote/Order shall not be displayed in the Nasdaq Quotation Montage 
under the [MMID] MPID for the UTP Exchange. Rather, UTP Agency Quotes/
Orders shall be reflected in the Nasdaq Order Display Facility and 
Nasdaq Quotation Montage in the same manner in which Non-Attributable 
Quotes/Orders from Nasdaq Quoting Market Participants are reflected in 
Nasdaq, as described in Rule 4707(b)(2).
    (3) Non-Directed Order Processing--UTP Exchanges that elect to 
participate in the system shall be required to provide automatic 
execution against their Quotes/Orders for Nasdaq Quoting Market 
Participants and NNMS Order Entry Firms, shall accept an execution of 
an order up to the size of the UTP Exchange's displayed Quote/Order, 
and shall have Non-Directed Orders they enter into the system processed 
as described in subparagraph (b) of this rule.
    (4) Directed Order Processing--UTP Exchanges that elect to 
participate in the system shall participate in the Directed Order 
processing as described in subparagraph (c) of this rule.
    (5) Decrementation--UTP Exchanges shall be subject to the 
decrementation procedures described in subparagraph (b) of this rule.
    (6) Scope of Rules--Nothing in these rules shall apply to UTP 
Exchanges that elect not to participate in the system.

4711. Clearance and Settlement

    All transactions executed in NNMS shall be cleared and settled 
through a registered clearing agency using a continuous net settlement 
system.

4712. Obligation To Honor System Trades

    (a) If an NNMS Participant, or clearing member acting on his 
behalf, is reported by NNMS to clearing, or shown by the activity 
reports generated by NNMS as constituting a side of a System trade, 
such NNMS Participant, or clearing member acting on his behalf, shall 
honor such trade on the scheduled settlement date.
    (b) Nasdaq shall have no liability if an NNMS Participant, or a 
clearing member acting on his behalf, fails to satisfy the obligations 
in paragraph (a).

4713. Compliance With Rules and Registration Requirements

    (a) Failure by an NNMS Participant to comply with any of the rules 
or registration requirements applicable to NNMS identified herein shall 
subject

[[Page 10788]]

such NNMS Participant to censure, fine, suspension or revocation of its 
registration as an NNMS Market Maker, ITS/CAES Market Maker, Order 
Entry Firm, and/or NNMS ECN or any other fitting penalty under the 
Rules of the Association.
    (b)(1) If an NNMS Participant fails to maintain a clearing 
relationship as required under paragraphs (a)(2), (c)(2), or (d)(3) of 
Rule 4705, it shall be removed from NNMS until such time as a clearing 
arrangement is reestablished.
    (2) An NNMS Participant that is not in compliance with its 
obligations under paragraphs (a)(2), (c)(2), or (d)(3) of Rule 4705 
shall be notified when Nasdaq exercises it authority under paragraph 
(b)(1) of Rule 4713.
    (3) The authority and procedures contained in paragraph (b) do not 
otherwise limit the Association's authority, contained in other 
provisions of the Associations rules, to enforce its rules or impose 
any fitting sanction.

4715. Adjustment of Open Quotes and/or Orders

    NNMS will automatically adjust the price and/or size of open quotes 
and/or orders in all NNMS securities (unless otherwise noted) resident 
in the system in response to issuer corporate actions related to a 
dividend, payment or distribution, on the ex-date of such actions, 
except where a cash dividend or distribution is less than one cent 
($0.01), as follows:
    (a) Quotes--All bid and offer side quotes shall be purged from the 
system.
    (b) Sell Orders--Sell side orders in Nasdaq-listed and NYSE-listed 
securities shall not be adjusted by the system and must be modified, if 
desired, by the entering party, except for reverse splits where such 
sell side orders shall be purged from the system. Sell side orders in 
Amex-listed securities shall be adjusted in accordance with the 
procedures set forth below for Buy Orders in the event of a Stock 
Dividend or Stock Split.
    (c) Buy Orders--Buy side orders shall be adjusted by the system 
based on the particular corporate action impacting the security (i.e. 
cash dividend, stock dividend, both, stock split, reverse split) as set 
forth below:
    (1) Odd lot orders in ITS Securities that result from partial 
execution rather than order entry shall be canceled rather than 
adjusted.
    [(1)] (2) Cash Dividends: Buy side order prices shall be first 
reduced by the dividend amount and the resulting price will then be 
rounded down to the nearest penny unless marked ``Do Not Reduce''.
    [(2)] (3) Stock Dividends and Stock Splits: Buy side order prices 
shall be determined by first rounding up the dollar value of the stock 
dividend or split to the nearest penny. The resulting amount shall then 
be subtracted from the price of the buy order. Unless marked ``Do Not 
Increase'', the size of the order shall be increased by first, (A) 
Multiplying the size of the original order by the numerator of the 
ratio of the dividend or split, then (B) dividing that result by the 
denominator of the ratio of the dividend or split, then (C) rounding 
that result to the next lowest share.
    [(3)] (4) Dividends Payable in Either Cash or Securities at the 
Option of the Stockholder: Buy side order prices shall be reduced by 
the dollar value of either the cash or securities, whichever is 
greater. The dollar value of the cash shall be determined using the 
formula in paragraph (1) above, while the dollar value of the 
securities shall be determined using the formula in paragraph (2) 
above. If the stockholder opts to receive securities, the size of the 
order shall be increased pursuant to the formula in subparagraph (2) 
above.
    [(4)] (5) Combined Cash and Stock Dividends/Split: In the case of a 
combined cash dividend and stock split/dividend, the cash dividend 
portion shall be calculated first as per section (1) above, and stock 
portion thereafter pursuant to sections (2) and/or (3) above.
    [(5)] (6) Reverse Splits: All orders (buy and sell) shall be 
cancelled and returned to the entering firm.
    (d) Open buy and sell orders that are adjusted by the system 
pursuant to the above rules, and that thereafter continuously remain in 
the system, shall retain the time priority of their original entry.

4719. Anonymity 2004-015

(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
    (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.
    (2)(A) The processing described in paragraph (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.
    (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.
    (3) The Association will reveal a member's identity in the 
following circumstances:
    (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;
    (B) for regulatory purposes or to comply with an order of an 
arbitrator or court; or
    (C) on risk management reports provided to the member's contra 
parties each day after 4 p.m., which disclose trading activity on an 
aggregate dollar value basis.
    (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.
    (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 (B) below, 
retain for the period specified in Rule 17a-4(a) the identity of each 
member that executes a fully anonymous transaction described in 
paragraph (b) of Rule 4719. The information shall be retained in its 
original form or a form approved under Rule 17a-6.
    (B) In the situations described in paragraphs (b)(2) or (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.
    * * *

[[Page 10789]]

5200. Intermarket Trading System/Computer Assisted Execution System

5210. Definitions

    (a)-(h) No Change.
    (i) ``CAES'' means the ``Computer Assisted Execution System'', the 
computerized order routing and execution facility for ITS Securities, 
as from time to time modified or supplemented, that is operated by The 
Nasdaq Stock Market, Inc. and made available to NASD members. CAES 
functionality is offered through the ``Nasdaq National Market Execution 
System'' or ``NNMS'' which operates pursuant to the Rule 4700 Series.

5220. ITS/CAES Registration

    In order to participate in ITS, a market maker must be registered 
with the Association as an ITS/CAES Market Maker in each security in 
which a market will be made in ITS. Such registration shall be 
conditioned upon the ITS/CAES Market Maker's continuing compliance with 
the following requirements:
    (a) registration as a CQS market maker pursuant to Rule 6320 and 
compliance with the Rule 6300 Series;
    (b) execution of an ITS/CAES Market Maker application agreement 
with the Association at least two days prior to the requested date of 
registration;
    (c) participation in NNMS in accordance with the Rule 4700 and 5200 
Series;
    ([c]d) compliance with SEC Rule 15c3-1;
    ([d]e) compliance with the ITS Plan, SEC Rule 11Ac1-1 and all 
applicable Rules of the Association;
    ([e]f) the maintenance of continuous two-sided quotations in the 
absence of the grant of an excused withdrawal or a functional excused 
withdrawal by the Association;
    ([f]g) maintenance of the physical security of the equipment used 
to interface with the ITS System located on the premises of the ITS/
CAES Market Makers to prevent the unauthorized entry of communications 
into the ITS System; and
    ([g]h) acceptance and settlement of each ITS System trade that the 
ITS System identifies as effected by such ITS/CAES Market Maker, or if 
settlement is to be made through another clearing member, guarantee of 
the acceptance of settlement of such identified ITS System trade by the 
clearing member on the regularly scheduled settlement date.

5221. Suspension or Revocation of ITS/CAES Registration

    No Change.

5230. ITS Operations

    No Change.

5240. Pre-Opening Application--Opening by ITS/CAES Market Maker

    No Change.

5250. Pre-Opening Application--Openings on Other Participant Markets

    No Change.

5260. System Trade and Quotations

5261. Obligation To Honor System Trades

    No Change.

5262. Trade-Throughs

    No Change.

5263. Locked or Crossed Markets

    No Change.

5264. Block Transactions

    No Change.

5265. Authority To Cancel or Adjust Transactions

    No Change.

6300. Consolidated Quotations Service (CQS)

    No Change.

6400. Reporting Transactions in Listed Securities

    No Change.

[FR Doc. 04-5114 Filed 3-5-04; 8:45 am]
BILLING CODE 8010-01-P