[Federal Register Volume 69, Number 55 (Monday, March 22, 2004)]
[Notices]
[Pages 13342-13344]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-6265]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49409; File No. SR-NASD-2004-035]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc., Extending Pilot Regarding the Issuance of 
Market Participant Identifiers

March 12, 2004.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on February 27, 2004, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by Nasdaq. Nasdaq has 
designated the proposed rule change as ``non-controversial'' under 
section 19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ 
which renders the proposed rule change effective upon filing with the 
Commission. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq is proposing to extend through October 1, 2004, a pilot 
program that enables members that are registered as market makers or 
electronic communications networks (``ECNs'') to request and receive a 
second market participant identifier (``MMID'') with which to enter a 
second Attributable Quote/Order in the Nasdaq Quotation Montage. The 
text of the proposed rule change is set forth below. Proposed new 
language is in italics; proposed deletions are in [brackets].
* * * * *

4613. Character of Quotations

    (a) Quotation Requirements and Obligations.
    (1) No Change.
    (2) For a six-month pilot period beginning [September 1, 2003] 
March 1, 2004, market makers and ECNs may request the use of a second 
MMID. A market maker may request the use of a second MMID for 
displaying Attributable Quotes/Orders in the Nasdaq Quotation Montage 
for any security in which it is registered and meets the obligations 
set forth in subparagraph (1) of this rule. An ECN may request the use 
of a second MMID for displaying Attributable Quotes/Orders in the 
Nasdaq Quotation Montage for any security in which it meets the 
obligations set forth in Rule 4623. A market maker or ECN that ceases 
to meet the obligations appurtenant to its first MMID in any security 
shall not be permitted to use the second MMID for any purpose in that 
security.
    (3) No Change.
    (b)-(e) No Change.
* * * * *

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

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    An NASD member that registers as a market maker or ECN is permitted 
to enter one two-sided quotation per security in the Nasdaq Quotation 
Montage, and it is assigned a unique MMID with which to enter such 
quotations. The NASD 4600 Rule Series governs the character of such 
quotations and the rights and obligations of members that display 
quotations in the Nasdaq Quotation Montage via their MMIDs. The NASD 
Rule 4700 Series sets forth the rights and obligations of members that 
participate in the Nasdaq National Market Execution System 
(``SuperMontage''), including the entry of quotes and orders and the 
display of quotations. Numerous other NASD and Commission rules govern 
the conduct of members in their use of MMIDs to enter and execute 
orders and display quotes, including, for example, NASD IM-2110-2 (the 
``Manning Interpretation''), NASD Rule 6950 (the ``Order Audit Trail 
System''), and NASD Rule 2320 (the ``Best Execution'' rule).
    Effective July 1, 2003, Nasdaq amended NASD Rule 4613(a) for a two-
month pilot period to permit market makers and ECNs to request the use 
of a second MMID for displaying Attributable Quotes/Orders in the 
Nasdaq Quotation Montage (the ``Pilot'').\5\ Under the Pilot, a market 
maker may request the use of a second MMID for displaying Attributable 
Quotes/Orders in any security in which it is registered and meets the 
obligations set forth in NASD Rule 4613(a)(1), including the 
maintenance of a continuous two-sided quotation. The Pilot also 
provides that an ECN may request the use of a second MMID for 
displaying Attributable Quotes/Orders in the Nasdaq Quotation Montage 
for any security in which it meets the obligations set forth in NASD 
Rule 4623.
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    \5\ For a more detailed explanation of the pilot rule change, 
see Securities Exchange Act Release Nos. 47954 (May 30, 2003), 68 FR 
34017 (June 6, 2003) (SR-NASD-2003-87) (notice of filing and 
immediate effectiveness of Pilot); and 48619 (October 9, 2003), 68 
FR 59832 (October 17, 2003) (SR-NASD-2003-137) (extension of Pilot 
for a six-month period beginning September 1, 2003).
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    Through this rule filing, Nasdaq is proposing to extend the Pilot 
through October 1, 2004. Since the Pilot began, Nasdaq has granted five 
market makers' applications for second MMIDs for displaying additional 
Attributable Quotes/Orders. As of the date of this filing, Nasdaq 
represents that one market maker has begun displaying additional 
Attributable Quotes/Orders under the Pilot. In addition, three ECNs are 
authorized to use second MMIDs for displaying additional Attributable 
Quotes/Orders in SuperMontage. Nasdaq represents that those ECNs were 
authorized to use second MMIDs prior to the launch of the Pilot. 
However, Nasdaq determined that their continued use of the second MMIDs 
was subsumed within the later-filed Pilot. According to Nasdaq, two of 
those three ECNs are currently using second MMIDs for displaying 
additional Attributable Quotes/Orders in SuperMontage.
    Nasdaq believes the Pilot, though not yet widely used by NASD 
members, will prove to be an important step in the evolution of its 
marketplace. Nasdaq represents that trading of Nasdaq securities has 
changed rapidly and dramatically due to increasingly sophisticated 
routing and linkage systems that are available to public investors, 
institutions, broker/dealers, and vendors. Nasdaq believes that the 
ability to enter quotes and orders and to display quotations under a 
second MMID would help Nasdaq keep pace with recent changes and allow 
it to offer functionality that market participants

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already find elsewhere today. Nasdaq believes that the Pilot should 
also improve the quality of executions within Nasdaq by enabling 
members to contribute more liquidity to the market and add to the 
transparency of trading interest. Due to the surveillance procedures 
described below, Nasdaq believes that the Pilot should also improve the 
regulation of trading in Nasdaq securities to the extent members 
consolidate more of their trading activity in Nasdaq.
    Nasdaq believes that it is essential to maintain its regulation of 
trading on Nasdaq at the same high level of compliance with NASD and 
Commission rules that it has achieved to date. Except as noted in the 
proposed rule, members that use a second MMID would be required to 
comply with all NASD and Commission rules applicable to their current 
use of a single MMID. Members would be prohibited from using a second 
MMID to accomplish indirectly what they are prohibited from doing 
directly through a single MMID. For example, members would not be 
permitted to use a second MMID to avoid their Manning obligations under 
NASD IM-2110-2, best execution obligations under NASD Rule 2320, or 
their obligations under the Commission's Order Handling Rules. Members 
would be required to continue to comply with the firm quote rule, the 
OATS rules, and the Commission's order routing and execution quality 
disclosure rules. In addition, NASD Rule 4613(a) specifically prohibits 
firms from displaying a second Attributable Quote/Order to engage in 
passive market making or to enter stabilizing bids because this could 
violate NASD Rules 4614 and 4619 and Regulation M under the Act. To the 
extent that the allocation of second MMIDs were to create regulatory 
confusion or ambiguity, every inference would be drawn against the use 
of a second MMID in a manner that would diminish the quality or rigor 
of the regulation of the Nasdaq market.
    Nasdaq represents that it, in conjunction with the NASD, has 
developed procedures to maintain a high level of surveillance and 
member compliance with its rules with respect to members' use of both 
Primary and Secondary MMIDs to display quotations in Nasdaq systems. 
Nasdaq and NASD have implemented a review process to ensure that firms 
utilizing second MMIDs under the pilot would do so in accordance with 
the terms under which use of the second MMID was granted.
    Further, Nasdaq represents that new, fully automated surveillance 
technology has been developed to enable NASD systems to analyze trading 
and generate alerts at the firm level (i.e., aggregating activity 
across all MMIDs for a firm into one primary MMID) or the individual 
MMID level (i.e., treating each MMID separately), depending on the 
particular surveillance requirements. Nasdaq believes that the use of 
firm-level information is essential to detecting market participants 
that may exceed certain surveillance thresholds at the firm level, but 
would otherwise go undetected at the individual MMID level. Further, 
Nasdaq believes that the ability to aggregate data and analyze data at 
the firm level is critical to identifying instances where a firm is 
using different MMIDs to engage in conduct such as marking-the-close 
and trading ahead, among other things. Conversely, Nasdaq believes that 
the use of specific MMID information is critical for the surveillance 
of individual quotes, trades, and orders for compliance with firm quote 
obligations, among other things.
    If it were to be determined that a Secondary MMID issued under the 
Pilot was being used improperly, Nasdaq would withdraw its grant of the 
Secondary MMID for all purposes for all securities.\6\ In addition, if 
a market maker or ECN were no longer to fulfill the conditions 
appurtenant to its Primary MMID (e.g., by being placed into an 
unexcused withdrawal), it would not be permitted to use the Secondary 
MMID for any purpose in that security.
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    \6\ Nasdaq represents that it has had no occasion to withdraw 
the grant of a Secondary MMID due to improper usage under the Pilot.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the Act, including section 15A(b)(6) of the Act,\7\ which requires, 
among other things, that a national securities association's rules be 
designed to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanisms of a free and open market and a national market 
system, and, in general to protect investors and the public interest. 
Nasdaq believes that the proposed rule change is consistent with these 
requirements because it would facilitate transactions in securities, 
remove impediments to a free and open market, and protect investors by 
improving the transparency and efficiency of transactions.
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    \7\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, if 
consistent with the protection of investors and the public interest, it 
has become effective pursuant to section 19(b)(3)(A) of the Act \8\ and 
Rule 19b-4(f)(6) thereunder.\9\ At any time within 60 days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate such rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6).
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    Nasdaq has requested that the Commission waive the 5-day pre-filing 
notification and the 30-day operative delay. The Commission believes 
that waiving the 5-day pre-filing notification and the 30-day operative 
delay is consistent with the protection of investors and the public 
interest, because it will allow Nasdaq to continue the Pilot without 
interruption. For these reasons, the Commission designates the proposal 
to be effective and operative upon filing with the Commission.\10\
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    \10\ For purposes only of waiving the 30-day operative delay of 
the proposed rule change the Commission considered the proposed 
rule's impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing,

[[Page 13344]]

including whether the proposed rule change is consistent with the Act. 
Persons making written submissions should file six copies thereof with 
the Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609. Comments may also be submitted 
electronically at the following e-mail address: [email protected]. 
All comment letters should refer to File No. SR-NASD-2004-035. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review comments more efficiently, 
comments should be sent in hardcopy or by e-mail but not by both 
methods. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the NASD. All submissions should refer to File No. 
SR-NASD-2004-035 and should be submitted by April 12, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\11\
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    \11\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-6265 Filed 3-19-04; 8:45 am]
BILLING CODE 8010-01-P