[Federal Register Volume 69, Number 73 (Thursday, April 15, 2004)]
[Notices]
[Pages 20091-20094]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-8520]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49547; File No. SR-NASD-2004-046]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 thereto by 
National Association of Securities Dealers, Inc. Regarding SuperMontage 
Postable Auto-Ex Orders

April 9, 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 March 16, 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. On April 2, 
2004, Nasdaq filed Amendment No. 1 to the proposal.\3\ The Commission 
is publishing this notice to solicit comments on the proposed rule 
change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from John M. Yetter, Associate General Counsel, 
Nasdaq, to, Katherine England, Assistant Director, Division of 
Market Regulation (``Division''), Commission, dated April 1, 2004 
(``Amendment No. 1''). In Amendment No. 1, Nasdaq clarified certain 
aspects of the description, proposed implementation date, and the 
rule text of the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to modify the Auto-Ex Order of the Nasdaq National 
Market Execution System (``NNMS'' or ``SuperMontage''). Pursuant to 
section 19(b)(3)(A) of the Act \4\ and Rule 19b-4(f)(6) thereunder,\5\ 
Nasdaq has designated the proposed rule change as non-controversial. 
Nasdaq intends to implement the proposed rule change on or about May 
17, 2004,\6\ and will inform market participants of the exact 
implementation date via a Head Trader Alert on http://www.nasdaqtrader.com.
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    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 C.F.R. 240.19b-4(f)(6).
    \6\ See Amendment No. 1, supra note 3.
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    The text of the proposed rule change is below. Proposed new 
language is italicized; proposed deletions are in brackets.\7\
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    \7\ The text of the proposed rule change is shown as marked 
against the text of the SuperMontage rules as published in Exhibit A 
to Securities Exchange Act Release No. 49349 (March 2, 2004), 69 FR 
10775 (March 8, 2004) (SR-NASD-2004-149). It should be noted, 
however, that such Exhibit A contained a minor technical error, in 
that it did not accurately reflect the text of Amendment Nos. 2 and 
3 to SR-NASD-2003-143, as approved by the Commission in Securities 
Exchange Act Release No. 49020 (January 5, 2004), 69 FR 1769 
(January 12, 2004) (SR-NASD-2003-143). Accordingly, this proposed 
rule change includes several additions and deletions to restore 
changes made through Amendment Nos. 2 and 3 to SR-NASD-2003-143. See 
Amendment No. 1, supra note 3.
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4700. NASDAQ NATIONAL MARKET EXECUTION SYSTEM (NNMS)
4701. Definitions
    Unless stated otherwise, the terms described below shall have the 
following meaning:
    (a)-(jj) No change.
    (kk) The term ``Auto-Ex'' shall mean, for orders in Nasdaq listed 
securities so designated, an order that (except when it is displayed or 
interacts with a displayed Discretionary Order at a price in its 
discretionary price range) 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. An Auto-Ex Order may be designated as ``Immediate or Cancel'' 
(an ``IOC Auto-Ex Order'') or ``Day'' or ``GTC'' (a ``Postable Auto-Ex 
Order''). An NNMS Participant entering a Postable Auto-Ex Order may 
(but is not required to) specify that the order will utilize the 
functionality associated with Discretionary Orders.
    (ll)-(nn) No change.
    (oo) Reserved.
    (pp)-(uu) No change.
* * * * *
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)-(B) No change.
    (1)-(3) No change.
    (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, Postable Auto-Ex, and Discretionary 
Orders) and GTC orders (other than Postable Auto-Ex Orders) may be 
executed prior to market open if required under Rule 4710(b)(3)(B).
    (5) [f]For Nasdaq listed securities, an order may be designated as 
``Auto-Ex,'' in which case the order may [will also automatically] be 
designated as IOC[.], Day or GTC. [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.] If an 
NNMS Participant entering a Postable Auto-Ex Order specifies that the 
order will utilize the functionality associated with Discretionary 
Orders, the order will automatically be designated as Day.
    (6)-(12) No change.
    (C)-(E) No change.
    (F) An 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, 
Auto-Ex Orders, 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

[[Page 20092]]

NNMS at market open. If an Immediate or Cancel limit order is 
unmarketable at the time it reaches the front of the 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. NNMS 
Order Entry Firms may also designate orders as ``Auto-Ex,'' in which 
case the order may be designated as IOC, Day or GTC. If an NNMS Order 
Entry Firm entering a Postable Auto-Ex Order specifies that the order 
will utilize the functionality associated with Discretionary Orders, 
the order will 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) No change.
    (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 or, in the case of ITS Securities, 
IOX, Auto-Ex Orders, 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 that is not marketable at the time it reaches the 
front of the time-priority processing queue will be returned to the 
entering participant.
    (b)-(e) No change.
* * * * *
4710. Participant Obligations in NNMS
    (a) No change.
    (b) Non-Directed Orders
    (1) No change.
    (A) No change.
    (B) No change.
    (i) No change.
    (ii) Exceptions--The following exceptions shall apply to the above 
execution parameters:
    a.-c. No change.
    [(d)] d. An Auto-Ex O[o]rder in a Nasdaq listed security that is 
designated IOC will [execute] interact solely [against] with 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 (``Auto-Ex Eligible 
Participants''). An IOC Auto-Ex Order will not interact with the Quote/
Order of an Auto-Ex Eligible Participant if the Quote/Order of an NNMS 
Participant that is not an Auto-Ex Eligible Participant is priced 
better than the Quote/Order of any Auto-Ex Eligible Participant at that 
time. An IOC Auto-Ex O[o]rder (or an unexecuted portion thereof) will 
be cancelled if it cannot be immediately executed.
    Upon entry into the NNMS, a Postable Auto-Ex Order will be 
processed in the same manner as an IOC Auto-Ex Order; provided, 
however, that if the Postable Auto-Ex Order includes discretionary 
prices, the order will be processed in the same manner as a 
Discretionary Order, but will interact solely with the Quotes/Orders of 
Auto-Ex Eligible Participants and will not interact with the Quote/
Order of an Auto-Ex Eligible Participant if the Quote/Order of an NNMS 
Participant that is not an Auto-Ex Eligible Participant is priced 
better than the Quote/Order of any Auto-Ex Eligible Participant at that 
time. Any portion of a Postable Auto-Ex Order that cannot be 
immediately executed will be displayed, unless it would lock or cross 
the Quote/Order of an NNMS Participant that is not an Auto-Ex Eligible 
Participant, in which case the Postable Auto-Ex Order (or any 
unexecuted portion thereof) will be cancelled. Depending on the 
functionality specified by the NNMS Participant entering the order, a 
Postable Auto-Ex Order that is displayed will have the same 
characteristics and be subject to the same rules as a regular limit 
order or a Discretionary Order.
    For purposes of this subclause d., any displayed Discretionary 
Order that may be executed against (or delivered to) an Auto-Ex Order 
at a price in the Discretionary Order's discretionary price range will 
be deemed to have been entered by an Auto-Ex Eligible Participant.
    e. No change.
    (C)-(D) No change.
    (2)-(8) No change.
    (c)-(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
    The Commission recently approved a new SuperMontage order type, 
known as the Auto-Ex Order,\8\ which executes solely against the 
Quotes/Orders of SuperMontage participants that participate in the 
system's automatic execution functionality and that do not charge a 
separate quote-access fee to participants accessing their Quotes/Orders 
through SuperMontage (``Auto-Ex Eligible Participants''). Auto-Ex 
Orders access liquidity available at multiple price levels, but do not 
``trade through'' the Quote/Order of an Order-Delivery ECN (or an auto-
ex ECN that charges an access fee). Thus, an Auto-Ex Order is now 
automatically designated Immediate or Cancel (``IOC''), and the order 
(or any unexecuted portion thereof) is cancelled whenever the best 
price available through SuperMontage solely reflects the Quote/Order of 
a market participant that is not eligible to receive the Auto-Ex Order.
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    \8\ See Securities Exchange Act Release No. 49020 (January 5, 
2004), 69 FR 1769 (January 12, 2004) (SR-NASD-2003-143).
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    Nasdaq is proposing to provide market participants with the option 
of designating Auto-Ex Orders as ``Day'' or ``Good-till-Cancelled'' 
orders (``Postable Auto-Ex Orders''). A Postable Auto-Ex Order would 
initially be processed in the same manner as an IOC Auto-Ex Order. Once 
all liquidity available from Auto-Ex Eligible Participants has been 
accessed, the order may then be eligible for display. However, the 
order will be cancelled, rather than displayed, if its price would lock 
or cross the Quote/Order of a market participant that is not an Auto-Ex 
Eligible Participant. For

[[Page 20093]]

example, if the best offer in Nasdaq was $20.05 and a market 
participant entered a Day Auto-Ex Order to buy at $20.05, the order 
would access all liquidity offered by Auto-Ex Eligible Participants at 
$20.05, and if there was no offer at that price level from a market 
participant that was not an Auto-Ex Eligible Participant, the order (or 
unexecuted portion thereof) would be displayed at $20.05. However, if 
an Order-Delivery ECN (or an auto-ex ECN that charges an access fee) 
had an offer at $20.05 displayed in SuperMontage, the Postable Auto-Ex 
Order (or unexecuted portion thereof) would be cancelled, because it 
would lock the ECN's offer if it were displayed. Once a Postable Auto-
Ex Order is displayed as a Quote/Order, it may interact with trading 
interest entered by any NNMS Participant, including participants that 
are not Auto-Ex Eligible Participants.
    Postable Auto-Ex Orders may be entered (but not displayed or 
executed) prior to market open. Such orders will be held in a time-
priority queue (along with IOC orders and executable Discretionary 
Orders) and processed by the NNMS at 9:30. Nasdaq believes that this 
limitation on the use of Postable Auto-Ex Order functionality in the 
period before the market open is logical, since automatic executions 
are not available before 9:29:30 in any event. If Postable Auto-Ex 
Orders entered before this time were not queued, they would, in almost 
all circumstances, be processed like regular Day or Good-Till-Cancelled 
orders; accordingly, Nasdaq expects that there would be little use of 
the order type prior to 9:30 if the order were displayable in the 
period before the market open.\9\ By queuing Postable Auto-Ex Orders 
entered before 9:30, Nasdaq will allow market participants to obtain 
rapid executions at market open, followed by the immediate cancellation 
or posting of size that cannot be immediately executed.
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    \9\ See Amendment No. 1, supra note 3.
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    The Postable Auto-Ex Order can be combined with the functionality 
associated with Discretionary Orders. Such an order will be processed 
like a regular Discretionary Order prior to posting, except that it 
will not be delivered to the Quotes/Orders of Order-Delivery ECNs (or 
access-fee charging ECNs). Like a regular Auto-Ex Order, however, the 
order may not execute at a price worse than a price available from an 
Order-Delivery (or access fee-charging) ECN, and would cancel if it 
could not be posted without locking or crossing such an ECN. 
Accordingly, since a Discretionary Order seeks to execute at multiple 
prices before posting, a Postable Auto-Ex Order with discretionary 
prices would be more likely to cancel prior to posting than a Postable 
Auto-Ex Order with a single price. If, however, the order can be 
posted, it will be subject to the same terms and conditions as any 
other Discretionary Order after it is posted.
    The filing also clarifies the manner in which an Auto-Ex Order may 
interact with a displayed Discretionary Order. Specifically, because a 
displayed Discretionary Order that is executable at a price in its 
discretionary price range is executed automatically or delivered based 
on the status of its potential contra party, rather than the status of 
the participant that entered the order, the Discretionary Order may 
execute against (or be delivered to) an incoming Auto-Ex Order even if 
the Discretionary Order was not posted by an Auto-Ex Eligible 
Participant. By contrast, if the Auto-Ex Order is executable against a 
Discretionary Order at its displayed price, the extent to which the 
orders may interact depends on whether the participant that entered the 
Discretionary Order is an Auto-Ex Eligible Participant.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\10\ in general, and with 
section 15A(b)(6) of the Act,\11\ in particular, in that it is 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 mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
The proposed rule change will provide market participants with a 
voluntary tool that will allow them to access liquidity available 
through SuperMontage quickly and at a low cost and subsequently to 
offer liquidity.
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    \10\ 15 U.S.C. 78o-3.
    \11\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

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

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

    Written comments were neither solicited nor received.

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

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A) of the Act,\12\ and subparagraph (f)(6) of Rule 19b-4,\13\ 
thereunder because it does not: (i) Significantly affect the protection 
of investors or the public interest; (ii) impose any significant burden 
on competition; (iii) become operative for 30 days from the date on 
which it was filed, or such shorter time as the Commission may 
designate. At any time within 60 days of the filing of the proposed 
rule change, the Commission may summarily abrogate such rule change if 
it appears to the Commission that such action is necessary or 
appropriate in the public interest, for the protection of investors, or 
otherwise in furtherance of the purposes of the Act. \14\
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ For the purposes of calculating the 60-day abrogation 
period, the Commission considers the proposed rule change to have 
been filed on April 2, 2004, the date Nasdaq filed Amendment No. 1.
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609. Comments should be submitted electronically at the 
following e-mail address: [email protected]. All comment letters 
should refer to File No. SR-NASD-2004-046. 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

[[Page 20094]]

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-2004-046 and should be 
submitted by May 6, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-8520 Filed 4-14-04; 8:45 am]
BILLING CODE 8010-01-P