[Federal Register Volume 69, Number 76 (Tuesday, April 20, 2004)]
[Notices]
[Pages 21172-21174]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-8861]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49556; File No. SR-NASD-2004-059]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Regarding an Interpretation to Its Trade 
Through Rule for Exchange-Listed Securities

April 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 April 2, 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 this proposal as a stated policy, practice, or 
interpretation with respect to the meaning, administration, or 
enforcement of an existing rule pursuant to section 19(b)(3)(A) of the 
Act,\3\ and Rule 19b-4(f)(1) \4\ thereunder, which renders the proposal 
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)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes an interpretation to Rule 5262 (``Trade-Throughs'') 
establishing that certain executions in exchange-listed securities will 
not be considered trade-throughs if a commitment to trade is sent 
contemporaneously via the Intermarket Trading System (``ITS'') with the 
execution to another market center to fully satisfy that other market's 
quotation.
    The text of the proposed rule change is below. Proposed new 
language is

[[Page 21173]]

italicized; proposed deletions are in brackets.
* * * * *

Rule 5262. Trade-Throughs

    (a)-(c) No Change.
* * * * *

IM 5262-1. Contemporaneous Sending of Commitments

    The terms ``trade-through'' and ``third participating market center 
trade-through'' do not include the situation where a member who 
initiates the purchase (sale) of an ITS Security, at a price which is 
higher (lower) than the price at which the security is being offered 
(bid) in another ITS participating market, sends contemporaneously 
through ITS to such ITS participating market a commitment to trade at 
such offer (bid) price or better and for at least the number of shares 
displayed with that market center's better-priced offer (bid). A trade-
through complaint sent in these circumstances is not valid, even if the 
commitment sent in satisfaction cancels or expires, and even if there 
is more stock behind the quote in the other market.
* * * * *

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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Nasdaq market center operates facilities for quoting and 
trading exchange-listed securities. Nasdaq's facilities are linked with 
exchanges that trade these securities via the Intermarket Trading 
System (``ITS''), which is governed by a national market system plan 
(``ITS Plan'').\5\ The ITS Plan requires each participant, including 
Nasdaq, to adopt a rule--Rule 5262--prohibiting participants from 
trading ITS securities at a price which is lower than the bid or higher 
than the offer displayed from an ITS Participant Exchange or ITS/CAES 
Market Maker.\6\ The rationale for the so-called ``Trade-Through Rule'' 
is that superior priced quotations in a security displayed from other 
participant markets should be protected or satisfied if, in another 
participant market, an execution in the security occurs at an inferior 
price. Under Rule 5262, one remedy for a trade-through is that, upon a 
valid complaint of a trade-through, a commitment to trade, at the price 
and for the number of shares in the disseminated quotation, must be 
sent to the other participant market to fully satisfy such quotation.
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    \5\ The ITS Plan was approved on a permanent basis on January 
27, 1983. See Securities Exchange Act Release No. 19456 (January 27, 
1983), 48 FR 4938. Signatories to the ITS Plan include the American 
Stock Exchange, LLC, the Boston Stock Exchange, Inc., the Chicago 
Board Options Exchange, Inc., the Chicago Stock Exchange, Inc., the 
Cincinnati Stock Exchange, Inc. (now known as the National 
Securities Exchange), the NASD, the New York Stock Exchange, Inc. 
(``NYSE''), the Pacific Exchange, Inc., and the Philadelphia Stock 
Exchange, Inc.
    \6\ Capitalized terms are defined in NASD Rule 5210.
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    The proposed interpretation of Rule 5262 recognizes that superior 
quotations are fully protected/satisfied if an ITS commitment is sent 
to trade with a bid/offer that would otherwise appear to have been 
traded through. That is, a trade will not be considered a trade-through 
if an ITS commitment is sent contemporaneously from the participant 
executing the trade for the purpose of being executed against the 
better-priced displayed bid or offer. A complaint is not valid even if 
a commitment cancels or expires and even if there is more stock behind 
the quote in the other market. Furthermore, the interpretation 
recognizes the impracticality of having to wait for the other market to 
revise its quotation as a result of trading with a satisfying 
commitment before trading activity may occur in other markets.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the Act, including section 15A(b)(6) \7\ of the Act, which requires, 
among other things, that a registered 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 to protect investors and the public interest. Nasdaq 
believes that the proposed rule change is consistent with these 
requirements because it will 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

    The foregoing rule change has become effective pursuant to section 
19(b)(3)(A)(i) \8\ of the Act, and subparagraph (f)(1) of Rule 19b-4 
thereunder,\9\ because it is concerned solely with the interpretation 
of the meaning, administration or enforcement of existing NASD Rule 
5262.
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    \8\ 15 U.S.C 78s(b)(3)(A)(i).
    \9\ 17 CFR 240.19b-4(f)(1).
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    At any time within 60 days of the filing of a rule change pursuant 
to section 19(b)(3)(A) of the Act, the Commission may summarily 
abrogate the 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic comments:

     Use the Commission's Internet comment form 
(http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please 
include File Number SR-NASD-2004-059 on the subject line.

Paper comments:

     Send paper comments in triplicate to Jonathan G. 
Katz, Secretary,

[[Page 21174]]

Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2004-059. 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, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/
rules/sro.shtml).
    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 Section, 450 Fifth Street, NW., 
Washington, DC 20549. Copies of such filing also will be available for 
inspection and copying at the principal office of the NASD. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASD-2004-059 and should be 
submitted on or before May 11, 2004.
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    \10\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-8861 Filed 4-19-04; 8:45 am]
BILLING CODE 8010-01-P