[Federal Register Volume 69, Number 84 (Friday, April 30, 2004)]
[Notices]
[Pages 23842-23844]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-9791]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49604; File No. SR-NASD-2004-066]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by National Association of Securities Dealers, Inc. Related to 
Direct ECN Connection to SuperMontage

April 22, 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 19, 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. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

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

    Nasdaq proposes to require ``Order-Delivery'' Electronic 
Communications Networks (``ECNs'') that participate in the Nasdaq 
National Market Execution System (``NNMS'' or ``SuperMontage'') to 
access the system using solely direct, dedicated point-to-point 
communication linkages. Nasdaq will implement the proposed rule change 
90 days after approval by the Commission. The exact date will be 
provided to market participants via a Head Trader Alert on http://www.nasdaqtrader.com.
    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *
4623. Alternative Trading Systems
    (a) No Change.
    (b) An ATS or ECN that seeks to utilize the Nasdaq-provided means 
to comply with SEC Rule 301(b)(3), the ECN display alternatives, or to 
provide orders to Nasdaq voluntarily shall:
    (1) through (6) No Change.
    (7) provide orders to Nasdaq only through a dedicated 
communications linkage as prescribed by Nasdaq.
    (c) No Change.
* * * * *
4710. Participant Obligations in NNMS
    (a) No Change.
    (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)-(B) No Change.
    (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) through (iii) No Change.
    (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. The 5-second response time shall be measured by timestamps 
generated by NNMS.
    (v) No Change.
    (D) No Change.
    (2)-(8) No Change.
    (c) through (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
    ECNs have two options when participating in Nasdaq's SuperMontage 
system. They can be ``Auto-Ex'' ECNs, in which case their quotes/orders 
are subject to automatic execution, or they can elect to be Order-
Delivery where the system instead delivers a buy or sell

[[Page 23843]]

trading message to the ECN that, in response, either executes or 
rejects the message. Today, all ECNs in Nasdaq's SuperMontage system 
participate as Order-Delivery ECNs.
    Under current SuperMontage rules, Order-Delivery ECNs must respond 
to messages sent to them by the system within 5 seconds on average, and 
in no event later than 30 seconds for any one message. The 5-second 
average response standard is measured by timestamps generated at the 
ECN's Service Delivery Platform (``SDP'') at the ECN's trading 
location.
    Recently, Nasdaq has experienced several instances of ECN response 
times materially slower than other market participants. While reasons 
for these delays can vary between issues related to ECN internal 
message processing capacity and delivery queuing in SuperMontage, the 
result is a disruption in trading--particularly during the crucial 
period immediately before the Nasdaq close. In response, Nasdaq is 
proposing the creation of mandatory dedicated ``point-to-point'' 
linkages between the SuperMontage host computer and individual Order-
Delivery ECNs. These linkages will connect directly to a participating 
ECN's host computers, bypassing the ECN's SDP. By creating these 
dedicated linkages, Nasdaq expects to significantly reduce response 
delays that can be encountered in the current environment where order 
delivery messages directed to ECNs use existing SuperMontage 
application programming interfaces (``APIs'') to reach their 
destination and are commingled, and compete with, other SuperMontage 
messaging (Executions, Cancels, etc.) for bandwidth to reach the ECN's 
SDP. Nasdaq notes that the proposed linkage would only speed delivery 
and receipt of messages between the SuperMontage host computer and the 
ECN, it would not give such messages any special priority in the 
SuperMontage execution process. Nasdaq believes that the new linkages 
will enhance the speed and efficiency of the SuperMontage system as a 
whole and provide a more accurate understanding of whether Nasdaq or an 
ECN's own internal system is at fault when ECN order processing is 
unduly delayed.
    Since Nasdaq's current rules governing ECN responsiveness are based 
on timestamps generated by the SDP, Nasdaq is also proposing modifying 
its rules to reflect that in the new environment the 5-second time 
period will be measure by data generated by Nasdaq's host computer. In 
short, Nasdaq will calculate and monitor, on a real-time basis, the 
difference between the following time stamps: (1) The time the 
SuperMontage host dispatched a message to the ECN using the dedicated 
linkage, and (2) the time the SuperMontage host received a response 
back from the ECN over the dedicated link. On an ongoing basis, Nasdaq 
will monitor individual ECN response times and provide each ECN with 
its own order responsiveness time statistics, which will not be made 
public. Like the current rule, if an ECN regularly fails to meet the 5-
second response time over a number of orders, Nasdaq will place that 
ECN's quote in a closed quote state. Also like the current rule, the 
closed quote state will be lifted when the ECN can certify that it can 
meet the 5-second response time requirement.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\3\ in general and with 
section 15A(b)(6) of the Act,\4\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, 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.
---------------------------------------------------------------------------

    \3\ 15 U.S.C. 78o-3.
    \4\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2004-066 on the subject line.
    Paper comments:
     Send paper comments in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, 
NW., Washington, DC 20549-0609.
    All submissions should refer to File Number SR-NASD-2004-066. 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-2004-066 and should be submitted on or before May 21, 2004.


[[Page 23844]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
---------------------------------------------------------------------------

    \5\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-9791 Filed 4-29-04; 8:45 am]
BILLING CODE 8010-01-P