[Federal Register Volume 69, Number 90 (Monday, May 10, 2004)]
[Notices]
[Pages 25941-25944]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-10561]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49650; File No. SR-NASD-2004-064]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc. Regarding Technical Corrections to 
SuperMontage Rules

May 4, 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 15, 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 Nasdaq has prepared. Pursuant to Section 
19(b)(3)(A) of the Act and Rule 19b-4(f)(3) thereunder,\3\ Nasdaq has 
designated this proposal as one concerned solely with the 
administration of the self-regulatory organization, which renders the 
rule effective upon the Commission's receipt of this filing. 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\ 17 CFR 240.19b-4(f)(3).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to make technical corrections to the rules 
governing the operation of the Nasdaq National Market Execution System 
(``NNMS'' or ``SuperMontage''). The text of the proposed rule change is 
set forth below. Proposed new language is in italics; proposed 
deletions are in [brackets].
* * * * *
4700. Nasdaq National Market Execution System (NNMS)
* * * * *
4701. Definitions
    Unless stated otherwise, the terms described below shall have the 
following meaning:
    (a) through (ll) No Change.
    (mm) The term ``Pegged'' shall mean, for priced limit 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 NNMS Participant entering a Pegged Order may specify that 
the price of the order will either equal the inside quote on the same 
side of the market (a ``Regular Pegged Order'') or equal a price that 
deviates from the inside quote on the contra side of the market by 
$0.01 (i.e., $0.01 less than the inside offer or $0.01 more than the 
inside bid) (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 permanently converted into an un-pegged limit order. 
Pegged Orders shall not be available for ITS Securities.
    (nn) through (uu) No Change.
* * * * *
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) No Change.
    (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) No Change.
    (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) No Change.
    (b) through (c) No Change.
    (d) Participation in NNMS as an NNMS ECN requires current 
registration as an NASD member and shall be conditioned upon the 
following:

[[Page 25942]]

    (1) through (2) No Change.
    (3) membership in, or access arrangement with a participant of, a 
clearing agency registered with the Commission [which] that maintains 
facilities through which NNMS-compared trades may be settled;
    (4) through (5) No Change.
    (e) through (h) No Change.
* * * * *
4706. Order Entry Parameters
    (a) No Change.
    (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) through (B) No Change.
    (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) through (5) No Change.
    (c) through (e) No Change.
* * * * *
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.
    (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) through (iv) No Change.
    (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 is 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) No Change.
    (ii) Exceptions--The following exceptions shall apply to the above 
execution parameters:
    a. through e. No Change.
    [(f)] 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) No Change.
    (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] eligible Quote/Order in queue. The system then will zero 
out [the] those ECN['s] Quote/Orders to which the Non-Directed Order 
was delivered. [at that price level on that side of the market,] If 
there are no other Quote/Orders at the declined price level, [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) through (v) No Change.
    (D) No Change.
    (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

[[Page 25943]]

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) No Change.
    (3) through (8) No Change.
    (c) through (e) No Change.
* * * * *
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) through (b) No Change.
    (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) through (3) No Change.
    (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]2) above, while the dollar value of the securities shall 
be determined using the formula in paragraph ([2]3) above. If the 
stockholder opts to receive securities, the size of the order shall be 
increased pursuant to the formula in subparagraph ([2]3) above.
    (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]2) above, and 
stock portion thereafter pursuant to sections ([2]3) and/or ([3]4) 
above.
    (6) No Change.
    (d) 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
    On March 2, 2004, the Commission approved Nasdaq's proposal to 
transition the trading of exchange-listed securities onto the 
SuperMontage trading platform from the Computer Assisted Execution 
System. The text of the SuperMontage rules approved as part of that 
proposal, filed as Exhibit A to that proposal (``Exhibit A''), 
contained minor technical errors as published.\4\ Exhibit A did not 
accurately reflect some of the text of several NASD rule proposals that 
had previously been approved by the Commission and were in effect.\5\
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    \4\ See Securities Exchange Act Release No. 49349 (March 2, 
2004), 69 FR 10775 (March 8, 2004) (``Exhibit A'').
    \5\ One of these omissions, the omission of text from Amendments 
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) was corrected in 
Securities Exchange Act Release No. 49547 (April 9, 2004), 69 FR 
20091 (SR-NASD-2004-46).
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    Specifically, Exhibit A did not accurately reflect some of the text 
of SR-NASD-2003-81 and Amendment No. 1 thereto, as approved by the 
Commission.\6\ That proposal modified NASD Rule 4710(b)(1)(C)(ii) to 
change how the quotes of order-delivery Electronic Communication 
Networks in SuperMontage are decremented after they decline an order 
shipped to them. Some of those approved changes were inadvertently 
omitted from Exhibit A and are being restored by this proposed rule 
change.
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    \6\ See Securities Exchange Act Release No. 48434 (September 3, 
2003), 68 FR 53409 (September 10, 2003).
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    Exhibit A also did not accurately reflect the text of Amendment No. 
3 to SR-NASD-2003-85, as approved by the Commission.\7\ Amendment No. 
3, among other things, made non-substantive changes to NASD Rule 4705 
to reflect that indirect participation in a clearing agency occurs 
through a `participant,' as such term is defined in Section 3(a)(24) of 
the Act. That approved change was inadvertently omitted from Exhibit A 
and is being restored by this proposed rule change. Exhibit A also did 
not accurately reflect the text of SR-NASD-2003-150, as approved by the 
Commission.\8\ Specifically, SR-NASD-2003-150 modified NASD Rule 
4701(mm) to create a new order type called a Pegged Order. Several of 
those approved changes are being restored through this proposed rule 
change.
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    \7\ See Securities Exchange Act Release No. 48527 (September 23, 
2003), 68 FR 56361 (September 30, 2003).
    \8\ See Securities Exchange Act Release No. 48798 (November 17, 
2003), 68 FR 66147 (November 25, 2003).
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    Lastly, the proposed rule change also makes numbering and other 
non-substantive rule modifications.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\9\ in general and with 
Section 15A(b)(6) of the Act,\10\ in particular, in that the proposal 
is designed to prevent fraudulent and manipulative acts and practices, 
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.
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    \9\ 15 U.S.C. 78o-3.
    \10\ 15 U.S.C. 78o-3(b)(6). Nasdaq originally stated that the 
filing was consistent with Section 15A(b)(3), but corrected the 
statutory reference. Telephone conversation between Thomas Moran, 
Associate General Counsel, Nasdaq, and Elizabeth MacDonald, 
Attorney, Division of Market Regulation (``Division''), Commission, 
April 21, 2004.
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    Nasdaq believes the proposed rule change is consistent with the 
Act, for the same reasons that the proposed rule changes were 
consistent with the Act when originally filed. According to Nasdaq, in 
approving SR-NASD-2003-81, the Commission found that the proposed quote 
decrementation procedure was consistent with the Act in that it is 
designed to produce fair and informative quotations, to prevent 
fictitious or misleading quotations, and to promote orderly procedures 
for

[[Page 25944]]

collecting, distributing, and publishing quotations. In approving SR-
NASD-2003-85, according to Nasdaq, the Commission found that post-trade 
\11\ anonymity is consistent with the Act and has been available in 
different forms for many years. As Nasdaq noted in SR-NASD-2003-150, 
the Pegged Order is consistent with the Act in that it provides market 
participants with a voluntary tool to use to offer liquidity at the 
inside market in Nasdaq.
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    \11\ Nasdaq corrected an error to the text, which formerly read 
``pre-trade.'' Telephone conversation between Thomas Moran, 
Associate General Counsel, Nasdaq, and Elizabeth MacDonald, 
Attorney, Division, Commission, May 3, 2004.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD does not believe that the proposed rule change will impose 
any burden on competition not necessary or appropriate in furtherance 
of the Act.

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

    The NASD neither solicited nor received written comments on this 
proposal.

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

    The forgoing rule change has become effective upon filing with the 
Commission pursuant to Section 19(b)(3)(A) of the Act,\12\ in that it 
is concerned solely with the administration of the self-regulatory 
organization.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
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    At any time within 60 days after the filing of the proposed rule 
change, 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-2004-064 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-2004-064. 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 20549-0609. 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-2004-064 and should be submitted on or before June 1, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-10561 Filed 5-7-04; 8:45 am]
BILLING CODE 8010-01-P