[Federal Register Volume 69, Number 102 (Wednesday, May 26, 2004)]
[Notices]
[Pages 29990-29995]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-11843]



[[Page 29990]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49733; File No. SR-NASD-2004-034]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by 
the National Association of Securities Dealers, Inc. To Allow Members 
To Report Certain Trades Through SuperMontage

May 19, 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 26, 2004, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), submitted to 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 filed 
the proposal pursuant to Section 19(b)(3)(A) of the Act,\3\ and Rule 
19b-4(f)(5) thereunder,\4\ which renders the proposal effective upon 
filing with the Commission. Nasdaq filed Amendment No. 1 to the 
proposed rule change on April 27, 2004.\5\ 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)(5).
    \5\ See letter from Peter R. Geraghty, Associate Vice President 
and Associate General Counsel, Nasdaq, to Katherine England, 
Assistant Director, Division of Market Regulation, Commission, dated 
April 26, 2004 (``Amendment No. 1''). In amendment No. 1, Nasdaq 
provided additional description of the proposed rule change but did 
not amend the proposed rule text.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to allow members to report certain trades through 
the Nasdaq National Market Execution System (``SuperMontage''). New 
text is italicized. Deleted text is in brackets.
* * * * *

4630. Reporting Transactions in Nasdaq National Market Securities

    This Rule 4630 Series applies to the reporting by members of 
transactions in Nasdaq National Market securities (``designated 
securities'') through the Automated Confirmation Transaction Reporting 
Service (ACT) or the Nasdaq National Market Execution System 
(``NNMS''), as permitted by Rule 4720.

4632. Transaction Reporting

* * * * *
(c) Information To Be Reported
    Each last sale report shall contain the following information:
* * * * *
    (6) For any transaction in an order for which a member has 
recording and reporting obligations under Rules 6954 and 6955, the 
trade report must include:
    (A) An order identifier, meeting such parameters as may be 
prescribed by the Association, assigned to the order that uniquely 
identifies the order for the date it was received (see Rule 
6954(b)(1)).
    (B) The time of the execution expressed in hours, minutes, and 
seconds. This information must be reported regardless of the period of 
time between execution of the trade and the ACT or NNMS trade report. 
All times reported to the ACT or NNMS systems shall be in Eastern Time.
(d) Procedures for Reporting Price and Volume
    Members that are required, or have the option, to report 
transactions using ACT or NNMS, pursuant to paragraph (b) above shall 
transmit last sale reports for all purchases and sales in designated 
securities in the following manner:
* * * * *
    (B) Exception: A ``riskless'' principal transaction in which a 
member, after having received an order to buy a security, purchases the 
security as principal at the same price to satisfy the order to buy or, 
after having received an order to sell, sells the security as principal 
at the same price to satisfy the order to sell, shall be reported as 
one transaction in the same manner as an agency transaction, excluding 
the mark-up or mark-down, commission-equivalent, or other fee. 
Alternatively, a member may report a riskless principal transaction by 
submitting the following report(s) to ACT or NNMS:
* * * * *
    Example:
    SELL as a principal 100 shares to another member at 40 to fill an 
existing order;
    BUY as principal 100 shares from a customer at 40 minus a mark-down 
of $12.50;
    REPORT 100 shares at 40 by submitting to ACT or NNMS either a 
single trade report marked with a ``riskless principal'' capacity 
indicator or by submitting the following reports:
    (1) Where required by this Rule, a tape report marked with a 
``principal'' capacity indicator; and
    (2) Either a non-tape, non-clearing report or a clearing-only 
report marked with a ``riskless principal'' capacity indicator.
(e) Transactions Not Required To Be Reported
    The following types of transactions shall not be reported:
    (1) Transactions executed through [the Nasdaq National Market 
Execution System (``]NNMS[''), the Primex Auction System, or the 
SelectNet service];
* * * * *

4640. Reporting Transactions in Nasdaq SmallCapSM Market 
Securities

    This Rule 4640 Series sets forth the requirements for reporting 
transactions in Nasdaq SmallCapSM Market securities 
(``designated securities'') utilizing the Automated Confirmation 
Transaction Service (ACT) or the Nasdaq National Market Execution 
System (``NNMS''), as permitted by Rule 4720.

4642. Transaction Reporting

* * * * *
(c) Information To Be Reported
    Each last sale report shall contain the following information:
* * * * *
    (6) For any transaction in an order for which a member has 
recording and reporting obligations under Rules 6954 and 6955, the 
trade report must include:
    (A) An order identifier, meeting such parameters as may be 
prescribed by the Association, assigned to the order that uniquely 
identifies the order for the date it was received (see Rule 
6954(b)(1)).
    (B) The time of execution expressed in hours, minutes, and seconds. 
This information must be reported regardless of the period of time 
between execution of the trade and the ACT or NNMS trade report. All 
times reported to the ACT or NNMS systems shall be in Eastern Time.
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    * For examples of reporting procedures, refer to Rule 4632, 
Transaction Reporting.
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(d) Procedures for Reporting Price and Volume*
    Members that are required, or have the option, to report 
transactions using ACT or NNMS, pursuant to paragraph (b) above shall 
transmit last sale reports for all purchases and sales in designated 
securities in the following manner:
* * * * *
    (B) Exception: A ``riskless'' principal transaction in which a 
member, after having received an order to buy a security, purchases the 
security as principal at the same price to satisfy the order to buy or, 
after having received an

[[Page 29991]]

order to sell, sells the security as principal at the same price to 
satisfy the order to sell, shall be reported as one transaction in the 
same manner as an agency transaction, excluding the mark-up or mark-
down, commission-equivalent, or other fee. Alternatively, a member may 
report a riskless principal transaction by submitting the following 
report(s) to ACT or NNMS:
* * * * *
    Example:
    SELL as a principal 100 shares to another member at 40 to fill an 
existing order;
    BUY as principal 100 shares from a customer at 40 minus a mark-down 
of $12.50;
    REPORT 100 shares at 40 by submitting to ACT or NNMS either a 
single trade report marked with a ``riskless principal'' capacity 
indicator or by submitting the following reports:
    (1) Where required by this Rule, a tape report marked with a 
``principal'' capacity indicator; and
    (2) Either a non-tape, non-clearing report or a clearing-only 
report marked with a ``riskless principal'' capacity indicator.
(e) Transactions Not Required To Be Reported
    The following types of transactions shall not be reported:
    (1) Transactions executed through NNMS [the SmallCap Small Order 
Execution System (SOES), the Primex Auction System, or the SelectNet 
service].
* * * * *

4650. Reporting Transactions in Nasdaq Convertible Debt Securities

    This Rule 4650 Series sets forth the applicable reporting 
requirements for transactions in convertible bonds that are listed on 
Nasdaq (designated securities) and reported utilizing the Automated 
Confirmation Transaction Service (ACT) or the Nasdaq National Market 
Execution System (``NNMS''), as permitted by Rule 4720.

4652. Transaction Reporting

* * * * *
(c) Information To Be Reported
    Each last sale report shall contain the following information:
* * * * *
    (6) For any transaction in an order for which a member has 
recording and reporting obligations under Rules 6954 and 6955, the 
trade report must include:
    (A) An order identifier, meeting such parameters as may be 
prescribed by the Association, assigned to the order that uniquely 
identifies the order for the date it was received (see Rule 6954 
(b)(1)).
    (B) The time of the execution expressed in hours, minutes, and 
seconds. This information must be reported regardless of the period of 
time between execution of the trade and the ACT or NNMS trade report. 
All times reported to the ACT or NNMS systems shall be in Eastern Time.
(d) Procedures for Reporting Price and Volume*
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    * For examples of reporting procedures, refer to Rule 4632, 
Transaction Reporting.
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    Members that are required, or have the option, to report 
transactions using ACT or NNMS, pursuant to paragraph (b) above shall 
transmit last sale reports for all purchases and sales in designated 
securities in the following manner:
* * * * *
    (B) Exception: A ``riskless'' principal transaction in which a 
member, after having received an order to buy a security, purchases the 
bond as principal at the same price to satisfy the order to buy or, 
after having received an order to sell, sells the bond as principal at 
the same price to satisfy the order to sell, shall be reported as one 
transaction in the same manner as an agency transaction, excluding the 
mark-up or mark-down, commission-equivalent, or other fee. 
Alternatively, a member may report a riskless principal transaction by 
submitting the following report(s) to ACT or NNMS:
    Example:
    SELL as a principal 100 shares to another member at 40 to fill an 
existing order;
    BUY as principal 100 shares from a customer at 40 minus a mark-down 
of $12.50;
    REPORT 100 shares at 40 by submitting to ACT or NNMS either a 
single trade report marked with a ``riskless principal'' capacity 
indicator or by submitting the following reports:
    (1) where required by this Rule, a tape report marked with a 
``principal'' capacity indicator; and
    (2) either a non-tape, non-clearing report or a clearing-only 
report marked with a ``riskless principal'' capacity indicator.
* * * * *

4710. Participant Obligations in NNMS

    (a) Registration--Upon the effectiveness of registration as a NNMS 
Market Maker, NNMS ECN, or NNMS Order Entry Firm, the NNMS Participant 
may commence activity within NNMS for exposure to orders, [or] entry of 
orders, or to report trades, 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.
* * * * *

4711. Clearance and Settlement

    All transactions executed in, or reported through, NNMS shall be 
cleared and settled through a registered clearing agency using a 
continuous net settlement system.
* * * * *

4720. Reporting Through NNMS

    Subject to the conditions set forth below, members may utilize NNMS 
to report trades in NNMS eligible securities required or eligible to be 
reported to Nasdaq pursuant to the Rule 4630, 4640, 4650 and 6100 
Series. 
    (1) Members shall include the time of execution on reports 
submitted to NNMS; and 
    (2) For transactions between members, the members who are parties 
to the trade shall agree to all trade details prior to submitting the 
report to NNMS, and have in effect and on file with Nasdaq, an 
Automated Confirmation Transaction Service Service Bureau/Executing 
Broker Supplement to the Nasdaq Workstation II Agreement (``Attachment 
2 Agreement''), and a Nasdaq National Market Execution System Give-Up 
Addendum to the Nasdaq Workstation II Subscriber Agreement 
(``SuperMontage Give-Up Agreement''). 

5400. NASDAQ STOCK MARKET AND ALTERNATIVE DISPLAY FACILITY TRADE 
REPORTING

5410. Applicability

    (a) For a period of time, NASD will operate two facilities for 
collecting trade reports for executions in Nasdaq National Market, 
Nasdaq SmallCap Market, and Nasdaq Convertible Debt securities 
(``designated securities''): The Nasdaq Stock Market and the 
Alternative Display Facility (``ADF''). Nasdaq will continue to operate 
the Automated Confirmation Transaction Service (``ACT'') and the Nasdaq 
National Market Execution System (``NNMS''), and NASD, through the ADF, 
will operate Trade Reporting and Comparison Service (``TRACS''). This 
Rule 5400 Series establishes the rules for determining which member 
must report a trade and whether a trade must be reported to ACT or NNMS 
(as permitted by Rule 4720), pursuant to the Rule 4630, 4640, 4650 and 
6100 Series

[[Page 29992]]

or TRACS, pursuant to the Rule 4630A and 6100A Series.
    (b) The requirements of this Rule 5400 Series are in addition to 
the trade reporting requirements contained in Rule Series 4630, 4640, 
4650, 6100, 4630A and 6100A Series, and Rule 4720.

5430. Transaction Reporting

(a) When and How Transactions Are Reported
* * * * *
    (2) Non-Registered Reporting Members shall, within 90 seconds after 
execution, transmit through ACT, NNMS or TRACS, as applicable, or if 
ACT, NNMS or TRACS is unavailable due to system or transmission 
failure, by telephone to Market Operations Department, last sale 
reports of transactions in designated securities executed during normal 
market hours. Transactions not reported within 90 seconds after 
execution shall be designated as late and such trade reports must 
include the time of execution.
* * * * *
    (5) All members shall report as soon as practicable to the Market 
Regulation Department on Form T, last sale reports of transactions in 
designated securities for which electronic submission into ACT, NNMS or 
TRACS is not possible (e.g., the ticker symbol for the security is no 
longer available or a market participant identifier is no longer 
active). Transactions that can be reported into ACT, NNMS or TRACS, 
whether on trade date or on a subsequent date on an ``as of'' basis (T 
+ N), shall not be reported on Form T.
* * * * *
(b) Which Party Reports Transaction and to Which Facility
    (1) In transactions between two Registered Reporting Nasdaq Market 
Makers, the member representing the sell side shall report the trade 
using ACT or NNMS.
    (2) In transactions between a Registered Reporting Nasdaq Market 
Maker and a Non-Registered Reporting Member, the Registered Reporting 
Nasdaq Market Maker shall report the trade using ACT or NNMS.
    (3) In transactions between two Non-Registered Reporting Members, 
the member representing the sell side shall report the trade using ACT, 
NNMS, or TRACS.
    (4) In transactions between a member and a customer, the member 
shall report as follows:
    (A) A Registered Reporting Nasdaq Market Maker shall report the 
trade using ACT or NNMS;
    (B) A Registered Reporting ADF Market Maker shall report the trade 
using TRACS; and
    (C) A Non-Registered Reporting Member shall report the trade using 
ACT, NNMS, or TRACS.
    (5) In transactions between two Registered Reporting ADF Market 
Makers, the member representing the sell side shall report the trade 
using TRACS.
    (6) In transactions between a Registered Reporting ADF Market Maker 
and a Non-Registered Reporting Member, the Registered Reporting ADF 
Market Maker shall report the trade using TRACS.
    (7) In transactions between a Registered Reporting Nasdaq Market 
Maker and a Registered Reporting ADF Market Maker, the member 
representing the sell side shall report as follows:
    (A) A Registered Reporting Nasdaq Market Maker shall report the 
trade using ACT or NNMS; and
    (B) A Registered Reporting ADF Market Maker shall report the trade 
using TRACS.
    (8) If a member simultaneously is a Registered Reporting Nasdaq 
Market Maker and a Registered Reporting ADF Market Maker, and has the 
trade reporting obligation pursuant to paragraphs (1), (2), (4), (5), 
(6), or (7), the member can report the trade using either ACT or NNMS, 
or TRACS, unless the trade is executed using ACES or [the Nasdaq 
National Market Execution System (``]NNMS['')]. A trade executed using 
ACES must be reported using ACT or NNMS, and trades executed using NNMS 
will be reported to ACT automatically.
    (9) In transactions conducted through an ACT/NNMS ECN (as defined 
in Rule 6110) that are reported to ACT or NNMS, the ACT/NNMS ECN shall 
ensure that transactions are reported in accordance with Rule 6130(c). 
If an ACT/NNMS ECN is also a Registered Reporting ADF ECN (as defined 
in Rule 4200A), Rule 6130(c) shall apply only to transactions conducted 
through the ECN for which trade reports are submitted to ACT or NNMS.
    (10) Nasdaq will append the .T modifier or the .SLD modifier, as 
appropriate, to those reports submitted to ACT or NNMS that contain the 
time of execution, but that do not contain the appropriate modifier.

6100. AUTOMATED CONFIRMATION TRANSACTION SERVICE (ACT)

6110. Definitions

    (q) The term ``ACT/NNMS ECN'' shall mean a member of the 
Association that is an electronic communications network that is a 
[member] participant of a registered clearing agency for clearing or 
comparison purposes or has a clearing arrangement with such a [member] 
participant, to the extent that transactions executed through it are 
reported to ACT or NNMS.

6130. Trade Report Input

(a) Reportable ACT Transactions
    With the exception of those trades reported to Nasdaq through the 
Nasdaq National Market Execution System `` ``NNMS'' (as permitted by 
Rule 4720), [M]members shall utilize ACT to report transactions that 
are required to be reported to Nasdaq pursuant to the Rule Series 4630, 
4640, 4650, 5430, 6400, 6500 and 6600 Series, including executions of 
less than one round lot if those executions are to be compared and 
locked-in. Members may utilize ACT to report transactions that are 
eligible to be reported to Nasdaq pursuant to Rule 5430, including 
executions of less than one round lot if those executions are to be 
compared and locked-in.
    Members also may utilize NNMS to report transactions that are 
eligible to be reported to Nasdaq pursuant to Rule 5430, including 
executions of less than one round lot if those executions are locked-
in. All trades that are reportable transactions will be processed 
through the National Trade Reporting System; however, only those trades 
that are subject to regular way settlement and are not already locked-
in trades will be compared and locked-in through ACT. Trades that are 
reported as other than regular way settlement (i.e., Cash, Next-Day, 
Seller's Option) will not be compared in ACT or reported to NSCC. All 
transactions in Direct Participation Program securities shall be 
reported to ACT pursuant to the Rule 6900 Series as set forth therein.
* * * * *
(c) Which Party Inputs Trade Reports to ACT
    ACT Participants shall, subject to the input requirements below, 
either input trade reports into the ACT system or utilize the Browse 
feature to accept or decline a trade within the applicable time-frames 
as specified in paragraph (b) of this Rule. Trade data input 
obligations are as follows:
* * * * *
    (5) in transactions conducted through an ACT/NNMS ECN that are 
reported to ACT or NNMS, the ACT/NNMS ECN shall ensure that 
transactions are reported in accordance with one of the following 
methods:

[[Page 29993]]

    (A) The ACT/NNMS ECN shall submit the trade reports to ACT or NNMS 
and identify itself as the reporting party;
    (B) The ACT/NNMS ECN shall submit the trade reports to ACT or NNMS 
on behalf of the reporting party and identify the reporting party in 
accordance with the rules for determining reporting parties reflected 
in paragraphs (1), (2), (3), and (4) above; or
    (C) The ACT/NNMS ECN shall require one of the parties, determined 
in accordance with the rules for determining reporting parties 
reflected in paragraphs (1), (2), (3), and (4) above, to submit the 
trade reports to ACT or NNMS.
    When an ACT/NNMS ECN reports transactions in accordance with 
subparagraph (A), the ACT/NNMS ECN shall be responsible for ensuring 
that the trade reports are accurate and contain all information 
required by subsection (d) of this rule for both the ACT/NNMS ECN and 
the identified non-reporting party. When an ACT/NNMS ECN reports 
transactions in accordance with subparagraph (B), both the ACT/NNMS ECN 
and the party identified as the reporting party shall be responsible 
for ensuring that the trade reports are accurate and contain all 
information required by subsection (d) of this rule for both the ACT/
NNMS ECN and the identified reporting party. When an ACT/NNMS ECN 
requires reporting of transactions in accordance with subparagraph (C), 
the reporting party shall be responsible for ensuring the accuracy and 
completeness of the trade report.
    An ACT/NNMS ECN shall provide written notice to the Association of 
the method of trade reporting used by the ACT/NNMS ECN for each of its 
subscribers, and may change the method of trade reporting used for a 
subscriber by providing advance written notice of the change to the 
Association;
    (6) In transactions conducted through two ACT/NNMS ECNs or an ACT/
NNMS ECN and an ECN that is not an ACT/NNMS ECN, an ACT/NNMS ECN shall 
be responsible for complying with the requirements of paragraph (5) 
above for reporting a transaction executed through its facilities, and 
an ECN that routed an order to it for execution shall be deemed to be 
an Order Entry Firm and a member for purposes of the rules for 
determining reporting parties reflected in paragraphs (1), (3), and (4) 
above; and
    (7) In transactions conducted through an ACT/NNMS ECN in which 
neither of the parties is a member, the ACT/NNMS ECN shall report the 
transaction in accordance with the requirements of subparagraph (5)(A) 
above.
* * * * *

6400. REPORTING TRANSACTIONS IN LISTED SECURITIES

* * * * *

6420. Transaction Reporting

* * * * *
(b) Which Party Reports Transaction
    (5) In transactions conducted through an ACT/NNMS ECN (as defined 
in Rule 6110), the ACT/NNMS ECN shall ensure that the transactions are 
reported in accordance with Rule 6130(c).

6600. OVER-THE-COUNTER EQUITY SECURITIES

* * * * *

6620. Transaction Reporting

* * * * *
(b) Which Party Reports Transactions
* * * * *
    (5) In transactions conducted through an ACT/NNMS ECN (as defined 
in Rule 6110), the ACT/NNMS ECN shall ensure that the transactions are 
reported in accordance with Rule 6130(c), and the term ``Market Maker'' 
as used in such rule shall be construed to refer to an OTC Market 
Maker.

6900. REPORTING TRANSACTIONS IN DIRECT PARTICIPATION PROGRAMS

* * * * *

6920. Transaction Reporting

(b) Which Party Reports Transactions
* * * * *
    (3) In transactions conducted through an ACT/NNMS ECN (as defined 
in Rule 6110), the ACT/NNMS ECN shall ensure that the transactions are 
reported in accordance with Rule 6130(c); provided that for purposes of 
Rule 6130(c)(5) (B) and (C), the party with the reporting obligation 
shall be as set forth in Rule 6130(c)(3) and the term ``Order Entry 
Firm'' as used in such rule shall be construed to refer to any member.
* * * * *

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
    Nasdaq proposes to provide members the ability to use SuperMontage 
to report trades in Nasdaq National Market and SmallCap Market 
securities (``Nasdaq securities'') that they have matched outside of 
any system operated by a self-regulatory organization. Today when a 
member matches orders in its own system it can report the trade to 
Nasdaq's Automated Confirmation Transaction Service (``ACT''). Under 
this proposal, members now will be able to report matched trades in 
Nasdaq securities to SuperMontage. SuperMontage will transmit the 
information to ACT, where it will be processed as any other information 
submitted to that system. For example, the trade information will be 
disseminated on the consolidated tape and included in ACT risk 
management calculations and Nasdaq's audit trail. In addition, the 
trades will be submitted to the National Securities Clearing 
Corporation (``NSCC'') for clearing, if necessary. Trades reported to 
SuperMontage will not be included in the SuperMontage execution 
algorithm, and thus will not interact with any quotes or orders in the 
system.
    Members will not be permitted to report through SuperMontage trades 
for which the details have not already been compared and agreed to by 
the parties to the trade. This limitation is necessary because 
SuperMontage will not have the same functionality as ACT that allows 
one party to submit the trade details and the other party to review the 
information and affirmatively agree to the trade, or the functionality 
that allows ACT to compare the information submitted by each party to 
the trade. Members that desire to report trades using either of these 
methods must continue to submit reports directly to ACT.
    As a result, SuperMontage will accept only: (1) Tape-only reports; 
\6\ (2) locked-

[[Page 29994]]

in clearing-only reports; \7\ (3) tape reports of locked-in trades that 
are to be submitted to clearing; \8\ and (4) non-clearing, non-tape 
reports.\9\ A member that seeks to submit a locked-in report to 
SuperMontage must have agreements with its contra party that permit one 
or both of them to submit orders to SuperMontage on behalf of the 
other, and to report trades on behalf of both of the parties.\10\
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    \6\ A ``tape-only report'' is a trade that is reported to Nasdaq 
for dissemination to the public, but the trade does not need to be 
transmitted to NSCC because one of the parties to the trade is a 
customer (i.e., not a broker-dealer), or the buyer and seller both 
are broker-dealers and they have a common clearing arrangement that 
will enable them to settle the trade without using NSCC's 
facilities.
    \7\ A transaction is ``locked-in'' when the buying and selling 
broker-dealers have agreed to all the trade details prior to 
submitting the trade to Nasdaq and no further comparison is 
necessary. A ``locked-in clearing-only report'' is a report that is 
locked-in and Nasdaq must forward the trade to NSCC for settlement. 
The trade does not have to be disseminated to the public because an 
exception to the public reporting requirement is applicable (e.g., 
the transaction is the offsetting leg of a riskless principal 
trade).
    \8\ A ``tape report of a locked-in trade that is submitted for 
clearing'' is a locked-in report of a trade that must be 
disseminated to the public and settled through NSCC.
    \9\ A ``non-clearing, non-tape report'' is a report of trade 
that is not required to be disseminated to the public and does not 
need to be transmitted to NSCC for settlement, but the broker-dealer 
is obligated or chooses to submit this ``regulatory report'' to 
Nasdaq. See, e.g., NASD Rule 4632 (d)(3)(B) and NASD Notice to 
Members 00-79.
    \10\ Today a member can submit locked-in trades to ACT if it has 
executed an Automated Confirmation Transaction Services Service 
Bureau/Executing Broker Supplement to the Nasdaq Workstation II 
Agreement (``Attachment 2 Agreement'') with its contra party and the 
agreement has been filed with Nasdaq. In addition, a member can 
submit orders to SuperMontage on behalf of another member if Nasdaq 
has on file a Nasdaq National Market Execution System Give-Up 
Addendum to the Nasdaq Workstation II[reg] Subscriber 
Agreement (commonly referred to as the ``SuperMontage Give-Up 
Agreement'') that has been executed by both parties. Among other 
things, these agreements establish which member is responsible for 
settling trades. A member that wishes to report locked-in trades 
through SuperMontage must have on file with Nasdaq executed 
Attachment 2 and SuperMontage Give-Up agreements for each member for 
which it will report trades though SuperMontage.
---------------------------------------------------------------------------

    Members will be able to report trades through SuperMontage during 
the hours that ACT is operational, which presently is 8:00 a.m. until 
6:30 p.m. eastern time. The full reporting functionality will be 
implemented in phases and, when fully implemented, with the exception 
of those trades for which comparison through ACT is necessary, members 
will be able to report to SuperMontage the same types of trades they 
can report directly through ACT today.\11\ In the first phase, members 
will be able to report, among other things, the security identity, the 
number of shares, the price, whether the member is the buyer or seller, 
and whether its member is acting as agent or principal. In addition, to 
facilitate the reporting of pre-open, after-hours, and late reports in 
the first phase, members will be required to include the time of 
execution on all reports submitted to SuperMontage.\12\
---------------------------------------------------------------------------

    \11\ Initially, with the exception of .T and .SLD trades, 
SuperMontage will not accept reports of trades that must include 
trade report modifiers (e.g., the .W modifier). During this initial 
phase SuperMontage also will not accept reports of trades that 
include special settlement conditions (e.g., next-day settlement), 
special processing conditions (e.g., reversals), or ``as/of'' 
reports, which are reports of a transaction executed on a previous 
day. Members will be able to submit these types of reports to 
SuperMontage once Nasdaq makes that necessary system changes. See 
infra note 12 for a discussion concerning reporting .T and .SLD 
trades to SuperMontage.
    \12\ Today, ACT automatically appends the .SLD modifier or .T 
modifier, as appropriate, to reports it receives that contain the 
time of execution. ACT compares the time of execution to the time 
the report was received by ACT, and if more than 90 seconds has 
elapsed between these times and the report does not contain the .SLD 
modifier, ACT will append the .SLD modifier. Similarly, ACT will 
read the time of execution, and if this time is outside normal 
market hours and the .T modifier is not included on the report, ACT 
will append the .T modifier. Therefore, requiring members to include 
the time of execution on reports submitted to SuperMontage will 
enable them to submit late reports and reports of pre-open and 
after-hours trades, because ACT will validate the time of execution 
and automatically append the .SLD modifier or the .T modifier, as 
appropriate.
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    The proposal is designed to provide members several benefits, 
including the possibility of consolidating the systems used for 
reporting and executing trades. In addition, members will be able to 
take advantage of the anonymity feature available in SuperMontage, 
which is not available for trades submitted directly to ACT, and 
combine it with the benefits of ``give-up'' relationships, which 
members utilize today in SuperMontage and ACT.\13\ The result is that a 
member will be able to give up the true contra parties to a trade, but 
still preserve full anonymity between these parties.
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    \13\ When a ``give-up'' occurs, the member that submits the 
order to SuperMontage (or the trade report to ACT) discloses to the 
contra party that the order (or report) is being entered on behalf 
of another member and the trade is to be settled with this other 
member. The member submitting the order (or trade report) has 
``given up'' the identity of the other member who is the true party 
to the trade.
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    For example, today ECNs match buyers and sellers in their own 
systems and provide anonymity by becoming the contra party to each 
party. With the proposed feature, the ECN could submit the same matched 
order to SuperMontage for anonymous processing and give up the parties 
that matched in its system. Now, instead of the ECN being the contra 
party, the parties that matched through the ECN will be direct contra 
parties. Full anonymity (i.e., anonymity through settlement) will be 
preserved because the actual buyer and seller will be informed that 
SIZE is their contra party, just the same as today when they trade 
fully anonymously, using SIZE in SuperMontage's Non-Directed Order 
processing.
    The processing of fully anonymous trades is the same regardless of 
whether the trade is executed as a result of a match occurring in the 
Non-Directed Order processing or matched in a member's own system and 
submitted to SuperMontage for reporting purposes. For example, the 
identities of all the parties (buyer, seller, and reporting member) 
will be known to Nasdaq and NSCC at all times.\14\ In addition, the 
anonymous trades reported through SuperMontage will be included in the 
risk management reports Nasdaq issues each day, and Nasdaq will reveal 
contra party identities to members on a trade-by-trade basis if NSCC 
ceases to act for the buyer or seller, or one of their clearing 
firms.\15\
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    \14\ A detailed description of the processing of anonymous 
orders in SuperMontage is contained in the Commission's order 
approving the anonymity feature. See Securities Exchange Act Release 
No. 48527 (September 23, 2003), 68 FR 56361 (September 30, 2003).
    \15\ NSCC's authority to cease to act for one of its 
participants is contained in NSCC Rule 46.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\16\ in general and with 
Section 15A(b)(6) of the Act,\17\ in particular, in that it is designed 
to foster coordination and cooperation with persons engaged in 
regulating, clearing, settling, processing information with respect to, 
and facilitating transactions in securities. Nasdaq asserts that the 
proposal is consistent with this obligation because it will provide 
members both the opportunity to consolidate the execution and reporting 
of trades and to combine the benefits give-up relationships and 
anonymous trading.
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    \16\ 15 U.S.C. 78o-3.
    \17\ 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 would 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.

[[Page 29995]]

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 \18\ and subparagraph (f)(5) of Rule 19b-4\19\ 
thereunder because it effects a change in an existing order entry or 
trading system that (i) does not significantly affect the protection of 
investors or the public interest; (ii) does not impose any significant 
burden on competition; and (iii) does not have the effect of limiting 
access to or availability of the system. At any time within 60 days of 
the filing of such 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.\20\
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    \18\ 15 U.S.C. 78s(b)(3)(A).
    \19\ 17 CFR 240.19b-4(f)(5).
    \20\ For purposes of calculating the 60-day abrogation period, 
the Commission considers the period to commence on April 27, 2004, 
the date Nasdaq filed Amendment No. 1.
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    Nasdaq believes that the proposed rule change, as amended, is 
consistent with these requirements because it proposes to add a 
reporting feature to SuperMontage, an existing order-entry system that 
will not have any affect on the protection of investors. Members are 
being provided an alternative means to report the types of trading they 
already conduct today, and the anonymity feature is the same as 
currently exists in SuperMontage. In addition, the functionality added 
by the proposed rule change is optional, and thus does not limit access 
to SuperMontage. Nasdaq states that it will make the proposed rule 
change operative as the necessary system changes are completed. Nasdaq 
expects to implement the first phase of the proposal on or about July 
15, 2004. Nasdaq has represented that it will issue a Head Trader Alert 
informing members of the implementation schedule once the exact dates 
are determined.

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. 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-2004-034 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-2004-034. 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 Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of Nasdaq. 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-2004-034 and should be submitted on or before June 
16, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\21\
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    \21\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-11843 Filed 5-25-04; 8:45 am]
BILLING CODE 8010-01-P