[Federal Register Volume 69, Number 103 (Thursday, May 27, 2004)]
[Notices]
[Pages 30354-30356]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-12026]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-49752; File No. SR-NASD-2004-055]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of a Proposed Rule Change and Amendment Nos. 1 and 2 
Thereto by the National Association of Securities Dealers, Inc. Related 
to Clarification of the Price/Time Execution Algorithm in SuperMontage

May 21, 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 29, 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'' or ``SEC'') the proposed rule change as described in 
items I, II, and III below, which items have been prepared by Nasdaq. 
On May 10, 2004, Nasdaq filed Amendment No. 1 to the proposed rule 
change.\3\ Nasdaq filed Amendment No. 2 to the proposed rule change on 
May 20, 2004.\4\ 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 Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq to Katherine A. England, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated May 
7, 2004 (``Amendment No. 1''). Amendment No. 1 replaces the original 
19b-4 in its entirety.
    \4\ See letter from Mary M. Dunbar, Vice President and Deputy 
General Counsel, Nasdaq to Katherine A. England, Assistant Director, 
Division, Commission, dated May 20, 2004 (``Amendment No. 2''). 
Amendment No. 2 makes technical changes to the rule text.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to clarify rule language describing the operation 
of the price/time execution algorithm in the Nasdaq Market Center 
system when using the ``I'' anti-internalization qualifier. Nasdaq will 
implement the proposed rule change immediately.
    Below is the text of the proposed rule change. Proposed new 
language is italics; proposed deletions are in [brackets].
* * * * *

4710. Participant Obligations in the Nasdaq Market Center

    (a) No Change.
    (b) Non-Directed Orders
    (1) General Provisions--A Quoting Market Participant in a Nasdaq 
Market Center eligible security, as well as Order Entry Firms, shall be 
subject to the following requirements for Non-Directed Orders:
    (A) No Change.
    (i) through (iv) No Change.
    (B) Processing of Non-Directed Orders--Upon entry of a Non-Directed 
Order into the system, the Nasdaq Market Center will ascertain who the 
next Quoting Market Participant or Order Entry Firm in queue to receive 
an order is and shall deliver an execution to Quoting Market 
Participants or 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 Nasdaq Market Center system shall be delivered to or automatically 
executed against Quoting Market Participants' or 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 the Nasdaq Market Center 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 quotation 
montage of the Nasdaq Market Center, remain in system and available for 
execution.
    (i) Execution Algorithm--Price/Time--The system will access 
interest in the system in the following priority and order:
    a. through c. No Change.
    (ii) Exceptions--The following exceptions shall apply to the above 
execution parameters:
    a. If a Nasdaq Quoting Market Participant or Order Entry Firm 
enters a Non-Directed Order into the system, before sending such Non-
Directed Order to the next Quoting Market Participants in queue, the 
Nasdaq Market Center will first attempt to match off the order against 
the Nasdaq Quoting Market Participant's or Order Entry Firm's own 
Quote/Order if the participant is at the best bid/best offer in Nasdaq. 
Nasdaq Quoting Market Participants and Order Entry Firms may avoid any 
attempted automatic system matching permitted by this paragraph through 
the use of an anti-internalization qualifier (AIQ) quote/order flag 
containing the following values: ``Y'' or ``I'', subject to the 
following restrictions:
    Y--if the Y value is selected, the system will execute the flagged 
quote/order solely against attributable and non-attributable quotes/
orders (displayed and reserve) of [Nasdaq] Quoting Market Participants 
and Order Entry Firms other than the party entering the AIQ ``Y'' 
flagged quote/order. If the only available trading interest is that of 
the same party that entered the AIQ ``Y'' flagged quote/order, the 
system will not execute at an inferior price level, and will instead 
return the latest entered of those interacting quote/orders (or 
unexecuted portions thereof) to the entering party; provided, however, 
that in the case of a Discretionary Order interacting with a bid/offer 
entered by the system pursuant to Rule 4710(b)(5), the Discretionary 
Order (or unexecuted portions thereof) will be returned.
    I--if the I value is selected, the system will execute against all 
available trading interest, including the quote/orders of the Order 
Entry Firm or Nasdaq Quoting Market Participant that entered the AIQ 
``I'' flagged order based on the price/time execution algorithm [in 
price/time priority].
    b. through f. No Change.
    (C) through (D) No Change.
    (2) through (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.

[[Page 30355]]

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    On February 11, 2004, the Commission approved SR-NASD-2003-128 
containing Nasdaq's proposal to eliminate the price/size and price/time 
with fee consideration execution algorithms from the SuperMontage 
system.\5\ One rule change approved at that time was a modification to 
NASD Rule 4710(b)(1)(B)(ii)(a) relating to the use of the ``I'' anti-
internalization qualifier and the price time execution algorithm of the 
system. Language added to that rule indicated that use of the I anti-
internalization qualifier would result in processing of quotes/orders 
in price/time priority. This rule change clarifies that the system 
processes quotes/orders in conformity with the price/time execution 
algorithm described in NASD Rule 4710(b)(1)(B)(i).
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    \5\ See Securities Exchange Act Release No. 49220 (February 11, 
2004), 69 FR 7836 (February 19, 2004). The SuperMontage System has 
since been re-named The Nasdaq Market Center. See SR-NASD-2004-76 
(filed on an immediately effective basis on May 5, 2004).
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    In addition, this proposal also removes the term ``Nasdaq'' from 
the rule language describing the operation of the ``Y'' anti-
internalization qualifier to make clear that orders entered with that 
designation interact with any resting quotes/orders of UTP Exchanges 
residing in the system. The use of the defined term Nasdaq Quoting 
Market Participant gives the incorrect impression that orders entered 
into the system with the Y qualifier will not execute against the party 
entering that order and will also only interact with quotes/orders of 
Nasdaq ECNs, Nasdaq Market Makers, Order-Entry Firms and ITS/CAES 
market makers. By removing the term Nasdaq, the rule will correctly 
indicate that the use of the Y qualifier only inhibits interaction with 
the quote/order of the party entering the Y-flagged order and that such 
orders remain free to interact with the quotes/orders of all other 
Nasdaq Market Center participants (market makers, ECNs, order-entry 
firms, UTP exchanges and ITS/CAES market makers.)
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
section 15A of the Act,\6\ in general, and with section 15A(b)(6) of 
the Act,\7\ in particular, in that the proposed rule change 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.
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    \6\ 15 U.S.C. 78o-3.
    \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

    No written comments were solicited or received with respect to the 
proposed rule change.

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

    The proposed rule change has been filed by Nasdaq pursuant to 
section 19(b)(3)(A) of the Act \8\ and subparagraph (f)(6) of Rule 19b-
4 thereunder.\9\ Because the foregoing proposed rule change: (1) Does 
not significantly affect the protection of investors or the public 
interest; (2) does not impose any significant burden on competition; 
and (3) does not become operative for 30 days from the date on which it 
was filed, or such shorter time as the Commission may designate if 
consistent with the protection of the investors and the public 
interest, it has become effective pursuant to section 19(b)(3)(A) of 
the Act \10\ and Rule 19b-4(f)(6) \11\ thereunder.
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    \8\ 15 U.S.C. 78s(b)(3)(A).
    \9\ 17 CFR 240.19b-4(f)(6).
    \10\ 15 U.S.C. 78s(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6).
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    A proposed rule change filed under Rule 19b-4(f)(6) \12\ normally 
does not become operative prior to 30 days after the date of filing. 
However, pursuant to Rule 19b-4(f)(6)(iii), the Commission may 
designate a shorter time if such action is consistent with the 
protection of investors and the public interest. Nasdaq has requested 
that the Commission waive both five-day notice and the 30-day operative 
delay specified in Rule 19b-4(f)(6)(iii).\13\
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    \12\ 17 CFR 240.19b-4(f)(6).
    \13\ 17 CFR 240.19b-4(f)(6)(iii).
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    The Commission believes that waiving the five-day notice and the 
30-day operative delay is consistent with the protection of investors 
and the public interest \14\ because it will allow Nasdaq to clarify 
rule language regarding the Nasdaq Market Center system. For these 
reasons, the Commission designates the proposed rule change as 
effective and operative on May 20, 2004.\15\ At any time within 60 days 
of the filing of such proposed rule change, the Commission may 
summarily abrogate such proposed 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.
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    \14\ For purposes of waiving the operative date of this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \15\ For purposes of calculating the 60-day abrogation period, 
the Commission considers the period to commence on May 20, 2004, the 
date Nasdaq filed Amendment No. 2.
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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. 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-2004-055 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-2004-055. 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

[[Page 30356]]

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-2004-055 and should be 
submitted on or before June 17, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-12026 Filed 5-26-04; 8:45 am]
BILLING CODE 8010-01-P