[Federal Register Volume 69, Number 148 (Tuesday, August 3, 2004)]
[Notices]
[Pages 46609-46611]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-17653]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50097; File No. SR-NASD-2004-112]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of Proposed Rule Change by the National 
Association of Securities Dealers, Inc. To Extend Its Pilot Program 
Relating to Price-Improvement Standards Under the Manning 
Interpretation

July 27, 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 July 23, 2004, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by NASD. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons and to approve the proposal, on an accelerated 
basis. This accelerated approval extends the pilot program 
retroactively to July 1, 2004, and prospectively through December 31, 
2004.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    NASD proposes to extend retroactively to July 1, 2004, and 
prospectively through December 31, 2004, the current pilot program 
relating to price-improvement standards for decimalized securities 
contained in NASD IM-2110-2--Trading Ahead of Customer Limit Order 
(``Manning Interpretation''). Without such an extension, these 
standards would expire on June 30, 2004. NASD does not propose to make 
any substantive changes to the pilot; NASD is proposing only to make 
the pilot rule effective on

[[Page 46610]]

a retroactive basis to July 1, 2004, and to extend the pilot's 
expiration date to December 31, 2004.

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

    In its filing with the Commission, NASD included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposal. The text of these 
statements may be examined at the places specified in Item III below. 
NASD 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
    NASD's Manning Interpretation, among other things, requires an NASD 
member firm to provide a minimum level of price improvement to an 
incoming order in an NMS or SmallCap security if the firm chooses to 
trade as principal with the incoming order at a price superior to that 
of the customer limit order that the firm currently holds. If the firm 
fails to provide the minimum level of price improvement to the incoming 
order, the firm must execute the held customer limit order. Generally, 
if the firm fails to provide the requisite amount of price improvement 
and also fails to execute the held customer limit order, it is in 
violation of the Manning Interpretation.
    On April 6, 2001, the Commission approved, on a pilot basis, price-
improvement standards in the Manning Interpretation for trading in a 
decimalized environment.\3\ That proposal added the following language 
to IM-2110-2:
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    \3\ See Securities Exchange Act Release No. 44165 (April 6, 
2001), 66 FR 19268 (April 13, 2001) (``Pilot Approval Order'').
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    For Nasdaq securities authorized for trading in decimals pursuant 
to the Decimals Implementation Plan For the Equities and Options 
Markets, the minimum amount of price improvement necessary in order for 
a market maker to execute an incoming order on a proprietary basis in a 
security trading in decimals when holding an unexecuted limit order in 
that same security, and not be required to execute the held limit 
order, is as follows:

    (1) For customer limit orders priced at or inside the best 
inside market displayed in Nasdaq, the minimum amount of price 
improvement required is $0.01; and
    (2) For customer limit orders priced outside the best inside 
market displayed in Nasdaq, the market maker must price improve the 
incoming order by executing the incoming order at a price at least 
equal to the next superior minimum quotation increment in Nasdaq 
(currently $0.01).\4\
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    \4\ Pursuant to the terms of the Decimals Implementation Plan 
for the Equities and Options Markets, the minimum quotation 
increment for Nasdaq securities (both NMS and SmallCap) at the 
outset of decimal pricing is $0.01. As such, Nasdaq displays priced 
quotations to two places beyond the decimal point (to the penny). 
Quotations submitted to Nasdaq that do not meet this standard are 
rejected by Nasdaq systems. See Securities Exchange Act Release No. 
43876 (January 23, 2001), 66 FR 8251 (January 30, 2001) (SR-NASD-
2001-07).

    Since approval, these standards have operated on a pilot basis, 
which would terminate on June 30, 2004.\5\ After consultation with SEC 
staff, NASD has determined to seek an extension of its current pilot 
until December 31, 2004. NASD also is seeking to make this proposal 
effective on a retroactive basis to July 1, 2004. NASD believes that 
such an extension provides for an appropriate continuation of the 
current Manning price-improvement standard while the Commission 
continues to analyze the issues related to customer limit order 
protection in a decimalized environment. NASD is not proposing any 
substantive changes to the pilot at this time.
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    \5\ See Securities Exchange Act Release No. 48876 (December 4, 
2003), 68 FR 69103 (December 11, 2003) (extending pilot price-
improvement standard to June 30, 2004).
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2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\6\ which requires, among 
other things, that NASD's rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. NASD believes that the proposed rule change would 
continue the current pilot program's protection of customer limit 
orders and promote the integrity of the market.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD 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.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the proposed rule change, 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 
SR-NASD-2004-112 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 SR-NASD-2004-112. 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 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 SR-NASD-2004-112 and should be submitted on 
or before August 24, 2004.

[[Page 46611]]

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    After careful consideration, the Commission finds that the proposed 
rule change is consistent with the requirements of the Act and the 
rules and regulations thereunder applicable to a national securities 
association.\7\ In particular, the Commission finds that the proposed 
rule change is consistent with section 15A(b)(6) of the Act \8\ because 
it is designed 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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    \7\ In approving this proposal, the Commission has considered 
the proposed rule's impact on efficiency, competition, and capital 
formation. See 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78o-3(b)(6).
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    The Commission previously has found NASD's pilot rule relating to 
price-improvement standards under the Manning Interpretation to be 
consistent with the Act.\9\ NASD now proposes to reinstate the pilot; 
to make it effective retroactively to July 1, 2004; and extend it 
through December 31, 2004. NASD is not proposing any textual changes to 
the pilot rule. In the Pilot Approval Order, the Commission stated that 
the pilot rule should ensure that customer limit orders ``will continue 
to have access to market liquidity ahead of market makers in 
appropriate circumstances.'' \10\ More recently, the Commission also 
has stated:
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    \9\ See supra note 3.
    \10\ 66 FR at 19271.

When market participants can gain execution priority for an 
infinitesimally small amount, important customer protection rules 
such as exchange priority rules and the NASD's Manning 
Interpretation as currently formulated could be rendered 
meaningless. * * * If investors' limit orders lose execution 
priority for a nominal amount, over time, investors may cease to use 
them, which would deprive the markets of a vital source of 
liquidity.\11\
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    \11\ Securities Exchange Act Release No. 49325 (February 26, 
2004), 69 FR 11126, 11170 (March 9, 2004) (proposing Regulation 
NMS). Nothing in this approval order presupposes any action that the 
Commission may take with respect to proposed Regulation NMS.

    For these reasons, the Commission continues to believe that NASD's 
pilot rule is consistent with the Act and will continue to provide 
beneficial protection to customer limit orders.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after publication of notice of filing 
thereof in the Federal Register. Accelerated approval will allow the 
customer limit order protection offered by the pilot rule to continue 
without interruption.

V. Conclusion

    Is it therefore ordered, pursuant to section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-NASD-2004-112) is hereby 
approved on an accelerated basis.
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    \12\ 15 U.S.C. 78s(b)(2).

    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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Jill M. Peterson,
Assistant Secretary
[FR Doc. 04-17653 Filed 8-2-04; 8:45 am]
BILLING CODE 8010-01-P