[Federal Register Volume 69, Number 155 (Thursday, August 12, 2004)]
[Notices]
[Pages 49923-49924]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-18419]



[[Page 49923]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50149; File No. SR-NASD-2004-099]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Permitting ITS/CAES Market Makers To Use the 
Automatic Quote Refresh Functionality for ITS Securities

August 5, 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 June 25, 2004, the National Association of Securities Dealers, Inc. 
(``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by Nasdaq. Nasdaq has 
filed this proposed rule change pursuant to section 19(b)(3)(A)(ii) of 
the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which renders the 
proposal effective upon filing with the Commission. 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)(ii).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to amend NASD Rule 4701 (``Definitions'') and NASD 
Rule 4710 (``Participant Obligations in the Nasdaq Market Center'') to 
allow market makers that trade Intermarket Trading System securities 
(``ITS/CAES market makers'') to use the Automatic Quote Refresh 
functionality. The text of the proposed rule change appears below. New 
language is in italics. Deleted text is in brackets.
* * * * *
4701. Definitions
    Unless stated otherwise, the terms described below shall have the 
following meaning:
    (a)-(d) No Change.
    (e) The term ``automatic refresh size'' shall mean the default size 
to which a Nasdaq Market Maker's or ITS/CAES Market Maker's quote will 
be refreshed pursuant to NASD Rule 4710(b)(2), if the market maker 
elects to utilize the Quote Refresh Functionality and does not 
designate to Nasdaq an alternative refresh size, which must be at least 
one normal unit of trading. The automatic refresh size default amount 
shall be 1,000 shares.
    (f)-(uu) No Change.
* * * * *
4710. Participant Obligations in the Nasdaq Market Center
    (a) No Change.
    (b) Non-Directed Orders
    (1) No Change.
    (2) Refresh Functionality
    (A) No Change.
    (B) Auto Quote Refresh (``AQR'')--Once a Nasdaq Market Maker's or 
ITS/CAES Market Maker's Displayed Quote/Order size and Reserve 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 Nasdaq Market Center 
executions, the Nasdaq Market Maker or ITS/CAES Market Maker may elect 
to have The Nasdaq Stock Market refresh the market maker's quotation as 
follows:
    (i) Nasdaq will refresh the market maker's quotation price on the 
bid or offer side of the market, whichever is decremented to an amount 
less than a normal unit of trading, by a price interval designated by 
the Nasdaq Market Maker or ITS/CAES Market Maker; and
    (ii) Nasdaq will refresh the market maker's displayed size to a 
level designated by the Nasdaq Market Maker or ITS/CAES Market Maker, 
or in the absence of such size level designation, to the automatic 
refresh size.
    (iii) This functionality shall produce an Attributable Quote/Order.
    (iv) The AQR functionality described in this subparagraph shall 
only be available for use in connection with a Nasdaq Market Maker's or 
ITS/CAES Market Maker's ``Legacy Quote.'' This functionality shall be 
available only to Nasdaq Market Makers or ITS/CAES Market Makers.
    [(v) The AQR functionality shall not be available to any 
participant for any ITS Security.]
    (3)-(8) No Change.
    (c)-(e) No Change.
* * * * *

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

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

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

1. Purpose
    On March 2, 2004, the Commission approved Nasdaq's proposal to 
transition the trading of exchange-listed securities in the Nasdaq 
Market Center to the same platform that Nasdaq uses for trading Nasdaq-
listed securities.\5\ Currently, NASD Rule 4710(b)(2)(B) allows market 
makers in Nasdaq securities to have their quote refreshed automatically 
in the event that the existing quote, on either side of the market, is 
decremented to less than one normal unit of trading (i.e., 100 shares) 
following an execution. This functionality, known as ``Auto Quote 
Refresh'' or ``AQR,'' refreshes the market maker's quote to a price 
level and size that is designated by the market maker in advance.\6\ 
According to Nasdaq, market makers use AQR to manage their quotations 
and to fulfill their quotation obligations.\7\ In the absence of AQR, 
market makers manage their quotes manually or via their firm's own 
quote management system. Nasdaq states that AQR is completely 
voluntary, but widely used in the trading of Nasdaq securities.
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    \5\ See Securities Exchange Act Release No. 49349 (March 2, 
2004), 69 FR 10775 (March 8, 2004) (approving SR-NASD-2003-149).
    \6\ Market makers may designate their quotes in round lots only. 
Telephone conversation between Jeffrey S. Davis, Associate Vice 
President and Associate General Counsel, Nasdaq, and Lisa N. Jones, 
Special Counsel and Marisol Rubecindo, Attorney, Division of Market 
Regulation, Commission, on August 3, 2004.
    \7\ Nasdaq notes that for purposes of Rule 11Ac1-1(c) under the 
Act, quotes generated by the AQR functionality are considered firm. 
17 CFR 11Ac1-1(c).
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    The AQR functionality is not currently available to market makers 
in ITS securities. Nasdaq states that when it proposed the new platform 
for the trading of ITS securities, it decided not to offer the AQR 
functionality to expedite the launch of the system. Nasdaq believes 
that removing the AQR functionality for ITS securities allowed Nasdaq 
to focus on the modification of the trading platform to accommodate the 
requirements of the ITS Plan, as well as on the functionality that 
Nasdaq believed was critical to market participants. Nasdaq believes 
that it is now able to add the AQR functionality

[[Page 49924]]

to the tools available for trading ITS securities. Nasdaq believes that 
the AQR functionality should benefit investors by assisting ITS/CAES 
market makers in maintaining continuous two-sided quotes and providing 
added liquidity to the market following an execution.\8\
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    \8\ Nasdaq notes that it will notify market participants of the 
operative date of the proposal via Head Trader Alert on 
www.nasdaqtrader.com.
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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,\9\ in general and with 
section 15A(b)(6) of the Act,\10\ in particular, which requires that 
the rules of the NASD be designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, to remove impediments to a free and open market 
and a national market system, and, in general, to protect investors and 
the public interest. Nasdaq believes that the current proposal is 
consistent with those objectives in that it increases transparency, 
liquidity and order interaction in ITS securities in the Nasdaq Market 
Center.
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    \9\ 15 U.S.C. 78o-3.
    \10\ 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

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not:
    (i) significantly affect the protection of investors or the public 
interest;
    (ii) impose any significant burden on competition; and
    (iii) 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 investors and the public interest, it 
has become effective pursuant to section 19(b)(3)(A) of the Act \11\ 
and Rule 19b-4(f)(6) thereunder.\12\ At any time within 60 days of the 
filing of the proposed rule change, the Commission may summarily 
abrogate the 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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    \11\ 15 U.S.C. 78s(b)(3)(A).
    \12\ 17 CFR 240.19b-4(f)(6).
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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 is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment for (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2004-099 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-2004-099. 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 the 
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 File Number 
SR-NASD-2004-099 and should be submitted on or before September 2, 
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. 04-18419 Filed 8-12-04; 8:45 am]
BILLING CODE 8010-01-P