[Federal Register Volume 69, Number 189 (Thursday, September 30, 2004)]
[Notices]
[Pages 58564-58567]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-21882]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50434; File No. SR-NASD-2004-134]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the National Association of 
Securities Dealers, Inc., Relating to Multiple Market Participant 
Identifiers

September 23, 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 September 1, 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. The proposed 
rule change has been filed by Nasdaq as a ``non-controversial'' rule 
change pursuant to Rule 19b-4(f)(6) under the Act.\3\ 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)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to continue two pilot programs that provide market 
participants who execute transactions in Nasdaq and exchange-listed 
securities through its systems the ability to display trading interests 
using up to 10 individual Market Participant Identifiers (``MPIDs''). 
The text of the proposed rule change is below. Proposed new

[[Page 58565]]

language is in italics; proposed deletions are in brackets.\4\
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    \4\ The proposed rule change is marked to show changes from the 
rule as it appears in the electronic NASD Manual available at http://www.nasdr.com, as amended by File No. SR-NASD-2004-097. See 
Securities Exchange Act Release No. 50140 (August 3, 2004), 69 FR 
48535 (August 10, 2004).
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* * * * *

4613. Character of Quotations

(a) Quotation Requirements and Obligations
    (1) No Change.
    (2) The first MPID issued to a member pursuant to subparagraph (1) 
of this rule, or Rule 4623, shall be referred to as the member's 
``Primary MPID.'' For a six-month pilot period beginning [March 1,] 
September 1, 2004, market makers and ECNs may request the use of 
additional MPIDs that shall be referred to as ``Supplemental MPIDs.'' 
Market makers and ECNs may be issued up to nine Supplemental MPIDs. A 
market maker may request the use of Supplemental MPIDs for displaying 
Attributable Quotes/Orders in the Nasdaq Quotation Montage for any 
security in which it is registered and meets the obligations set forth 
in subparagraph (1) of this rule. An ECN may request the use of 
Supplemental MPIDs for displaying Attributable Quotes/Orders in the 
Nasdaq Quotation Montage for any security in which it meets the 
obligations set forth in Rule 4623. A market maker or ECN that ceases 
to meet the obligations appurtenant to its Primary MPID in any security 
shall not be permitted to use a Supplemental MPID for any purpose in 
that security.
    (3) No Change.
(b)-(e) No Change
* * * * *

5266. Market Participant Identifiers

    (a) No Change.
    (b) For a six-month pilot period commencing [June 24, 2004 and 
terminating September 31, 2004,] September 1, 2004,\5\ ITS/CAES market 
makers may request the use of additional MPIDs that shall be referred 
to as ``Supplemental MPIDs.'' ITS/CAES market makers may be issued up 
to nine Supplemental MPIDs. An ITS/CAES market maker may request the 
use of Supplemental MPIDs for displaying two-sided Attributable Quotes/
Orders in Nasdaq for any security in which it is registered and meets 
the obligations set forth in Rule 5220; an ITS/CAES market maker may 
not use a Supplemental MPID for displaying one-sided Attributable 
Quotes/Orders. An ITS/CAES market maker that fails to meet the 
obligations appurtenant to its Primary MPID in any security shall not 
be permitted to use a Supplemental MPID for any purpose in that 
security.
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    \5\ The Commission corrected the proposed rule text to italicize 
the comma after ``September 1, 2004.'' Voicemail message from 
Jeffrey Davis, Associate Vice President and Associate General 
Counsel, Nasdaq, to Marc McKayle, Special Counsel, Division of 
Market Regulation, Commission, on September 17, 2004.
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    (c) 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
    Nasdaq is proposing to extend through March 1, 2005, its current 
pilot programs that enable market makers and electronic communication 
networks (``ECNs'') in Nasdaq stocks and ITS/CAS Market Makers in 
exchange-listed stocks to use Supplemental MPIDs for displaying 
Attributable Quotes/Orders in the Nasdaq Market Center. On March 1, 
2004, Nasdaq submitted to the Commission File No. SR-NASD-2004-037 \6\ 
which established the ability of ECNs and market makers in Nasdaq 
securities to use up to 10 individual MPIDs to display attributable 
quotes and orders in the Nasdaq Quotation Montage. On July 29, 2004, 
Nasdaq submitted to the Commission File No. SR-NASD-2004-097,\7\ which 
created the same capability for ECNs and market makers using Nasdaq 
systems to quote and trade exchange-listed securities. Pursuant to 
these programs, which will be extended under the proposed rule change, 
MPIDs for Nasdaq and exchange-listed securities are allocated and, when 
Nasdaq is reaching technological limits for displayed, attributable 
MPIDs, re-allocated using the same procedures.\8\ Additional MPIDs are 
known as ``Supplemental MPIDs'' with a market maker's or ECN's first 
MPID being known as the ``Primary MPID.''
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    \6\ See Securities Exchange Act Release No. 49471 (March 25, 
2004), 69 FR 17006 (March 31, 2004).
    \7\ See Securities Exchange Act Release No. 50140 (August 3, 
2004), 69 FR 48535 (August 10, 2004).
    \8\ Under those procedures, rankings used to allocate display 
privileges are based only on the volume associated with a member's 
Supplemental MPID. Primary MPIDs will be excluded from the 
calculation. The member with lowest volume using a Supplemental MPID 
will continue to be the first to lose the display privilege, but 
only with respect to the Supplemental MPID that caused them to have 
the lowest ranking; the member will not lose its authority to use 
the Supplemental MPID in that security to submit quotes and orders 
to SIZE or the display privileges associated with that Supplemental 
MPID with respect to other securities in which it is permitted to 
use the identifier. When re-allocating the display privileges, 
requests for Primary MPIDs will continue to receive precedence over 
requests for Supplemental MPIDs.
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    The purpose of providing Supplemental MPIDs is to provide quoting 
market participants a better ability to organize and manage diverse 
order flows from their customers and to route orders and quotes to 
Nasdaq's listed trading facilities from different units/desks. Nasdaq 
believes that to the extent that this flexibility provides increased 
incentives to provide liquidity to Nasdaq systems, all market 
participants can be expected to benefit.\9\
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    \9\ Nasdaq assesses no fees for the issuance or use of a 
Supplemental MPIDs other than the Commission-approved transaction 
fees set forth in NASD Rule 7010.
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    The restrictions on the use of any Supplemental MPID are the same 
as those applicable to a Primary MPID. Regardless of the number of 
MPIDs used, NASD members will trade exchange-listed securities using 
Nasdaq systems in compliance with all pre-existing NASD and Commission 
rules governing the trading of these securities. There are only two 
exceptions to this general principle. First, the continuous quote 
requirement and the need to obtain an excused withdrawal, or functional 
excused withdrawal, as described in Rule 4613(a) and Rule 5220(e), as 
well as the procedures described in Rule 4710(b)(2)(B) and (b)(5), do 
not apply to Supplemental MPIDs. Second, only one MPID, its Primary 
MPID,\10\ may be used to engage in passive market making or to enter 
stabilizing bids pursuant to NASD Rules 4614 and 4619. In all other 
respects, market makers and ECNs will continue to have the same rights 
and obligations in using a Supplemental MPID to enter quotes and orders 
and to display

[[Page 58566]]

quotations, as they have using their Primary MPIDs.\11\
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    \10\ Clarification made pursuant to telephone conversation 
between Jeffrey Davis, Associate Vice President and Associate 
General Counsel, Nasdaq, and Marc McKayle, Special Counsel, and Ted 
Venuti, Law Clerk, Division of Market Regulation, Commission, on 
September 13, 2004.
    \11\ Telephone conversation between Jeffrey Davis, Associate 
Vice President and Associate General Counsel, Nasdaq, and Ira 
Brandriss, Assistant Director, and Ted Venuti, Law Clerk, Division 
of Market Regulation, Commission, on September 21, 2004.
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    The granting of Supplemental MPIDs is secondary to the integrity of 
the Nasdaq system trading those issues. As such, ECNs and market makers 
may not use a Supplemental MPID(s) to accomplish indirectly what they 
would be prohibited from doing directly through a single MPID. For 
example, members will not be permitted to use a Supplemental MPID to 
avoid their Manning or best execution obligations or their obligations 
under the Commission's Order Handling Rules, the firm quote rule, the 
OATS rules, and the Commission's order routing and execution quality 
disclosure rules. To the extent that the allocation of Supplemental 
MPIDs creates regulatory confusion or ambiguity, every inference will 
be drawn against the use of Supplemental MPIDs in a manner that would 
diminish the quality or rigor of the regulation of the Nasdaq market. 
Accordingly, if it is determined that a Supplemental MPID is being used 
improperly, Nasdaq will withdraw its grant of the Supplemental MPID for 
all purposes for all securities.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\12\ in general and with 
Section 15A(b)(6) of the Act,\13\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, remove impediments to a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest. In particular, the use of 
multiple MPIDs in listed securities can be expected to provide greater 
flexibility in the processing of diverse order flows, thereby improving 
overall system liquidity for the benefit of all market participants.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 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 impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act, as amended.

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

    Written comments on the proposed rule change were neither solicited 
nor received.

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

    The proposed rule change has been designated by Nasdaq as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A) of the Act 
\14\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\15\
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    \14\ 15 U.S.C. 78s(b)(1).
    \15\ 17 CFR 240.19b-4(f)(6).
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    The foregoing 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) by its terms does not become 
operative for 30 days after the date of this filing, or such shorter 
time as the Commission may designate, if consistent with the protection 
of investors and the public interest, and the NASD gave the Commission 
written notice of its intent to file the proposed rule change, along 
with a brief description and text of the proposed rule change, at least 
five business days prior to the date of filing of the proposed rule 
change. Consequently, the proposed rule change has become effective 
pursuant to Section 19(b)(3)(A) of the Act \16\ and Rule 19b-4(f)(6) 
thereunder.\17\
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    \16\ 15 U.S.C. 78s(b)(1).
    \17\ 17 CFR 240.19b-4(f)(6).
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    Pursuant to Rule 19b-4(f)(6)(iii),\18\ a proposed ``non-
controversial'' rule change does not become operative for 30 days after 
the date of filing, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest. Nasdaq has requested that the Commission waive the 30-day 
operative delay. The Commission has determined that good cause exists 
to waive the 30-day period to permit the pilot program to continue on 
an uninterrupted basis.\19\
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    \18\ 17 CFR 240.19b-4(f)(6)(iii).
    \19\ For the purposes only of waiving the 30-day operative 
delay, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the 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.

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 No. SR-NASD-2004-134 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 No. SR-NASD-2004-134. 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, 450 Fifth 
Street, NW., Washington, DC 20549. Copies of such filing will also 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 No. SR-NASD-2004-134 and 
should be submitted on or before October 21, 2004.


[[Page 58567]]


    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-21882 Filed 9-29-04; 8:45 am]
BILLING CODE 8010-01-P