[Federal Register Volume 69, Number 203 (Thursday, October 21, 2004)]
[Notices]
[Pages 61886-61888]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2734]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50537; File No. SR-NASD-2004-143]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change, and Amendment No. 1 thereto, by 
National Association of Securities Dealers, Inc. Relating to 
Attributable Summary Orders in the Nasdaq Market Center

October 14, 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 24, 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. On October 4, 
2004, Nasdaq filed Amendment No. 1 to the proposed rule change.\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\ See letter from Edward Knight, Executive Vice President, 
Nasdaq, to Katherine England, Assistant Director, Division of Market 
Regulation (``Division''), Commission, dated September 29, 2004 
(``Amendment No. 1''). In Amendment No. 1, Nasdaq clarified the 
description of the proposed rule change and provided rationale for 
its request to waive the 30-day operative delay for the proposed 
rule change.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq is filing a proposed rule change with the Commission to 
provide Order Delivery electronic communication networks (``ECNs'') in 
the Nasdaq Market Center the ability to enter attributable Summary 
Orders--an order type that rejects back to the entering party if the 
order would lock or cross the best bid or best offer displayed in the 
Nasdaq Market Center.\4\ The text of the proposed rule change is below. 
Proposed deletions are in brackets.\5\
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    \4\ See Amendment No. 1, note 3 supra.
    \5\ 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 well as SR-NASD-2004-76 filed on an immediately 
effective basis on May 5, 2004. See Securities Exchange Act Release 
No. 50074 (July 23, 2004), 69 FR 45866 (July 30, 2004).
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* * * * *

4700. Nasdaq Market Center--Execution Services

4701. Definitions
    Unless stated otherwise, the terms described below shall have the 
following meaning:
    (a)--(nn) No Change.
    (oo) The term ``Summary'' shall mean, for priced limit orders so 
designated, that if an order is marketable upon receipt by the Nasdaq 
Market Center, it shall be rejected and returned to the entering party. 
Summary Orders may only be entered by Order-Delivery ECNs. [Summary 
Orders may only be designated as Non-Attributable Orders.]
    (pp)-(uu) No Change.
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[[Page 61887]]

4706. Order Entry Parameters
    (a) Non-Directed Orders--
    (1) General. The following requirements shall apply to Non-Directed 
Orders Entered by Nasdaq Market Center Participants: \6\
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    \6\ Pursuant to a telephone conversation on October 14, 2004, 
between Thomas Moran, Office of General Counsel, Nasdaq, and Marc 
McKayle, Special Counsel, Division, Commission, the Commission 
corrected the proposed rule text by replacing the term ``NNMS'' with 
``National Market Center.''
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    (A) No Change.
    (B) A Non-Directed Order must be a market or limit order, must 
indicate whether it is a buy, short sale, short-sale exempt, or long 
sale, and may be designated as ``Immediate or Cancel,'' ``Day,'' 
``Good-till-Cancelled,'' ``Auto-Ex,'' ``Fill or Return,'' ``Pegged,'' 
``Discretionary,'' ``Sweep,'' ``Total Day,'' ``Total Good till 
Cancelled,'' ``Total Immediate or Cancel,'' or ``Summary.''
    (i) through (xii) No Change.
    (xiii) An order may be designated as ``Summary,'' in which case the 
order shall be designated either as Day or GTC. A Summary Order that is 
marketable upon receipt by the Nasdaq Market Center shall be rejected 
and returned to the entering party. If not marketable upon receipt by 
the Nasdaq Market Center, it will be retained by the system. Summary 
Day and GTC orders shall be executed prior to the market open if 
required under Rule 4710(b)(3)(B). Summary Orders may only be entered 
by Order-Delivery ECNs. [Summary Orders may only be designated as Non-
Attributable Orders.]
    (C)-(F) No Change.
    (2) No Change.
    (A) through (B) No Change.
    (b)-(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
    Nasdaq is proposing to allow Order Delivery ECNs participating in 
the Nasdaq Market Center to enter attributable Summary Orders. Summary 
Orders, in essence, provide a warning that the price of the order would 
lock or cross the best prices then displayed in the Nasdaq Market 
Center by rejecting such an order back to the entering party. If the 
Summary Order does not lock or cross the best price, it is retained by 
the system for normal processing. Today, the use of Summary Orders is 
restricted to Nasdaq Order Delivery ECNs and such orders may only be 
used to enter Non-Attributable Orders into SIZE.\7\ This proposal will 
give Nasdaq Order Delivery ECNs the choice to enter such orders as 
either attributable or non-attributable.
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    \7\ SIZE is the anonymous Market Participant Identifier 
(``MPID'') used to display Non-Attributable Quotes/Orders in the 
Nasdaq Market Center. See NASD Rule 4707(b)(2).
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    Under current Nasdaq Market Center processing, quotes already 
provide the lock/cross warning via rejection attributes of the Summary 
Order. Orders that are not designated as Summary, however, do not 
provide similar lock/cross warning capabilities and are considered 
immediately executable indications of trading interest that would be 
executed by the system if they locked or crossed the Nasdaq inside 
market. As such, Order Delivery ECNs generally refrain from using 
orders when displaying trading interest in the Nasdaq Market Center and 
instead aggregate multiple orders at their best price level and submit 
them to Nasdaq using a single aggregated quote. In turn, this 
aggregation increases internal processing complexity for ECNs that must 
convert and combine individual orders residing in their systems into a 
single quote and then appropriately parcel out subsequent order 
deliveries against that quote back to individual subscribers.
    The ability to receive a warning via order rejection when entering 
a locking or crossing order is an important component in providing 
Nasdaq Order Delivery ECNs control over how their orders are processed 
in the Nasdaq Market Center so as to manage executions taking place in 
their own systems as well in the Nasdaq Market Center. This control is 
particularly important to ECNs that act exclusively as agents and seek 
to avoid dual liability for multiple executions against the same single 
share amount displayed simultaneously, and potentially accessible, in 
the Nasdaq Market Center as well as the ECNs own internal book. As 
noted above, lock or cross warnings are available today to ECNs when 
they represent trading interest in Nasdaq using quotes. Nasdaq believes 
that the current limitation on using Summary Orders only to place Non-
Attributable Orders in SIZE restricts the ability of Nasdaq Order 
Delivery ECNs that, in lieu of quotes, may desire to provide multiple 
orders at the same price level to Nasdaq and have such orders 
attributed to them through a displayed MPID. Expansion of the Summary 
Order to allow the entry of attributable orders by ECNs that desire to 
enter multiple orders at multiple price levels into the Nasdaq Market 
Center ensures that such orders behave in a manner similar to quotes by 
providing for the rejection of locking or crossing trading interest as 
well as having that trading interest associated with the identity of 
the entering ECN via an attributable MPID. For ECNs that currently 
aggregate their customers' trading interest and submit it combined in a 
single quote, Summary Orders can provide a simplified, and less 
technologically burdensome, method to pass such orders individually to 
the Nasdaq Market Center and thereafter track and reconcile any 
resulting transactions with their own internal execution and order 
management systems while continuing to have such orders publicly 
associated with the entering ECN via attribution similar to quotes.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A of the Act,\8\ in general, and with 
section 15A(b)(6) of the Act,\9\ 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, Nasdaq 
believes that the increased control given to all market participants 
through the use of Summary Orders will assist in improving execution 
quality for themselves and their customers. In addition, to the extent 
that expansion of the Summary Order to attributable orders encourages 
the submission of greater amounts of trading interest in the form of 
such orders into the Nasdaq Market Center all market participants can 
be expected to benefit from such increased system liquidity.
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    \8\ 15 U.S.C. 78o-3.
    \9\ 15 U.S.C. 78o-3(b)(6).

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[[Page 61888]]

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, as amended.

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

    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 
\10\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\11\
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    \10\ 15 U.S.C. 78s(b)(1).
    \11\ 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,\12\ and Rule 19b-4(f)(6) 
thereunder.\13\
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    \12\ 15 U.S.C. 78s(b)(1).
    \13\ 17 CFR 240.19b-4(f)(6).
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    Pursuant to Rule 19b-4(f)(6)(iii),\14\ 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. Nasdaq believes that adoption of this proposal will 
encourage the submission of greater liquidity in the form of multiple 
attributable orders at multiple price levels. Nasdaq believes that the 
benefits of this liquidity should be made available to all market 
participants as soon as practicable, and respectfully requests that the 
Commission waive the 30-day pre-operative period contained in Rule 19b-
4(f)(6)(iii) of the Act.\15\ Nasdaq notes that the functionality 
proposed here is already available to Order-Delivery ECNs using Non-
Attributable Orders. The Commission believes that this proposal may 
encourage greater liquidity and transparency and that waiver of the 30-
day operative delay is consistent with the protection of investors and 
the public interest.\16\ Accordingly, the Commission has determined to 
waive the operative delay.
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    \14\ 17 CFR 240.19b-4(f)(6)(iii).
    \15\ See Amendment No. 1, note 3 supra.
    \16\ 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, 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 Please include 
File Numb (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. er SR-NASD-2004-
143 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-2004-143. 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 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-2004-143 and 
should be submitted on or before November 12, 2004.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
Margaret H. McFarland,
Deputy Secretary.
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    \17\ 17 CFR 200.30-3(a)(12).
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 [FR Doc. E4-2734 Filed 10-20-04; 8:45 am]
BILLING CODE 8010-01-P