[Federal Register Volume 69, Number 225 (Tuesday, November 23, 2004)]
[Notices]
[Pages 68202-68204]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3300]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50678; File No. SR-NASD-2004-156]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by National Association of 
Securities Dealers, Inc. Related to ECN Response Time Measurement in 
the Nasdaq Market Center

November 16, 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 November 3, 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 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.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to change NASD Rule 4710 pertaining to the 
measurement of Electronic Communication Network (``ECN'') response 
times and will provide ECNs participating in the Nasdaq Market Center 
the option to receive and respond to order match delivery traffic using 
a direct, dedicated point-to-point communication linkage.\3\ The text 
of the proposed rule change is below. Proposed new language is in 
italics.
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    \3\ Pursuant to a telephone conversation on November 15, 2004, 
between Thomas Moran, Associate General Counsel, Nasdaq, and Marc 
McKayle, Special Counsel, Division of Market Regulation 
(``Division''), Commission, the above language was changed to 
clarify that an ECN's use of the direct, dedicated point-to-point 
communication linkage is voluntary under the proposed rule change.
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* * * * *

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)-(B) No Change.
    (C) Decrementation Procedures--The size of a Quote/Order displayed 
in the order display service and/or the quotation montage of the Nasdaq 
Market Center will be decremented upon the delivery of a Liability 
Order or the delivery of an execution of a Non-Directed Order or 
Preferenced Order in an amount equal to the system-delivered order or 
execution.
    (i) through (iii) No Change.
    (iv) If a Nasdaq ECN regularly fails to meet a 5-second response 
time (as measured by the ECN's Service Delivery Platform if linked to 
the Nasdaq Market Center by an application programming interface; or as 
measured by timestamps generated by the Nasdaq Market Center if linked 
to the system by a direct connection) over a period of orders, such 
that the failure endangers the maintenance of a fair and orderly 
market, Nasdaq will place that ECN's quote in a closed-quote state. 
Nasdaq will lift the closed-quote state when the Nasdaq ECN certifies 
that it can meet the 5-second response time requirement with regularity 
sufficient to maintain a fair and orderly market.
    (v) No Change.
    (D) No Change.
    (2)-(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.

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

1. Purpose
    ECNs have two options when participating in the Nasdaq Market 
Center. They can be ``Auto-Ex'' ECNs, in which case their quotes/orders 
are subject to automatic execution, or they can elect to be ``Order-
Delivery,'' where the system instead delivers a buy or sell trading 
message to the ECN that, in response, either executes or rejects the 
message. Today, all ECNs in the Nasdaq Market Center participate as 
order-delivery ECNs.
    Under current Nasdaq Market Center rules, order-delivery ECNs must 
respond to messages sent to them by the system within 5 seconds on 
average, and in no event later than 30 seconds for any one message. The 
5-second average response standard is measured by timestamps generated 
by the ECN's Service Delivery Platform (``SDP'') at the ECN's trading 
location. In this filing, Nasdaq is proposing the adoption of an 
alternative method to measure the 5-second response time for ECNs that 
voluntarily elect to link to Nasdaq using a direct, dedicated point-to-
point communication linkage to receive and respond to order matches 
delivered to them.\4\ Since use of the dedicated linkage obviates the 
need for the SDP to process order match and response traffic, Nasdaq 
proposes to measure directly-linked ECN response times using data 
generated by the Nasdaq Market Center's host computers. In short, 
Nasdaq will calculate and monitor, on a real-time basis, the difference 
between two time stamps: (1) The time the Nasdaq Market Center host 
dispatched a message to the ECN, and (2) the time the Nasdaq Market 
Center received a response back from the ECN. On an ongoing basis, 
Nasdaq will monitor individual directly-linked ECN response times and 
provide those ECNs with its own order responsiveness time statistics, 
which will not be made public. As before, if an ECN regularly fails to 
meet the 5-second response time over a number of orders, Nasdaq will 
place that ECN's quote in a closed quote state and the closed quote 
state will be lifted when the ECN can certify that it can meet the 5-
second response time requirement.
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    \4\ This proposed rule change replaces File No. SR-NASD-2004-66, 
which was published for comment, and subsequently withdrawn. See 
respectively, Securities Exchange Act Release No. 49604 (April 22, 
2004), 69 FR 54818 (April 30, 2004), and Letter from Edward S. 
Knight, Executive Vice President, Nasdaq to Katherine A. England, 
Assistant Director, Division of Market Regulation, Commission, dated 
October 15, 2004.
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    By providing ECNs the option to use a dedicated linkage, Nasdaq 
expects to significantly reduce response delays that can be encountered 
in the current environment where order delivery messages directed to 
ECNs use existing Nasdaq Market Center application programming 
interfaces (``APIs'') to reach their destination and are commingled, 
and compete with, other Nasdaq Market Center messaging (executions, 
cancels, etc.) for bandwidth to reach the ECN's SDP. All messaging 
other than ECN match order delivery and response traffic (e.g., quote 
updates/ order deliveries, cancels, and executions

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reports) will continue to flow between Nasdaq and ECNs using existing 
communications linkages.\5\ As such, ECNs electing to use a dedicated 
linkage will be required, for the foreseeable future, to maintain the 
current linkage infrastructure as well as support the new dedicated 
match order delivery and response linkage.\6\
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    \5\ While all of this data is important, it is in the area of 
Match Order delivery and response traffic where delays can have the 
most negative impact on market participants as a whole since they 
are the basis for the swift execution of trades between order-
delivery ECNs and those seeking to interact with them. Thus, it is 
on this messaging that Nasdaq's proposed rule change is initially 
focused.
    \6\ Nasdaq notes that the above linkage only speeds delivery and 
receipt of match delivery and response messages between the Nasdaq 
Market Center host computers and the directly-linked ECN, it would 
not give such traffic any special priority in the Nasdaq Market 
Center execution process. Nasdaq believes that its approach will 
enhance the speed and efficiency of the Nasdaq Market Center system 
as a whole and can provide a more accurate understanding of whether 
Nasdaq or an ECN's own internal system is at fault when ECN order 
processing is unduly delayed.
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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,\7\ in general and with 
section 15A(b)(6) of the Act,\8\ 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.
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    \7\ 15 U.S.C. 78o-3.
    \8\ 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, 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 
\9\ and subparagraph (f)(6) of Rule 19b-4 thereunder.\10\
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    \9\ 15 U.S.C. 78s(b)(1).
    \10\ 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. Nasdaq has requested that the 
Commission waive the 30-day pre-operative period and the five-day pre-
filing notice requirement for ``non-controversial'' proposals, based on 
the following representations: (1) The instant proposal is 
substantively similar to File No. SR-NASD-2004-66, which was published 
for comment,\11\ (2) this proposal simply establishes a means for ECNs 
to link directly with Nasdaq in order to measure the 5-second response 
time obligation that ECNs are currently subject to, (3) Nasdaq will 
conduct the calculation process for policing the 5-second standard for 
directly-linked ECNs and this proposal will not impose any specific 
programming burdens on ECNs, and (4) the use of a dedicated linkage by 
an ECN will be purely voluntary. In light of the foregoing, and because 
the Commission believes that the proposal should assist Nasdaq's 
ability to oversee and monitor the quality of its market, the 
Commission believes that waiver of the 5-day pre-filing requirement and 
30-day operative delay is consistent with the protection of investors 
and the public interest. Accordingly, the Commission has determined to 
waive the pre-filing requirement and the operative delay.
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    \11\ See supra note 4.
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    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\ with no operative delay.\14\
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    \12\ 15 U.S.C. 78s(b)(1).
    \13\ 17 CFR 240.19b-4(f)(6).
    \14\ Nasdaq will provide market participants with notice of the 
exact date of the implementation of the proposed rule change via a 
Head Trader Alert on http://www.nasdaqtrader.com. Corresponding 
changes and footnote added pursuant to telephone conversation 
between Thomas Moran, Associate General Counsel, Nasdaq, and Marc 
McKayle, Special Counsel, Division, Commission, on November 16, 
2004.
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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 (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-NASD-2004-156 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-2004-156. 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 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-2004-156 and 
should be submitted on or before December 14, 2004.


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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.15
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E4-3300 Filed 11-22-04; 8:45 am]
BILLING CODE 8010-01-P