[Federal Register Volume 69, Number 225 (Tuesday, November 23, 2004)]
[Notices]
[Page 68204]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-3301]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-50683; File No. SR-NASD-2004-107]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Order Approving Proposed Rule Change Relating to 
Computer Generated Quoting in Exchange-Listed Securities

November 17, 2004.

I. Introduction

    On July 12, 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''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to allow market makers to engage in Computer 
Generated Quoting (``CGQ'') in exchange-listed securities. The proposed 
rule change was published for comment in the Federal Register on 
October 12, 2004.\3\ The Commission received no comment letters on the 
proposal. This order approves the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 50478 (September 30, 
2004), 69 FR 60692.
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II. Description of the Proposal

    Nasdaq proposed to eliminate NASD Rule 6330(d), which governs CGQ 
in exchange-listed securities. NASD Rule 6330(d) prohibits the practice 
of automatically, and without cognizable human intervention, updating a 
market maker's quote to keep the market maker away from the inside 
market. NASD Rule 6330(d)(2) however, contains exceptions to the 
general prohibition in CGQ, including exceptions for conduct that is 
consistent with the Commission's Order Handling Rules, and for CGQ that 
equals or improves either or both sides of the national best bid or 
offer (``NBBO'') or adds size to the NBBO.
    The limitations contained in NASD Rule 6330(d) were originally 
implemented because of capacity constraints that Nasdaq has stated no 
longer persist. Under procedures implemented by the Consolidated Tape 
Association,\4\ Nasdaq, as well as any other Participant, now has the 
opportunity to request additional capacity to accommodate increased 
quoting, while bearing the expense. Under the proposal, market makers 
would be able to engage in CGQ without limitations.
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    \4\ See Securities Exchange Act Release No. 47030 (December 18, 
2002), 67 FR 78832 (December 26, 2002).
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III. Discussion and Commission Findings

    In the past, the Commission has recognized concerns regarding the 
accessibility of CGQ and the impact of such quoting on system 
capacity.\5\ Nasdaq has assured the Commission that these capacity 
constraints no longer persist, since it is now able to request 
additional capacity in order to accommodate increased quoting. Thus the 
Commission believes that lifting the current restrictions on CGQ in 
exchange-listed securities should not cause a significant impact upon 
system capacity and data traffic. Furthermore, the Commission notes 
that various markets have moved towards automated systems to make their 
markets more efficient.\6\
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    \5\ See Securities Exchange Act Release No. 37619A (September 6, 
1996), 61 FR 48290 (September 12, 1996) (``Order Execution 
Obligations'').
    \6\ See Securities Exchange Act Release No. 49749 (February 26, 
2004), 69 FR 11126 (March 9, 2004) (``Proposed Regulation NMS'').
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    In addition, the Commission notes that permitting automated 
generation of quotations will likely contribute to more accurate and 
informative quotations because market makers are able to use automated 
measures to produce accessible quotations that add value to the market 
without limitation. Permitting the use of CGQ by market makers allows 
them to utilize technology to fulfill their quotation obligations 
efficiently. Moreover, allowing market makers to utilize technology in 
this manner reduces any competitive disadvantage that the previous 
auto-quote ban may have created, with the potential to benefit 
investors by improving liquidity, transparency, and order interaction 
in the Nasdaq Market Center.
    Section 8(d)(ii) of the Intermarket Trading System (``ITS'') Plan 
governs the adoption and implementation of trade-through rules by ITS 
Participants. In February 2000, the Commission granted NASD an 
exemption from the provisions of the ITS Plan relating to automated 
quote generation by market makers trading non-Rule 19c-3 and Rule 19c-3 
securities,\7\ thus allowing market makers to engage in CGQ in 
exchange-listed securities, under particular circumstances. The 
Commission has extended the exemption annually since December 2000.\8\ 
In granting the exemption, the Commission determined that the exemption 
was consistent with the public interest, the protection of investors, 
the maintenance of fair and orderly markets and the removal of 
impediments to, and the perfection of the mechanisms of, a national 
market system because it allowed market makers to continue to 
participate in the market for non-Rule 19c-3 securities and to compete 
for order flow in Rule 19c-3 securities. The Commission is not aware of 
any negative effects from the use of computer generated quotations by 
Nasdaq market makers during the nearly four year period covered by the 
Commission's exemption.
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    \7\ See Letter to Eugene A. Lopez, Senior Vice President, 
Nasdaq, from Robert L.D. Colby, Deputy Director, Division of Market 
Regulation (``Division''), Commission, dated February 11, 2000.
    \8\ See Letters to Eugene A. Lopez, Senior Vice President, 
Nasdaq, from Robert L.D. Colby, Deputy Director, Division, 
Commission dated December 22, 2000, and December 21, 2001; Letter to 
Eugene A. Lopez, Senior Vice President, Nasdaq, from Alden S. 
Adkins, Associate Director, Division, Commission, December 31, 2002; 
and Letter to Eugene A. Lopez, Executive Vice President, Nasdaq, 
from David S. Shillman, Associate Director, Division, Commission, 
dated December 23, 2003.
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    For the foregoing reasons, the Commission finds that the proposed 
rule change is consistent with the provisions of section 15A of the Act 
\9\ in general, and section 15A(b)(6) of the Act,\10\ which requires 
that the rules of the NASD foster cooperation and coordination with 
persons engaged in facilitating transactions in securities and remove 
impediments to and perfect the mechanism of a free and open market.
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    \9\ 15 U.S.C. 78o-3.
    \10\ 15 U.S.C. 78o-3(b)(6).
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IV. Conclusion

    It is therefore ordered, Pursuant to section 19(b)(2) of the Act 
\11\ the proposed rule change (SR-NASD-2004-107) is approved.
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    \11\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
Margaret H. McFarland,
Deputy Secretary.
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    \12\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E4-3301 Filed 11-22-04; 8:45 am]
BILLING CODE 8010-01-P