[Federal Register Volume 70, Number 37 (Friday, February 25, 2005)]
[Notices]
[Pages 9412-9414]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-774]



[[Page 9412]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51223; File No. SR-NASD-2005-010]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change and Amendment No. 1 To Modify Restrictions on Computer-
Generated Quoting

February 17, 2005.
    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 January 25, 2005, 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 filed 
the proposal as a ``non-controversial'' rule change pursuant to Section 
19(b)(3)(A) of the Act,\3\ and Rule 19b-4(f)(6) thereunder,\4\ which 
renders the proposal effective upon filing with the Commission. On 
February 16, 2005, the Exchange filed Amendment No. 1 to the proposal. 
The Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, 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).
    \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 Rules 4705 and IM-4613 to modify 
restrictions on autoquoting and computer-generated quoting of Nasdaq-
listed stocks. Nasdaq will implement the proposed rule change 30 days 
after the date of its filing.
    The text of the proposed rule change is available on the Nasdaq's 
Web site http://www.nasdaq.com, at the Nasdaq's Office of the 
Secretary, and at the Commission's Public Reference Room.

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 amend its rules governing autoquoting and 
computer-generated quoting (collectively, ``CGQ'') \5\ in Nasdaq-listed 
stocks to provide market participants with greater latitude in using 
technology to manage their quotation activity. The limitations 
contained in IM-4613 were originally implemented due to capacity and 
operational constraints that no longer exist. The Commission recently 
approved Nasdaq's proposal to remove restrictions on CGQ in exchange-
listed securities.\6\ In a similar vein, this proposed rule change will 
eliminate member filing requirements that are currently associated with 
CGQ in Nasdaq-listed securities. Market participants have developed 
sophisticated systems that generate quote updates through automated 
means. In many cases, these systems reflect trading strategies in which 
quoted prices are based on several factors, such as the last sale, 
bids, offers, and sizes of stocks, futures, and options, and 
statistically derived relationships among these instruments. IM-4613 
currently interprets Rule 4613, which governs quotation activity in 
Nasdaq, to allow CGQ only under certain conditions. In light of 
substantial experience administering the restrictions of the current 
rule, Nasdaq has concluded that the conditions currently imposed upon 
CGQ are unnecessary, and should be replaced with a flexible rule 
allowing Nasdaq to impose temporary restrictions on CGQ if Nasdaq 
determines that they are necessary to protect the integrity of Nasdaq's 
systems.
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    \5\ IM-4613 currently defines ``autoquoting'' as the use of any 
system that ``track[s] changes to the inside quotation in Nasdaq and 
automatically react[s] by generating another quote to keep the 
market maker's quote away from the best market'' and defines 
``computer-generated quoting'' as ``effecting, without a physical 
entry, a quote update that is not designed to keep a * * * quote 
away from the Nasdaq and/or national best bid/best offer.'' For the 
sake of simplicity, the term ``CGQ'' is used in this filing to refer 
to all forms of automated entry or updating of quotes or orders.
    \6\ Securities Exchange Act Release No. 50683 (November 17, 
2004), 69 FR 68204 (November 23, 2004) (SR-NASD-2004-107).
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    IM-4613 provides that a market maker must request approval to 
engage in CGQ by submitting an application to Nasdaq, and must update 
its application to reflect subsequent changes. In 2003, Nasdaq 
streamlined the approval process by allowing firms to proceed with CGQ 
after providing five days' notice, unless Nasdaq specifically rejects 
or imposes conditions upon a firm's application.\7\ Because the 
capacity of Nasdaq systems is well in excess of current and foreseeable 
quoting and trading volumes, however, Nasdaq has not found occasion to 
reject or condition approval of any firm's application. Moreover, 
Nasdaq has found that the information provided through the applications 
and their updates is less useful to a technical understanding of firms' 
CGQ activity than ongoing personal contact between Nasdaq and 
programmers and traders at the firms that engage in CGQ. Accordingly, 
Nasdaq has concluded that the requirement to file and update the 
application imposes an unwarranted paperwork burden on firms and should 
be eliminated.
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    \7\ Securities Exchange Act Release No. 48274 (August 1, 2003), 
68 FR 47119 (August 7, 2003) (SR-NASD-2003-102).
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    Moreover, Nasdaq believes that the provision of IM-4613 that 
restricts CGQ at prices away from the inside market is now unnecessary 
in light of Nasdaq's capacity and the fully automated nature of the 
Nasdaq market. Quotes at prices away from the inside market are 
regularly executed by orders that ``sweep the book,'' and therefore 
such quotes offer liquidity at prices acceptable to the market 
participants that enter orders accessing them.\8\ Moreover, since the 
Nasdaq Market Center allows market participants to establish quotes at 
multiple levels, Nasdaq believes that market participants with multiple 
quotes should be permitted to use automation to manage their quotes 
away from the inside market as well as their quotes at the inside 
market.
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    \8\ Nasdaq notes, however, that Rule 4613(c) continues to 
require that a market maker's quotations be reasonably related to 
the prevailing market. Accordingly, a market maker whose quotation 
is so far away from the inside market as to preclude an execution 
against the quote may be required to re-enter its quotations under 
the rule and may be suspended if it fails to do so.
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    Nasdaq notes, however, that IM-4613 contains an important 
safeguard, in that it allows Nasdaq to restrict or impose conditions on 
CGQ by one firm or multiple firms in order to protect the integrity of 
Nasdaq's systems if necessary. Although Nasdaq has not had occasion to 
use this authority and, consistent with the reduced restrictions

[[Page 9413]]

on CGQ reflected in this rule change, Nasdaq does not currently foresee 
circumstances that would require its use, nevertheless Nasdaq believes 
that this authority should be retained with appropriate modifications 
to ensure that Nasdaq has the flexibility to respond to exigent 
circumstances. Specifically, Nasdaq proposes to adopt a new paragraph 
in Rule 4705, which governs the general terms and conditions of 
participation in the Nasdaq Market Center, to provide that Nasdaq may 
impose upon any Nasdaq Market Center Participant such temporary 
restrictions upon the automated entry or updating of orders or Quotes/
Orders as Nasdaq may determine to be necessary to protect the integrity 
of Nasdaq's systems. Thus, the modified rule would be broader than the 
current rule in several respects. First, it would recognize that order 
entry and updating, like quotation entry and updating, can be 
automated, and that a rule allowing the restriction of automated 
activity should not reflect an artificial distinction between these two 
forms of interaction with the market. Second, the modified rule would 
apply to all Nasdaq Market Center Participants, whether market makers, 
electronic communications networks, or order entry firms, in 
recognition of the fact that automated activity is not limited to 
market makers, and would apply to both Nasdaq-listed and exchange-
listed securities. The modified rule would be narrower, however, in 
that it contemplates only such temporary restrictions on automated 
activity as may be necessary to address, for example, a system problem 
at a particular firm or an unexpected period of extremely high message 
traffic. Although the rule does not define temporary, it would be 
Nasdaq's intent to file a proposed rule change to impose a permanent 
restriction on a particular aspect of automated activity if it appeared 
that the circumstances giving rise to a particular restriction could 
not be mitigated within a one-month period. Any temporary restriction 
imposed will be communicated to affected participants in writing, to 
ensure that the market participants have a clear understanding of the 
scope of the restriction and to provide a clear record in the event 
that a market participant seeks review of the restriction.
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, 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. Easing restrictions on CGQ 
will allow market participants to make greater use of automation in 
establishing their quotations, which should enhance the price discovery 
process and allow members to increase the number of stocks in which 
they are registered as market makers. At the same time, Nasdaq's 
retained authority to impose restrictions on CGQ will allow Nasdaq to 
address any temporary system problems that may arise. The proposed rule 
change will also remove certain paperwork burdens that are currently 
imposed upon market makers engaging in CGQ.
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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 rule change, as amended, does not:
    (i) Significantly affect the protection of investors or the public 
interest;
    (ii) Impose any significant burden on competition; and
    (iii) Does not become operative for 30 days from the date on which 
it was filed, or such shorter time as the Commission may designate, it 
has become effective \11\ pursuant to Section 19(b)(3)(A) of the Act 
\12\ and Rule 19b-4(f)(6) thereunder.\13\
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    \11\ Nasdaq provided the Commission with notice of its intent to 
file the proposed rule change at least five days prior to the filing 
date.
    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
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    At any time within 60 days of the filing of the proposed rule 
change, as amended, 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.\14\
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    \14\ For purposes of calculating the 60-day abrogation period, 
the Commission considers the proposed rule change to have been filed 
on February 16, 2005, when Amendment No. 1 was filed.
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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, 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 No. SR-NASD-2005-010 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-2005-010. 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 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 Nasdaq. 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-2005-010 and should be submitted on or before March 
18, 2005.


[[Page 9414]]


    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. E5-774 Filed 2-24-05; 8:45 am]
BILLING CODE 8010-01-P