[Federal Register Volume 70, Number 70 (Wednesday, April 13, 2005)]
[Notices]
[Pages 19538-19543]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-1743]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51504; File No. SR-NASD-2004-033]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment Nos. 1, 2, and 3 Thereto by the National 
Association of Securities Dealers, Inc. Seeking to Modify the Nasdaq 
Market Center Execution Service to Add an Optional Routing Feature

April 7, 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 February 25, 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 July 15, 
2004, Nasdaq submitted Amendment No. 1 to the proposed rule change.\3\ 
On February 23, 2005, Nasdaq submitted Amendment No. 2 to the proposed 
rule change.\4\ On April 7, 2005, Nasdaq submitted Amendment No. 3 to 
the proposed rule change.\5\ 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    \3\ Amendment No. 1 replaced and superseded the originally filed 
proposed rule change.
    \4\ Amendment No. 2 replaced and superseded the originally filed 
proposed rule change, as amended.
    \5\ Amendment No. 3 replaced and superseded the originally filed 
proposed rule change, as amended.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to modify the Nasdaq Market Center execution 
service (formerly known as SuperMontage or the Nasdaq National Market 
Execution System) to provide an optional routing feature that will 
route orders in Nasdaq-listed securities to other markets accessible by 
the router when these markets are displaying quotes at prices that are 
superior to those available on Nasdaq. Pending Commission approval, 
Nasdaq is scheduled to implement the routing feature on or about May 9, 
2005. Below is the text of the proposed rule change, as amended. 
Proposed new language is italicized; proposed deletions are in 
[brackets].
* * * * *

4700. NASDAQ MARKET CENTER--EXECUTION SERVICES


4701.  Definitions

    Unless stated otherwise, the terms described below shall have the 
following meaning:
    (a) The term ``active Nasdaq Market Center securities'' shall mean 
those Nasdaq Market Center eligible securities in which at least one 
Nasdaq Market Maker or ITS/CAES Market Maker is currently active in the 
Nasdaq Market Center, or at least one exchange or the Association's 
Alternative Display Facility is actively quoting the security and 
Nasdaq has access to the quotes of these markets under Rule 4714. A 
security will not be considered an ``active Nasdaq Market Center 
security'' when trading on Nasdaq has been halted pursuant to Rule 4120 
and the interpretations thereunder.
    (b)-(z) No change
    (aa) The term ``Preferenced Order'' shall mean an order that is 
entered into the Non-Directed Order Process and is designated to be 
delivered to or executed against a particular Quoting Market 
Participant's Attributable Quote/Order if the Quoting Market 
Participant is at the best bid/best offer when the Preferenced Order is 
the next in line to be executed or delivered. Preferenced Orders shall 
be executed subject to the conditions set out in Rule 4710(b). 
Preferenced Orders shall not be eligible for routing as set out in Rule 
4714.
    (bb)-(jj) No change
    (kk) The term ``Auto-Ex'' shall mean, for orders in Nasdaq listed 
securities so designated, an order that (except when it is displayed or 
interacts with a displayed Discretionary Order at a price in its 
discretionary price range) will execute solely against the Quotes/
Orders of Nasdaq Market Center Participants that participate in the 
automatic execution functionality of the Nasdaq Market Center and that 
do not charge a separate quote access fee to Nasdaq Market Center 
Participants accessing their Quotes/Orders through the Nasdaq Market 
Center. An Auto-Ex Order may be designated as ``Immediate or Cancel'' 
(an ``IOC Auto-Ex Order'') or ``Day'' or ``GTC'' (a ``Postable Auto-Ex 
Order''). A party entering a Postable Auto-Ex Order may (but is not 
required to) specify that the order will utilize the functionality 
associated with Discretionary Orders. Auto-Ex orders shall not be 
eligible for routing as set out in Rule 4714.
    (ll) The term ``Fill or Return'' shall mean for orders in ITS 
Securities so designated, an order that is to be delivered to or 
executed by Nasdaq Market Center Participants without delivering the 
order to an ITS Exchange and without trading through the quotations of 
ITS Exchanges. Fill or Return orders shall not be eligible for routing 
as set out in Rule 4714.
    (mm) The term ``Pegged'' shall mean, for priced limit orders so 
designated, that after entry into the Nasdaq Market Center, the price 
of the order is automatically adjusted by the Nasdaq Market Center in 
response to changes in the Nasdaq Market Center inside bid or offer, as 
appropriate. The Nasdaq Market Center Participant entering a Pegged 
Order may specify that the price of the order will either equal the 
inside quote on the same side of the market (a ``Regular Pegged 
Order'') or equal a price that deviates from the inside quote

[[Page 19539]]

on the contra side of the market by $0.01 (i.e., $0.01 less than the 
inside offer or $0.01 more than the inside bid) (a ``Reverse Pegged 
Order''). The market participant entering a Pegged Order may (but is 
not required to) specify a cap price, to define a price at which 
pegging of the order will stop and the order will be permanently 
converted into an unpegged limit order. Pegged Orders shall not be 
available for ITS Securities. Pegged orders shall not be eligible for 
routing as set out in Rule 4714.
    (nn) The term ``Discretionary'' shall mean,
    (1) for priced limit orders in Nasdaq listed securities so 
designated, an order that when entered into the Nasdaq Market Center 
has both a displayed bid or offer price, as well as a non-displayed 
discretionary price range in which the participant is also willing to 
buy or sell, if necessary. The displayed price may be fixed or may be 
pegged to equal the inside quote on the same side of the market. The 
pegging of the Discretionary Order may be capped in the same manner as 
that of a Pegged Order. The discretionary price range of a 
Discretionary Order that is pegged will be adjusted to follow the 
pegged displayed price. Discretionary Orders for Nasdaq listed 
securities shall be eligible for routing as set out in Rule 4714.
    (2) for orders in ITS Securities so designated, an order that when 
entered into the Nasdaq Market Center has both a displayed bid or offer 
price, as well as a non-displayed discretionary price range in which 
the participant is also willing to buy or sell, if necessary. The 
display price must be fixed. A Discretionary Order in an ITS Security 
may not result in a quote that locks or crosses the national best bid 
and offer and shall not be executed at a price that trades through the 
quotation of an ITS Exchange unless it is designated as a Sweep Order. 
Discretionary Orders for ITS Securities shall not be eligible for 
routing as set out in Rule 4714.
    (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 Nasdaq Order-Delivery ECNs. 
Summary orders shall not be eligible for routing as set out in Rule 
4714.
    (pp)-(qq) No change
    (rr) The term ``Sweep Order'' shall mean, for orders in ITS 
Securities so designated, an order that may be delivered to or executed 
by Nasdaq Market Center Participants at multiple price levels. Sweep 
Orders shall not be eligible for routing as set out in Rule 4714.
* * * * *


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:
    (A) A Nasdaq Market Center Participant may enter into the Nasdaq 
Market Center a Non-Directed Order in order to access the best bid/best 
offer as displayed in Nasdaq and other markets as set out in Rule 4714.
    (B) A Non-Directed Order must be a market or limit order, must 
indicate whether it should be not routed to another market in 
accordance with Rule 4714, 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'', or ``Total Immediate or Cancel,'' or ``Summary.''
    (i)-(xiii) No change
    (C) The system will not process a Non-Directed Order to sell short 
if the execution of such order would violate [NASD Rule 3350 or, in the 
case of ITS Securities,] SEC Rule 10a-1, in the case of ITS Securities. 
Non-Directed Orders to sell short shall not be executed in the Nasdaq 
Market Center if the execution of such order would violate NASD Rule 
3350. Non-Directed Orders to sell short that cannot be executed in the 
Nasdaq Market Center and that have elected to be routed to other 
markets as set out in Rule 4714 shall be routed to another market and 
processed in accordance with the short sale restrictions in effect at 
the destination market.
    (D)-(F) No change
* * * * *


4707.   Entry and Display of Quotes/Orders

    (a) Entry of Quotes/Orders--Nasdaq Quoting Market Participants may 
enter Quotes/Orders into the Nasdaq Market Center, and Order Entry 
Firms may enter Non-Attributable Orders into the Nasdaq Market Center, 
subject to the following requirements and conditions:
    (1) No change
    (2) Upon entry of a Quote/Order into the system, the Nasdaq Market 
Center shall time-stamp it, which time-stamp shall determine the 
ranking of the Quote/Order for purposes of processing Non-Directed 
Orders as described in Rules 4710(b) and 4714. For each subsequent size 
increase received for an existing quote at a given price, the system 
will maintain the original time-stamp for the original quantity of the 
quote and assign a separate time-stamp to that size increase. When a 
Pegged Order (including a Discretionary Order that is pegged) is 
displayed as a Quote/Order, its time-stamp will be updated whenever its 
price is adjusted.
    (3)-(4) No change
    (b) Display of Quotes/Orders in Nasdaq--The Nasdaq Market Center 
will display [a Nasdaq] Quotes/Orders submitted to the system as 
follows:
    (1)-(2) No change
    (3) Exceptions--The following exceptions shall apply to the display 
parameters set forth in paragraphs (1) and (2) above:
    (A)-(C) No change
    (D) Non-Directed Orders and Routing--Non-Directed Orders marked for 
routing as set out in Rule 4714 shall not be displayed in the Nasdaq 
Market Center while outside the Nasdaq Market Center. Non-Directed 
Orders marked for routing shall be displayed in the Nasdaq Market 
Center as set out in Rules 4701 and 4707 while such orders are in the 
Nasdaq Market Center.
* * * * *


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) No change
    (B) Processing of Non-Directed Orders--Upon entry of a Non-Directed 
Order into the system, the Nasdaq Market Center will ascertain who the 
next Quoting Market Participant or Order Entry Firm in queue to receive 
an order is and shall deliver an execution to Quoting Market 
Participants or Order Entry Firms that participate in the automatic-
execution functionality of the system, or shall deliver a Liability 
Order to Quoting Market Participants that participate in the order-
delivery functionality of the system. Non-Directed Orders entered into 
the Nasdaq Market Center system shall be delivered to or automatically 
executed against Quoting Market Participants' or Order Entry Firms' 
Displayed Quotes/Orders and Reserve Size, in strict price/time 
priority, as described in the algorithm contained in subparagraph 
(b)(B)(i) of this rule. The individual time priority of each Quote/
Order submitted to the Nasdaq Market Center shall be assigned by the 
system based on the date and time such Quote/Order was received. 
Remainders of Quote/Orders reduced by execution, if retained by the 
system,

[[Page 19540]]

shall retain the time priority of their original entry. For purposes of 
the execution algorithms described in paragraphs (i), (ii) and (iii) 
below, ``Displayed Quotes/Orders'' shall also include any odd-lot, odd-
lot portion of a mixed-lot, or any odd-lot remainder of a round-lot(s) 
reduced by execution, share amounts that while not displayed in the 
quotation montage of the Nasdaq Market Center, remain in system and 
available for execution.
    (i) Execution Algorithm--Price/Time--The system will default to a 
strict price/time priority within Nasdaq, and will attempt to access 
interest in the system in the following priority and order:
    a. Displayed Quotes/Orders of Nasdaq Market Makers, ITS/CAES Market 
Makers, and Nasdaq ECNs, displayed Non-Attributable Quotes/Orders of 
Order Entry Firms, and displayed non-attributable agency Quotes/Orders 
of UTP Exchanges (as permitted by subparagraph (f) of this rule), in 
time priority between such participants' Quotes/Orders;
    b. Reserve Size of Nasdaq Quoting Market Participants and Order 
Entry Firms, in time priority between such participants' Quotes/Orders; 
and
    c. Principal Quotes/Orders of UTP Exchanges, in time priority 
between such participants' Quotes/Orders.
    (ii) Exceptions--The following exceptions shall apply to the above 
execution parameters:
    a. If a Nasdaq Quoting Market Participant or Order Entry Firm 
enters a Non-Directed Order into the system, before sending such Non-
Directed Order to the next Quoting Market Participants in queue, the 
Nasdaq Market Center will first attempt to match off the order against 
the Nasdaq Quoting Market Participant's or Order Entry Firm's own 
Quote/Order if the participant is at the best bid/best offer in Nasdaq. 
Nasdaq Quoting Market Participants and Order Entry Firms may avoid any 
attempted automatic system matching permitted by this paragraph through 
the use of an anti-internalization qualifier (AIQ) quote/order flag 
containing the following values: ``Y'' or ``I'', subject to the 
following restrictions:
    Y--if the Y value is selected, the system will execute the flagged 
quote/order solely against attributable and non-attributable quotes/
orders (displayed and reserve) of Quoting Market Participants and Order 
Entry Firms other than the party entering the AIQ ``Y'' flagged quote/
order. If the only available trading interest is that of the same party 
that entered the AIQ ``Y'' flagged quote/order, the system will not 
execute at an inferior price level, and will instead return the latest 
entered of those interacting quote/orders (or unexecuted portions 
thereof) to the entering party or route the quote/order to another 
market as set out in Rule 4714 if the quote/order is marked for 
routing; provided, however, that in the case of a Discretionary Order 
interacting with a bid/offer entered by the system pursuant to Rule 
4710(b)(5), the Discretionary Order (or unexecuted portions thereof) 
will be returned.
    I--if the I value is selected, the system will execute against all 
available trading interest, including the quote/orders of the Order 
Entry Firm or Nasdaq Quoting Market Participant that entered the AIQ 
``I'' flagged order, based on the price/time execution algorithm
    b. No change
    c. No change
    d. No change
    e. If a Nasdaq Market Center Participant enters a Discretionary 
Order, the Discretionary Order shall first be executed against (or 
delivered in an amount equal to) the Quotes/Orders and Reserve Size of 
Nasdaq Market Center Participants (including displayed Discretionary 
Orders at their displayed prices) in conformity with this rule and 
subject to any applicable exceptions. If the full size of the incoming 
Discretionary Order cannot be executed at its displayed price, the 
order may also be executed against (or delivered in an amount equal to) 
the Quotes/Orders and Reserve Size of Nasdaq Market Center Participants 
within the incoming Discretionary Order's discretionary price range 
(including displayed Discretionary Orders at their displayed prices), 
in conformity with this rule and subject to any applicable exception. 
If the full size of the incoming Discretionary Order cannot be executed 
in this manner, the order may also be executed by (or receive delivery 
of) displayed Discretionary Orders with discretionary price ranges that 
overlap with the incoming Discretionary Order's discretionary price 
range, in conformity with this rule and subject to any applicable 
exception. The unexecuted portion of a Discretionary Order will then be 
retained by the Nasdaq Market Center for potential display in 
conformity with Rule 4707(b). To the extent a Discretionary Order 
designated for routing is not executed in full in accordance with the 
procedures described above upon submission to the Nasdaq Market Center 
the order shall be routed as set out in Rule 4714.
    When a Discretionary Order is displayed as a Quote/Order, Non-
Directed Orders or Quotes/Orders entered at the displayed price 
(including incoming Discretionary Orders with a displayed or 
discretionary price equal to the displayed Discretionary Order's 
displayed price) may be executed against (or delivered to) the 
displayed Discretionary Order, and market orders may be executed 
against (or delivered to) the displayed Discretionary Order when its 
displayed price is at the inside. Non-Directed Orders or Quotes/Orders 
(other than Discretionary Orders) entered at a price within the 
displayed Discretionary Order's discretionary price range may be 
executed by (or receive delivery of) the displayed Discretionary Order 
at the price of the incoming Non-Directed Order or Quote/Order if there 
are no displayed Quotes/Orders at that price or better. Incoming 
Discretionary Orders with a discretionary price range that overlaps 
with the displayed Discretionary Order's discretionary price range may 
be executed by (or receive delivery of) the displayed Discretionary 
Order at the overlapping price most favorable to the displayed 
Discretionary Order. A displayed Discretionary Order that may be 
executed at a price in its discretionary price range will execute 
against Non-Directed Orders and Quotes/Orders entered by Nasdaq Market 
Center Participants in the automatic execution functionality of the 
Nasdaq Market Center, and will be delivered to Non-Directed Orders and 
Quotes/Orders entered by Nasdaq Order-Delivery ECNs.
    For purposes of determining execution priority, the price priority 
of a displayed Discretionary Order will be based on its displayed price 
when it may be executed at its displayed price. When displayed 
Discretionary Orders may be executed at prices within their 
discretionary price ranges, their price priority vis-[aacute]-vis one 
another will be based on their most aggressive discretionary prices, 
and their price priority vis-[aacute]-vis Quotes/Orders that are not 
Discretionary Orders will be based upon the price at which they are 
executable.
    f. No change
    g. Non-Directed Orders marked for routing shall be processed in 
accordance with Rule 4714.
* * * * *
    (e) UTP Exchanges--Direct Participation in Nasdaq Market Center
    Direct [P]participation in the Nasdaq Market Center by UTP 
Exchanges is voluntary. If a UTP Exchange does not participate directly 
in the Nasdaq Market Center, the UTP Exchange's quotes may nevertheless 
be accessible in accordance with Rule 4714 [will not be accessed 
through the Nasdaq Market

[[Page 19541]]

Center, and the Nasdaq Market Center will not include the UTP 
Exchange's quotation for order processing and execution purposes].
    A UTP Exchange may voluntarily participate in the Nasdaq Market 
Center directly if it executes a Nasdaq Workstation Subscriber 
Agreement, as amended, for UTP Exchanges, and complies with the terms 
of this subparagraph [(e)] (f) of this rule. The terms and conditions 
of such access and participation, including available functionality and 
applicable rules and fees, shall be set forth in and governed by the 
Nasdaq Workstation Subscriber Agreement, as amended for UTP Exchanges. 
The Nasdaq Workstation Subscriber Agreement, as amended for UTP 
Exchanges may expand but shall not contract the rights and obligations 
set forth in these rules. Access to UTP Exchanges may be made available 
on terms that differ from the terms applicable to members but may not 
unreasonably discriminate among similarly situated UTP Exchanges. The 
following provisions shall apply to UTP Exchanges that choose to 
participate in the Nasdaq Market Center.
* * * * *


4714.   Routing--Nasdaq-Listed Securities

    If a Non-Directed Order for a Nasdaq-listed security is not 
executed in its entirety in the Nasdaq Market Center and such order is 
designated for routing, the order (or the unfilled portion thereof--
referred to hereinafter as an ``order'') shall be processed as follows:
    (a) The order shall be routed to those markets accessible through 
the Nasdaq Market Center router that are displaying quotes priced 
better than the Quotes/Orders available in the Nasdaq Market Center as 
a limit order. Routed orders shall be executed pursuant to the rules 
and regulations of the destination market.
    (b) In the event an order routed from the Nasdaq Market Center to 
another market is not executed in its entirety, the remaining portion 
of the order shall be returned to the Nasdaq Market Center and shall be 
eligible for execution, or re-routing, if marketable. A market order 
that is converted to a limit order for routing will become a market 
order again upon return to the Nasdaq Market Center.
    (c) In the event an order becomes non-marketable while it is in the 
execution queue, or the order is not marketable upon return to Nasdaq, 
the order shall be included in the Nasdaq Market Center book (if 
consistent with the order's time in force condition) in accordance with 
the time priority established by the time-stamp assigned to the order 
when it was initially submitted to the Nasdaq Market Center. Once an 
order is placed in the Nasdaq Market Center book it shall not be routed 
outside the Nasdaq Market Center.
    (d) An order that has been routed to another market shall have no 
time standing in the Nasdaq Market Center execution queue relative to 
other orders in the Nasdaq Market Center. A request from a Nasdaq 
Market Center Participant to cancel an order while it is outside the 
Nasdaq Market Center shall be processed subject to the applicable rules 
of the market to which the order has been routed.
    (e) Orders shall not be routed to other markets during the Nasdaq 
Market Center Opening and Closing Crosses, as described in Rules 4704 
and 4709.
    (f) Orders shall not be routed to other markets at prices that 
exceed the execution price governors described in Rule 
4710(b)(1)(B)(ii)(c).
* * * * *

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, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. 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 modify the Nasdaq Market Center execution 
service to create an optional routing feature that will route orders in 
Nasdaq-listed securities to other markets when those markets are 
displaying quotes at prices that are superior to those displayed in 
Nasdaq and that are accessible through the router.\6\ Under the 
proposal, Nasdaq Market Center Participants will be able to choose on 
an order-by-order basis whether they want an order routed outside the 
Nasdaq Market Center.\7\ Routed orders would be executed pursuant to 
the rules and regulations of the destination market. Nasdaq states that 
there will be no change in the processing of orders not marked for 
routing; these orders will continue to be processed through the normal 
Nasdaq Market Center execution service execution algorithm.
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    \6\ Nasdaq states that the routing feature will be optional; 
members can continue to use other routers to reach other markets. In 
general, Non-Directed market orders and limit orders will be 
eligible for routing. In addition, Discretionary Non-Directed Orders 
will be eligible for routing. Members also will be able to use the 
following time in force conditions on Non-Directed Orders eligible 
for routing: Immediate or Cancel, Day, Good-till-Cancelled, Total 
Day, Total Good till Cancelled, Total Immediate or Cancel, and End 
of Day. Other unique Non-Directed Order types, such as Pegged 
orders, are not eligible for routing. Finally, routing will not be 
available for Directed Orders and Preferenced Orders.
    Non-Directed orders will not be routed outside the Nasdaq Market 
Center during Nasdaq's Opening and Closing Crosses, which are 
described in NASD Rules 4704 and 4709. Nasdaq believes that routing 
orders outside Nasdaq during the opening and closing crosses would 
be inconsistent with the purpose of these auctions, which is to 
arrive at a single price that is based on the maximum number of 
shares that can be executed on Nasdaq.
    Nasdaq states that it also will not route orders at prices that 
exceed the execution price governors that limit the prices at which 
orders can execute in the Nasdaq Market Center (NASD Rule 
4710(b)(1)(B)(ii)(c)). The governors prevent large market orders and 
marketable limit orders priced significantly away from the inside, 
which in many instances are entered in error, from executing through 
numerous price levels automatically without any restraint and thus 
establishing a new inside market and potentially a new historic high 
or low price for a security that is not truly reflective of current 
market trading. Nasdaq adopted the governors to balance the goals of 
rapid execution and price discovery against the need to protect 
investors from excessive volatility and market confusion that can 
result from these orders. For these very same reasons, Nasdaq 
believes it should not route orders to other markets at prices that 
exceed these price limitations.
    \7\ By default, eligible Non-Directed Orders will be marked for 
routing. Members, however, will be able to override the default by 
indicating that an order should not be routed.
    While Nasdaq initially expects to access through its router 
those quotes that would qualify as ``automated quotations'' as under 
Regulation NMS, Nasdaq may route to non-automated quotations as 
appropriate. Nasdaq will access the quotes of exchanges through its 
broker-dealer subsidiary, Brut, which may not be a member of all 
exchanges (Brut's quotes are displayed in the Nasdaq Market Center, 
thus the liquidity in the Brut ECN will be accessible as part of the 
liquidity in the Nasdaq Market Center). Routing done by Brut for the 
Nasdaq Market Center is conducted separately from routing the Brut 
Facility performs for its subscribers. Nasdaq also will route orders 
to exchanges in which Brut is not a member, to the extent Brut has 
access to the market participants displaying quotes in these other 
markets. For example, one national securities exchange's quotes can 
be accessed indirectly by routing orders to the ECN that is the 
predominant, if not sole, market participant displaying quotes on 
that exchange. In addition, Nasdaq also may route orders to market 
centers that display their quotes through the NASD's Alternative 
Display Facility (``ADF'') and market centers that do not display 
their quotes through exchanges or the ADF.
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    According to Nasdaq, the processing of an order marked for routing 
will differ depending on whether there are quotes on other markets at 
prices

[[Page 19542]]

superior to those displayed on Nasdaq and such quotes are accessible by 
Nasdaq. For each order flagged for routing, the Nasdaq Market Center 
will determine whether Nasdaq is at the best price vis-a-vis other 
markets that are accessible through Nasdaq's router. If Nasdaq is 
displaying the best prices, the order will be executed in full or up to 
the maximum amount of shares available in Nasdaq at the price levels 
that are superior to the prices at these other markets. Nasdaq would 
route any unfilled portion of the order to one of the other markets 
that are displaying superior quotes and that is accessible by the 
Nasdaq router. If more than one market is at a price level that is 
superior to Nasdaq's displayed price, the computer algorithm of the 
Nasdaq Market Center router will determine the market, or markets, to 
which the order will be sent, based on several factors including the 
number of shares being displayed, response time, likelihood of 
undisplayed trading interest, and the cost of accessing the market.
    If other markets accessible through the router have prices superior 
to those on Nasdaq when an order is next in line to be processed, the 
order will by-pass the Nasdaq Market Center execution algorithm and 
will be routed to a market or markets displaying the superior priced 
quotes.\8\ If an order (or a portion of the order) remains unfilled 
after being routed, it will be returned to Nasdaq where, if the order 
is marketable, it will be returned to the Non-Directed Order processing 
queue, where it can be executed in Nasdaq, or routed again, if Nasdaq 
is not at the best price when the order is next in line in the 
processing queue.\9\ Once a routed limit order is no longer marketable, 
whether it becomes non-marketable upon return to Nasdaq or while in the 
execution queue, it will be placed on the Nasdaq Market Center book, if 
consistent with the order's time in force condition.\10\ Once on the 
book, however, an order will not be routed out of the Nasdaq Market 
Center, even if it becomes marketable against the quotes of another 
market.
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    \8\ Nasdaq states that when a member submits a market order to 
the Nasdaq Market Center and has chosen to have the order routed, if 
routed, the market order will be routed to another market as a limit 
order. An order that has been routed to another market shall have no 
time standing in the Nasdaq Market Center execution queue relative 
to other orders in the Nasdaq Market Center.
    \9\ Nasdaq states that a market order that is converted to a 
limit order when it is routed to another market will become a market 
order again upon return to Nasdaq. However, if after being placed 
back in the order execution queue the order is routed yet again, it 
will be re-converted to a limit order.
    \10\ Nasdaq states that orders returned to Nasdaq will be placed 
on the Nasdaq Market Center book on the basis of the time-stamp 
assigned to the order when it was originally submitted to the Nasdaq 
Market Center.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with Section 15A of the Act,\11\ in general, and furthers 
the objectives of Section 15A(b)(6),\12\ in particular, in that Section 
15A(b)(6) requires the NASD's rules to be designed, among other things, 
to protect investors and the public interest. In addition, Nasdaq 
believes its proposal is consistent with Section 11A(a)(1)(C)(ii) of 
the Act,\13\ which states that it is in the public interest and 
appropriate for the protection of investors and the maintenance of fair 
and orderly markets to assure, among other things, fair competition 
among brokers and dealers, among exchange markets, and between exchange 
markets and markets other than exchange markets. Finally, Nasdaq 
believes its proposal is consistent with the Commission's Regulation 
NMS, which supports the concept of self-regulatory organizations 
(``SROs'') accessing the quotes of other SROs through broker-
dealers.\14\
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    \11\ 15 U.S.C. 78o-3.
    \12\ 15 U.S.C. 78o-3(b)(6).
    \13\ 15 U.S.C. 78k-1(a)(1)(C)(ii).
    \14\ Securities Exchange Act Release Nos. 49325 (Feb. 26, 2004), 
69 FR 11126 (Mar. 9, 2004); 49749 (May 20, 2004), 69 FR 30142 (May 
26, 2004); 50870 (Dec. 16, 2004), 69 FR 77424 (Dec. 27, 2004).
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    Nasdaq believes this proposal is consistent with the NASD's 
obligations under Section 15A of the Act because it would enable 
members to use the Nasdaq Market Center to access other markets that 
are displaying prices superior to those available on Nasdaq. In 
addition, Nasdaq also believes that the proposal is consistent with 
Section 11A because it should allow Nasdaq to compete with a national 
securities exchange that offers a similar routing feature through its 
broker-dealer subsidiary. Further, Nasdaq believes that the proposal 
would allow Nasdaq to implement the method envisioned by the Commission 
in Regulation NMS for accessing other SROs' quotes.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change, as amended, 
will impose 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

    No written comments were either solicited or received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding, or (ii) as to 
which Nasdaq consents, the Commission will:
    (A) By order approve such proposed rule change, as amended; or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

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-2004-033 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-2004-033. 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

[[Page 19543]]

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-2004-033 and should be submitted on or before May 
4, 2005.

    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. E5-1743 Filed 4-12-05; 8:45 am]
BILLING CODE 8010-01-P