[Federal Register Volume 70, Number 174 (Friday, September 9, 2005)]
[Notices]
[Pages 53698-53700]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4926]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52376; File No. SR-NASD-2005-102]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change and Amendment No. 1 Thereto To Allow Members To Report 
Certain Trades in Exchange-Listed Securities Through the Execution 
Services of the Nasdaq Market Center

September 1, 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 August 26, 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. On August 31, 
2005, Nasdaq filed Amendment No. 1 to the proposed rule change.\3\ 
Nasdaq filed the proposed rule change pursuant to Section 19(b)(3)(A) 
of the Act \4\ and Rule 19b-4(f)(5) \5\ thereunder, and therefore the 
proposed rule change is effective upon filing with the Commission. The 
Commission is publishing this notice to solicit

[[Page 53699]]

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\ 3 Amendment No. 1 clarified the scope of NASD Rule 4720 
prior to adoption of the proposed rule change, corrected 
typographical errors, and made other clarifying changes in response 
to comments from the Commission staff.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(5).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes changes to NASD Rule 4720. The text of the proposed 
rule change is below. Proposed new language is in italics; proposed 
deletions are in [brackets].\6\
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    \6\ Changes are marked to the rule text that appears in the 
electronic NASD Manual found at www.nasd.com.
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* * * * *

4720. Reporting Through the Execution Services of the Nasdaq Market 
Center

    Subject to the conditions set forth below, members may utilize the 
Nasdaq Market Center to report trades in Nasdaq Market Center eligible 
securities required or eligible to be reported to Nasdaq pursuant to 
the Rule 4630, 4640, 4650, [and] 6100 and 6400 Series.
    (1) Members shall include the time of execution on reports 
submitted to the Nasdaq Market Center; and
    (2) For transactions between members, the members who are parties 
to the trade shall agree to all trade details prior to submitting the 
report to the Nasdaq Market Center, and have in effect and on file with 
Nasdaq, an Automated Confirmation Transaction Service Service Bureau/
Executing Broker Supplement to the Nasdaq Workstation II Agreement 
(``Attachment 2 Agreement''), and a Nasdaq National Market Execution 
System Give-Up Addendum to the Nasdaq Workstation II Subscriber 
Agreement (``SuperMontage Give-Up Agreement'').
* * * * *

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 provide members the ability to use the 
execution services of the Nasdaq Market Center to report trades in 
exchange-listed securities that were matched outside of any system 
operated by a self-regulatory organization. Currently, Nasdaq members' 
ability to use the order execution service to report matched trades is 
limited to trades in Nasdaq National Market and SmallCap Market 
securities, convertible bonds listed on Nasdaq, and other reportable 
securities identified in the NASD Rule 6100 Series.\7\
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    \7\ A detailed description of how matched trades in Nasdaq and 
other eligible securities are reported through the execution 
services of the Nasdaq Market Center is contained in Securities 
Exchange Act Release No. 49733 (May 19, 2004), 69 FR 29990 (May 26, 
2004) (SR-NASD-2004-034). The reporting of matched trades in 
exchange-listed securities proposed in this rule change is intended 
to operate in the same manner.
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    Under Nasdaq's proposal, matched trades in exchange-listed 
securities that are reported though the execution services of the 
Nasdaq Market Center will be transmitted to the trade reporting service 
and processed in the same manner as information about matched trades in 
Nasdaq and other eligible securities submitted to that system. For 
example, trade information will be disseminated on the consolidated 
tape, and included in the reporting service's risk management 
calculations and Nasdaq's audit trail. In addition, the trades will be 
submitted to the National Securities Clearing Corporation (``NSCC'') 
for clearing, if necessary. Trades in exchange-listed securities 
reported through the order execution service will not be included in 
the execution algorithm, and thus will not interact with any Quotes/
Orders in the system.
    Under this rule change, members will not be permitted to report 
through the execution services of the Nasdaq Market Center trades in 
exchange-listed securities for which comparison is necessary. As is the 
case for trades in Nasdaq and other eligible securities, the order 
execution service will accept only: (1) Tape only reports; \8\ (2) 
locked-in clearing only reports;\9\ (3) tape reports of locked-in 
trades that are to be submitted to clearing; \10\ and (4) non-tape, 
non-clearing reports.\11\ Members will be able to report trades through 
the execution services of the Nasdaq Market Center during the hours 
that the trade reporting service is operational, which presently is 8 
a.m. until 6:30 p.m. Eastern time.
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    \8\ A ``tape only report'' is a trade that is reported to Nasdaq 
for dissemination to the public, but the trade does not need to be 
transmitted to NSCC because one of the parties to the trade is a 
customer (i.e., not a broker-dealer), or the buyer and seller both 
are broker-dealers and they have a common clearing arrangement that 
will enable them to settle the trade without using NSCC's 
facilities.
    \9\ A transaction is ``locked-in'' when the buying and selling 
broker-dealers have agreed to all the trade details prior to 
submitting the trade to Nasdaq and no further comparison is 
necessary. A ``locked-in clearing only report'' is a report that is 
locked-in and Nasdaq must forward the trade to NSCC for settlement. 
The trade does not have to be disseminated to the public because an 
exception to the public reporting requirement is applicable (e.g., 
the transaction is the offsetting leg of a riskless principal 
trade).
    \10\ A ``tape report of a locked-in trade that is submitted for 
clearing'' is a locked-in report of a trade that must be 
disseminated to the public and settled through NSCC.
    \11\ A ``non-tape, non-clearing report'' is a report of trade 
that is not required to be disseminated to the public, and does not 
need to be transmitted to NSCC for settlement, but the broker-dealer 
is obligated or chooses to submit this ``regulatory report'' to 
Nasdaq. See e.g., NASD Rule 4632(d)(3)(B) and Notice to Members 00-
79.
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    By extending this functionality to reporting of matched trades in 
exchange-listed securities, members will be able to take advantage of 
several benefits that previously were limited to reporting matched 
trades in Nasdaq and other eligible securities. For example, it will be 
possible for members to consolidate the reporting and execution systems 
for a broader range of trades. In addition, members will be able to 
take advantage of the existing anonymity feature available in the order 
execution service by utilizing it for trades transmitted to the trade 
reporting service, and combine it with the benefits of ``give up'' 
relationships, also available to members today in both the order 
execution and trade reporting services of the Nasdaq Market Center.\12\ 
As a result, members will be able to give up the true contra parties to 
a trade in exchange-listed securities, but still preserve full 
anonymity between these parties.
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    \12\ When a ``give up'' occurs, the member that submits the 
order to the order execution service (or the trade report to the 
trade reporting service) discloses to the contra party that the 
order (or report) is being entered on behalf of another member and 
the trade is to be settled with this other member. The member 
submitting the order (or trade report) has ``given up'' the identity 
of the other member who is the true party to the trade.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A of the Act,\13\ in 
general and with Section 15A(b)(6) of the Act,\14\ in particular, in 
that it is designed to foster coordination and cooperation with persons 
engaged in regulating, clearing, settling, processing information with 
respect to, and facilitating transactions in securities. The proposal 
is consistent with this obligation because it will provide members both 
the opportunity

[[Page 53700]]

to consolidate the execution and reporting of a wider range of trades, 
and will extend the combined benefits of give-up relationships and 
anonymous trading to reporting of matched trades in exchange-listed 
securities.
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    \13\ 13 15 U.S.C. 78o-3.
    \14\ 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, as amended, 
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 foregoing rule change, as amended, has become effective upon 
filing pursuant to Section 19(b)(3)(A)(iii) of the Act \15\ and Rule 
19b-4(f)(5) \16\ thereunder in that it effects a change in an existing 
order execution system of Nasdaq that does not significantly affect the 
protection of investors or the public interest, does not impose any 
significant burden on competition, and it does not have the effect of 
limiting the access to or availability of the system. 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.\17\
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    \15\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \16\ 17 CFR 240.19b-4(f)(5).
    \17\ The effective date of the original proposed rule is August 
26, 2005. The effective date of Amendment No. 1 is August 31, 2005. 
For purposes of calculating the 60-day period within which the 
Commission may summarily abrogate the proposed rule change under 
Section 19(b)(3)(C) of the Act, the Commission considers the period 
to commence on August 31, 2005, the date on which Nasdaq submitted 
Amendment No. 1. See 15 U.S.C. 78s(b)(3)(C).
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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 Number SR-NASD-2005-102 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NASD-2005-102. 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 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-2005-102 and should be submitted on or before 
September 30, 2005.
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    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
Jonathan G. Katz,
Secretary.
[FR Doc. E5-4926 Filed 9-8-05; 8:45 am]
BILLING CODE 8010-01-P