Federal Register, Volume 71 Issue 72 (Friday, April 14, 2006)

[Federal Register Volume 71, Number 72 (Friday, April 14, 2006)]
[Notices]
[Pages 19573-19597]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-3341]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53583; File No. SR-NASDAQ-2006-001]

Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto
Relating to the Nasdaq Market Center

March 31, 2006.

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 7, 2006, The NASDAQ Stock Market LLC (``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 March 29, 2006, Nasdaq submitted
Amendment No. 1 to the proposed rule change.\3\ 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 makes the following substantive and
technical changes to the original proposal: (1) Eliminates from the
original filing Nasdaq Rule 4611(d), Nasdaq's proposal to prohibit
members from charging access fees triggered by the execution of a
quotation within the System; (2) clarifies in Nasdaq Rules
4751(f)(6), 4755(a)(4) and 4757(a) that members must designate
orders as Intermarket Sweep Orders (``ISOs'') rather than have the
system automatically default to treat orders as ISOs absent other
designation and enumerates in Nasdaq Rule 4751(f)(6) members'
obligations when entering ISOs into the system; (3) amends Nasdaq
Rule 4613(e), Nasdaq's rule for implementing the locked and crossed
markets provisions of Rule 610 of Regulation NMS under the Act, to
track more closely the language developed by the Commission staff in
consultation with other exchanges; (4) modifies several examples of
system processing throughout the filing; (5) groups within Nasdaq
Rule 4751(d) all definitions related to system quotation
functionality; (6) modifies Nasdaq Rule 4756(c) to clarify the
display and non-display of trading interest within the system and
adds language in Nasdaq Rule 4756(c)(4) to the effect that Nasdaq
has procedures in place to identify its quotes as manual or
automated and to notify its members of the status of its quotations;
(7) modifies Nasdaq Rule 4751(h)(5) to clarify the processing of
MIOC Orders; (8) states that the Nasdaq Board has approved the
submission of this proposed rule change; (9) eliminates the
requirement in Nasdaq Rule 4612(d) that Participants append a
geographic identifier for their separate trading locations; (10)
inserts Nasdaq Rule 4620(b)(4) to clarify that Nasdaq will reveal
contra party information at the end of the day when a member trades
change, with its own quote or order, unless the member requests not
to receive that information; and (11) makes various grammatical and
syntactic modifications.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

Nasdaq is proposing to integrate the operations of the existing
Nasdaq Market Center, along with Nasdaq's Brut Facility and Nasdaq's
INET Facility to create the fairest, fastest, most efficient and most
transparent system in Nasdaq's 35-year history. This integration will
benefit investors by creating a single pool of liquidity from three,
thereby increasing order interaction, and execution speed and fill
rates. Integration will enable Nasdaq to further reduce the cost to
investors of executing trades on Nasdaq by, for example, reducing the
cost for subscriber connectivity and increasing the efficiency of the
resulting facility.
Nasdaq is currently on schedule to launch the proposed integrated
system timely to comply with the requirements of the Fair Access and
Order Protection rules, Rules 610 and 611 of Regulation NMS under the
Act (``Regulation NMS''). The integrated system will be designed to
enable Nasdaq to operate its execution system as that of a national
securities exchange rather than as an association, pursuant to the
Commission order, dated January 13, 2006, approving Nasdaq's
application to register as a national securities exchange.\4\ Below is
the text of the proposed rule change. Proposed new language is
italicized and proposed deletions are in [brackets].
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\4\ See Securities Exchange Act Release No. 53128 (January 13,
2006), 71 FR 3550 (January 23, 2006) (``January 13, 2006 Order'').
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* * * * *

4120. Trading Halts

(a) Authority To Initiate Trading Halts
In circumstances in which Nasdaq deems it necessary to protect
investors and the public interest, Nasdaq may, pursuant to the
procedures set forth in paragraph (b):
(1) Halt trading on Nasdaq of a Nasdaq-listed security to permit
the dissemination of material news; or
(2) Halt trading on Nasdaq of a security listed on another national
securities exchange during a trading halt imposed by such exchange to
permit the dissemination of material news; or
(3) Halt trading [by] on Nasdaq: (i) [ITS/CAES Market Makers] in a
security listed on another national securities exchange when such
exchange imposes a trading halt in that security because of an order
imbalance or influx (``operational trading halt''); or (ii) [Nasdaq
market makers] in a security listed on Nasdaq, when the security is a
derivative or component of a security listed on another national
securities exchange and such exchange imposes an operational trading
halt in that security. [ITS/CAES Market Makers and] In the event that
Nasdaq halts trading, Nasdaq Participants [Market Makers] may commence
quotations and trading at any time following initiation of operational
trading halts, without regard to procedures for resuming trading set
forth in paragraph (b); or
(4) Halt trading in an American Depository Receipt (``ADR'') or
other security listed on Nasdaq, when the Nasdaq-listed security or the
security underlying the ADR is listed on or registered with another
national or foreign securities exchange or market, and the national or
foreign securities exchange or market, or regulatory authority
overseeing such exchange or market, halts trading in such security for
regulatory reasons; or
(5) Halt trading in a security listed on Nasdaq when Nasdaq
requests from the issuer information relating to:
(A) Material news;
(B) The issuer's ability to meet Nasdaq listing qualification
requirements, as set forth in the Rule 4300, 4400, and 4800 Series; or
(C) Any other information which is necessary to protect investors
and the public interest.
(6) Halt trading in a security listed on Nasdaq when
(A) Extraordinary market activity in the security is occurring,
such as the execution of a series of transactions for a significant
dollar value at prices substantially unrelated to the current market
for the security, as measured by the national best bid and offer, and
(B) Nasdaq determines that such extraordinary market activity is
likely to have a material effect on the market for the security; and
(C)(i) Nasdaq believes that such extraordinary market activity is
caused by the misuse or malfunction of an electronic quotation,
communication, reporting, or execution system operated by, or linked
to, Nasdaq;
(ii) After consultation with another national securities exchange
trading the security on an unlisted trading privileges basis, Nasdaq
believes that such extraordinary market activity is caused by the
misuse or malfunction of an electronic quotation, communication,
reporting, or execution system operated

[[Page 19574]]

by, or linked to, such other national securities exchange; or
(iii) After consultation with NASD regarding an NASD facility
trading the security, Nasdaq believes that such extraordinary market
activity is caused by the misuse or malfunction of such NASD facility
or an electronic quotation, communication, reporting, or execution
system linked to such NASD facility.
(7) Halt trading in a security that is the subject of an Initial
Public Offering on Nasdaq.
(b) Procedure for Initiating a Trading Halt
(1) Nasdaq issuers are required to notify Nasdaq of the release of
certain material news prior to the release of such information to the
public as required by Rules 4310(c)(16) and 4320(e)(14).
(2) Notification shall be provided directly to Nasdaq's MarketWatch
Department by telephone, facsimile, or other compatible means of
electronic communication.\5\ Information communicated orally by
authorized representatives of a Nasdaq issuer should be confirmed
promptly in writing.
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\5\ Notification may be provided to the MarketWatch Department
by telephone 1-800-537-3929 and (240) 386-6046. Between 7 p.m. and
7:30 a.m. eastern time, voice mail messages may be left on either
number. The fax number is (240) 386-6047.
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(3) Upon receipt of information, from the issuer or other source,
Nasdaq will promptly evaluate the information, estimate its potential
impact on the market and determine whether a trading halt in the
security is appropriate.
(4) Should Nasdaq determine that a basis exists under Rule 4120(a)
for initiating a trading halt, the commencement of the trading halt
will be effective at the time specified by Nasdaq in a notice posted on
a publicly available Nasdaq Web site. In addition, Nasdaq shall
disseminate notice of the commencement of a trading halt through major
wire services.
(5) Trading in a halted security shall resume at the time specified
by Nasdaq in a notice posted on a publicly available Nasdaq Web site.
In addition, Nasdaq shall disseminate notice of the resumption of
trading through major wire services.
(6)(i) In the case of a trading halt under Rule 4120(a)(6) based on
the misuse or malfunction of an electronic quotation, communication,
reporting, or execution system that is not operated by Nasdaq, Nasdaq
will promptly contact the operator of the system in question (as well
as any national securities exchange or NASD facility to which such
system is linked) to ascertain information that will assist Nasdaq in
determining whether a misuse or malfunction has occurred, what effect
the misuse or malfunction is having on trading in a security, and what
steps are being taken to address the misuse or malfunction. If the
operator of the system is unavailable when contacted by Nasdaq, Nasdaq
will continue efforts to contact the operator of the system to
ascertain information that will assist Nasdaq in determining whether
the trading halt should be terminated.
(ii) A trading halt initiated under Rule 4120(a)(6) shall be
terminated as soon as Nasdaq determines either that the system misuse
or malfunction that caused the extraordinary market activity will no
longer have a material effect on the market for the security or that
system misuse or malfunction is not the cause of the extraordinary
market activity.
(7)(a) A trading halt initiated under Rule 4120(a)(1), (4), (5) or
(6) shall be terminated when Nasdaq releases the security for trading.
Prior to terminating the halt, there will be a 5-minute Display Only
Period during which market participants may enter quotations and orders
in that security in Nasdaq systems. At the conclusion of the 5-minute
Display Only Period, the security shall be released for trading unless
Nasdaq extends the Display Only Period for an additional 1-minute
period pursuant to subparagraph (c) below. There shall be a period of
between zero and 15 seconds (randomly selected) at which point the
Display Only Period shall end and trading shall resume pursuant to Rule
4753.
(b) A trading halt initiated under Rule 4120(a)(7) shall be
terminated when Nasdaq releases the security for trading. Prior to
terminating the halt, there will be a 15-minute Display Only P[p]eriod
during which market participants may enter quotes and orders in that
security in Nasdaq systems. At the conclusion of the 15-minute Display
Only P[p]eriod, [the halt shall be terminated and the security released
for trading.] the security shall be released for trading unless Nasdaq
extends the Display Only Period for one, two or three additional 5-
minute Display Only Periods pursuant to subparagraph (c) below. At the
conclusion of the Display Only Period(s), there shall be an additional
delay of between zero and 15 seconds (randomly selected) and then
trading shall resume pursuant to Rule 4753.
(c) If at the end of a Display Only Period, Nasdaq detects a
liquidity imbalance in the security. Nasdaq will extend the Display
Only Period as permitted under subparagraphs (a) and (b) above.
Liquidity Imbalances shall be established when (1) the Current
Reference Prices, as defined in Rule 4705(a)(2), disseminated 15
seconds and immediately prior to the end of the Display Only Period
differ by greater than (i) 10 percent or (ii) 50 cents (whichever is
greater), or (2) all buy or sell market orders will not be executed in
the cross.
* * * * *

4600. Requirements for Nasdaq Market Makers and Other Nasdaq Market
Center Participants

4601. Scope

Unless otherwise specified, the rules set forth in this 4600 Series
apply only to the quoting and trading of System [Nasdaq] securities via
the Nasdaq Market Center. [Participation in the Nasdaq Market Center as
an ITS/CAES Market Maker shall be conditioned upon the initial and
continuing compliance with the requirements set forth in the Rule 5200
Series. Participation in the Nasdaq Market Center as a UTP Exchange
shall be conditioned upon the UTP Exchange's initial and continuing
compliance with the requirements set forth in Nasdaq Rule 4710(e).
Terms used in the Rule 4600 Series shall have the meaning as defined in
Rule 4701.]

4602. Definitions

The following definitions apply to the Rule 4600 and 4750 Series
for the trading of securities listed on a national securities exchange
other than Nasdaq.
(a) The term ``Non-Nasdaq ITS Participant Market'' shall mean a
participant in the ITS Plan that is a national securities exchange
(other than Nasdaq) or a national securities association.
(b) The term ``ITS Plan'' shall mean the plan agreed upon by the
ITS participants, as from time to time amended in accordance with the
provisions therein, and approved by the Commission pursuant to Section
11A(a)(3)(B) of the Act and SEC Rule 608 thereunder.
(c) The term ``ITS Security'' shall mean any security which may be
traded through the ITS System by Nasdaq.
(d) The term ``ITS System'' shall mean the communications network
and related equipment that links electronically the Non-Nasdaq ITS
Participant Markets and Nasdaq as described in the Plan.
(e) The term ``Nasdaq Market Maker'' when used in reference to ITS
Securities, shall mean a member of Nasdaq that is registered as a
market

[[Page 19575]]

maker with Nasdaq for the purposes of participation in ITS with respect
to one or more ITS securities in which it is then actively registered.
The term ``Nasdaq Market Maker'' shall also include a member of Nasdaq
that meets the definition of electronic communications network
(``ECN''), as defined in SEC Rule 600, or alternative trading system
(``ATS''), subject to SEC Regulation ATS Rule 301(b), and has
voluntarily chosen to register with Nasdaq and meets the terms of
registration set forth in Rule 4752.
(f) The term ``Participant Market'' shall mean the securities
market of each participating Non-Nasdaq ITS Market and the markets of
Nasdaq in ITS securities.
(g) A ``Third Participating Market Center Trade-Through,'' as that
term is used in this Rule, occurs whenever Nasdaq initiates the
purchase of an ITS Security by sending a commitment to trade-through
the System and such commitment results in an execution at a price which
is higher than the price at which the security is being offered (or
initiates the sale of such a security by sending a commitment to trade-
through the System and such commitment results in an execution at a
price which is lower than the price at which the security is being bid
for) at the time of the purchase (or sale) in another ITS Participant
Market as reflected by the offer (bid) then being displayed by Nasdaq
Market Makers from such other market center. The member described in
the foregoing sentence is referred to in this Rule as the ``member who
initiated a third participating market center trade-through.''
(h) ``CAES'' means the ``Computer Assisted Execution System, ``the
computerized order routing and execution facility for ITS Securities,
as from time to time modified or supplemented, that is operated by
Nasdaq and made available to Nasdaq members. CAES functionality is
offered through the Nasdaq Market Center pursuant to the Rule 4750
Series.

4610. Registration and Other Requirements

4611. Nasdaq Market Center Participant Registration

(a) Participation in the Nasdaq Market Center as a Nasdaq Market
Maker, Nasdaq ECN or Order Entry Firm requires current registration as
such with Nasdaq. Such registration shall be conditioned upon the
participant's initial and continuing compliance with the following
requirements:
(1) Execution of applicable agreements with Nasdaq;
(2) Membership in, or access arrangement with a participant of, a
clearing agency registered with the Commission which maintains
facilities through which Nasdaq Market Center compared trades may be
settled;
(3) Compliance with all applicable rules and operating procedures
of Nasdaq and the Commission, including with respect to Nasdaq Market
Makers in ITS Securities, the ITS Plan in their use of the System;
(4) Maintenance of the physical security of the equipment located
on the premises of the Nasdaq Market Maker, Nasdaq ECN or Order Entry
Firm to prevent the improper use or access to Nasdaq systems, including
unauthorized entry of information into the Nasdaq Market Center; and
(5) Acceptance and settlement of each Nasdaq Market Center trade
that the Nasdaq Market Center identifies as having been effected by
such participant, or if settlement is to be made through another
clearing member, guarantee of the acceptance and settlement of such
identified Nasdaq Market Center trade by the clearing member on the
regularly scheduled settlement date.
A member's registration shall become effective upon receipt by the
member of notice of an approval of registration by Nasdaq. The
registration required hereunder will apply solely to the qualification
of a Participant to participate in the System. Such registration shall
not be conditioned upon registration in any particular Nasdaq Market
Center securities.
(b) Each Nasdaq Market Maker, Nasdaq ECN or Order Entry Firm shall
be under a continuing obligation to inform Nasdaq of noncompliance with
any of the registration requirements set forth above.
(c) Nasdaq may impose upon any Nasdaq Market Maker, Nasdaq ECN or
Order Entry Firm 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. For example,
such temporary restrictions may be necessary to address a system
problem at a particular Nasdaq Market Maker, Nasdaq ECN or Order Entry
Firm or at Nasdaq, or an unexpected period of extremely high message
traffic. The scope of any such restrictions shall be communicated to
the affected Nasdaq Market Maker, Nasdaq ECN or Order Entry Firm in
writing.

4612. Registration as a Nasdaq Market Maker

(a) Quotations and quotation sizes may be entered into the Nasdaq
Market Center only by a member registered as a Nasdaq Market Maker or
other entity approved by Nasdaq to function in a market-making
capacity.
(b) A Nasdaq Market Maker may become registered in an issue by
entering a registration request via a Nasdaq approved electronic
interface with Nasdaq's systems or by contacting Nasdaq Market
Operations. Registration shall become effective on the day the
registration request is entered.
(c) A Nasdaq Market Maker's registration in an issue shall be
terminated by Nasdaq if the market maker fails to enter quotations in
the issue within five (5) business days after the market maker's
registration in the issue becomes effective.
[(d) In cases where a Nasdaq Market Maker has more than one trading
location, a fifth character geographic indicator shall be appended to
the Nasdaq Market Maker's identifier for that security to identify the
branch location where the security is traded. The fifth-character
branch indicators are established by Nasdaq and published from time to
time in the Nasdaq symbol directory.]

4613. Character of Quotations

A member registered as a Nasdaq Market Maker shall engage in a
course of dealings for its own account to assist in the maintenance,
insofar as reasonably practicable, of fair and orderly markets in
accordance with this Rule.
(a) Quotation Requirements and Obligations
(1) Two-Sided Quote Obligation. For each security in which a member
is registered as a Nasdaq Market Maker, the member shall be willing to
buy and sell such security for its own account on a continuous basis
and shall enter and maintain a two-sided quotation (``Principal
Quote''), which is attributed to the market maker by a special maker
participant identifier (``MPID'') and is displayed in the Nasdaq Market
Center at all times, subject to the procedures for excused withdrawal
set forth in Rule 4619.
(A) A registered market maker [in a Nasdaq-listed security] must
display a quotation size for at least one normal unit of trading (or a
larger multiple thereof) when it is not displaying a limit order in
compliance with SEC Rule 604, provided, however, that a registered
Nasdaq Market Maker may augment its

[[Page 19576]]

displayed quotation size to display limit orders priced at the market
maker's quotation. Unless otherwise designated, a ``normal unit of
trading'' shall be 100 shares.
(B) [Minimum Price Variation for Decimal-based Quotations--The
minimum quotation increment for Nasdaq securities authorized for
decimal pricing shall be $0.01. Quotations failing to meet this
standard shall be rejected.] The minimum quotation increment for
quotations of $1.00 or above in all System Securities shall be $0.01.
The minimum quotation increment in the System for quotations below
$1.00 in System Securities shall be $0.0001.
(b) Firm Quotations
(1) All quotations and orders to buy or sell entered into the
System by Nasdaq Market Makers, Nasdaq ECNs, and Nasdaq Order Entry
firms are firm and automatically executable for their displayed and
non-displayed size in the System. [A Nasdaq Market Maker that receives
an offer to buy or sell from another member shall execute a transaction
for at least a normal unit of trading at its displayed quotations as
disseminated in the Nasdaq Market Center at the time of receipt of any
such offer. If a Nasdaq Market Maker displays a quotation for a size
greater than a normal unit of trading, it shall, upon receipt of an
offer to buy or sell from another member, execute a transaction at
least at the size displayed.]
[(2) If a Nasdaq Market Maker, upon receipt of an offer to buy or
sell from another member in any amount that is at least one normal unit
of trading greater than its published quotation size as disseminated in
the Nasdaq Market Center at the time of receipt of any such offer,
executes a transaction in an amount of shares less than the size of the
offer, then such market maker shall, immediately after such execution,
display a revised quotation at a price that is inferior to its previous
published quotation. The failure of a Nasdaq Market Maker to execute
the offer in an amount greater than its published quotation size shall
not constitute a violation of subparagraph (c) of this rule.]
(c) Quotations Reasonably Related to the Market
A Nasdaq Market Maker shall enter and maintain quotations that are
reasonably related to the prevailing market. Should it appear that a
market maker's quotations are no longer reasonably related to the
prevailing market, Nasdaq may require the market maker to re-enter its
quotations. If a Nasdaq Market Maker whose quotations are no longer
reasonably related to the prevailing market fails to re-enter its
quotations, Nasdaq may suspend the market maker's quotations in one or
all securities.
In the event that a Nasdaq Market Maker's ability to enter or
update quotations is impaired, the market maker shall immediately
contact Nasdaq Market Operations to request the withdrawal of its
quotations.
In the event that a Nasdaq Market Maker's ability to enter or
update quotations is impaired and the market maker elects to remain in
Nasdaq, the Nasdaq Market Maker shall execute an offer to buy or sell
received from another member at its quotations as disseminated through
the Nasdaq Market Center.
(d) Reserved
(e) Locked and Crossed Markets
(1) Locked and Cross Markets within the System: Any quotes or
orders that are entered into the System that would lock or cross
another order in the System will be executed by the System. This
processing, set forth in Rule 4757, ensures that no locked or crossed
markets can exist within the System and that price improvement is
allocated fairly.
(2) Inter-market Locked and Crossed Markets
(A) Definitions. For purposes of this Rule, the following
definitions shall apply:
(i) The terms automated quotation, effective national market system
plan, intermarket sweep order, manual Quotation, NMS stock, protected
quotation, regular trading hours, and trading center shall have the
meanings set forth in Rule 600(b) of Regulation NMS under the
Securities Exchange Act of 1934.
(ii) The term crossing quotation shall mean the display of a bid
for an NMS stock during regular trading hours at a price that is higher
than the price of an offer for such NMS stock previously disseminated
pursuant to an effective national market system plan, or the display of
an offer for an NMS stock during regular trading hours at a price that
is lower than the price of a bid for such NMS stock previously
disseminated pursuant to an effective national market system plan.
(iii) The term locking quotation shall mean the display of a bid
for an NMS stock during regular trading hours at a price that equals
the price of an offer for such NMS stock previously disseminated
pursuant to an effective national market system plan, or the display of
an offer for an NMS stock during regular trading hours at a price that
equals the price of a bid for such NMS stock previously disseminated
pursuant to an effective national market system plan.
(B) Prohibition. Except for quotations that fall within the
provisions of paragraph (D) of this Rule, Nasdaq members shall
reasonably avoid displaying, and shall not engage in a pattern or
practice of displaying any quotations that lock or cross a protected
quotation, and any manual quotations that lock or cross a quotation
previously disseminated pursuant to an effective national market system
plan.
(C) Manual Quotations. If a member of the Exchange displays a
manual quotation that locks or crosses a quotation previously
disseminated pursuant to an effective national market system plan, such
member of the Exchange shall promptly either withdraw the manual
quotation or route an intermarket sweep order to execute against the
full displayed size of the locked or crossed quotation.
(D) Exceptions.
(i) The locking or crossing quotation was displayed at a time when
the trading center displaying the locked or crossed quotation was
experiencing a failure, material delay, or malfunction of its systems
or equipment.
(ii) The locking or crossing quotation was displayed at a time when
a protected bid was higher than a protected offer in the NMS stock.
(iii) The locking or crossing quotation was an automated quotation,
and the Nasdaq member displaying such automated quotation
simultaneously routed an intermarket sweep order to execute against the
full displayed size of any locked or crossed protected quotation.
(iv) The locking or crossing quotation was a manual quotation that
locked or crossed another manual quotation, and the member of the
Exchange displaying the locking or crossing manual quotation
simultaneously routed an intermarket sweep order to execute against the
full displayed size of the locked or crossed manual quotation.
[(1) A Nasdaq Market Maker shall not, except under extraordinary
circumstances, enter or maintain quotations in Nasdaq during normal
business hours if:
(A) The bid quotation entered is equal to (``lock'') or greater
than (``cross'') the asked quotation of another Nasdaq Market Maker
entering quotations in the same security; or
(B) The asked quotation is equal to (``lock'') or less than
(``cross'') the bid quotation of another Nasdaq Market Maker entering
quotations in the same security.

[[Page 19577]]

(2) A Nasdaq Market Maker shall, prior to entering a quotation that
locks or crosses another quotation, make reasonable efforts to avoid
such locked or crossed market by executing transactions with all Nasdaq
Market Makers whose quotations would be locked or crossed. Pursuant to
the provisions of paragraph (b) of this Rule, a Nasdaq Market Maker
whose quotations are causing a locked or crossed market is required to
execute transactions at its quotations as displayed through Nasdaq at
the time of receipt of any order.
(3) For purposes of this rule, the term ``market maker'' shall
include:
(A) Any Nasdaq member that enters into an ECN, as that term is
defined in SEC Rule 600, a priced order that is displayed in the Nasdaq
Market Center;
(B) Any Nasdaq member that operates the ECN when the priced order
being displayed has been entered by a person or entity that is not a
Nasdaq member;
(C) Any Nasdaq member that enters into an ATS, as that term is
defined in SEC Regulation ATS, an order that is displayed in the Nasdaq
Market Center; and
(D) Any Nasdaq member that operates the ATS when the order being
displayed has been entered by a person or entity that is not a Nasdaq
member.]

4614. Stabilizing Bids

(a) Nasdaq Market Maker [and ITS/CAES Market Maker] Obligation/
Identifier
A Nasdaq Market Maker [or ITS/CAES Market Maker] that intends to
stabilize the price of a security that is a subject or reference
security under SEC Rule 101 shall submit a request to Nasdaq
MarketWatch for the entry of a one-sided bid that is identified on
Nasdaq as a stabilizing bid in compliance with the standards set forth
in this Rule and SEC Rules 101 and 104.
(b) Eligibility
Only one Nasdaq Market Maker [or ITS/CAES Market Maker] in a
security may enter a stabilizing bid.
(c) Limitations on Stabilizing Bids
(1) A stabilizing bid shall not be entered in Nasdaq unless at
least one other Nasdaq Market Maker [or ITS/CAES Market Maker] in
addition to the market maker entering the stabilizing bid is registered
as a Nasdaq Market Maker [or ITS/CAES Market Maker] in the security and
entering quotations that are considered an independent bid under SEC
Rule 104.
(2) A stabilizing bid must be available for all freely tradable
outstanding securities of the same class being offered.
(d) Submission of Request to Nasdaq
(1) A Nasdaq Market Maker [or ITS/CAES Market Maker] that wishes to
enter a stabilizing bid shall submit a request to Nasdaq MarketWatch
for entry on Nasdaq of a one-sided bid identified as a stabilizing bid.
The Nasdaq Market Maker [or ITS/CAES Market Maker] shall confirm its
request in writing no later than the close of business the day the
stabilizing bid is entered by submitting an Underwriting Activity
Report to Nasdaq MarketWatch that includes the information required by
subparagraph (d)(2).
(2) In lieu of submitting the Underwriting Activity Report as set
forth in subparagraph (d)(1), the market maker may provide written
confirmation to Nasdaq MarketWatch that shall include:
(A) The identity of the security and its symbol;
(B) The contemplated effective date of the offering and the date
when the offering will be priced;
(C) The date and time that an identifier should be included on
Nasdaq; and
(D) A copy of the cover page of the preliminary or final prospectus
or similar offering document, unless Nasdaq determines otherwise.

4615. Reserved

4616. Reports

A Nasdaq Market Maker, Nasdaq ECN, or Order Entry Firm [or ITS/CAES
Market Maker] shall make such reports to Nasdaq as may be prescribed
from time to time by Nasdaq.

4617. Normal Business Hours

The System operates from 7 a.m. to 8 p.m. eastern time on each
business day, unless modified by Nasdaq. A Nasdaq Market Maker shall be
open for business as of 9:30 a.m. Eastern Time and shall close no
earlier than 4 p.m. Eastern Time. [Should a] A Nasdaq Market Maker
[wish to] may voluntarily open for business prior to 9:30 a.m. and
remain open for business later than 4 p.m. eastern time[, it shall so
notify Nasdaq Market Operations and shall close only on the hour or the
half hour, but no later than 6:30 p.m. eastern time]. Nasdaq Market
Makers whose quotes are open prior to 9:30 a.m. Eastern time or after 4
p.m. eastern time shall be obligated to comply, while their quotes are
open, with all Nasdaq Rules that are not by their express terms, or by
an official interpretation of Nasdaq, inapplicable to any part of the 7
a.m. to 9:30 a.m. or 4 p.m. to [6:30] 8 p.m. eastern time period.

4618. Clearance and Settlement

(a) All transactions through the facilities of the Nasdaq Market
Center shall be cleared and settled through a registered clearing
agency using a continuous net settlement system. This requirement may
be satisfied by direct participation, use of direct clearing services,
or by entry into a correspondent clearing arrangement with another
member that clears trades through such an agency.
(b) Notwithstanding paragraph (a), transactions in Nasdaq listed
securities may be settled ``ex-clearing'' provided that both parties to
the transaction agree.

4619. Withdrawal of Quotations and Passive Market Making

(a) Except as provided in paragraph (b) of this Rule, a market
maker that wishes to withdraw quotations in a security or have its
quotations identified as the quotations of a passive market maker shall
contact Nasdaq MarketWatch to obtain excused withdrawal status prior to
withdrawing its quotations or identification as a passive market maker.
Withdrawals of quotations or identifications of quotations as those of
a passive market maker shall be granted by Nasdaq MarketWatch only upon
satisfying one of the conditions specified in this Rule.
(b) A Nasdaq Market Maker that wishes to obtain excused withdrawal
status based on a market maker's systemic equipment problems, such as
defects in a Nasdaq Market Maker's software or hardware systems or
connectivity problems associated with the circuits connecting Nasdaq
Market Center systems with the Nasdaq Market Maker's systems, shall
contact Nasdaq Market Operations. Nasdaq Market Operations may grant
excused withdrawal status based on systemic equipment problems for up
to five (5) business days, unless extended by Nasdaq Market Operations.
(c)(1) For Nasdaq-listed securities, e[E]xcused withdrawal status
based on circumstances beyond the Nasdaq Market Maker's control, other
than systemic equipment problems, may be granted for up to five (5)
business days, unless extended by Nasdaq MarketWatch. Excused
withdrawal status based on demonstrated legal or regulatory
requirements, supported by appropriate documentation and accompanied by
a representation that the condition necessitating the withdrawal of
quotations is not permanent in nature, may, upon

[[Page 19578]]

notification, be granted for not more than sixty (60) days (unless such
request is required to be made pursuant to paragraph (e) below).
Excused withdrawal status based on religious holidays may be granted
only if written notice is received by Nasdaq one business day in
advance and is approved by Nasdaq. Excused withdrawal status based on
vacation maybe granted only if:
([1]A) The written request for withdrawal is received by Nasdaq one
business day in advance, and is approved by Nasdaq
([2]B) The request includes a list of the securities for which
withdrawal is requested; and
([3]C) The request is made by a Nasdaq Market Maker with three (3)
or fewer Nasdaq level 3 terminals. Excused withdrawal status may be
granted to a Nasdaq Market Maker that has withdrawn from an issue prior
to the public announcement of a merger or acquisition and wishes to re-
register in the issue pursuant to the same-day registration procedures
contained in Rule 4611 above, provided the Nasdaq Market Maker has
remained registered in one of the affected issues. The withdrawal of
quotations because of pending news, a sudden influx of orders or price
changes, or to effect transactions with competitors shall not
constitute acceptable reasons for granting excused withdrawal status.
(2) For ITS Securities, a Nasdaq Market Maker that wishes to
withdraw quotations shall contact Nasdaq MarketWatch to obtain excused
withdrawal status prior to withdrawing its quotations. Excused
withdrawal status based on illness, vacations or physical circumstances
beyond the Market Maker's control may be granted for up to five (5)
business days, unless extended by Nasdaq MarketWatch. Excused
withdrawal status based on investment activity or advice of legal
counsel, accompanied by a representation that the condition
necessitating the withdrawal of quotations is not permanent in nature,
may, upon written request, be granted for not more than sixty (60)
days. The withdrawal of quotations because of pending news, a sudden
influx of orders or price changes, or to effect transactions with
competitors shall not normally constitute acceptable reasons for
granting excused withdrawal status, unless Nasdaq has initiated a
trading halt for Market Makers in the security. pursuant to Rule 4120.
(d) Excused withdrawal status may be granted to a Nasdaq Market
Maker that fails to maintain a clearing arrangement with a registered
clearing agency or with a member of such an agency and is withdrawn
from participation in the trade reporting service of the Nasdaq Market
Center, thereby terminating its registration as a Nasdaq Market Maker.
Provided however, that if Nasdaq finds that the Nasdaq Market Maker's
failure to maintain a clearing arrangement is voluntary, the withdrawal
of quotations will be considered voluntary and unexcused pursuant to
Rule 4620 and the Rule 4700 Series governing the Nasdaq Market Center.
Nasdaq Market Makers that fail to maintain a clearing relationship will
have their Nasdaq Market Center system status set to ``suspend'' and be
thereby prevented from entering, or executing against, any quotes/
orders in the system.
(e) Excused withdrawal status or passive market maker status may be
granted to a Nasdaq Market Maker that is a distribution participant
(or, in the case of excused withdrawal status, an affiliated purchaser)
in order to comply with SEC Rule 101, 103, or 104 under the Act on the
following conditions:
(1) A member acting as a manager (or in a similar capacity) of a
distribution of a security that is a subject security or reference
security under SEC Rule 101 and any member that is a distribution
participant or an affiliated purchaser in such a distribution that does
not have a manager shall provide written notice to Nasdaq MarketWatch
and the Market Regulation Department of NASD Regulation, Inc. no later
than the business day prior to the first entire trading session of the
one-day or five-day restricted period under SEC Rule 101, unless later
notification is necessary under the specific circumstances.
(A) The notice required by subparagraph (e)(1) of this Rule shall
be provided by submitting a completed Underwriting Activity Report that
includes a request on behalf of each Nasdaq Market Maker that is a
distribution participant or an affiliated purchaser to withdraw the
Nasdaq Market Maker's quotations, or that includes a request on behalf
of each Nasdaq Market Maker that is a distribution participant (or an
affiliated purchaser of a distribution participant) that its quotations
be identified as those of a passive market maker and includes the
contemplated date and time of the commencement of the restricted
period.
(B) The managing underwriter shall advise each Nasdaq Market Maker
that it has been identified as a distribution participant or an
affiliated purchaser to Nasdaq MarketWatch and that its quotations will
be automatically withdrawn or identified as passive market maker
quotations, unless a market maker that is a distribution participant
(or an affiliated purchaser of a distribution participant) notifies
Nasdaq MarketWatch as required by subparagraph (e)(2), below.
(2) A Nasdaq Market Maker that has been identified to Nasdaq
MarketWatch as a distribution participant (or an affiliated purchaser
of a distribution participant) shall promptly notify Nasdaq MarketWatch
and the manager of its intention not to participate in the prospective
distribution or not to act as a passive market maker in order to avoid
having its quotations withdrawn or identified as the quotations of a
passive market maker.
(3) If a Nasdaq Market Maker that is a distribution participant
withdraws its quotations in a Nasdaq security in order to comply with
the net purchases limitation of SEC Rule 103 or with any other
provision of SEC Rules 101, 103, or 104 and promptly notifies Nasdaq
MarketWatch of its action, the withdrawal shall be deemed an excused
withdrawal. Nothing in this subparagraph shall prohibit Nasdaq from
taking such action as is necessary under the circumstances against a
member and its associated persons for failure to contact Nasdaq
MarketWatch to obtain an excused withdrawal as required by
subparagraphs (a) and (e) of this Rule.
(4) The quotations of a passive market maker shall be identified on
Nasdaq as those of a passive market maker.
(5) A member acting as a manager (or in a similar capacity of a
distribution subject to subparagraph (e)(1) of this Rule shall submit a
request to Nasdaq MarketWatch and the Market Regulation Department of
NASD Regulation, Inc. to rescind the excused withdrawal status or
passive market making status of distribution participants and
affiliated purchasers, which request shall include the date and time of
the pricing of the offering, the offering price, and the time the
offering terminated, and, if not in writing, shall be confirmed in
writing no later than the close of business the day the offering
terminates. The request by this subparagraph may be submitted on the
Underwriting Activity Report.
(f) The Market Operations Review Committee shall have jurisdiction
over proceedings brought by Nasdaq Market Makers seeking review of the
denial of an excused withdrawal pursuant to this Rule 4619, or the
conditions imposed on their reentry.

4620. Voluntary Termination of Registration

(a) A market maker may voluntarily terminate its registration in a
security by withdrawing its two-sided quotation

[[Page 19579]]

from the Nasdaq Market Center. A Nasdaq Market Maker that voluntarily
terminates its registration in a security may not re-register as a
market maker in that security for twenty (20) business days in the case
of Nasdaq-listed securities or for one (1) business day in the case of
ITS securities. Withdrawal from participation as a Nasdaq Market Maker
in the Nasdaq Market Center shall constitute termination of
registration as a market maker in that security for purposes of this
Rule; provided, however, that a Nasdaq Market Maker that fails to
maintain a clearing arrangement with a registered clearing agency or
with a member of such an agency and is withdrawn from participation in
the Nasdaq Market Center and thereby terminates its registration as a
Nasdaq Market Maker may register as a market maker at any time after a
clearing arrangement has been reestablished unless Nasdaq finds that
the Nasdaq Market Maker's failure to maintain a clearing arrangement is
voluntary, in which case the withdrawal of quotations will be
considered voluntary and unexcused.
(b) Notwithstanding the above, a Nasdaq Market Maker that
accidentally withdraws as a Nasdaq Market Maker may be reinstated if:
(1) The Nasdaq Market Maker notified MarketWatch of the accidental
withdrawal as soon as practicable under the circumstances, but within
at least one hour of such withdrawal, and immediately thereafter
provided written notification of the withdrawal and reinstatement
request;
(2) It is dear that the withdrawal was inadvertent and the market
maker was not attempting to avoid its market making obligations; and
(3) The Nasdaq Market Maker's firm would not exceed the following
reinstatement limitations:
(A) For firms that simultaneously made markets in less than 250
stocks during the previous calendar year, the firm can receive no more
than two (2) reinstatements per year;
(B) For firms that simultaneously made markets in 250 or more but
less than 500 stocks during the previous calendar year, the firm can
receive no more than three (3) reinstatements per year; and
(C) For firms that simultaneously made markets in 500 or more
stocks during the previous calendar year, the firm can receive no more
than six (6) reinstatements per year.
(c) Factors that Nasdaq will consider in granting a reinstatement
under paragraph (b) of this rule include, but are not [be] limited to:
(1) The number of accidental withdrawals by the Nasdaq Market Maker
in the past, as compared with Nasdaq Market Makers making markets in a
comparable number of stocks;
(2) The similarity between the symbol of the stock that the Nasdaq
Market Maker intended to withdraw from and the symbol of the stock that
the Nasdaq Market Maker actually withdrew from;
(3) Market conditions at the time of the withdrawal;
(4) Whether, given the market conditions at the time of the
withdrawal, the withdrawal served to reduce the exposure of the
member's position in the security at the time of the withdrawal to
market risk; and
(5) The timeliness with which the Nasdaq Market Maker notified
MarketWatch of the error.
(d) For purposes of paragraph (a) of this Rule, a market maker
shall not be deemed to have voluntarily terminated its registration in
a security by voluntarily withdrawing its two-sided quotation from the
Nasdaq Market Center if the Nasdaq Market Maker's two-sided quotation
in the subject security is withdrawn by Nasdaq's systems due to issuer
corporate action related to a dividend, payment or distribution, or due
to a trading halt, and one of the following conditions is satisfied:
(1) The Nasdaq Market Maker enters a new two-sided quotation prior
to the close of the regular market session on the same day when
Nasdaq's systems withdrew such a quotation;
(2) The Nasdaq Market Maker enters a new two-sided quotation on the
day when trading resumes following a trading halt, or, if the
resumption of trading occurs when the market is not in regular session,
the Nasdaq Market Maker enters a new two-sided quotation prior to the
opening of the next regular market session; or
(3) Upon request from the market maker, Nasdaq MarketWatch
authorizes the market maker to enter a new two-sided quotation,
provided that Nasdaq MarketWatch receives the market maker's request
prior to the close of the regular market session on the next regular
trading day after the day on-which the market maker became eligible to
re-enter a quotation pursuant to subparagraph (d)(1) or (d)(2) hereof
and determines that the market maker was not attempting to avoid its
market making obligations by failing to re-enter such a quotation
earlier.
(e) The Market Operations Review Committee shall have jurisdiction
over proceedings 29 brought by market makers seeking review of their
denial of a reinstatement pursuant to paragraphs (b) or (d) of this
Rule.

4621. Suspension and Termination of Quotations

Nasdaq may, pursuant to the procedures set forth in the Rule 9000
Series, suspend, condition, limit, prohibit or terminate the authority
of a Nasdaq Market Maker, Nasdaq ECN, or Order Entry Firm [or ITS/CAES
Market Maker] to enter quotations in one or more authorized securities
for violations of applicable requirements or prohibitions.

4622. Termination of Nasdaq Service

Nasdaq may, upon notice, terminate Nasdaq service in the event that
a Nasdaq Market Maker, Nasdaq ECN, or Order Entry Firm [or ITS/CAES
Market Maker] fails to qualify under specified standards of eligibility
or fails to pay promptly for services rendered by Nasdaq.

4623. Alternative Trading Systems

(a) Nasdaq may provide a means to permit alternative trading
systems (``ATSs''), as such term is defined in Regulation ATS, and
electronic communications networks (``ECNs''), as such term is defined
in SEC Rule 600,
(1) To comply with SEC Rule 301(b)(3);
(2) To comply with the terms of the ECN display alternative
provided for in SEC Rule 602(b)(5)(ii)(A) and (B) (``ECN display
alternatives''); or
(3) To provide orders to Nasdaq voluntarily.
In providing any such means, Nasdaq shall establish a mechanism
that permits the ATS or ECN to display the best prices and sizes of
orders entered into the ATS or ECN by [Nasdaq market makers (and other]
subscribers of the ATS or ECN, if the ECN or ATS so chooses or is
required by SEC Rule 301(b)(3) to display a subscriber's order in
Nasdaq[)], and allows any Nasdaq member the electronic ability to
effect a transaction with such priced orders that is equivalent to the
ability to effect a transaction with a Nasdaq market maker quotation in
Nasdaq operated systems.
(b) An ATS or ECN that seeks to utilize the Nasdaq-provided means
to comply with SEC Rule 301(b)(3), the ECN display alternatives, or to
provide orders to Nasdaq voluntarily shall:
(1) Demonstrate to Nasdaq that it is in compliance with Regulation
ATS or that it qualifies as an ECN meeting the definition in the SEC
Rule 600;
(2) Be registered as a Nasdaq member;
(3) Enter into and comply with the terms of applicable agreements
with Nasdaq;

[[Page 19580]]

(4) Agree to provide for Nasdaq's dissemination in the quotation
data made available to quotation vendors the prices and sizes of
[Nasdaq market maker orders (and orders from other] subscriber[s]
orders of the ATS or ECN, if the ATS or ECN so chooses or is required
by SEC Rule 301(b)(3) to display a subscriber's order in Nasdaq[)], at
the highest buy price and the lowest sell price for each Nasdaq
security entered in and widely disseminated by the ATS or ECN; and
prior to entering such prices and sizes, register with Nasdaq Market
Operations as an ATS or ECN;
(5) Provide an automatic[ ed] execution [or, if the price is no
longer available, an automated rejection] of any quote or order [routed
to] entered into the System by the ATS or ECNJ through the Nasdaq-
provided display alternative.]
[(6) Not charge to broker-dealers that access the ATS or ECN
through the Nasdaq Market Center any fee that is inconsistent with the
requirements of SEC Rule 301(b)(4) or that exceeds $0.003 per share].
[(c) When a Nasdaq member attempts to electronically access through
a Nasdaq-provided system an ATS or ECN-displayed order by sending an
order that is larger than the ATS's or ECN's Nasdaq-displayed size and
the ATS or ECN is displaying the order in Nasdaq on a reserved size
basis, the Nasdaq member that operates the ATS or ECN shall execute
such Nasdaq-delivered order:]
[(1) Up to the size of the Nasdaq-delivered order, if the ATS or
ECN order (including the reserved size and displayed portions) is the
same size or larger than the Nasdaq-delivered order; or]
[(2) Up to the size of the ATS or ECN order (including the reserved
size and displayed portions), if the Nasdaq-delivered order is the same
size or larger than the ATS or ECN order (including the reserved size
and displayed portions).]
[No ATS or ECN operating in Nasdaq pursuant to this rule is
permitted to provide a reserved-size function unless the size of the
order displayed in Nasdaq is 100 shares or greater. For purposes of
this rule, the term ``reserved size'' shall mean that a customer
entering an order into an ATS or ECN has authorized the ATS or ECN to
display publicly part of the full size of the customer's order with the
remainder held in reserve on an undisplayed basis to be displayed in
whole or in part as the displayed part is executed.]
[Nothing in this Rule shall require the provision to Nasdaq of a
locking or crossing bid or offer, if such locking or crossing bid or
offer is instead provided to another display alternative operated by a
national securities exchange or national securities association.]

4624. Penalty Bids and Syndicate Covering Transactions

(a) A Nasdaq Market Maker [or ITS/CAES Market Maker] acting as a
manager (or in a similar capacity) of a distribution of a security that
is a subject or reference security under SEC Rule 101 shall provide
written notice to the Corporate Financing Department of NASD
Regulation, Inc. of its intention to impose a penalty bid on syndicate
members or to conduct syndicate covering transactions pursuant to SEC
Rule 104 prior to imposing the penalty bid or engaging in the first
syndicate covering transaction. A Nasdaq Market Maker [or ITS/CAES
Market Maker] that intends to impose a penalty bid on syndicate members
may request that its quotation be identified as a penalty bid on Nasdaq
pursuant to paragraph (c) below.
(b) The notice required by paragraph (a) shall include:
(1) The identity of the security and its symbol;
(2) The date the member is intending to impose the penalty bid and/
or conduct syndicate covering transactions.
(c) Notwithstanding paragraph (a), a Nasdaq Market Maker [or ITS/
CAES Market Maker] may request that its quotation be identified as a
penalty bid on Nasdaq display by providing notice to Nasdaq
MarketWatch, which notice shall include the date and time that the
penalty bid identifier should be entered on Nasdaq and, if not in
writing, shall be confirmed in writing no later than the close of
business the day the penalty bid identifier is entered on Nasdaq.
(d) The written notice required by this Rule may be submitted on
the Underwriting Activity Report.

4625. Obligation To Provide Information

(a) A Nasdaq Market Maker, Nasdaq ECN, or Order Entry Firm [or ITS/
CAES Market Maker] operating in or participating in the Nasdaq Market
Center or other Nasdaq-operated system shall provide information
orally, in writing, or electronically (if such information is, or is
required to be, maintained in electronic form) to the staff of Nasdaq
when:
(1) Nasdaq MarketWatch staff makes an oral, written, or
electronically communicated request for information relating to a
specific Nasdaq rule, SEC rule, or provision of a joint industry plan
(e.g., ITS, UTP, CTA, and CQA) (as promulgated and amended from time-
to-time) that Nasdaq MarketWatch is responsible for administering or to
other duties and/or obligations imposed on Nasdaq MarketWatch by
Nasdaq; this shall include, but not be limited to, information relating
to:
(A) A locked or crossed market; or
(B) Reserved
(C) Trading activity, rumors, or information that a member may
possess that may assist in determining whether there is a basis to
initiate a trading halt, pursuant to Nasdaq Rule 4120 and IM-4120-1; or
(D) A quotation that appears not to be reasonably related to the
prevailing market; or
(E) A clearly erroneous transaction, pursuant to Nasdaq Rule 11890;
or
(F) A request for an excused withdrawal or reinstatement, pursuant
to Nasdaq Rules 4619[,] and 4620[, and 5222]; or
(G) The resolution of a trade-through complaint, or other
transaction, pursuant to Nasdaq Rules 4759 [, 5262, 5265,] and 11890;
or
(H) A request to submit a stabilizing bid, pursuant to Nasdaq Rule
4614, or a request to have a quotation identified as a penalty bid on
Nasdaq, pursuant to Nasdaq Rule 4624.
(2) Nasdaq Market Operations staff makes an oral, written, or
electronically communicated request for information relating to a
specific Nasdaq rule, SEC rule, provision of a joint industry plan
(e.g., ITS, UTP, CTA, and CQA) (as promulgated and amended from time-
to- time) that Nasdaq Market Operations is responsible for
administering or to other duties and/or obligations for which Nasdaq
Market Operations is responsible, this shall include, but not be
limited to, information relating to an equipment failure.
(b) A failure to comply in a timely, truthful, and/or complete
manner with a request for information made pursuant to this rule may be
deemed conduct inconsistent with just and equitable principles of
trade.

4626. Limitation of Liability

(a) Except as provided for in paragraph (b) below, Nasdaq and its
affiliates shall not be liable for any losses, damages, or other claims
arising out of the Nasdaq Market Center or its use. Any losses,
damages, or other claims, related to a failure of the Nasdaq Market
Center to deliver, display, transmit, execute, compare, submit for
clearance and settlement, adjust, retain priority for, or otherwise
correctly process an order, Quote/Order, message, or other data entered
into, or created by,

[[Page 19581]]

the Nasdaq Market Center shall be absorbed by the member, or the member
sponsoring the customer, that entered the order, Quote/Order, message,
or other data into the Nasdaq Market Center.
(b) Nasdaq, subject to the express limits set forth below, may
compensate users of the Nasdaq Market Center or Nasdaq's Brut [order
execution] system for losses directly resulting from the systems'
actual failure to correctly process an order, Quote/Order, message, or
other data, provided the Nasdaq Market Center, or Brut system, as
applicable, has acknowledged receipt of the order, Quote/Order,
message, or data.
(1) For one or more claims made by a single market participant
related to the use of the Nasdaq Market Center or Brut system on a
single trading day, Nasdaq's liability shall not exceed the larger of
$100,000, or the amount of any recovery obtained by Nasdaq under any
applicable insurance policy.
(2) For the aggregate of all claims made by all market participants
related to the use of the Nasdaq Market Center or Brut system on a
single trading day, Nasdaq's liability shall not exceed the larger of
$250,000, or the amount of the recovery obtained by Nasdaq under any
applicable insurance policy.
(3) For the aggregate of all claims made by all market participants
related to the use of the Nasdaq Market Center or Brut system during a
single calendar month, Nasdaq's liability shall not exceed the larger
of $500,000, or the amount of the recovery obtained by Nasdaq under any
applicable insurance policy.
(4) In the event all of the claims arising out of the use of the
Nasdaq Market Center or Brut system cannot be fully satisfied because
in the aggregate they exceed the maximum amount of liability provided
for in this Rule, then the maximum amount will be proportionally
allocated among all such claims arising on a single trading day, or
during a single calendar month, as applicable.
(5) All claims for compensation pursuant to this Rule shall be in
writing and must be submitted no later than the opening of trading on
the next business day following the day on which the use of the Nasdaq
Market Center or the Brut system gave rise to such claims. Nothing in
this rule shall obligate Nasdaq or Brut to seek recovery under any
applicable insurance policy.

4627. Obligation To Honor System Trades

(a) If a Participant, or clearing member acting on a Participant's
behalf, is reported by the System, or shown by the activity reports
generated by the System, as constituting a side of a System trade, such
Participant, or clearing member acting on its behalf, shall honor such
trade on the scheduled settlement date.
(b) Nasdaq shall have no liability if a Participant, or a clearing
member acting on the Participant's behalf, fails to satisfy the
obligations in paragraph (a).

4628. Compliance With Rules and Registration Requirements

(a) Failure by a Participant to comply with any of the rules or
registration requirements applicable to the Nasdaq Market Center
identified herein shall subject such Participant to censure, fine,
suspension or revocation of its registration as a Nasdaq Market Maker,
Order Entry Firm and/or Nasdaq ECN or any other fitting penalty under
the Nasdaq Rules.
(b)(1) If a Participant fails to maintain a clearing relationship
as required under paragraphs (a)(2) of Rule 4611, it shall be removed
from the Nasdaq Market Center until such time as a clearing arrangement
is reestablished.
(2) A Participant that is not in compliance with its obligations
under paragraphs (a)(2) of Rule 4611 shall be notified when Nasdaq
exercises it authority under paragraph (b)(1) above.
(3) The authority and procedures contained in this paragraph (b) do
not otherwise limit Nasdaq's authority, contained in other provisions
of the Nasdaq Rules, to enforce its rules or impose any fitting
sanction.

[4700. NASDAQ MARKET CENTER--EXECUTION SERVICES]

Nasdaq is proposing to delete each and every rule in the 4700
Series that was approved in the Order dated January 13, 2006.

4750. NASDAQ MARKET CENTER--EXECUTION SERVICES

4751. Definitions

The following definitions apply to the Rule 4600 and 4750 Series
for the trading of securities listed on a national securities exchange
other than Nasdaq.
(a) The term ''Nasdaq Market Center,'' or ``System'' shall mean the
automated system for order execution and trade reporting owned and
operated by The NASDAQ Stock Market LLC. The Nasdaq Market Center
comprises:
(1) An order execution service that enables Participants to
automatically execute transactions in System Securities; and provides
Participants with sufficient monitoring and updating capability to
participate in an automated execution environment;
(2) A trade reporting service that submits ``locked-in'' trades for
clearing to a registered clearing agency for clearance and settlement;
transmits last-sale reports of transactions automatically to the
National Trade Reporting System, if required, for dissemination to the
public and industry; and provides participants with monitoring and risk
management capabilities to facilitate participation in a ``locked-in''
trading environment;
(3) A data feed(s) that can be used to display with attribution to
Participants' MPIDs all Quotes and Displayed Orders on both the bid and
offer side of the market for all price levels then within the Nasdaq
Market Center.
(b) The term ``System Securities'' shall mean all securities listed
on Nasdaq and all securities subject to the Consolidated Tape
Association Plan and the Consolidated Quotation Plan.
(c) The term ``Participant'' shall mean an entity that fulfills the
obligations contained in Rule 4611 regarding participation in the
System, and shall include:
(1) ``Nasdaq ECNs.'' members that meet all of the requirements of
Rule 4623, and that participates in the System with respect to one or
more Nasdaq-listed securities.
(2) ``Nasdaq Market Makers,'' members that are registered as Nasdaq
Market Makers for purposes of participation in the System on a fully
automated basis with respect to one or more System securities.
(3) ``Order Entry Firms,'' members that are registered as Order
Entry Firms for purposes of entering orders in System Securities into
the System. This term shall also include any Electronic Communications
Network or Alternative Trading System that fails to meet all the
requirements of Rule 4623.
(d) With respect to System-provided quotation functionality:
(1) The term ``Quote'' shall mean a single bid or offer quotation
submitted to the System and designated for display (price and size)
next to the Participant's MPID by a Participant that is eligible to
submit such quotations.
(2) The term ``Automatic Quote Refresh'' shall mean the default
price increment away from the executed price and the size to which a
Participant's Quote will be refreshed if the Participant elects to
utilize this functionality. If the Participant does not designate an
Automatic Quote Refresh size, which must be at least one normal unit of
trading, the default Automatic Quote Refresh size shall be 100 shares
and the default Automatic Quote Refresh price increment shall be $0.25.

[[Page 19582]]

(3) The term ''Reserve Size'' shall mean the System-provided
functionality that permits a Participant to display in its Displayed
Quote part of the full size of a proprietary or agency order, with the
remainder held in reserve on an undisplayed basis. Both the displayed
and non-displayed portions are available for potential execution
against incoming orders. If the Displayed Quote is reduced to less than
a normal unit of trading, the System will replenish the display portion
from reserve up to at least a single round-lot amount. A new timestamp
is created for the replenished portion of the order each time it is
replenished from reserve, while the reserve portion retains the time-
stamp of its original entry.
(e) The term ``Order'' shall mean a single order or multiple orders
at the same price submitted to the System by a Participant that is
eligible to submit such orders and shall include:
(1) ``Attributable Orders,'' orders that are designated for display
(price and size) next to the Participant's MPID;
(2) ''Non-Attributable Orders,'' orders that are entered by a
Participant that is designated for display (price and size) on an
anonymous basis in the order display service of the System; and
(3) ``Non-Displayed Orders,'' a limit order that is not displayed
in the System, but nevertheless remains available for potential
execution against all incoming orders until executed in full or
cancelled.
(f) The term ``Order Type'' shall mean the unique processing
prescribed for designated orders that are eligible for entry into the
System, and shall include:
(1) ``Discretionary Orders'' are orders that have a displayed price
and size, as well as a non-displayed discretionary price range, at
which the entering party, if necessary, is also willing to buy or sell.
The non-displayed trading interest is not entered into the System book
ut is, along with the displayed size, converted to an IOC buy (sell)
order priced at the highest (lowest) price in the discretionary price
range when displayed shares become available or an execution takes
place at any price within the discretionary price range. The generation
of this IOC order is triggered by the cancellation of the open shares
of the Discretionary Order. If more than one Discretionary Order is
available for conversion to an IOC order, the system will convert all
such orders at the same time and priority will be given to the first
IOC order(s) that reaches the trading interest on the other side of the
market. If an IOC order is not executed in full, the unexecuted portion
of the order is automatically re-posted and displayed in the System
book with a new time stamp, at its original displayed price, and with
its non-displayed discretionary price range.
(2) ``Reserve Orders'' are limit orders that have both a round-lot
displayed size as well as an additional non-displayed share amount.
Both the displayed and non-displayed portions of the Reserve Order are
available for potential execution against incoming orders. If the
round-lot displayed portion of a Reserve Order is reduced to less than
a normal unit of trading, the System will replenish the display portion
from reserve up to at least a single round-lot amount. A new timestamp
is created for the replenished portion of the order each time it is
replenished from reserve, while the reserve portion retains the time-
stamp of its original entry.
(3) ``Limit Orders'' are orders to buy or sell a stock at a
specified price or better. A limit order is marketable when, for a
limit order to buy, at the time it is entered into the System, the
order is priced at the current inside offer or higher, or for a limit
order to sell, at the time it is entered into the System, the order is
priced at the inside bid or lower.
(4) ``Pegged Orders'' are orders that, after entry, has their price
automatically adjusted by the System in response to changes in bids or
offers in the market, as appropriate. A Pegged Order can specify that
its price will equal the inside quote on the same side of the market
(``Primary Peg'') or the opposite side of the market (``Market Peg'').
A Pegged Order may have a limit price beyond which the order shall not
be executed. In addition, Pegged Orders may also establish their
pricing relative to the appropriate bids or offers by the selection of
one or more offset amounts that will adjust the price of the order by
the offset amount selected. A new timestamp is created for the order
each time it is automatically adjusted.
(5) ``Minimum Quantity Orders'' are orders that require that a
specified minimum quantity of shares be obtained, or the order is
cancelled. Minimum Quantity Orders may only be entered with a time-in-
force designation of System Hours Immediate or Cancel or Market Hours
Immediate or Cancel. Minimum Quantity Orders with a Market Hours
Immediate or Cancel time in force received prior to the opening cross
or after 4 p.m. will be rejected.
(6) ``Intermarket Sweep Order'' or ``ISO'' are limit orders that
are designated as ISOs in the manner prescribed by Nasdaq and are
executed within the System by Participants at multiple price levels
without respect to Protected Quotations of other market centers within
the meaning of Rule 600(b) of Regulation NMS under the Exchange Act of
1934. ISOs are immediately executable within the System pursuant to
Rule 4757 and shall not be eligible for routing as set out in Rule
4758.
Simultaneously with the routing of an ISO to the System, one or
more additional limit orders, as necessary, are routed by the entering
party to execute against the full displayed size of any protected bid
or offer (as defined in Rule 600(b) of Regulation NMS under the Act) in
the case of a limit order to sell or buy with a price that is superior
to the limit price of the limit order identified as an intermarket
sweep order (as defined in Rule 600(b) of Regulation NMS under the
Act). These additional routed orders must be identified as intermarket
sweep orders.
(7) ``Price to Comply Order'' are orders that, if, at the time of
entry, a Price to Comply Order would create a violation of Rule 610(d)
of Regulation NMS under the Exchange Act of 1934 by locking or crossing
the protected quote of an external market or would cause an Order
Protection Rule violation, the order will be converted by the System to
a Non-Displayed Order and re-priced to the current low offer (for bids)
or to the current best bid (for offers). Such Non-Displayed Orders will
be cancelled by the System if the market moves through the price of the
order after the order is accepted.
(8) ``Price to Comply Post Order'' are orders that, if, at the time
of entry, a Price to Comply Post Order would create a violation of Rule
610(d) of Regulation NMS under the Exchange Act of 1934 by locking or
crossing the protected quote of an external market or would cause an
Order Protection Rule violation, the order will be re-priced and
displayed by the System to one MPV below the current low offer (for
bids) or to one penny above the current best bid (for offers). Price to
Comply Post Orders will not be routed outside of the System.
(g) The term ``Order Size'' shall mean the number of shares up to
999,999 associated with a Quote or Order and shall include:
(1) ``Normal unit of trading'': The round lot size for the
security.
(2) ``Mixed lot'': An order that is for more than a normal unit of
trading but not a multiple thereof.
(3) ``Odd-lot'': An order that is for less than a normal unit of
trading.
(h) The term ``Time in Force'' shall mean the period of time that
the System will hold an order for potential execution, and shall
include:
(1) ``System Hours Immediate or Cancel'' or ``SIOC'' shall mean,
for limit orders so designated, that if after entry

[[Page 19583]]

into the System the order (or a portion thereof) is not marketable, the
order (or unexecuted portion thereof) shall be canceled and returned to
the entering Participant. SIOC Orders shall be available for entry and
execution from 7 a.m. until 8 p.m. eastern time.
(2) ``System Hours Day'' or ``SDAY'' shall mean, for orders so
designated, that if after entry into the System, the order is not fully
executed, the order (or the unexecuted portion thereof) shall remain
available for potential display and/or execution from 7 a.m. until 8
p.m. eastern time on the day it was submitted unless cancelled by the
entering party.
(3) ``System Hours Good-till-Cancelled'' or ``SGTC'' shall mean,
for orders so designated, that if after entry into the System, the
order is not fully executed, the order (or unexecuted portion thereof)
shall remain available for potential display and/or execution from 7
a.m. until 8 p.m. eastern time unless cancelled by the entering party,
or until 1 year after entry, whichever comes first.
(4) ``System Hours Expire Time'' or ``SHEX'' shall mean, for orders
so designated, that if after entry into the System, the order is not
fully executed, the order (or the unexecuted portion thereof) shall
remain available for potential display and/or execution for the amount
of time specified by the entering Participant unless canceled by the
entering party. SHEX Orders shall be available for entry and execution
from 7 a.m. until 8 p.m. eastern time.
(5) ``Market Hours IOC'' or ``MIOC'' shall mean for orders so
designated, that if after entry into the System a marketable limit
order (or unexecuted portion thereof) becomes non-marketable, the order
(or unexecuted portion thereof) shall be canceled and returned to the
entering participant. MIOC Orders shall be available for entry from 7
a.m. until 4 p.m. eastern time and for potential execution from 9:30
a.m. until 4 p.m. eastern time. MIOC Orders entered between 7 a.m. and
9:30 a.m. eastern time will be held within the System until 9:30 a.m.
at which time the System shall determine whether such orders are
marketable.
(6) ``Market Hours Day'' or ``MDAY'' shall mean for orders so
designated, that if after entry into the System, the order is not fully
executed, the order (or unexecuted portion thereof) shall remain
available for potential display and/or execution until 4 p.m. eastern
time, unless canceled by the entering party, after which it shall be
returned to the entering party. MDAY Orders shall be available for
entry from 7 a.m. until 4 p.m. eastern time and for potential execution
from 9:30 a.m. until 4 p.m. eastern time.
(7) ``Market Hours GTC'' or ``MGTC'' shall mean for orders so
designated, that if after entry into System, the order is not fully
executed, the order (or unexecuted portion thereof) shall remain
available for potential display and/or execution unless cancelled by
the entering party, or until 1 year after entry, whichever comes first.
MGTC Orders shall be available for entry from 7 a.m. until 8 p.m.
eastern time and for potential execution from 9:30 a.m. until 4 p.m.
eastern time.
(8) ``Good-til-market close'' or ``GTMC'' shall mean for orders so
designated, that if after entry into the System, the order is not fully
executed, the order (or unexecuted portion thereof) shall remain
available for potential display and/or execution until cancelled by the
entering party, or until the completion of the Nasdaq Closing Cross,
after which it shall be returned to the entering party. GTMC orders
shall be available for entry and potential execution from 7 a.m. and 8
p.m. eastern time. GTMC orders entered after the Nasdaq Closing Cross
will be treated as SIOC orders.
(i) The term ``System Book Feed'' shall mean a data feed for System
eligible securities.

4752. Opening Process for Nasdaq-Listed Securities

(a) Definitions. For the purposes of this rule the term:
(1) ``Imbalance'' shall mean the number of shares of buy or sell
MOO. LOO or Early Market Hours orders that may not be matched with
other MOO, LOO, Early Market Hours, Open Eligible Interest or OIO order
shares at a particular price at any given time.
(2) ``Order Imbalance Indicator'' shall mean a message disseminated
by electronic means containing information about MOO, LOO, OIO, and
Early Market Hours orders and the price at which those orders would
execute at the time of dissemination. The Order Imbalance Indicator
shall disseminate the following information:
(A) ``Current Reference Price'' shall mean:
(i) The single price that is at or within the current Nasdaq Market
Center best bid and offer at which the maximum number of shares of MOO,
LOO, OIO, Open Eligible Interest and Early Market Hours orders can be
paired.
(ii) If more than one price exists under subparagraph (i), the
Current Reference Price shall mean the price that minimizes any
Imbalance.
(iii) If more than one price exists under subparagraph (ii), the
Current Reference Price shall mean the entered price at which shares
will remain unexecuted in the cross.
(iv) If more than one price exists under subparagraph (iii), the
Current Reference Price shall mean the price that minimizes the
distance from the bid-ask midpoint of the inside quotation prevailing
at the time of the order imbalance indicator dissemination.
(B) the number of shares represented by MOO, LOO, OIO, Early Market
Hours orders, and Open Eligible Interest that are paired at the Current
Reference Price;
(C) The size of any Imbalance;
(D) The buy/sell direction of any Imbalance; and
(E) Indicative prices at which the Nasdaq Opening Cross would occur
if the Nasdaq Opening Cross were to occur at that time and the percent
by which the indicative prices are outside the then current Nasdaq
Market Center best bid or best offer. whichever is closer. The
indicative prices shall be:
(i) ``Near Clearing Price'' which shall mean the price at which
both the MOO, LOO, OIO, and Early Market Hours orders and Open Eligible
Interest in the Nasdaq Market Center would execute, and
(ii) ``Far Clearing Price'' which shall mean the price at which the
MOO, LOO, OIO, and Early Market Hours orders in the Nasdaq Opening Book
would execute.
(iii) If marketable buy (sell) shares would remain unexecuted above
(below) the Near Clearing Price or Far Clearing Price, Nasdaq shall
disseminate an indicator for ``market buy'' or ``market sell''.
(3) ``Limit On Open Order'' or ``LOO'' shall mean an order to buy
or sell at a specified price or better that is to be executed only
during the Nasdaq Opening Cross. LOO orders shall execute only at the
price determined by the Nasdaq Opening Cross and shall be available for
automatic execution. LOO orders may be entered, cancelled and cancel/
replaced between 7 a.m. and 9:28 a.m. without restriction. LOO orders
may not be cancelled or corrected after 9:28 a.m.
(4) ``Market on Open Order'' or ``MOO'' shall mean an order to buy
or sell at the market that is to be executed only during the Nasdaq
Opening Cross. MOO orders may be entered, cancelled, and cancel/
replaced between 7 a.m. and 9:28 a.m. and shall execute only at the
price determined by the Nasdaq Opening Cross.
(5) ``Nasdaq Opening Cross'' shall mean the process for determining
the price at which orders shall be executed

[[Page 19584]]

at the open and for executing those orders.
(6) ``Opening Imbalance Only Order'' or ``OIO'' shall mean an order
to buy or sell at a specified price or better that may be executed only
during the Nasdaq Opening Cross and only against MOO, LOO or Early
Market Hours orders. OIO orders may be entered between 7 a.m. and
9:29:59 a.m., but they may not be cancelled or modified after 9:28
except to increase the number of shares. OIO sell (buy) orders shall
only execute at or above (below) the 9:30 Nasdaq Market Center offer
(bid).
(7) ``Market Hours Orders'' shall mean any order that may be
entered into the system and designated with a time-in-force of MIOC,
MDAY, MGTC. Market Hours Orders shall be designated as ``Early Market
Hours Orders'' if entered into the system prior to 9:28 a.m. and shall
be treated as market-on-open and limit-on-open orders, as appropriate,
for the purposes of the Nasdaq Opening Cross. Orders entered into the
system at 9:28 a.m. or after shall be designated as ``Late Market Hours
Orders'' and shall be treated as imbalance-only orders for the purposes
of the cross. Beginning at 9:28 a.m., requests to cancel or modify
Market Hours Orders shall be suspended until after completion of the
Opening Cross at which time such requests shall be processed, to the
extent that such orders remain available within the System.
(8) ``Open Eligible Interest'' shall mean any quotation or any
order that may be entered into the system and designated with a time-
in-force of SDAY, SGTC, SHEX, or GTMC.
(b) Trading Prior to Normal Market Hours. The system shall process
all eligible Quotes/Orders in Nasdaq-listed securities at 7 a.m.:
(1) At 7 a.m., the system shall add in time priority all eligible
Orders in accordance with each order's defined characteristics.
(2) At 9:25 a.m., the system shall open all remaining unopened
Quotes in accordance with each firm's instructions.
(3) Nasdaq Quoting Market Participants may instruct Nasdaq to open
their Quotes as follows:
(A) At the price of the firm's quote when the quote was closed by
the participant during the previous trading day with a normal unit of
trading displayed size;
(B) At a price and size entered by the participant between 7 a.m.
and 9:24:59 a.m.
(4) All trades executed prior to 9:30 shall be automatically
appended with the ``.T'' modifier.
(c) System securities in which no Nasdaq Opening Cross occurs shall
begin trading at 9:30 a.m. by integrating Market Hours orders into the
book in time priority and executing in accordance with market hours
rules.
(d) Processing of Nasdaq Opening Cross. For Nasdaq-listed
securities, the Nasdaq Opening Cross shall occur at 9:30, and market
hours trading shall commence when the Nasdaq Opening Cross concludes.
(1) Beginning at 9:28 a.m., Nasdaq shall disseminate by electronic
means an Order Imbalance Indicator every 5 seconds until market open.
(2)(A) The Nasdaq Opening Cross shall occur at the price that
maximizes the number of shares of MOO, LOO, OIO, Early Market Hours
orders, and executable quotes and orders in the Nasdaq Market Center to
be executed.
(B) If more than one price exists under subparagraph (A), the
Nasdaq Opening Cross shall occur at the price that minimizes any
Imbalance.
(C) If more than one price exists under subparagraph (B), the
Nasdaq Opening Cross shall occur at the entered price at which shares
will remain unexecuted in the cross.
(D) If more than one price exists under subparagraph (C), the
Nasdaq Opening Cross shall occur at the price that minimizes the
distance from the bid-ask midpoint of the inside quotation prevailing
at 9:30 a.m.
(E) If the Nasdaq Opening Cross price established by subparagraphs
(A) through (D) is outside the benchmarks established by Nasdaq by a
threshold amount, the Nasdaq Opening Cross shall occur at a price
within the threshold amounts that best satisfies the conditions of
subparagraphs (A) through (D). Nasdaq management shall set and modify
such benchmarks and thresholds from time to time upon prior notice to
market participants.
(3) If the Nasdaq Opening Cross price is selected and fewer than
all shares of MOO, LOO, OIO and Early Market Hours Orders that are
available in the Nasdaq Market Center would be executed, all Quotes and
Orders shall be executed at the Nasdaq Opening Cross price in the
following priority:
(A) MOO and Early Market Hours market peg orders, with time as the
secondary priority;
(B) LOO orders, Early Market Hours limit orders, OIO orders, SDAY
limit orders, SGTC limit orders, GTMC limit orders, SHEX limit orders,
displayed quotes and reserve interest priced more aggressively than the
Nasdaq Opening Cross price based on limit price with time as the
secondary priority;
(C) LOO orders, OIO Orders, Early Market Hours and displayed
interest of quotes, SDAY limit orders, SGTC limit orders, GTMC limit
orders, and SHEX limit orders at the Nasdaq Opening Cross price with
time as the secondary priority;
(D) Reserve interest of quotes, SDAY limit orders, SGTC limit
orders, and GTMC limit orders and SHEX limit order at the Nasdaq
Opening Cross price with time as the secondary priority; and
(4) All Quotes and Orders executed in the Nasdaq Opening Cross
shall be executed at the Nasdaq Opening Cross price, trade reported
anonymously, and disseminated via a national market system plan. The
Nasdaq Opening Cross price shall be the Nasdaq Official Opening Price
for stocks that participate in the Nasdaq Opening Cross.

4753. Nasdaq Halt Cross

(a) Definitions.
For the purposes of this rule the term:
(1) ``Imbalance'' shall mean the number of shares of Eligible
Interest that may not be matched with other order shares at a
particular price at any given time.
(2) ``Order Imbalance Indicator'' shall mean a message disseminated
by electronic means containing information about Eligible Interest and
the price at which such interest would execute at the time of
dissemination. The Order Imbalance Indicator shall disseminate the
following information:
(A) ``Current Reference Price'' shall mean:
(i) The single price at which the maximum number of shares of
Eligible Interest can be paired.
(ii) If more than one price exists under subparagraph (i), the
Current Reference Price shall mean the price that minimizes any
Imbalance.
(iii) If more than one price exists under subparagraph (ii), the
Current Reference Price shall mean the entered price at which shares
will remain unexecuted in the cross.
(iv) If more than one price exists under subparagraph (iii), the
Current Reference Price shall mean:
(a) In the case of an IPO, the price that is closest to the
Issuer's Initial Public Offering Price;
(b) In the case of another halt type in which the security has
already traded during normal market hours on that trading day, the
price that is closest to the last Nasdaq execution prior to the trading
halt; and
(c) In the case of another halt type in which the security has not
already traded during normal market hours on that trading day, the
price that is closest

[[Page 19585]]

to the previous Nasdaq Official Closing Price.
(B) the number of shares of Eligible Interest that are paired at
the Current Reference Price;
(C) the size of any Imbalance;
(D) the buy/sell direction of any Imbalance; and
(E) indicative prices at which the Nasdaq Halt Cross would occur if
the Nasdaq Halt Cross were to occur at that time. The indicative prices
shall be:
(i) The Far Clearing Price which shall be the same as the Current
Reference Price, and
(ii) The Near Clearing Price which shall be the same as the Current
Reference Price.
(iii) If marketable buy (sell) shares would remain unexecuted above
(below) the Near Clearing Price or Far Clearing Price, Nasdaq shall
disseminate an indicator for ``market buy'' or ``market sell''.
(3) ``Nasdaq Halt Cross'' shall mean the process for determining
the price at which Eligible Interest shall be executed at the open of
trading for a halted security and for executing that Eligible Interest.
(4) ``Eligible Interest'' shall mean any quotation or any order
that may be entered into the system and designated with a time-in-force
of SIOC, SDAY, SGTC, MIOC, MDAY, MGTC, SHEX, or GTMC.
(b) Processing of Nasdaq Halt Cross. For Nasdaq-listed securities
that are the subject of a trading halt initiated pursuant to Rule
4120(a)(1), (4), (5), (6) or (7), the Nasdaq Halt Cross shall occur at
the time specified by Nasdaq pursuant to Rule 4120, and Market hours
trading shall commence when the Nasdaq Halt Cross concludes.
(1) At the beginning of the Display Only Period and continuing
through the resumption of trading, Nasdaq shall disseminate by
electronic means an Order Imbalance Indicator every 5 seconds.
(2)(A) The Nasdaq Halt Cross shall occur at the price that
maximizes the number of shares of Eligible Interest in the Nasdaq
Market Center to be executed.
(B) If more than one price exists under subparagraph (A), the
Nasdaq Halt Cross shall occur at the price that minimizes any
Imbalance.
(C) If more than one price exists under subparagraph (B), the
Nasdaq Halt Cross shall occur at the entered price at which shares will
remain unexecuted in the cross.
(D) If more than one price exists under subparagraph (C), the
Nasdaq Halt Cross shall occur at:
(i) In the case of an IPO, the price that is closest to the
Issuer's Initial Public Offering Price;
(ii) In the case of another halt type in which the security has
already traded during normal market hours on that trading day, the
price that is closest to the last Nasdaq execution prior to the trading
halt; and
(iii) In the case of another halt type in which the security has
not already traded during normal market hours on that trading day, the
price that is closest to the previous Nasdaq Official Closing Price.
(3) If the Nasdaq Halt Cross price is selected and fewer than all
shares of Eligible Interest that are available in the Nasdaq Market
Center would be executed, all Eligible Interest shall be executed at
the Nasdaq Halt Cross price in price/time priority.
(4) All Eligible Interest executed in the Nasdaq Halt Cross shall
be executed at the Nasdaq Halt Cross price, trade reported anonymously,
and disseminated via a national market system plan. The Nasdaq Halt
Cross price shall be the Nasdaq Official Opening Price for stocks that
participate in the Nasdaq Halt Cross unless the stock has already been
traded during normal market hours on that trading day.
(c) Nasdaq-listed securities that are the subiect of a trading halt
initiated pursuant to Rule 4120(a) and in which no Halt Cross occurs,
shall open for trading at the time specified by Nasdaq pursuant to Rule
4120 in the following manner:
(1) Orders shall be added to the book in time priority.
(2) The Nasdaq Official Opening Price for such securities shall be
the first Nasdaq market center execution following trade resumption
unless the security has already traded during Market hours on that
trading day.

4754. Nasdaq Closing Cross

(a) Definitions. For the purposes of this rule the term:
(1) ``Close Eligible Interest'' shall mean any quotation or any
order that may be entered into the system and designated with a time-
in-force of SDAY, SGTC, MDAY, MGTC, SHEX, or GTMC.
(2) ``Imbalance'' shall mean the number of shares of buy or sell
MOC or LOC orders that cannot be matched with other MOC or LOC, Close
Eligible Interest or IO order shares at a particular price at any given
time.
(3) ``Imbalance Only Order'' or ``IO'' shall mean an order to buy
or sell at a specified price or better that may be executed only during
the Nasdaq Closing Cross and only against MOC or LOC orders. IO orders
can be entered between 7 a.m. and 3:59:59 p.m., but they cannot be
modified after 3:50:00 except to increase the number of shares. IO
orders can be cancelled between 3:50:00 p.m. and 3:55:00 p.m. only by
requesting Nasdaq to correct a legitimate error (e.g., side, size,
symbol, price or duplication of an order). IO orders cannot be
cancelled after 3:55:00 p.m. for any reason. IO sell (buy) orders will
only execute at or above (below) the 4:00:00 System offer (bid).
(4) ``Limit on Close Order'' or ``LOC'' shall mean an order to buy
or sell at a specified price or better that is to be executed only
during the Nasdaq Closing Cross. LOC orders can be entered, cancelled,
and corrected without restriction between 7 a.m. and 3:50:00 p.m. LOC
orders can be cancelled between 3:50:00 p.m. and 3:55:00 p.m. only by
requesting Nasdaq to correct a legitimate error (e.g., side, size,
symbol, price or duplication of an order). LOC orders cannot be
cancelled after 3:55:00 p.m. for any reason. LOC Orders will execute
only at the price determined by the Nasdaq Closing Cross. All LOC
orders must be available for automatic execution.
(5) ``Market on Close Order or MOC'' shall mean an order to buy or
sell at the market that is to be executed only during the Nasdaq
Closing Cross. MOC orders can be entered, cancelled, and corrected
between 7 a.m. and 3:50:00 p.m. MOC orders can be cancelled between
3:50:00 p.m. and 3:55:00 p.m. only by requesting Nasdaq to correct a
legitimate error (e.g., side, size, symbol, price or duplication of an
order). MOC orders cannot be cancelled after 3:55:00 p.m. for any
reason. MOC orders will execute only at the price determined by the
Nasdaq Closing Cross. All MOC orders must be available for automatic
execution.
(6) ``Nasdaq Closing Cross'' shall mean the process for determining
the price at which orders shall be executed at the close and for
executing those orders.
(7) ``Order Imbalance Indicator'' shall mean a message disseminated
by electronic means containing information about MOC, LOC, IO, and
Close Eligible Interest and the price at which those orders would
execute at the time of dissemination. The Order Imbalance Indicator
shall disseminate the following information:
(A) ``Current Reference Price'' shall mean:
(i) The single price that is at or within the current Nasdaq Market
Center best bid and offer at which the maximum

[[Page 19586]]

number of shares of MOC, LOC, IO and Close Eligible Interest can be
paired.
(ii) If more than one price exists under subparagraph (i), the
Current Reference Price shall mean the price that minimizes any
Imbalance.
(iii) If more than one price exists under subparagraph (ii), the
Current Reference Price shall mean the entered price at which shares
will remain unexecuted in the cross.
(iv) If more than one price exists under subparagraph (iii), the
Current Reference Price shall mean the price that minimizes the
distance from the bid-ask midpoint of the inside quotation prevailing
at the time of the order imbalance indicator dissemination.
(B) The number of shares represented by MOC, LOC, IO, and Close
Eligible Interest that are paired at the Current Reference Price;
(C) The size of any Imbalance;
(D) The buy/sell direction of any Imbalance; and
(E) Indicative prices at which the Nasdaq Closing Cross would occur
if the Nasdaq Closing Cross were to occur at that time and the percent
by which the indicative prices are outside the then current Nasdaq
Market Center best bid or best offer, whichever is closer. The
indicative prices shall be:
(i) ``Far Clearing Price'' which shall mean the price at which both
the MOC, LOC, and IO, orders would execute, and
(ii) ``Near Clearing Price'' which shall mean the price at which
the MOC, LOC, IO, and Eligible Interest would execute.
(iii) If marketable buy (sell) shares would remain unexecuted above
(below) the Near Clearing Price or Far Clearing Price, Nasdaq shall
disseminate an indicator for ``market buy'' or ``market sell''.
(b) Processing of Nasdaq Closing Cross. The Nasdaq Closing Cross
will begin at 4:00:00, and post-market hours trading will commence when
the Nasdaq Closing Cross concludes.
(1) Order Imbalance Indicator. Beginning at 3:50 p.m., Nasdaq shall
disseminate by electronic means an Order Imbalance Indicator every 5
seconds until market close.
(2)(A) The Nasdaq Closing Cross will occur at the price that
maximizes the number of shares of Eligible Interest in the Nasdaq
Market Center to be executed.
(B) If more than one price exists under subparagraph (A), the
Nasdaq Closing Cross shall occur at the price that minimizes any
Imbalance.
(C) If more than one price exists under subparagraph (B), the
Nasdaq Closing Cross shall occur at the entered price at which shares
will remain unexecuted in the cross.
(D) If more than one price exists under subparagraph (C), the
Nasdaq Closing Cross shall occur at: a price that minimizes the
distance from the System bid-ask midpoint at the time of the Nasdaq
Closing Cross.
(E) If the Nasdaq Closing Cross Price established by subparagraphs
(A) through (D) above is outside the benchmarks established by Nasdaq
by a threshold amount, the Nasdaq Closing Cross will occur at a price
within the threshold amounts that best satisfies the conditions of
subparagraphs (A) through (D) above. Nasdaq management shall set and
modify such benchmarks and thresholds from time to time upon prior
notice to market participants.
(3) If the Nasdaq Closing Cross price is selected and fewer than
all MOC, LOC IO and Close Eligible Interest would be executed, orders
will be executed at the Nasdaq Closing Cross price in the following
priority:
(A) MOC orders, with time as the secondary priority:
(B) LOC orders, limit orders, IO orders, displayed quotes and
reserve interest priced more aggressively than the Nasdaq Closing Cross
price based on price with time as the secondary priority:
(C) LOC orders, IO Orders displayed interest of limit orders, and
displayed interest of quotes at the Nasdaq Closing Cross price with
time as the secondary priority:
(D) Reserve interest at the Nasdaq Closing Cross price with time as
the secondary priority; and
(E) Unexecuted MOC, LOC, and IO orders will be canceled.
(4) All orders executed in the Nasdaq Closing Cross will be
executed at the Nasdaq Closing Cross price, trade reported anonymously,
and disseminated via the consolidated tape. The Nasdaq Closing Cross
price will be the Nasdaq Official Closing Price for stocks that
participate in the Nasdaq Closing Cross.
(5) Auxiliary Procedures--When significant trading volume is
expected at the close of Market hours, Nasdaq may apply auxiliary
procedures for the Closing Cross to ensure a fair and orderly market.
The determination to implement auxiliary procedures for the Closing
Cross shall be made by the President of Nasdaq or any Executive Vice
President designated by the President. Nasdaq shall inform market
participants of such auxiliary procedures as far in advance as
practicable. Auxiliary procedures shall include:
(A) Setting an earlier time or times for the end of the order entry
periods set forth in paragraph (a) for IO, MOC, and LOC orders. Nasdaq
may end the order entry period as early as 3:40 p.m.
(B) Setting an earlier time for the order modification and
cancellation periods in paragraph (a) for IO, MOC, and LOC orders.
Nasdaq may end the order modification and cancellation periods as early
as 3:40 p.m.
(C) Setting an earlier time for the dissemination times and
frequencies set forth in paragraph (b) for the Order Imbalance
Indicator. Nasdaq may begin disseminating the Order Imbalance Indicator
as early as 3:40 p.m. and may increase or decrease the frequency with
which the Order Imbalance Indicator is disseminated.
(D) Adjusting the threshold values set forth in subparagraph
(c)(2)(D) to no greater than 20 percent.

4755. Order Entry Parameters

( a) System Orders
(1) General--A System order is an order that is entered into the
System for display and/or execution as appropriate. Such orders are
executable against marketable contra-side orders in the System.
(A) All System Orders shall indicate limit price and whether they
are a buy, short sale, short-sale exempt, or long sale. Systems Orders
can be designated as Market Hours Immediate or Cancel (``MIOC''),
Market Hours Good-till-Cancelled (``MGTC''), Market Hours Day
(``MDAY''), System Hours Expire Time (``SHEX''), System Hours Day
(``SDAY''), System Hours Immediate or Cancel (``SIOC''), System Hours
Good-till-Cancelled (``SGTC''), or Good-till-Market Close (``GTMC'').
(B) A System order may also be designated as Reserve Order, a
Pegged Order, a Non-Displayed Order, a Minimum Quantity Order, an
Intermarket Sweep Order, a Price to Comply Order, a Price to Comply
Post Order, or a Discretionary Order.
(C) System Hours Pegged Orders. excluding System Hours Pegged
Orders ultimately sought to be directed to either the New York Stock
Exchange (``NYSE'') or the American Stock Exchange (``AMEX''), may only
be entered between 9:30 a.m. and 4:00 p.m. eastern time.
(2) Short Sale Compliance--System orders to sell short shall not be
executed if the execution of such an order would violate any applicable
short sale regulation of the SEC or Nasdaq.
(3) Routing--All System orders entered by Participants directing or
permitting routing to other market centers shall be routed for
potential display and/or execution as set forth in Rule 4758 in
Compliance with Regulation NMS.

[[Page 19587]]

(4) Regulation NMS--Intermarket Sweep Orders shall be executed
exclusively within the System and the entering Participants shall be
responsible for compliance with Regulation NMS Order Protection Rule
and Locked and Crossed market rule with respect to such orders. Orders
eligible for execution outside the System shall be processed in
compliance with Regulation NMS, including accessing protected
quotations and resolving locked and crossed markets, as instructed.

4756. Entry and Display of Quotes and Orders

(a) Entry of Orders--Participants can enter orders into the System,
subject to the following requirements and conditions:
(1) Participants shall be permitted to transmit to the System
multiple orders at a single as well as multiple price levels. Each
order shall indicate the amount of Reserve Size (if applicable).
(2) The System shall time-stamp an order which shall determine the
time ranking of the order for purposes of processing the order.
(3) Orders can be entered into the System (or previously entered
orders cancelled) from 7 a.m. until 8 p.m. eastern time.
(b) Entry of Quotes--Nasdaq Market Makers and Nasdaq ECNs can enter
Quotes into the system from 7 a.m. to 8 p.m. eastern time. When open,
Quotes will be processed as System Hours GTC Orders (SGTC). Nasdaq
Market Makers and Nasdaq ECNs may elect to utilize the Automatic Quote
Refresh functionality. Entry of Quotes will be subject to the
requirements and conditions set forth in section (a) above.
(c) Display of Quotes and Orders--The System will display quotes
and orders submitted to the System as follows:
(1) System Book Feed--Quotes and orders resident in the System
available for execution will be displayed via the System Book Feed.
(2) Best Priced Order Display--For each System Security, the
aggregate size of all Quotes and Orders at the best price to buy and
sell resident in the System will be transmitted for display to the
appropriate network processor, unless the aggregate size is less than
one round lot in which case the aggregate size will be displayed in the
System Book Feed but not be transmitted to a network processor.
(3) Exceptions-- The following exceptions shall apply to the
display parameters set forth in paragraphs (1 ) and (2) above:
(A) Reserve Size--Reserve Size shall not be displayed in the
System, but shall be accessible as described in Rule 4757.
(B) Discretionary Orders--The discretionary portion of
Discretionary Orders shall not be displayed but shall be made available
for execution only upon the appearance of contra-side marketable
trading interest, and shall be executed pursuant to 4751(f) and Rule
4757.
(C) Non-Displayed Orders--Non-Displayed Orders are not displayed in
the System, and have lower priority within the System than an equally
priced Displayed Order, regardless of time stamp, and shall be executed
pursuant to Rule 4757.
(D) ITS Trade-Through Compliance and Locked or Crossed Markets--If,
at the time of entry, a Displayed Order in an exchange-listed security
that the entering party has elected not to make eligible for routing
would lock or cross the market, it will be converted by the System into
a Non-Displayed Order. If, at the time of entry, a Displayed Order
would lock or cross the market or would cause a trade-through
violation, the order will be converted by the System to a Non-Displayed
Order and re-priced to the current low offer (for bids) or to the
current best bid (for offers). Such Non-Displayed Orders will be
cancelled by the System if the market moves through the price of the
order after the order is accepted. For securities subject to the SEC's
De Minimis Exemption for certain Exchange Traded Funds, if, at the time
of entry, a Displayed Order that the entering party has elected not to
make eligible for routing would lock or cross the market, it will be
converted by the System into a Non-Displayed Order. If, at the time of
entry, a Displayed Order would cross the market by more than 3 cents or
would cause a trade-through violation, the order will be converted by
the System to a Non-Displayed Order and re-priced to 3 cents above the
current low offer (for bids) or 3 cents below the current best bid (for
offers). Such Non-Displayed Orders will be cancelled by the System if
the market moves through the price of the order after the order is
accepted.
(4) Pursuant to Rule 600(b)(4) of Regulation NMS under the Act,
Nasdaq has implemented such systems, procedures, and rules as are
necessary to render it capable of meeting the requirements for
automated quotations, as defined in Rule 600(b)(3) of Regulation NMS
under the Act; and immediately to identify its quotations as manual
whenever it has reason to believe it is not capable of displaying
automated quotations. Nasdaq has adopted policies and procedures for
notifying members and other trading centers that it has reason to
believe it is not capable of displaying automated quotations or, once
manual, that it has restored the ability to display automated
quotations and is preparing to identify its quotation as automated. In
addition, Nasdaq has adopted policies and procedures for responding to
notices that it receives from other trading centers indicating that
they have elected to use the ``self-help'' exception of Rule 611(b)(1)
of Regulation NMS under the Act.

4757. Book Processing

(a) System orders shall be executed through the Nasdaq Book Process
set forth below:
(1) Execution Algorithm-Price/Time--The System shall execute
equally priced or better priced trading interest within the System in
price/time priority in the following order:
(A) Displayed Orders;
(B) Non-Displayed Orders, the reserve portion of Quotes and Reserve
Orders, in price/time priority among such interest;
(C) The discretionary portion of Discretionary Orders as set forth
in Rule 4751(f).
(2) Decrementation--Upon execution, an order shall be reduced by an
amount equal to the size of that execution.
(3) Price Improvement--any potential price improvement resulting
from an execution in the System shall accrue to the taker of liquidity.
Example:
Buy order resides on System book at 10.
Incoming order to sell priced at 9 comes into the System.
Order executes at 10 (seller get $1 price improvement).

4758. Order Routing

(a) Order Routing Process
(1) The Order Routing Process shall be available to Participants
from 7 a.m. until 8 p.m. Eastern Time, and shall route orders as
described below:
(A) Exchange-Listed Routing Options. The System provides four
routing options for orders in exchange-listed securities. Of these
four, only DOT is available for orders ultimately sought to be directed
to either the New York Stock Exchange (''NYSE'') or the American Stock
Exchange (``AMEX''). The System also allows firms to send individual
orders to the NYSE Direct + System, and to elect to have orders not be
sent to the AMEX. Except as noted below in SPDY, routed pegged orders
in securities listed on another exchange, the System will consider the
quotations of accessible markets. The four System routing

[[Page 19588]]

options for NYSE and/or Amex listed orders are:
(i) DOT (``DOT'')--under this option, after checking the System for
available shares, orders are sent to other available market centers for
potential execution, per entering firm's instructions before the
destination exchange, so long as such price would not violate the Order
Protection Rule. Any un-executed portion will thereafter be sent to the
NYSE or AMEX, as appropriate, at the order's original limit order price
as a non-intermarket sweep order (ISO). This option may only be used
for orders with time-in-force parameters of either SDAY, SIOC, MDAY,
MIOC, GTMC or market-on-open/close.
(ii) Reactive Electronic Only (``STGY'')--under this option, after
checking the System for available shares, orders are sent to other
available market centers for potential execution, per entering firm's
instructions, in compliance with the Order Protection Rule. When
checking the book, the System will seek to execute at the price it
would send the order to a destination market center. If shares remain
un-executed after routing, they are posted on the book and are not sent
to the NYSE or AMEX. Once on the book, should the order subsequently be
locked or crossed by another accessible market center, the System shall
route the order to the locking or crossing market center for potential
execution in order to resolve the locked or crossed market. With the
exception of the Minimum Quantity order type, all time-in-force
parameters and order types may be used in conjunction with this routing
option. This process is one of the routing strategies allowed by the
System for all securities.
(iii) Electronic Only Scan (``SCAN'')--under this option, after
checking the System for available shares, orders are sent to other
available market centers for potential execution, per entering firm's
instructions, in compliance with Rule 6111 under Regulation NMS. When
checking the book, the System will seek to execute at the price it
would send the order to a destination market center. If shares remain
un-executed after routing, they are posted on the book and are not sent
to the NYSE or AMEX. Once on the book, should the order subsequently be
locked or crossed by another market center, the System will not route
the order to the locking or crossing market center. With the exception
of the Minimum Quantity order type, all time-in-force parameters and
order types may be used in conjunction with this routing option. This
process is one of the routing strategies allowed by the System for all
securities.
(iv) Aggressive Electronic Only (``SPDY'')--under this option,
after checking the System for available shares, orders are sent to
other available market centers for potential execution, per entering
firm's instructions, in compliance with Rule 611 of Regulation NMS.
When checking the book, the System will seek to execute at the price it
would send the order to a destination market center. If shares remain
un-executed after routing, they are posted on the book and are not sent
to the NYSE or AMEX. Once on the book, should the order subsequently be
locked or crossed by another accessible market center, the System shall
route the order to the locking or crossing market center for potential
execution in order to resolve the locked or crossed market. Market
orders with the SPDY designation will, during a locked or crossed
market, have their price adjusted by the System to match the best price
displayed on the same side of the market as the market order (i.e., a
buy order to the bid, a sell to the offer). If the order is for a
security eligible for a de minimis exception to the trade-through rule
set forth in Section 8(d)(i) of the ITS Plan, the System will ignore
AMEX prices when adjusting the SPDY order during a locked or crossed
market. With the exception of the Minimum Quantity order type, all
time-in-force parameters and order types may be used in conjunction
with this routing option. The process is one of the routing strategies
allowed by the System for all securities.
(B) Nasdaq-Listed Routing Options. The STGY, SPDY, and SCAN options
are the only routing options provided by the System for orders in
Nasdaq-listed securities not sought to be directed to either the NYSE
or AMEX. For routed pegged orders in Nasdaq-listed securities, the
System will consider accessible, automated quotes.
(C) Priority of Routed Orders. Regardless of the routing option
selected, orders sent by the System to other markets do not retain time
priority with respect to other orders in the System and the System
shall continue to execute other orders while routed orders are away at
another market center. Once routed by the System, an order becomes
subject to the rules and procedures of the destination market
including, but not limited to, short-sale regulation and order
cancellation. If a routed order is subsequently returned, in whole or
in part, that order, or its remainder, shall receive a new time stamp
reflecting the time of its return to the System.

4759. ITS Commitments

Until such time as Nasdaq withdraws from the ITS Plan, Quotes and
Orders that are eligible for ITS will be processed by the System and
routed to the appropriate Non-Nasdaq Participant Market as an ITS
Commitment in accordance with the requirements of the ITS Plan and all
applicable Nasdaq rules. Nasdaq shall participate in the ITS Plan as
set forth below.
(a) Incorporation of ITS Rules.
(1) Pre Opening Application. Nasdaq may use the System to
participate in the Pre Opening Application in accordance with Section 7
and Exhibit A of the ITS Plan as though they were set forth in their
entirety herein.
(2) The System will comply with the Order Protection obligations
set forth in Section 8(d) and Exhibits B and C of the ITS Plan as
though they were set forth herein in their entirety.
(b) Inbound ITS Commitments
(1) If the ITS Commitment contains an obvious error, the Nasdaq
Market Center will decline it. For purposes of this Rule, a transaction
may have an obvious error in any term, such as price, number of shares
or other unit of trading, identification of the security, or if a
specific commitment to trade has been executed with the wrong Nasdaq
Market Maker.
(2) If the ITS Commitment, if executed, would result in a violation
of SEC Rule 10a-1, the Nasdaq Market Center will decline it.
(3) If the conditions described in subparagraphs (1) and (2) above
do not apply, the System will execute an inbound ITS Commitment in
accordance with applicable provisions of the ITS Plan.
(c) Outbound Commitments: Any ``commitment to trade,'' which is
transmitted by an Nasdaq Participant to another Non-Nasdaq ITS
Participant Market through ITS, shall be firm and irrevocable for the
period of thirty seconds following transmission by the sender. All such
commitments to trade shall, at a minimum:
(1) Direct the commitment to a particular Non-Nasdaq Participant
Market;
(2) Specify the security which is the subject of the commitment;
(3) Designate the commitment as either a commitment to buy or a
commitment to sell;
(4) Specify the amount of the security to be bought or sold, which
amount shall be for one unit of trading or any multiple thereof;
(5) Specify:
(A) A price equal to the offer or bid price then being furnished by
the

[[Page 19589]]

destination Non-Nasdaq Participant Market, which price shall represent
the price at or below which the security is to be bought or the price
at or above which the security is to be sold, respectively;
(B) A price at the execution price in the case of a commitment to
trade sent in compliance with the block trade rule; or
(C) That the commitment is a commitment to trade ``at the market'';
(6) Designate the commitment ``short'' or ``short exempt'' whenever
it is a commitment to sell which, if it should result in an execution
in the receiving market, would result in a short sale to which the
provisions of SEC Rule 10a-1(a) under the Act would apply.
(d) Transactions in ITS securities executed in the System are
reported to the CTA Plan Processor by the System at the price specified
in the commitment or if executed at a better price, the execution
price.

IM 4759-1. Contemporaneous Sending of ITS Commitments

With respect to trading of ITS Securities only, the terms ``trade-
through'' and ``third participating market center trade-through'' do
not include the situation where a member who initiates the purchase (
sale) of an ITS Security, at a price which is higher (lower) than the
price at which the security is being offered (bid) in another ITS
Participant Market, sends contemporaneously through ITS to such ITS
Participant Market a commitment to trade at such offer (bid) price or
better and for at least the number of shares displayed with that market
center's better-priced offer (bid). A trade-through complaint sent in
these circumstances is not valid, even if the commitment sent in
satisfaction cancels or expires, and even if there is more stock behind
the quote in the other market.

4760. Anonymity

(a) Transactions executed in the System shall be cleared and
settled anonymously. The transaction reports produced by the System
will indicate the details of the transactions, and shall not reveal
contra party identities.
(b) Nasdaq shall reveal a Participant's identity in the following
circumstances:
(1) When a registered clearing agency ceases to act for a
participant. or the Participant's, clearing firm, and the registered
clearing agency determines not to guarantee the settlement of the
Participant's trades;
(2) For regulatory purposes or to comply with an order of an
arbitrator or court;
(3) If both Participants to the transaction consent;
(4) Unless otherwise instructed by a member, Nasdaq will reveal to
a member, no later than the end of the day on the date an anonymous
trade was executed, when the member's Quote or Order has been
decremented by another Quote or Order submitted by that same member.

4761. Adjustment of Open Quotes and/or Orders

The Nasdaq Market Center will automatically purge all open quotes
and/or orders in all Nasdaq Market Center eligible securities resident
in the system in response to issuer corporate actions related to a
dividend, payment or distribution, on the ex-date of such actions,
except where a cash dividend or distribution is less than one cent
($0.01).

4762. Clearly Erroneous Transactions

All matters related to clearly erroneous transactions executed in
the System shall be initiated and adjudicated pursuant to Rule 11890.
* * * * *

[4900. BRUT SYSTEMS]

Nasdaq is proposing to delete each and every rule in the 4900
Series that was approved in the Order dated January 13. 2006.

[4950. INET SYSTEM]

Nasdaq is proposing to delete each and every rule in the 4950
Series that was approved in the Order dated January 13, 2006.
* * * * *

[5200. INTERMARKET TRADING SYSTEM/COMPUTER ASSISTED EXECUTION SYSTEM]

Nasdaq is proposing to delete each and every rule in the 5200
Series that was approved in the Order dated January 13, 2006.
* * * * *

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

1. Purpose
Nasdaq currently operates three execution systems: (1) The Nasdaq
Market Center, formerly known as Supermontage (``NMC Facility''); (2)
the Brut ECN, a registered broker-dealer which is a Nasdaq subsidiary
(``Brut Facility''); and (3) the INET ECN which is also operated by
Brut, LLC, a subsidiary of Nasdaq (``INET Facility'') (collectively,
the ``Nasdaq Facilities'').\6\ The Nasdaq Facilities are all linked,
but each operates pursuant to independent Commission-approved rules,
the NMC Facility under the 4700 Series, the Brut Facility under the
4900 Series, and the INET Facility under the 4950 Series.
---------------------------------------------------------------------------

\6\ Nasdaq states that, until January 31, 2006, INET ATS, Inc.
was a registered broker-dealer and a member of the NASD. On February
1, 2006, the INET broker-dealer was merged into the Brut broker-
dealer which is a member of the New York Stock Exchange. Nasdaq
states that it will continue to operate the Brut Facility and INET
Facility under the rubric of a single broker-dealer until the
Integrated System is fully operational.
---------------------------------------------------------------------------

Through this filing, Nasdaq is proposing to integrate the three
matching systems operating in the Nasdaq Facilities into a single
matching system (the ``Integrated System'' or ``System''), governed by
a single set of rules, and subject to a single fee schedule. Nasdaq
states that, to ease the transition for Nasdaq participants, the
Integrated System will utilize the same connectivity by which users
access each of the Nasdaq Facilities, and leverage functionality that
is already approved and operational within one or more of the Nasdaq
Facilities. For example, the Integrated System will use slightly
modified functionality from the INET Facility for order entry, display,
processing, and routing and draw on functionality in the NMC Facility
for the opening and closing processes. Participants will remain subject
to general obligations applicable to all Nasdaq Facilities, including
honoring System trades, complying with all Commission and Nasdaq rules,
and properly clearing and settling trades.
As described in more detail below, Nasdaq is also proposing limited
modifications that are: (1) Designed to ensure Nasdaq's compliance with
Regulation NMS; (2) utilized when Nasdaq operates as an exchange; and
(3) improvements to how the System serves investors, for example, by
requiring participation in the System on an automated basis.
1. Reorganization and Simplification of Rules. Nasdaq states that
merging the three Nasdaq Facilities into a single platform provides
Nasdaq with an opportunity to simplify its rule manual and make it more
transparent to investors. Nasdaq will merge five sets of rules (the
4600, 4700, 4900, 4950, and 5200 Series) into two (the 4600 and 4750
Series). First, Nasdaq is proposing to eliminate two complete sets of
rules, those governing the Brut Facility (4900 Series) and those
governing the INET Facility (4950 Series). Because the Integrated
System draws from both the current NMC Facility rules as well as

[[Page 19590]]

the INET Facility rules, Nasdaq determined to create an entirely new
set of rules for the Integrated System, the 4750 Series, rather than
attempt to modify the current NMC Facility rules.
Second, since the Integrated System provides a single platform for
the trading of stocks listed on the Nasdaq exchange as well as other
exchanges, Nasdaq is merging the rules governing members that trade
both sets of securities. Specifically, Nasdaq is proposing to eliminate
the Nasdaq Rule 5200 Series governing securities eligible to trade via
the Intermarket Trading System (``ITS Securities''). Nasdaq will retain
the obligations set forth in the Nasdaq Rule 5200 Series, many of which
overlap completely with rules in the Nasdaq Rule 4600 Series that
currently apply only to market makers in Nasdaq-listed securities.
Nasdaq will insert into similar rules already contained in the Nasdaq
Rule 4600 Series governing Nasdaq-listed securities. As a result, the
proposed Nasdaq Rule 4600 Series will set forth the obligations of all
Nasdaq participants--market makers, order entry firms, and ECNs--in all
securities traded on Nasdaq.
Nasdaq states that, because market makers in ITS Securities are
already subject to strict regulations applicable to those for Nasdaq
securities, Nasdaq is able to merge these rule sets with the assistance
of only a single new rule. Proposed Nasdaq Rule 4602 sets forth
definitions formerly contained in Nasdaq Rule 5210 that are specific to
the trading of ITS Securities. All other market maker obligations from
the Nasdaq Rule 5200 Series will reside in the Nasdaq Rule 4600 Series
with minor changes or none at all. Specifically, Nasdaq is proposing to
merge former Nasdaq Rule 5220 regarding ITS/CAES Registration into
proposed Nasdaq Rule 4611; former Nasdaq Rule 5221 (Obligations of ITS/
CAES Market Makers) into proposed Nasdaq Rules 4612 and 4613; former
Nasdaq Rule 5222 (Withdrawal of Quotations) into proposed Nasdaq Rule
4619; former Nasdaq Rule 5223 (Voluntary Termination of Registration)
into proposed Nasdaq Rule 4620; former Nasdaq Rule 5224 (Suspension and
Termination of Quotations) into proposed Nasdaq Rule 4621; former
Nasdaq Rule 5265 (Authority to Cancel or Adjust Transactions) into
proposed Nasdaq Rule 4762); and former Nasdaq Rule 5266 (Market
Participant Identifiers) into proposed Nasdaq Rule 4613. As a result,
Nasdaq market makers will have virtually uniform obligations across all
securities under those rules. As described in more detail in Section 2
below, the remainder of the Nasdaq Rule 5200 Series obligations will be
retained in proposed Nasdaq Rule 4959 governing ITS Commitments.
Finally, Nasdaq is proposing to create a set of rules that purely
governs the operation of the Integrated System, separate from the rules
governing System participants. Therefore, the proposed Nasdaq Rule 4750
Series contains only those rules relating to the execution of trades by
the Integrated System, and rules unrelated to actual executions have
been moved to the Nasdaq Rule 4600 Series. For example, current Nasdaq
Rules 4712 and 4713 (NMC Facility), 4907 and 4908 (Brut Facility), and
4958 and 4959 (INET Facility) governing participants' obligations to
honor trades and to comply with applicable rules and registration
requirements have been all renumbered as Nasdaq Rules 4627 \7\ and
4628. Several rules formerly contained in the Nasdaq Rule 4700 Series
governing the NMC Facility duplicate in whole or in part rules that
also exist in the Nasdaq Rule 4600 Series. For example, current Nasdaq
Rules 4617, 4705, 4912, and 4963 all describe Nasdaq's hours of
operation and Nasdaq Rules 4618, 4711, 4906, and 4957 all govern
Clearance and Settlement. Those rules will be maintained in the Nasdaq
Rule 4600 Series as Nasdaq Rules 4617 and 4618.
---------------------------------------------------------------------------

\7\ Nasdaq states that proposed Nasdaq Rule 4627 will also apply
to trading in ITS Securities and will replace current Nasdaq Rule
5261.
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As set forth in more detail in Section 2 below, the remaining rules
contained in the Nasdaq Rule 5200 Series will be incorporated into
proposed Nasdaq Rule 4759 governing ITS Commitments.
2. Exchange Registration Readiness. Nasdaq will program the
Integrated System to operate in compliance with Nasdaq's recent
registration as a national securities exchange to reflect the Nasdaq
rules approved via the January 13, 2006 Order. For example, the
Integrated System will not accept reports of transactions occurring
outside the Integrated System as it does today. The Integrated System
will interact with the network processors for the various national
market system plans in compliance with Commission rules governing
exchanges, most notably the Quote Rule provisions governing
transmission of quotation information in Rule 602(a)(1)(i) under
Regulation NMS. Nasdaq states that the Integrated System will also
fulfill Nasdaq's new role as an exchange in the national market system
plans themselves.
In fact, the vast majority of exchange-related modifications are
necessitated by changes to the national market system plan governing
the Intermarket Trading System (``ITS Plan'').\8\ Nasdaq states that it
ensures that its members comply with the ITS Plan by programming many
Plan restrictions into its execution system. As an association market,
Nasdaq participates in ITS trading through its individual ITS market
makers. The ITS Plan has detailed rules governing the obligations of
individual ITS market makers, including the obligations of each to
maintain a two-sided quote, to comply with the ITS trade through rule
and locked and crossed market rule, and to maintain particular ITS
operations on their premises. A significant aspect of Nasdaq's current
participation in the ITS linkage is the inability for Nasdaq order
entry firms to post liquidity in the Nasdaq Market Center.
---------------------------------------------------------------------------

\8\ Nasdaq states that on December 27, 2005, the Operating
Committee of the ITS Plan unanimously approved the 22nd Amendment to
the Plan which admits Nasdaq to the ITS Plan as a new Exchange
Participant. The 22nd Amendment will be formally filed with the
Commission when each of the ITS Participants has executed the
required documents. The 22nd Amendment and the formation documents
for the successor to the ITS Plan, the so-called ``NMS Linkage
Plan,'' are being circulated simultaneously.
---------------------------------------------------------------------------

As an exchange market, Nasdaq states that it will participate as a
single, unified trading entity on its own behalf for the benefit of its
members. As such, Nasdaq itself will be bound by the obligations of the
ITS Plan, and its members will be relieved of obligations that have not
applied to members of other exchanges or even to NASD members that
participate in other exchanges' execution facilities. Nasdaq will
maintain a single two-sided quotation, rather than its members being
obligated individually to maintain two-sided quotes. Additionally,
Nasdaq states that it, rather than its members, will be responsible for
trade-through compliance, opening the system to full participation by
order entry firms.
Nasdaq states that it will continue to rely on system programming
to comply with its obligations under the ITS Plan. Nasdaq has re-
numbered current NASD Rule 4708 as Nasdaq Rule 4759, in order to
retain--on an exchange basis--the compliance obligations contained in
the current rule. Specifically, proposed Nasdaq Rule 4759(a) states
that the System will comply with obligations imposed by ITS Plan
provisions governing Trade Throughs,\9\ Block

[[Page 19591]]

Trade Throughs, and Locked and Crossed Markets (Section 8).\10\ Nasdaq
states that it will retain all existing Plan obligations, but is
proposing to incorporate by reference the ITS Plan language by
reference rather than needlessly repeating the lengthy Plan language in
its rule manual, thereby eliminating the need for current Nasdaq Rules
5240, 5250, 5262, 5263, and 5264.
---------------------------------------------------------------------------

\9\ Nasdaq is proposing to retain at Nasdaq Rule 4756(b)(3)(F)
the INET Facility processing for ITS Trade Through and Locked and
Crossed markets compliance which currently is described at NASD Rule
4954(b)(3)(F). Nasdaq proposes adding a description of the System
processing for securities subject to the Commission's so-called ``de
minimis'' exception to the ITS trade through rule.
\10\ Though Nasdaq may do so under proposed Nasdaq Rule
4759(a)(1), Nasdaq states that it is not planning to initiate a Pre-
Opening Application or to participate in the Pre-Opening
Applications of other markets. The Pre-Opening Application is a
mechanism designed for use by the primary listing markets for ITS
Securities to open their markets at prices that are materially
different than the previous day's closing prices. Today, the Pre-
Opening Application is initiated by the NYSE and Amex for their
securities.
---------------------------------------------------------------------------

Nasdaq states that proposed Nasdaq Rule 4759(b) is identical to
current NASD Rule 4708(b) with one exception. Nasdaq is proposing to
expand section (b)(1) to include the ITS ``clearly erroneous policy''
currently stated in NASD Rule 5265. Nasdaq states that this
modification is designed to maintain the status quo with respect to
Nasdaq's implementation of the obvious error policy for ITS Securities.
Nasdaq is also proposing to add Nasdaq Rule 4759(c), which will
incorporate subsections (b) and (d) of NASD Rule 5230, entitled ``ITS
Operations,'' with minor updates to reflect current ITS functionality
and Nasdaq's rule as an exchange rather than an association. Nasdaq is
proposing to eliminate subsection (a) of NASD Rule 5230 as redundant
with proposed Nasdaq Rule 4618 governing clearance and settlement.
Nasdaq is proposing to eliminate subsection (c) of NASD Rule 5230 and
to rely instead on Nasdaq Rules 4619 and 4620 to govern market maker
quotation practices in ITS Securities. Finally, Nasdaq is proposing to
renumber without modification the text of NASD IM-5262-1 except to
limit the proposed rule to ITS securities, governing the
contemporaneous sending of commitments, as Nasdaq IM-4759-1.
3. Regulation NMS Readiness. Nasdaq is proposing to design the
Integrated System to comply with Regulation NMS, and to launch it to
precede or coincide with the implementation of the Fair Access and
Order Protection Rules, Rules 610 and 611 of Regulation NMS.\11\ First,
Nasdaq has proposed, as Nasdaq Rule 4613(e), the language recently
proposed by the staff of the Division of Market Regulation
(``Division'') as a uniform rule on locked and crossed markets for each
self regulatory organization subject to Regulation NMS. Nasdaq states
that it will amend this filing to incorporate any modifications that
the Division proposes prior to approval of this filing.
---------------------------------------------------------------------------

\11\ Nasdaq has already adopted a rule to implement its
obligations under the sub-penny rule, Rule 612 of Regulation NMS
under the Act. Nasdaq proposes to renumber that provision at Nasdaq
Rule 4613(a)(1)(B).
---------------------------------------------------------------------------

Second, Nasdaq is proposing to design the Book Processing (Nasdaq
Rule 4757) and Order Routing (Nasdaq Rule 4758) functionality of the
Integrated System to comply with Regulation NMS. With respect to Book
Processing, Nasdaq will permit firms to designate orders entered into
the Integrated System as Intermarket Sweep Orders within the definition
of Rule 600(b) of Regulation NMS, and to require the entering party to
assume responsibility for compliance with respect to the presence of
protected quotations in market centers outside of Nasdaq. Nasdaq states
that orders designated as such will be automatically matched and
rapidly executed without reference to protected quotations in other
trading centers. Nasdaq believes that this approach will increase the
efficiency of the Nasdaq system and also preserve the maximum
flexibility for Nasdaq participants to use alternative order routing
systems.
As described in more detail in Section 8 below, for orders entered
into the Integrated System without the Intermarket Sweep designation,
Nasdaq will offer routing strategies that comply with Rules 610 and 611
of Regulation NMS. Nasdaq states that its Integrated System will
automatically identify circumstances requiring routing and utilize the
routing strategy selected by the entering party in compliance with
Rules 610 and 611 of Regulation NMS, whether the circumstances pertain
to the existence of a protected quote, the existence of a locked or
crossed market, or the need to resolve an existing locked or crossed
market.
Third, Nasdaq is proposing not to offer order delivery processing
in the Integrated System to avoid harming investors that participate in
Nasdaq on an automatic execution basis. Nasdaq has determined that
offering order delivery functionality risks harming automatic execution
participants in Nasdaq's system by threatening to render Nasdaq a non-
automated or ``slow'' market center and render quotes there un-
protected, at any time a single order delivery participant's quote is
``slow.'' Furthermore, Nasdaq states that a single order delivery
participant experiencing technical or operations difficulties could
prompt other market centers to invoke the ``self-help'' exception under
Rule 611(b)(1) of Regulation NMS against the Nasdaq Market Center.
Nasdaq's experience with order delivery participants has established
that, at certain times, especially leading up to the close of market
hours, order delivery participants are unable to respond to delivered
orders to meet the definition of an automated response under Rule
600(b) of Regulation NMS. Finally, Nasdaq does not believe it can offer
order delivery functionality and also continuously provide ``a response
to incoming orders that does not significantly vary between orders
handled entirely within the SRO trading facility and orders delivered
to the ECN.'' \12\ Nasdaq states that it would be at a substantial
competitive disadvantage were it to risk moving into a slow quote
status or to risk having other market centers declare self-help against
the Nasdaq Market Center in order to integrate order delivery
participants.\13\
---------------------------------------------------------------------------

\12\ See Responses to Frequently Asked Questions Concerning Rule
611 and Rule 610 of Regulation NMS under the Act, dated January 27,
2006, at Question 5 (http://www.sec.gov/divisions/marketreg/rule611faq.pdf).
\13\ Nasdaq states that it is unable to detect in Regulation NMS
or in the Exchange Act a requirement that national securities
exchanges offer the opportunity for order delivery participation in
their execution systems. If such a requirement were to exist, Nasdaq
states that it would consider adopting a rule similar to that of
other exchanges that offer order delivery participation in
compliance with Regulation NMS.
---------------------------------------------------------------------------

Nasdaq states that it will offer current order delivery
participants extensive testing opportunities to test their systems
using Nasdaq's automatic execution functionality. Nasdaq assumes that
firms that remain order delivery participants today have chosen to do
so for financial or other competitive reasons beyond Nasdaq's control
or responsibility.
Finally, Nasdaq has added Nasdaq Rule 4756(c)(4), which states that
Nasdaq has adopted policies and procedures to identify its quotes as
manual or automated and to notify its members of the status of its
quotations.
4. Openings and Closing. Nasdaq is proposing to leverage its highly
successful opening and closing processes, including the Opening and
Closing Crosses and the recently proposed IPO/Halt Cross. The Cross
functionality is currently described in NASD Rules 4704 and 4709, and
will be renumbered as Nasdaq Rules 4752 (Opening), 4753 (IPO/Halt) \14\
and 4754 (Closing), and modified to optimize its efficiency on the new
Nasdaq Market

[[Page 19592]]

Center platform. Set forth below is a detailed description of the
proposed changes from current functionality.
---------------------------------------------------------------------------

\14\ Nasdaq states that proposed Nasdaq Rule 4753, governing the
Nasdaq Halt Cross, incorporates a proposal set forth in SR-NASD-
2006-015, which has not yet been approved.
---------------------------------------------------------------------------

Nasdaq states that the Nasdaq Opening Process, set forth in
proposed Nasdaq Rule 4753, is modeled closely on functionality approved
for use in the Nasdaq Market Center under current Nasdaq Rule 4704.
Several definitions have been changed in non-substantive ways to make
the language of the rules governing the Opening and Closing Crosses
more consistent and readable. Specifically, existing Nasdaq Rule
4704(a)(2) and (7) have been combined to describe in one place the
purpose and function of the Order Imbalance Indicator, and the phrase
``Inside Match Price'' replaced by ``Current Reference Price'' with a
clarifying tiebreaker added at Nasdaq Rule 4752(a)(2)(A)(iii) and a
minor modification to the wording of the third tiebreaker set forth in
subsection (a)(2)(A)(iv).
Nasdaq is proposing to modify slightly the entry parameters for
Opening Cross orders. Specifically, entry of Limit on Open (``LOO'')
Orders will begin at 7 a.m. rather than 7:30 a.m. and cease at 9:28
a.m. rather than 9:30 a.m. (Nasdaq Rule 4752(a)(3)). Market on Open
(``MOO'') Orders (subsection (a)(4) and Opening Imbalance Only
(``OIO'') orders (subsection (a)(6)) will also be permitted entry at 7
a.m. rather than 7:30 a.m. ``Regular Hours Orders'' have been recast in
proposed Nasdaq Rule 4752(a)(7) as ``Market Hours Orders'' and modified
such that, for purposes of the Opening Cross, Early Market Hours Orders
will be treated as MOO or LOO orders as appropriate and Late Market
Hours Orders will be treated like OIO Orders.
Under proposed Nasdaq Rule 4752(b), the System will open for
trading prior to normal market hours at 7 a.m. rather than 7:30 a.m.
Participants will have the option to open their quotes at a price and
size determined by the participant between 7 a.m. and 9:24:59 a.m. At
9:25 a.m., the System will open all remaining quotes according to each
firm's instructions as to price and size. Securities in which no
Opening Cross occurs will, pursuant to proposed Nasdaq Rule 4752(c),
begin trading at 9:30 a.m. according to market hours processing rules
described in further detail below.
The Opening Cross itself will occur as it does currently with two
minor exceptions. First, Nasdaq is proposing to add a tiebreaker to
Nasdaq Rule 4752(d)(2)(C) to clarify that shares will be executed in
price priority. Second, Nasdaq is substituting current Regular Hours
order types with proposed Market Hours order types with slightly
different characteristics. Nasdaq states that the mechanism for setting
the Opening Cross price, determining priority, executing the cross, and
reporting to the consolidated tape will remain unchanged from today.
Nasdaq states that the proposed Nasdaq Halt Cross is virtually
identical to that proposed for use by the Nasdaq Market Center. The
phrase ``Current Reference Price'' has replaced ``Inside Match Price''
and Nasdaq has added new language to both the Current Reference Price
(Nasdaq Rule 4753(a)(2)(C) and the Cross (Nasdaq Rule 4753(b)(2)(C) to
clarify the tiebreakers used in determining reference and execution
prices. The term ``Eligible Interest'' has been modified to reflect the
new order types that Nasdaq is proposing herein (Nasdaq Rule
4753(a)(4), and Nasdaq is proposing to clarify that trades executed as
part of the Halt Cross will be reported anonymously to the network
processor (Nasdaq Rule 4753(b)(4)).
The Nasdaq Closing Cross, set forth at proposed Nasdaq Rule 4754,
will be modified as were the Opening and Halt Crosses. The definitions
have been modified to reflect the order types proposed for the
Integrated System, to substitute ``Current Reference Price'' for
``Inside Match Price,'' and to add the same additional tiebreaker to
the calculation of the Current Reference Price and the Closing Cross
itself. Nasdaq states that, as with the Opening and Halt Crosses, the
substance of the Nasdaq Closing Cross will remain as it is currently on
the Nasdaq Market Center.
5. Order Display/Matching System. Nasdaq states that the System
will be based upon functionality currently approved for use in Nasdaq's
INET Facility. Specifically, the System will allow participants to
enter priced limit orders to buy and sell Nasdaq and exchange-listed
securities as attributed, non-attributed, or non-displayed orders.
Attributable Orders are designated for display (price and size) next to
the Participant's MPID. Non-Attributable Orders are entered by a
Participant and designated for display (price and size) on an anonymous
basis in the order display service of the System. Non-Displayed Orders
are not displayed in the System, but nevertheless remains available for
potential execution against all incoming orders until executed in full
or canceled.
Orders may be in round-lots, mixed-lots, or odd-lots of any size up
to 999,999 shares. Participants will be permitted to enter multiple
orders at single or multiple price levels and will have the option to
have a portion of their order held in reserve and not displayed to the
marketplace. Nasdaq will, in turn, make available to System
participants and market data vendors a data feed of all displayable
orders on both the bid and offer side of the market (excluding reserve
size share amounts) for all price levels at which shares are available
within its System. Nasdaq states that the System will comply with Rule
612 of Regulation NMS by accepting sub-penny prices in $0.0001
increments for securities priced under $1.00 a share and by rejecting
orders in sub-penny increments for securities priced over $1.00 per
share. Sub-penny prices are viewable via the System Data Feed.
Nasdaq will also offer the opportunity for Nasdaq participants to
enter quotations from 7 a.m. until 8 p.m. eastern time. When open,
quotes will be processed as System Hours GTC Orders, as set forth in
Nasdaq Rule 4751(h)(3) under the same terms and conditions as order
entry under Nasdaq Rule 4757(a). Nasdaq Market Makers and Nasdaq ECNs
may elect to utilize the Automatic Quote Refresh functionality, which
will refresh a participant's quote to 100 shares unless another size is
selected.
6. Order Types. Nasdaq states that the proposed System will make
available to Participants Limit Orders, Discretionary Orders, and
Reserve Orders with the same characteristics and functionality that is
currently approved for use in the INET Facility. ``Limit Orders'' are
orders to buy or sell a stock at a specified price or better. A limit
order is marketable when, for a limit order to buy, at the time it is
entered into the System, the order is priced at the current inside
offer or higher, or for a limit order to sell, at the time it is
entered into the System, the order is priced at the inside bid or
lower.
``Discretionary Orders'' are orders that have a displayed price and
size, as well as a non-displayed discretionary price range, at which
the entering party, if necessary, is also willing to buy or sell. The
non-displayed trading interest is not entered into the System book but
is, along with the displayed size, converted to an IOC buy (sell) order
priced at the highest (lowest) price in the discretionary price range
when displayed shares become available or an execution takes place at
any price within the discretionary price range. The generation of this
IOC order is triggered by the cancellation of the open shares of the
Discretionary Order. If more than one Discretionary Order is available
for conversion to an IOC order, the system will convert all such orders
at the same time and priority will be given to the first IOC order(s)
that

[[Page 19593]]

reaches the trading interest on the other side of the market. If an IOC
order is not executed in full, the unexecuted portion of the order is
automatically re-posted and displayed in the System book with a new
time stamp, its original displayed price, and its non-displayed
discretionary price range.
``Reserve Orders'' are limit orders that have both a round-lot
displayed size as well as an additional non-displayed share amount.
Both the displayed and non-displayed portions of the Reserve Order are
available for potential execution against incoming orders. If the
round-lot displayed portion of a Reserve Order is reduced to less than
a normal unit of trading, the System will replenish the display portion
from reserve up to at least a single round-lot amount. Nasdaq states
that a new timestamp is created for the replenished portion of the
order each time it is replenished from reserve, while the reserve
portion retains the time-stamp of its original entry.
The proposed System will make available the Pegged Order and the
Minimum Quantity Order types that are currently approved for use in the
INET Facility with minor modifications as described below. ``Pegged
Orders'' are orders that, after entry, have their price automatically
adjusted by the System in response to changes in bids or offers in the
market, as appropriate. A Pegged Order can specify that its price will
equal the inside quote on the same side of the market (``Primary Peg'')
or the opposite side of the market (``Market Peg''). A Pegged Order may
be a market order (the only market order available in the System) or it
may have a limit price beyond which the order shall not be executed.
Nasdaq states that a Pegged Order--whether Primary, Market, limit-
priced, or market-priced--will comply with Rule 610 of Regulation NMS,
the locked and crossed market rule. In addition, Pegged Orders may also
establish their pricing relative to the appropriate bids or offers by
the selection of one or more offset amounts that will adjust the price
of the order by the offset amount selected. A new timestamp is created
for the order each time it is automatically adjusted.
Nasdaq is proposing to clarify that Pegged Orders will be priced
relative to the bids and offers of the markets to which they may be
routed in accordance with the routing instructions selected by the
entering firm. For example, if the routing instruction calls for the
System to route the order to either the New York Stock Exchange
(``NYSE''), Archipelago, or the National Stock Exchange, the bids and
offers considered will be those of the potential recipient markets and
will not include, for example, the bids and offers of the American
Stock Exchange (``Amex''). Nasdaq states that, after Regulation NMS is
implemented, an order that is pegged to the NBBO will be pegged to the
best-priced protected quotations as defined in Rule 600 of Regulation
NMS and will not consider non-protected quotations. As described in
more detail in the Routing section below, the System will provide a
variety of routing alternatives that comply with Regulation NMS without
further action by the entering firm, as well as options that require
entering firms to take additional steps to comply with their own
regulatory obligations.
``Minimum Quantity Orders'' are orders that require that a
specified minimum quantity of shares be obtained, or the order is
cancelled. Minimum Quantity Orders may only be entered with a time-in-
force designation of Immediate or Cancel (``IOC''). This order type is
being modified to reflect that IOC orders may have a time in force of
either System Hours Immediate or Cancel or Market Hours Immediate or
Cancel. Minimum Quantity Orders with a Market Hours Immediate or Cancel
time in force received prior to the opening cross will be rejected.
Finally, Nasdaq is proposing three new order types for the
integrated system: Intermarket Sweep Orders, Price to Comply Orders,
and Price to Comply Post Orders. ``Intermarket Sweep Orders'' are limit
orders entered into the System and designated by Participants to be
executed within the System at multiple price levels without respect to
protected quotations on other market centers. Intermarket Sweep Orders
are immediately executable within the System under Nasdaq Rule 4757 and
are not be eligible for routing as set out in Nasdaq Rule 4758. By
designating an order as an Intermarket Sweep Order, entering firms are
agreeing that they will take any additional steps that they deem
necessary to comply with their own regulatory obligations.
Specifically, simultaneously with the routing of an ISO to the System,
one or more additional limit orders, as necessary, are routed to
execute against the full displayed size of any protected bid or offer
(as defined in Rule 600(b) of Regulation NMS) in the case of a limit
order to sell or buy with a price that is superior to the limit price
of the limit order identified as an Intermarket sweep order (as defined
in Rule 600(b) of Regulation NMS). These additional routed orders must
be identified as intermarket sweep orders.
``Price to Comply Order'' are orders that, if, at the time of
entry, a Price to Comply Order would create a violation of Rule 610(d)
of Regulation NMS by locking or crossing the protected quote of an
external market or would cause an Order Protection Rule violation, the
order will be converted by the System to a Non-Displayed Order and re-
priced to the current low offer (for bids) or to the current best bid
(for offers). Such Non-Displayed Orders will be cancelled by the System
if the market moves through the price of the order after the order is
accepted.
Lastly, Nasdaq is proposing to offer a ``Price to Comply Post
Order,'' which is an order that, if, at the time of entry, a Price to
Comply Post Order would create a violation of Rule 610(d) of Regulation
NMS by locking or crossing the protected quote of an external market or
would cause an Order Protection Rule violation, the order will be re-
priced and displayed by the System to one quotation increment below the
current low offer (for bids) or to one penny above the current best bid
(for offers). Price to Comply Post orders will not be routed outside of
the System.
7. Time in Force Designations. Nasdaq is proposing to expand the
number of time in force designations currently available for use in the
INET Facility. Participants entering orders into the System may
designate such orders to remain in force and available for display and/
or potential execution for varying periods of time. Unless cancelled
earlier, once these time periods expire, the order (or the unexecuted
portion thereof) is returned to the entering party.
The time in force designations are broken down into two categories:
system hours and market hours. ``System Hours'' designated orders may
be entered beginning at 7 a.m. e.s.t. and are available for execution
at all times while the System operates, 7 a.m. through 8 p.m. e.s.t.
``Market Hours'' designated orders may be entered beginning at 7 a.m.
but are available for execution only during normal market hours, 9:30
a.m. through 4 p.m. e.s.t. These ``time in force'' designations are
described in more detail below.
``System Hours Immediate or Cancel'' or ``SIOC'': limit orders,
with this designation may be entered and executed between 7 a.m. and 8
p.m. e.s.t. but if after entry into the System any portion of the order
is not marketable, that portion order is canceled and returned to the
entering Participant.
``System Hours Day'' or ``SDAY'': orders with this designation may
be entered, displayed and/or executed between 7 a.m. and 8 p.m. but if
after entry into the System, the order is not

[[Page 19594]]

fully executed, the unexecuted portion remains available for potential
display and/or execution until 8 p.m. e.s.t. on the day it was
submitted unless cancelled before then by the entering party.
``System Hours Good-till-Cancelled'' or ``SGTC'': if after entry
into the System, orders designated as SGTC that are not fully executed
remain available for potential display and/or execution between 7 a.m.
and 8 p.m. eastern time until cancelled by the entering party, or until
1 year after entry, whichever comes first.
When using the ``System Hours Expire Time'' or ``SHEX'' order,
users will be permitted to designate the amount of time the order will
remain available for execution within the System. If, after entry, the
order is not fully executed, the order (or the unexecuted portion
thereof) shall remain available for potential display and/or execution
for the amount of time specified unless canceled by the entering party.
SHEX Orders will be available for entry and execution from 7 a.m.
eastern time until 8 p.m. eastern time.
``Market Hours IOC'' or ``MIOC'': if after entry a marketable limit
order designated as MIOC becomes non-marketable, the order (or
unexecuted portion) will be canceled and returned to the entering
participant. MIOC Orders may be entered between 7 a.m. and 4 p.m.
e.s.t. and executed between 9:30 a.m. and 4 p.m. e.s.t. MIOC Orders
entered between 7 a.m. and 9:30 a.m. eastern time will be held within
the System until 9:30 a.m. at which time the System shall determine
whether such orders are marketable.
``Market Hours Day'' or ``MDAY'': if after entry an order
designated as MDAY is not fully executed, the order (or unexecuted
portion) remains available for display and/or execution until 4 p.m.
eastern time, after which it will be returned to the entering party.
MDAY Orders are available for entry between 7 a.m. and 4 p.m. e.s.t.
and for execution between 9:30 a.m. and 4 p.m. e.s.t.
``Market Hours GTC'' or ``MGTC'': if after entry an order
designated as MGTC is not fully executed, the order (or unexecuted
portion) remains available for display and/or execution until cancelled
by the entering party, or until 1 year after entry, whichever comes
first. MGTC Orders may be entered between 7 a.m. and 8 p.m. e.s.t. and
executed between 9:30 a.m. and 4 p.m. e.s.t.
``Good-til-market close'' or ``GTMC'': if entered into the System
between 7 a.m. and 4 p.m., an order designated as GTMC that is not
fully executed, the order remains available for display and/or
execution until cancelled by the entering party, or until the
completion of the Nasdaq Closing Cross, after which it is returned to
the entering party if unexecuted. GTMC orders entered after the Nasdaq
Closing Cross will be treated as SIOC orders.
8. Anonymity. Nasdaq states that the System's anonymity standards
are substantially similar to those in place in the INET Facility except
that the System will clear trades through a registered clearing agency
rather than through INET.
9. Routing. Nasdaq states that the System will provide the same
capability that the INET Facility currently offers to route orders to
other available market centers, with the exception that Nasdaq is
proposing to consolidate the current DOT routing options for ITS
Securities. DOT orders will be routed to available destinations based
on the entering firm's instructions. In addition, Nasdaq is revising
the routing functionality to comply with the Order Protection and Fair
Access provisions of Regulation NMS. Routing functionality is available
to System users between the hours of 7 a.m. and 8 p.m. eastern time. In
general, the System provides users with four optional routing
strategies for exchange-listed securities. These strategies are
summarized below:
DOT (DOT). After checking the System for available shares, the
order will be sent to various available market centers for potential
execution, as instructed by entering firm. Any remaining un-executed
portion will thereafter be sent to the NYSE or the American Stock
Exchange, as appropriate, at the limit order price for posting. This
strategy may only be used for orders with time-in-force parameters of
either MDAY, MIOC, or market-on-open/close.
Example of DOT Routable Order
The current NBBO is $10.00 bid x $10.02 offer
Offer size is as follows:

--300 shares System displayed
--200 shares System non-displayed
--100 shares PCX
--200 shares NYSE

Participant A enters a buy order for 1,000 shares at 10.02
Participant A will execute against 300 shares at 10.02
displayed and the 200 shares non-displayed
The System will route the remaining shares to PCX
Participant A will receive 100 shares from PCX
The System will then route 400 shares to NYSE.
Participant A will receive 200 shares from NYSE. The
remaining 200 shares will reside on the NYSE book, per routing
instructions.
SCAN/STGY/SPDY. In all of these routing options, after checking the
System for available shares, orders will be sent to various available
market centers for potential execution, as instructed by the entering
firm. For all these options, when checking the System book, the System
will look to execute at the price it would send the order to a
destination market center and, if any shares remain un-executed after
routing, they are posted on the System book and are not sent to another
market for posting.
Once returned to the System book after routing, an order with the
SCAN designation will not be routed out to an accessible market center
that subsequently locks or crosses the SCAN order. Orders with STGY and
SPDY will be routed to an accessible market center that subsequently
locks or crosses the STGY or SPDY order. While both STGY and SPDY
orders will route to locking or crossing markets, the SPDY order will
be re-priced by the System to match on then being displayed on the same
side of the market by the locking or crossing market center (i.e., a
buy order to the bid and a sell to the offer).
With the exception of the Minimum Quantity Order type, all time-in-
force parameters and order types may be used with the STGY, SCAN, and
SPDY routing options. Nasdaq states that orders routed by Nasdaq to
another market do not retain time priority with respect to other orders
in the System and Nasdaq continues to execute other orders while the
routed order is away at another market. Nasdaq states that, once
routed, an order becomes subject to the rules and procedures of the
destination market including, but not limited to, short-sale regulation
and order cancellation. Orders routed to a destination market that are
subsequently returned in whole or in part to the System shall have
their time priority based on the time they are returned to the System.
Example of STGY Routable Order
The current NBBO is $10.00 bid x $10.02 offer, size 200
shares at Chicago
Nasdaq has a non-display offer of 500 shares at $10.01
Participant A enters an order into the System to buy 1,000
shares at $10.02
The System will first check the System book for any
potential orders at $10.02.
Participant A will execute 500 shares on Nasdaq at $10.01
(the non-display order on the book)

[[Page 19595]]

The System will then route the order to Chicago at $10.02
200 shares execute at Chicago at $10.02
300 shares of the order remain unexecuted, and are entered
onto the System book at $10.02.
5 seconds later PCX enters the market with an offer of
$10.02 for 500 shares.
The System will cancel the order off the book, and route
300 shares at $10.02 to PCX
PCX executes 300 shares at $10.02
Participant A receives an execution for the remaining 300
shares in the order
Example of STGY Routable Order (Crossed Market)
The current NBBO is $10.01 bid x $10.00 offer
The System has 500 shares on the offer at $10.00
PCX has 300 shares on the offer at $10.00
Participant A enters a Market Pegged Order to buy 1,000
shares
The System will price the order at $10.00 and IOC the
System book
Participant A will receive 500 shares at $10.00
The System will route the remaining shares to PCX
Participant A will receive 300 shares at $10.00 from PCX
After attempting to exhaust the quotes, the remaining 200
shares will be posted to the System book at $10.00
Example of SCAN Routable Order
The current NBBO is $10.00 bid x $10.02 offer, size 200
shares at PCX
Nasdaq has a non-display offer of 500 shares at $10.01
Participant A enters an order onto Nasdaq to buy 1,000
shares at $10.02
The System will first IOC the Nasdaq book for any
potential orders at or better than the limit price
Participant A will execute 500 shares on Nasdaq at $10.01
(the non-display order on the book)
The System will route the order off the book with the
remaining shares of the order, 500, to the PCX at $10.02
200 shares execute at the PCX at $10.02
300 shares of the order remain unexecuted, and are entered
onto the System book at $10.02
5 seconds later PCX enters the market with an offer of
$10.02
The System will not route the order to PCX, but will keep
the order on the System, per Participant A's routing instructions
Example of SPDY Routable Order (Crossed Market)
The current NBBO is $10.01 bid x $10.00 offer
Nasdaq has 1,000 shares on the offer at $10.01
PCX has 300 shares on the offer at $10.00
Participant A enters a Market Pegged Order to buy 1,000
shares
After checking the System at $10.00 and finding no orders,
the System will route the 1,000 shares to PCX at $10.00
Participant A will receive 300 shares at $10.00 from PCX
The remaining 700 shares will be sent to the System book
at $10.01
Participant A executes 700 shares at $10.01 on the System
10. Book Processing
Nasdaq states that the System, like the INET Facility, will have a
single execution algorithm based on price/time priority. Nasdaq states
that new Nasdaq Rule 4757 is identical to current Nasdaq Rule 4955
governing the INET Facility. For each order, among equally-priced or
100 better-priced trading interest, the System executes against
available contra-side displayed share amounts in full, in price/time
priority, before then moving to any non-displayed shares which are
likewise executed in price/time priority.
Nasdaq believes that the System execution algorithm complies with
the Order Protection and Access Rules, Rules 611 and 610, respectively
of Regulation NMS. With respect to Intermarket Sweep Orders within the
meaning of Rule 600(b )(30) of Regulation NMS, the System will execute
them in price/time priority and the entering Participant will be
responsible for compliance with Rules 610 and 611 of Regulation NMS.
Below are examples of this algorithm:
Displayed Order
The current NBBO is $10.00 bid x $10.02 offer
Participant A enters a display order to buy 1,000 shares
at $10.01
NBBO is changed to $10.01 x $10.02
Participant B sees the 1,000 share order at $10.01 and
enters an order to sell 500 shares at $10.01
The orders match at $10.01, with 500 shares matched
NBBO remains at $10.01 x $10.02 with the size on the bid
decremented to 500 shares, the amount of shares matched
Limit Order (with Reserve)
The current NBBO is $10.01 bid x $10.02 offer
Participant A enters an order to buy 1,000 shares, display
200, at $10.01
The System bid is $10.01, 200 displayed, 800 non-displayed
Participant B enters a display buy order for 1,000 shares
at $10.01
The System bid is $10.01, 1,200 displayed, 800 non-
displayed
Participant C enters an order to sell 1,500 shares at
$10.01
Participant C receives executions against orders as
follows:

--Participant A executes 200 shares at $10.01
--Participant B executes 1,000 shares at $10.01 (display order receives
priority over non-display even though non-display order was there
first)
--Participant A executes 300 shares from non-display portion

Participant C has executed a total of 1,500 shares 103
Participant B has executed all 1,000 of its shares
Participant A has 200 shares remaining in its order, and
is now displayed, per original instructions
Routable Order
The current NBBO is $10.00 bid x $10.02 offer, size 200
shares at PCX
Nasdaq has a non-display offer of 500 shares at $10.01
Participant A enters an order into Nasdaq to buy 1,000
shares at $10.02
The System will first check the System book for any
potential orders at or better than the inside offer
Participant A will execute 500 shares on Nasdaq at $10.01
(the non-display order on the book)
500 shares of the order remain unexecuted, and are routed
to PCX at $10.02
200 shares execute at PCX
300 shares remain unexecuted and are entered onto the
Nasdaq book at $10.02
11. Adjustment of Open Orders. Nasdaq has determined that, in the
event of a corporate actions related to a dividend, payment or
distribution by the issuer of a System security, Nasdaq will
automatically purge from the System all open quotes and/or orders on
the ex-date of such actions, except where a cash dividend or
distribution is less than one cent ($0.01). Nasdaq's current approach
to the adjustment of open orders varies depending upon whether: (1) The
trading interest is a quotation, an order to buy, or an order to sell
order; (2) the order is a round lot or odd lot, (3) the security is
listed on Nasdaq, NYSE, or Amex, and (4) the corporate action is a
stock dividend, cash dividend, split, or reverse split. Nasdaq
currently believes that this

[[Page 19596]]

function is more appropriately performed by individual Nasdaq members
in consultation with their clients.
12. Phase-in Plan. Nasdaq currently expects to launch the
Integrated System in time for the implementation of the Order
Protection and Access Rules under Regulation NMS, currently scheduled
for June 29, 2006. Nasdaq states that, ideally, it would implement the
Integrated System in May of 2006, sufficiently far in advance of the
re-constitution of the Russell indices to permit participants to enter
the Nasdaq closing cross with the same confidence and with the same
superior performance they have achieved in the past. Alternatively,
Nasdaq states that it would implement the Integrated System in early
July of 2006 to avoid impacting the reconstitution.
Nasdaq, having determined that market participants generally prefer
a rapid system roll-out over a protracted one, states that it plans to
make a complete transition within three to four weeks of first
launching the Integrated System, barring unforeseen circumstances.
13. Pricing. Nasdaq has filed a unified fee and rebate structure
governing the use of the System.
2. Statutory Basis
Nasdaq believes that the proposed rule change, as amended, is
consistent with the provisions of Section 6 of the Act\15\ in general,
and Section 6(b)(5) of the Act\16\ in particular, in that it is it is
designed to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest;
and are not designed to permit unfair discrimination between customers,
issuers, brokers, or dealers, or to regulate by virtue of any authority
conferred by this title matters not related to the purposes of the Act
or the administration of the exchange.
---------------------------------------------------------------------------

\15\ 15 U.S.C. 78f.
\16\ 15 U.S.C. 78f(b)(5). The statutory basis section in
Nasdaq's proposed rule change inadvertently referenced 15 U.S.C.
78f(b)(6) and has been redesignated 15 U.S.C. 78f(b)(5). Telephone
conversation on March 30, 2006 between Jeffrey Davis, Senior
Associate General Counsel, Nasdaq, and David Liu, Attorney Division,
Commission.
---------------------------------------------------------------------------

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. Nasdaq operates in an intensely
competitive global marketplace for listing, financial products,
transaction services, and market data. Relying on its array of services
and benefits, Nasdaq competes for the privilege of providing market and
listing services to broker-dealers and issuers. Nasdaq states that its
ability to compete in this environment is based in large part on the
quality of its trading systems, the overall quality of its market and
its attractiveness to the largest number of investors, as measured by
speed, likelihood and cost of executions, as well as spreads, fairness,
and transparency.
With these aspects of competition as a guide, Nasdaq states that it
has designed its current proposal to create the fastest, fairest, most
transparent, most efficient, and least expensive trading venue
available for the trading of equity securities. Nasdaq believes that
the proposed system will fuse the best functional elements from each of
Nasdaq's three separate systems, including the automatic execution
environment and speed of the INET and Brut Facilities, the Opening and
Closing Crosses from the NMC Facility, and the liquidity from all
three. Nasdaq believes that the resulting system will reduce overall
trading costs and increase price competition, both pro-competitive
developments. Nasdaq believes that the resulting system will have the
pro-competitive effect of spurring further initiative and innovation
among market centers and market participants. Nasdsq states that market
participants that disagree and do not view these developments as pro-
competitive, will have the flexibility and choice to use only those
functions that improve their trading or to not use the system at all;
participation in the system in whole or part is completely voluntary.
Nasdaq is proposing to discontinue some aspects of its current
system that harm Nasdaq's competitiveness, including the order delivery
functionality of the NMC facility. Nasdaq states that the order
delivery functionality harms Nasdaq's competitiveness against other
exchanges and reduces the overall quality of its marketplace for the
average participant. Nasdaq states that, with respect to other markets,
Nasdaq's order delivery function is unique; no other exchange offers
order delivery to its participants. Nasdaq states that providing order
delivery is expensive, complex, and detrimental to system performance,
thereby increasing the cost and complexity of Nasdaq's trading systems
and decreasing its performance vis [agrave] vis Nasdaq's competitors.
Because market participants cannot predict whether their orders will be
delivered (slow) as opposed to automatically executed (fast), Nasdaq
states that order delivery also discourages order flow providers to
send orders to Nasdaq for processing and thereby harms Nasdaq's ability
to compete with other markets operated by self-regulatory organizations
that do not offer order delivery.
Moreover, Nasdaq believes that, within its own systems, the
presence of order delivery negatively impacts the competition between
market makers, ECNs/ATS, and agency broker-dealers that compete for
retail and institutional order flow. Although Nasdaq will not itself
engage in that competition, Nasdaq views this competition among its
system participants as a major factor in the quality of its market.
Nasdaq states that today, market makers and agency broker-dealers that
are required to participate in Nasdaq via automatic execution view
themselves as disadvantaged relative to ECNs and ATSs that can
participate via either automatic execution or order delivery. Nasdaq
believes that eliminating order delivery functionality will level the
playing field between market participants that compete within Nasdaq's
system thereby increasing the attractiveness of Nasdaq's system to the
largest number of investors and market participants and, in turn,
improving Nasdaq's overall competitiveness as a market.
Nasdaq states that its ability to innovate and compete by providing
the fastest, fairest, most efficient system possible is particularly
important in light of the adoption of Regulation NMS. Regulation NMS
highlights the importance of speed, accessibility, and efficiency as
well as the risks of delay, isolation and inefficiency. To remain
competitive under Regulation NMS, Nasdaq, and all other market
participants, will be required to continually evaluate their systems
and business models in the manner Nasdaq has done here.

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.

[[Page 19597]]

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 or 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, as amended, 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:

Electronics 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-NASDAQ-2006-001 on the subject line.

Paper Comments

Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASDAQ-2006-001.
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-NASDAQ-2006-001 and should be submitted on or before May
5, 2006.

For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\17\
---------------------------------------------------------------------------

\17\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
[FR Doc. 06-3341 Filed 4-13-06; 8:45 am]
BILLING CODE 8010-01-M