[Federal Register Volume 71, Number 100 (Wednesday, May 24, 2006)]
[Rules and Regulations]
[Pages 30038-30041]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 06-4797]



[[Page 30037]]

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Part IV





Securities and Exchange Commission





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17 CFR Part 242



Regulation NMS; Final Rule

  Federal Register / Vol. 71, No. 100 / Wednesday, May 24, 2006 / Rules 
and Regulations  

[[Page 30038]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

[Release No. 34-53829; File No. S7-10-04]


Regulation NMS

AGENCY: Securities and Exchange Commission.

ACTION: Final rule; extension of compliance dates.

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SUMMARY: The Commission is extending the compliance dates for Rule 610 
and Rule 611 of Regulation NMS under the Securities Exchange Act of 
1934 (``Exchange Act''). Rule 610 requires fair and non-discriminatory 
access to quotations, establishes a limit on access fees, and requires 
each national securities exchange and national securities association 
to adopt, maintain, and enforce written rules that prohibit their 
members from engaging in a pattern or practice of displaying quotations 
that lock or cross protected quotations. Rule 611 requires trading 
centers to establish, maintain, and enforce written policies and 
procedures reasonably designed to prevent the execution of trades at 
prices inferior to protected quotations displayed by other trading 
centers, subject to an applicable exception. The Commission is 
extending the compliance dates to give automated trading centers 
additional time to finalize development of their new or modified 
trading systems, and to give the securities industry sufficient time to 
establish the necessary access to such trading systems.

DATES: The effective date for Rule 610 and Rule 611 remains August 29, 
2005. The initial compliance date for Rule 610 and Rule 611 has been 
extended from June 29, 2006 to a series of five dates, beginning on 
October 16, 2006, for different functional stages of compliance that 
are set forth in section II.A of this release. The effective date for 
this release is May 24, 2006.

FOR FURTHER INFORMATION CONTACT: Raymond Lombardo, Special Counsel, at 
(202) 551-5615, or David Liu, Attorney, at (202) 551-5645, Division of 
Market Regulation, Securities and Exchange Commission, 100 F Street, 
NE., Washington, DC 20549-6628.

SUPPLEMENTARY INFORMATION: 

I. Introduction

    On June 29, 2005, the Commission published its release adopting 
Regulation NMS (``NMS Release'').\1\ The adopted regulatory 
requirements include: (1) New Rule 610 of Regulation NMS, which 
addresses access to markets and locking or crossing quotations; (2) new 
Rule 611 of Regulation NMS, which provides intermarket protection 
against trade-throughs (i.e., trades at inferior prices) for certain 
displayed quotations that are automated and accessible; and (3) an 
amendment to the joint industry plans for disseminating market 
information to the public that modifies the formulas for allocating 
plan revenues to the self-regulatory organization (``SRO'') 
participants in the plans (``Allocation Amendment'').
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    \1\ Securities Exchange Act Release No. 51808 (June 9, 2005), 70 
FR 37496 (June 29, 2005).
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    The effective date for all of the initiatives in the NMS Release 
was August 29, 2005. The compliance dates for Rule 610, Rule 611, and 
the Allocation Amendment have not yet arrived. Phase 1 of compliance 
with Rule 610 and Rule 611 for 250 NMS stocks was set for June 29, 
2006, and Phase 2 for all NMS stocks was set for August 31, 2006. The 
compliance date for the Allocation Amendment is September 1, 2006. For 
the reasons discussed below, the Commission has determined that the 
SROs and securities industry participants need additional time to 
implement these new NMS regulatory requirements. It therefore has 
decided to extend the compliance dates for Rule 610 and Rule 611 as set 
forth in this release. In addition, the Commission has today, by 
separate order, exempted the SRO participants in the joint industry 
plans from compliance with the Allocation Amendment until April 1, 
2007.\2\
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    \2\ Securities Exchange Act Release No. 53828 (May 18, 2006) 
(order exempting SROs from compliance with the Allocation Amendment 
until April 1, 2007). See section II.B below.
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II. Extension of Compliance Dates

    One of the primary Exchange Act objectives for the national market 
system (``NMS'') is to promote the efficient execution of securities 
transactions by capitalizing on advances in communications and 
processing technologies.\3\ Two of the core elements of Rule 610 and 
Rule 611 are the display of automated quotations, as defined in Rule 
600(b)(3), and the operation of automated trading centers, as defined 
in Rule 600(b)(4). Automated trading centers displaying automated 
quotations must, among other things, immediately respond to incoming 
orders seeking to access the quotations and immediately update the 
quotations. Under Rule 611, only automated quotations displayed by 
automated trading centers will qualify as ``protected quotations'' 
under Rule 600(b)(58) and thereby receive intermarket protection 
against trade-throughs. In addition, Rule 610(d) requires SROs to adopt 
rules requiring their members reasonably to avoid displaying quotations 
that lock or cross protected quotations. Finally, the Allocation 
Amendment allocates market data revenues to SROs based partially on the 
extent to which they display quotations that equal the national best 
bid or offer in an NMS stock, but only if the quotations are automated.
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    \3\ See, e.g., Exchange Act section 11A(a)(1)(B), 
11A(a)(1)(C)(i), and 11A(a)(1)(D); see also NMS Release, 70 FR at 
37497.
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    Given the new regulatory framework created by Regulation NMS and 
the desire of investors and other market participants for more 
automated and efficient trading services, many SROs have announced 
major revisions of their trading systems. For example, the New York 
Stock Exchange LLC (``NYSE'') is implementing its Hybrid Market, which 
is designed to integrate aspects of an auction market with automated 
trading.\4\ The American Stock Exchange LLC (``Amex'') has proposed to 
adopt a new trading platform that would offer both an electronic 
marketplace and floor-based trading.\5\ The Boston Stock Exchange, Inc. 
(``BSE'') plans to launch a new electronic trading system.\6\ The 
Chicago Stock Exchange (``CHX'') has proposed to no longer operate a 
physical trading floor and instead to adopt a new fully-automated 
matching system.\7\ The Nasdaq Stock Market LLC (``Nasdaq'') has 
proposed to integrate three different matching systems into a single, 
integrated matching system.\8\ Finally, to qualify quotations displayed 
in the Alternative Display Facility (``ADF'') as protected 
quotations,\9\ the NASD must modify the ADF to designate a single 
participant for the ADF best bid and a single participant for the ADF 
best offer, because the ADF does not provide a single point of 
connectivity to ADF quotations. ADF participants, in turn,

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must meet the new automated trading center requirements discussed above 
to qualify their quotations for trade-through protection, as well as 
the new access standards of Rule 610(b)(1).
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    \4\ See Securities Exchange Act Release No. 53539 (March 22, 
2006), 71 FR 16353 (March 31, 2006) (approval of NYSE rules 
establishing the Hybrid Market). Information concerning NYSE's 
Hybrid Market also is available at http://www.nyse.com.
    \5\ Information concerning Amex's proposed Auction and 
Electronic Market Integration (AEMI) platform, including a proposed 
rule change to establish the AEMI platform (SR-Amex-2005-104), is 
available at http://www.amex.com.
    \6\ Information concerning BSE's planned electronic equities 
trading market is available at http://www.bostonstock.com.
    \7\ Information concerning CHX's proposed rule change to 
establish the new trading market (SR-CHX-2006-05) is available at 
http://www.chx.com.
    \8\ Information concerning Nasdaq's proposed rule change to 
establish an integrated matching system (SR-NASDAQ-2006-001) is 
available at http://www.nasdaq.com.
    \9\ See NMS Release, 70 FR at 37534 (ADF best bid or offer must 
be accessible by routing to a single ADF participant).
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    The SROs currently are in varying stages of development of their 
new or modified trading systems. The ongoing nature of these changes to 
SRO trading systems has seriously complicated the efforts of securities 
industry participants to comply with the new NMS regulatory 
requirements. The SROs intend that their new or modified SRO systems 
would be automated trading centers and therefore sources of protected 
quotations. In addition, the current participants in ADF, as well as 
potentially new participants, have indicated their intent to be sources 
of protected quotations when they represent the ADF best bid or offer. 
To comply with Regulation NMS, industry participants must have clarity 
concerning all sources of protected quotations. For example, any 
industry participants that wish to rely on the exceptions in Rule 
611(b)(5) and (6) for intermarket sweep orders (``ISOs'') must have 
access to all sources of protected quotations to assure that they can 
meet the ISO requirements of Rule 600(b)(30).\10\
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    \10\ See NMS Release, 70 FR at 37523.
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    Industry participants therefore must develop policies, procedures, 
and systems that will enable them to route orders to access the 
protected quotations displayed by all of the new or modified SRO 
trading systems and ADF participants. To establish the connectivity and 
interfaces necessary to perform this function, industry participants 
must receive final technical specifications for all automated trading 
centers well in advance of the initial compliance date for trade-
through protection. In addition, given the novel features of many of 
the new SRO trading systems, industry participants have indicated that 
they need a period in time in which to gain practical experience 
trading on the new systems, also in advance of the initial compliance 
date for trade-through protection. Finally, all of these changes must 
be implemented while trading continues in the most active equity 
markets in the world. Each day, the U.S. equity markets handle trading 
volume in NMS stocks of more than 3.9 billion shares and 120 billion 
dollars. The implementation of Regulation NMS must be managed 
appropriately so that it does not risk any disruption to the 
functioning of our equity markets.
    The Commission fully supports the SROs' plans to develop more fully 
automated trading systems. These SRO systems would represent a major 
upgrade in the NMS that could benefit investors and all market 
participants by providing platforms for more efficient trading. The 
Commission also understands the need for industry participants to have 
sufficient time to establish the necessary access to these new SRO 
trading systems as they become operational. It therefore has decided to 
extend substantially the original compliance dates for Rule 610 and 
Rule 611. To provide the SROs and industry participants with greater 
certainty concerning the phase-in of NMS implementation, the Commission 
is adopting a series of revised compliance dates that incorporate the 
major functional steps required to achieve full implementation of 
Regulation NMS. The revised dates provide additional time for SROs to 
develop and install their new trading systems, but also impose firm 
deadlines for these functional steps to be completed. This systematic 
approach to implementation should give all industry participants an 
enhanced opportunity to complete their compliance preparations in the 
least disruptive and most cost-effective manner possible.

A. Rule 610 and Rule 611 Compliance Dates

    The extended compliance dates for Rule 610 and Rule 611 are as 
follows:
    October 16, 2006 (``Specifications Date''): Final date for 
publication on Internet Web sites of applicable SROs (i.e., the 
exchange for SRO trading facilities and the NASD for ADF participants) 
of final technical specifications for interaction with Regulation NMS-
compliant trading systems of all automated trading centers (both SRO 
trading facilities and ADF participants) that intend to qualify their 
quotations for trade-through protection under Rule 611 during the 
Pilots Stocks Phase and All Stocks Phase (as defined below).
    February 5, 2007 (``Trading Phase Date''): Final date for full 
operation of Regulation NMS-compliant trading systems of all automated 
trading centers (both SRO trading facilities and ADF participants) that 
intend to qualify their quotations for trade-through protection under 
Rule 611 during the Pilots Stocks Phase and All Stocks Phase (as 
defined below). The period from February 5, 2007 till May 21, 2007 is 
the ``Trading Phase.''
    May 21, 2007 (``Pilot Stocks Phase Date''): Start of full industry 
compliance with Rule 610 and Rule 611 for 250 NMS stocks (100 NYSE 
stocks, 100 Nasdaq stocks, and 50 Amex stocks). The period from May 21, 
2007 till July 9, 2007 is the ``Pilot Stocks Phase.''
    July 9, 2007 (``All Stocks Phase Date''): Start of full industry 
compliance with Rule 610 and Rule 611 for all remaining NMS stocks. The 
period from July 9, 2007 till October 8, 2007 is the ``All Stocks 
Phase.''
    October 8, 2007 (``Completion Date''): Completion of phased-in 
compliance with Rule 610 and Rule 611.
    Each of these compliance dates represents an essential functional 
step on the way to full implementation of Rules 610 and 611. It is 
particularly important that all automated trading centers meet the 
October 16 Specifications Date and the February 5 Trading Phase Date. 
These new dates give automated trading centers more than seven 
additional months beyond the original June 29, 2006 Phase 1 compliance 
date to bring their new Regulation NMS-compliant trading systems into 
full operation. The seven-month extension is in addition to the one-
year period originally provided when Regulation NMS was published. 
Accordingly, the extended dates are designed to provide all automated 
trading centers intending to display protected quotations during the 
Pilot Stocks Phase and the All Stocks Phase with sufficient time to 
meet the new intermediate compliance dates for posting final technical 
specifications and commencing full operation of the specified trading 
systems.
    The Commission believes that industry participants need certainty 
concerning the protected quotations for which they will be required to 
afford trade-through protection under Rule 611 during the Pilot Stocks 
Phase and All Stocks Phase. Moreover, to prevent potentially serious 
disruption to implementation efforts, the industry needs this certainty 
well in advance of the Pilot Stocks Phase Date. Industry participants 
should not be placed in a position where they would be unexpectedly 
required to access the additional protected quotations of an automated 
trading center that had not posted its final technical specifications 
and commenced operation of its new trading system in a timely manner.
    Accordingly, the Commission may consider, after the Specifications 
Date, whether to issue an exemptive order identifying those automated 
trading centers that met the Specifications Date and exempting all 
industry participants from trade-through and locking/crossing 
responsibilities with respect to the quotations of any trading center 
not identified as having met the Specifications Date. The Commission 
also may consider updating any

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previously-issued exemptive order to remove any trading center that 
failed to meet the Trading Phase Date by commencing full operation of 
its Regulation NMS-compliant trading system in accordance with its 
final technical specifications posted on the Specifications Date.
    In addition to completing the functional steps that have been 
assigned specific compliance dates, the consolidated data streams need 
to be modified in several respects. As discussed in the NMS 
Release,\11\ consolidated quotation and trade data in NMS stocks is 
disseminated to the public through three Networks jointly operated by 
the SROs--Network A for stocks listed on the NYSE, Network C for stocks 
listed on Nasdaq, and Network B for stocks listed on the Amex and other 
national securities exchanges. To facilitate compliance with Rule 610 
and Rule 611, the Network quotation feeds must identify automated and 
manual quotations, as well as any types of quotations (such as ``non-
firm'' quotations) that do not qualify as protected quotations. In 
addition, the Network quotation feeds must identify a single 
participant in the NASD's ADF for its best bid and for its best 
offer.\12\ Finally, the Network trade feeds need to be modified to 
identify trades that are executed pursuant to exceptions set forth in 
Rule 611(b).\13\ The Commission understands that the Networks have made 
substantial progress toward modifying their data feeds to reflect 
Regulation NMS. Given this progress, the Commission expects that 
appropriately modified Network data feeds will be fully operational in 
advance of the Specifications Date. It will consider further action in 
the future if necessary to assure that the Networks meet this 
timeframe.
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    \11\ 70 FR at 37558.
    \12\ See NMS Release, 70 FR at 37534 (ADF best bid or offer must 
be accessible by routing to a single ADF participant).
    \13\ See NMS Release, 70 FR at 37535 n. 317 (need for 
transparency concerning Rule 611 exceptions).
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    The extended compliance dates established in this release, as well 
as the potential consequences for automated trading centers of failing 
to meet such dates, are discussed in greater detail below.
1. Specifications Date
    By no later than October 16, 2006, all trading centers (both SRO 
trading facilities and ADF participants) intending to qualify their 
quotations for trade-through protection during the Pilot Stocks Phase 
and All Stocks Phase must post final technical specifications on the 
Internet Web site of the applicable SRO (i.e., the exchange for SRO 
trading facilities and the NASD for ADF participants). The purpose of 
posting these specifications is to enable industry participants to plan 
their NMS compliance and modify their systems to interface with the 
systems of the automated trading centers. Given this purpose, the 
specifications must, at a minimum, address: (1) The identification of 
quotations as automated or manual to meet the requirements of Rule 
600(b)(4); (2) an immediate-or-cancel functionality that meets the 
requirements of an automated quotation in Rule 600(b)(3); (3) an ISO 
functionality that allows industry participants to meet the 
requirements of Rule 600(b)(30); and (4) any other basic 
functionalities necessary to trade on the system. In addition, the 
specifications must be final with respect to these basic Regulation NMS 
functions and must remain so at least through the Completion Date. A 
significant alteration of the specifications prior to completion of the 
phase-in periods would defeat the purpose of giving the industry 
certainty concerning the quotations for which they will have trade-
through and locking/crossing responsibilities.
    The Commission recognizes that automated trading centers cannot 
produce final technical specifications until all relevant SRO proposed 
rule changes necessary for Regulation NMS-compliant trading systems 
have been filed, published for public comment, and approved by the 
Commission. Accordingly, it anticipates working closely with the SROs 
to address any issues raised by the filings and to take appropriate 
action by no later than October 1, 2006.
    After the Specifications Date, the Commission intends to consider 
whether to issue an exemptive order pursuant to Rule 610(e) and Rule 
611(d). Such an order could identify those trading centers that 
complied with the Specifications Date, and could exempt all industry 
participants from trade-through requirements under Rule 611 and locked/
crossed requirements under Rule 610 for the quotations displayed by any 
trading center that is not identified in the exemptive order as having 
complied with the Specifications Date. This exemption could continue in 
effect at least through the Completion Date.\14\
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    \14\ Any exemptive order would address trade-through and locked/
crossed responsibilities, but would not preclude the quotations 
displayed by a trading center not identified in the order from 
meeting the definition of an ``automated quotation'' under Rule 
600(b)(3). Industry participants would need to include such 
quotations in their best execution analyses, and would be able 
particularly to assess whether their ability to access such 
quotations made them reasonably available when considered in the 
context of the ongoing challenges of meeting the compliance dates 
for Rule 610 and Rule 611.
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2. Trading Phase Date
    By no later than February 5, 2007, all trading centers (both SRO 
trading facilities and ADF participants) intending to qualify their 
quotations for trade-through protection must bring a Regulation NMS-
compliant trading system into full operation for all NMS stocks 
intended to be traded during the phase-in period (i.e., through the 
Completion Date). The trading system must operate in accordance with 
the specifications that were posted by the Specifications Date. The 
Trading Phase is designed to provide industry participants with an 
opportunity to gain experience with the new or modified systems of all 
automated trading centers that will display protected quotations during 
the phase-in periods. For example, industry participants will be able 
to test the effectiveness of their policies and procedures under Rule 
610 and Rule 611, prior to any liability attaching under the Rules.
    After the Trading Phase Date, the Commission may consider whether 
to update any exemptive order issued after the Specifications Date to 
remove any trading centers that failed to meet the Trading Phase Date. 
Any updated order could continue in effect at least through the 
Completion Date.
3. Pilot Stocks Phase Date
    May 21, 2007 is the initial, all-industry compliance date for Rule 
610 and Rule 611 with respect to 250 pilot stocks--100 for Network A, 
100 for Network C, and 50 for Network B. The particular stocks will be 
chosen by the primary listing market, in consultation with Commission 
staff, to be reasonably representative of the range of each Network's 
securities. The primary purpose of the Pilot Stocks Phase is to allow 
all market participants to verify the functionality of their policies, 
procedures, and systems that are necessary to comply with the Rules.
    The Pilot Stocks Phase is analogous to Phase 1 of the original 
implementation schedule set forth in the NMS Release.\15\ May 21, 2007, 
therefore, provides the securities industry a nearly eleven-month 
extension of the original Phase 1 compliance date. In addition, the 
revised date gives all industry participants a seven-month period to 
complete their implementation efforts after the public posting of final 
technical specifications for automated

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trading centers. The revised date also provides securities firms a more 
than three-month period to gain experience in actual trading with the 
new or modified systems of automated trading centers. These extended 
time periods are designed to facilitate a non-disruptive and cost-
effective initiation of trade-through protection and locked/crossed 
quotation restrictions under Rule 610 and Rule 611.
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    \15\ See NMS Release, 70 FR at 37576.
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4. All Stocks Phase Date
    July 9, 2007 is the all-industry compliance date for Rules 610 and 
611 with respect to all remaining NMS stocks. This All Stocks Phase 
will last three months and is intended to provide a final period for 
industry participants to gain significant experience complying with the 
Rules.
5. Completion Date
    On October 8, 2007, the phase-in of compliance with Rules 611 and 
610 will be complete. As of this date, any exemptive order issued after 
the Specifications Date, or updated after the Trading Phase Date, could 
be modified so that industry participants would have trade-through and 
locked/crossed requirements for the quotations of an automated trading 
center that may have failed to meet the Specifications Date or the 
Trading Phase Date. The quotations of any such automated trading center 
must be commenced pursuant to an approved SRO proposed rule change or 
other established SRO procedure that provides sufficient notice to the 
industry, as well as all necessary information (such as final technical 
specifications), that will enable industry participants to meet their 
regulatory responsibilities.\16\
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    \16\ SRO trading facilities would be subject to the proposed 
rule change requirements of section 19(b) of the Exchange Act. ADF 
participants would be subject to procedures adopted by the NASD, 
after approval by the Commission, to assure appropriate access to 
the ADF participants. See NMS Release, 70 FR at 37543.
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B. Allocation Amendment Exemption

    The Allocation Amendment modifies the existing formulas for 
allocating revenues to the SRO participants in the market data 
plans.\17\ One of the most significant changes is the introduction of 
``Quoting Shares''--the allocation of revenues based on the extent to 
which automated quotations displayed by SROs equal the national best 
bid or offer in NMS stocks. Under the old formulas, no revenues are 
allocated for quotations. Under the new formula, 50% of revenues will 
be allocated for Quoting Shares. Due to the extension until February 5, 
2007 of the deadline for automated trading centers to commence full 
operation of NMS-compliant trading systems, the Commission believes 
that the SRO participants in the joint industry plans for disseminating 
market information should be exempted from complying with the 
Allocation Amendment until after the Trading Phase Date. Accordingly, 
the Commission, by separate order, has exempted the SRO participants in 
the plans from complying with the Allocation Amendment until April 1, 
2007.\18\ The exemption gives trading centers additional time to 
implement systems that are capable of displaying automated quotations 
and thereby qualify for Quoting Shares.
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    \17\ See NMS Release, 70 FR at 37568.
    \18\ See note 2 above.
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III. Conclusion

    For the reasons cited above, the Commission, for good cause, finds 
that notice and solicitation of comment regarding the extension of the 
compliance dates set forth herein are impractical, unnecessary, or 
contrary to the public interest.\19\ All industry participants will 
receive substantial additional time to comply with Rule 610 and Rule 
611 beyond the compliance dates originally set forth in the NMS 
Release. In addition, the Commission recognizes that industry 
participants urgently need notice of the extended compliance dates so 
that they do not expend unnecessary time and resources in meeting the 
original June 29, 2006 compliance date, such as by developing 
interfaces with trading systems that could change substantially prior 
to the extended compliance dates. Providing immediate effectiveness 
upon publication of this release will allow industry participants to 
adjust their implementation plans accordingly.\20\
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    \19\ See section 553(b)(3)(B) of the Administrative Procedure 
Act (5 U.S.C. 553(b)(3)(B)) (``APA'') (an agency may dispense with 
prior notice and comment when it finds, for good cause, that notice 
and comment are ``impractical, unnecessary, or contrary to the 
public interest'').
    \20\ The compliance date extensions set forth in this release 
are effective upon publication in the Federal Register. Section 
553(d)(1) of the APA allows effective dates that are less than 30 
days after publication for a ``substantive rule which grants or 
recognizes an exemption or relieves a restriction.'' 5 U.S.C. 
553(d)(1).

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    By the Commission.

    Dated: May 18, 2006.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 06-4797 Filed 5-23-06; 8:45 am]
BILLING CODE 8010-01-P