regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.,

[Federal Register: July 10, 2001 (Volume 66, Number 132)]

[Notices]

[Page 36020-36022]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr10jy01-103]

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-44506; File No. SR-NASD-2001-40]

Self-Regulatory Organizations; Notice of Filing and Immediate Effectiveness of Proposed Rule Change and Amendment No. 1 to the Proposed Rule Change by the National Association of Securities Dealers, Inc. Relating to Non-Liability SelectNet Messages in the Nasdaq National Market System

July 3, 2001.

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 June 21, 2001, the National Association of Securities Dealers, Inc. (``NASD'' or ``Association''), through its subsidiary, The Nasdaq Stock Market, Inc. (``Nasdaq''),\3\ filedwith the Securities and Exchange Commission (``SEC'' or ``Commission'') the proposed rule change as described in Items I, II, and III below, which Items have been prepared by Nasdaq. Nasdaq has filedthe proposed rule change pursuant to section 19(b)(3)(A) of the Act \4\ and Rule 19b-4(f)(5) thereunder.\5\ Nasdaq has designated the proposal as a change to an existing order entry or trading system of a self-regulatory organization that (i) does not significantly affect the protection of investors or the public interest; (ii) does not impose any significant burden on competition; and (iii) does not have the effect of limiting the access to or availability of the system. This designation renders the proposed rule change, as amended, immediately effective upon filing with the Commission. The Commission is publishing this notice to solicit comments on the proposed rule change, as amended, from interested persons.

\1\ 15 U.S.C. 78s(b)(1).

\2\ 17 CFR 240.19b-4.

\3\ On June 21, 2001, Nasdaq amended its proposal to indicate that the NASD, through its subsidiary, Nasdaq, filedthe proposed rule change. See letter from Thomas P. Moran, Associate General Counsel, Office of General Counsel, Nasdaq, to Katherine A. England, Assistant Director, Division of Market Regulation, Commission, dated June 20, 2001 (``Amendment No. 1'').

\4\ 15 U.S.C. 78s(b)(3)(A).

\5\ 17 CFR 240.19b-4(f)(5).

1. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

   Nasdaq proposes to amend NASD Rule 4720(c), ``Prohibition Regarding the Entry of Certain Preferenced Orders to Nasdaq National Market Execution System Market Makers,'' to allow

   [[Page 36021]]

   members to send a SelectNet preferenced (i.e., directed) order to a Nasdaq National Market Execution System (``NNMS'' or ``SuperSOES'') \6\ market maker if the order is designated as a non-liability order that is entered at a price that is inferior to the displayed quote to which the preferenced order is directed. Nasdaq plans to implement the proposed change upon the commencement of SuperSOES trading, which currently is scheduled to begin on July 9, 2001. The text of the proposed rule change appears below. Proposed new language is italicized; proposed deletions are in brackets.

   \6\ The Commission approved the NNMS, a new platform for trading Nasdaq National Market (``NNM'') securities, on January 14, 2000. See Securities Exchange Act Release No. 42344 (January 14, 2000), 65 FR 3897 (January 25, 2000) (order approving File No. SR-NASD-99-11) (``SuperSOES Order'').

   * * * * *

   4720. SelectNet Service

   (a) No Change

   (b) No Change

   (c) Prohibition Regarding the Entry of Certain Preferenced Orders to Nasdaq National Market Execution System Market Makers

   No member may direct a SelectNet preferenced order to a Nasdaq National Market Execution System (``NNMS'') market maker (as defined in NASD Rule 4701) including that market maker's Agency Quote (as defined in NASD rule 4613) unless that order is designated as:

   (i) a non-liability order that is entered as an ``All-or-None'' order (``AON'') and is at least one normal unit of trading (i.e., 100 shares) in excess of the displayed quote to which the referenced order is directed; or

   (ii) a non-liability order that is entered as a ``Minimum Acceptable Quantity'' order (``MAQ''), with a MAQ value of at least one normal unit of trading in excess of the displayed quote to which the preferenced order is directed[.] ; or

   (iii) a non-liability order that is entered at a price that is inferior to the displayed quote to which the preferenced order is directed. The prohibitions of this paragraph shall not apply to preferenced orders sent by a UTP Specialist to an NNMS market maker or to preferenced orders sent by an NNMS market maker to a UTP Specialist. For purposes of this rule a ``UTP Specialist'' shall mean a broker/ dealer registered as a specialist in Nasdaq securities pursuant to the rules of an exchange that is a signatory to the Joint Self- Regulatory Organization Plan Governing the Collection, Consolidation and Dissemination of Quotation and Transaction Information for Exchange-Listed Nasdaq/National Market System Securities Traded On Exchanges On An Unlisted Trading Privilege Basis (``Nasdaq/NMS/UTP Plan''). * * * * *

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

   In its filing with the Commission, Nasdaq included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. Nasdaq has prepared summaries, set forth in sections (A), (B), and (C) below, of the most significant aspects of such statements.

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

   Currently, NASD Rule 4720(c) prohibits the entry of preferenced SelectNet orders to NNMS market makers unless those orders are designated by the sending party as either an ``All-or-None'' or ``Minimum Acceptable Quantity'' order that is at least one normal unit of trading (i.e., 100 shares) in excess of the displayed quote to which the preferenced order is directed. In response to input from market participants that desire greater flexibility in sending non-liability SelectNet orders in a SuperSOES environment, Nasdaq has determined to amend NASD Rule 4720(c) to provide an additional alternative method for sending non-liability messages to NNMS market makers. Specifically, Nasdaq proposes to adopt NASD Rule 4720(c)(iii), which will allow NNMS participants to enter preferenced SelectNet orders to NNMS market makers if the preferenced orders contain prices that are inferior to the quoted bids and/or offers to which they are directed. For example, if a SuperSOES market maker is quoting 20.00 bid and 20.03 offer, the proposed rule change would allow a market participant to preference that market maker with either an order to sell at 20.01or more, or an order to buy at 20.02 or less. Because these orders are not priced at levels that would obligate the receiving market maker to execute them under current firm quote standards, the NNMS market maker could choose to either ignore the orders or negotiate with the sending party to reach an agreement that would allow a trade to take place.

   Nasdaq notes that the proposed alternative method of sending non- liability SelectNet messages is consistent with the Nasdaq rules approved previously by the Commission \7\ that generally limit SelectNet to a negotiation function when accessing market maker quotes.\8\ Nasdaq adopted the limitation to reduce potential dual liability for market makers who under Nasdaq's current system may be forced to provide share amounts in excess of their displayed quote when they contemporaneously receive a liability SelectNet message and an execution through Nasdaq's Small Order Execution System.

   \7\ See SuperSOES Order, Supra note 6.

   \8\ Market makers and electronic communication networks (``ECNs'') will continue to be allowed to send liability SelectNet messages at the displayed price and size of the quotes of those ECNs that do not agree to become full participants in NNMS and provide automatic executions for orders received from NNMS participants. See SuperSOES Order, supra note 6. In addition, unlisted trading privilege (``UTP'') exchange specialists will continue to send SelectNet preferenced liability orders to NNMS market makers and NNMS market makers will continue to send SelectNet preferenced liability orders to UTP exchange specialists. See NASD Rule 4720(c).

   Based on the above, Nasdaq believes that the proposed rule change is consistent with the provisions of section 15A(b)(6) of the Act \9\ in that the proposal is designed to prevent fraudulent and manipulative acts and practices, 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.

   \9\ 15 U.S.C. 78o-3(b)(6).

   (B) Self-Regulatory Organization's Statement on Burden on Competition

   Nasdaq does not believe that the proposed rule change will impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.

   (C) Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others

   Written comments were neither solicited nor received with respect to the proposed rule change.

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

   Nasdaq represents that the proposed rule change would effect a change in an existing order entry or trading system that: (1) Does not significantly affect the protection of investors or the public interest; (ii) does not impose any

   [[Page 36022]]

   significant burden on competition; and (iii) does not have the effect of limiting the access to or availability of the system. Accordingly, the proposal, as amended, has become effective upon filing with the Commission pursuant to section 19(b)(3)(A) of the Act and Rule 19b- 4(f)(5) thereunder. At any time within 60 days of the filing of a such proposed rule change, the Commission may summarily abrogate such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act.

4. Solicitation of Comments

   Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether it is consistent with the Act. Persons making written submissions should file six copies thereof with the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. Copies of the submission, all subsequent amendments, all written statements with respect to the proposed rule change that are filedwith 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 at the Commission's Public Reference Section, 450 Fifth Street, NW., Washington, DC. Copies of such filing will also be available for inspection and copying at the principal office of the NASD. All submissions should refer to File No. SR-NASD-2001-40 and should be submitted by July 31, 2001.

   For the Commission, by the Division of Market Regulation, pursuant to delegated authority.\10\

   \10\ 17 CFR 200.30-3(a)(12).

   Jonathan G. Katz, Secretary.

   [FR Doc. 01-17133Filed7-9-01; 8:45 am]

   BILLING CODE 8010-01-M