[Federal Register Volume 65, Number 91 (Wednesday, May 10, 2000)]
[Notices]
[Pages 30167-30170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-11683]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42754; File No. SR-NASD-00-18]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. and 
Amendment No. 1 thereto Relating to the Entry of Locking/Crossing 
Quotations Prior to the Nasdaq Market Opening

May 3, 2000.
    Pursuant to Section 19(b0(1) of the Securities Exchange Act of 1934

[[Page 30168]]

(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 13, 2000, the National Association of Securities Dealers, Inc. 
(``NASD'' or ``Association;''), through its wholly owned subsidiary, 
the Nasdaq Stock Market, Inc. (``Nasdaq'', filed with the Securities 
and Exchange Commission (``Commission'') the proposed rule change as 
described in Items I, II, and III below, which Items have been prepared 
by Nasdaq. On April 18, 2000, the NASD and Nasdaq submitted Amendment 
No. 1 to the proposal.\3\ The Commission is publishing this notice, as 
amended, to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4
    \3\ See letter from Robert E. Aber, General Counsel and Senior 
Vice President, Nasdaq, to Katherine A. England, Assistant Director, 
Division of Market Regulation, Commission, dated April 14, 2000 
(``Amendment No. 1''). In Amendment No. 1, Nasdaq corrected an 
inadvertent misstatement contained in an example describing the 
proposal's operation.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq proposes to amend NASD Rule 4613(e) as it relates to the 
entry of locking/crossing quotations prior to the market's open. 
Proposed new language is italicized.

4613.  Character of Quotations

    (a)-(d) No Changes
    (e) Locked and Crossed Markets
    (1) A 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 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 market maker entering 
quotations in the same security.
    (C) Obligations Regarding Locked/Crossed Market Conditions Prior to 
Market Opening
    (i) No Change.
    (ii) Locked/Crossed market Between 9:20 and 9:29:59 a.m.--If a 
market maker locks or crosses the market between 9:20 and 9:29:59 a.m. 
Eastern Time, the market maker must immediately send through SelectNet 
to the market maker whose quotes it is locking or crossing a Trade-or-
move Message that is at the receiving market maker's quoted price and 
that is for at least 5,000 shares (in instances where there are 
multiple market makers to a lock/cross, the locking/crossing market 
maker must send a message to each party the lock/cross and the 
aggregate size of all such messages must be at least 5,000 shares); 
provided, however, that if a market participant is representing an 
agency order (as defined in subparagraph (iv) of this rule), the market 
participant shall be required to send a Trade-or-Move Message(s) in an 
amount equal to the agency order, even if that order is less than 5,000 
shares. A market maker that receives a Trade-or-Move Message during 
this period and that is a party to a lock/cross, must within 30 seconds 
of receiving such message either: fill the incoming Trade-or-Move 
Message for the full size of the message; or move its bid down (offer 
up) by a quotation increment that unlocks/uncrosses the market. A 
market participant shall not be subject to the 5,000 share requirement 
of this rule if the market participant is representing agency interest 
only.
    (iii) No Change.
    (iv) For the purposes of this rule ``agency order''shall mean an 
order(s) that is for the benefit of the account of a natural person 
executing securities transactions with or through or receiving 
investment banking services from a broker/dealer, or for the benefit of 
an ``institutional account'' as defined in NASD Rule 3110. An agency 
order shall not include an order(s) that is for the benefit of a market 
maker in the security at issue, but shall include an order(s) that is 
for the benefit of a broker/dealer that is not a market maker in the 
security at issue.
    (2)-(3) No Change.

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

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

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

    Nasdaq is proposing a rule to amend NASD Rule 4613(e), to permit 
market participants, when representing agency interests, to lock/cross 
the market at the actual size of the agency order, instead of 5,000 
shares as currently required by rule.
1. Background
    On February 7, 2000, the Commission approved amendments to NASD 
Rule 4613(e), which relate to the entry of locking/crossing quotes by 
Nasdaq market participants--market maker and electronic communications 
networks (``ECNs'')--prior to the market's open.\4\ As amended and 
approved by the Commission, NASD Rule 4613(e) provides that if a market 
participant locks/crosses the market between 9:20 a.m. and 9:29:59 a.m. 
Eastern Time, the market participant must send the market maker(s) or 
ECN(s) being locked/crossed, a SelectNet<Register> message that has 
appended to it a ``TRD OR MOV'' administrative message (``Trade-or-Move 
Message'') \5\ The aggregate size of these Trade-or-Move Messages must 
be at least 5,000 shares.\6\ (Thus, in order to lock/cross the market 
during this 10 minute before the market opens, a market participant 
must send a Trade-or-Move Message for 5,000 shares and be willing to 
trade at least this amount.)\7\ The party being locked or crossed must 
respond to the Trade-or Move Message within 30 seconds by trading in 
full with the incoming message or moving its quotation to a price level 
that resolves the locked/crossed market.\8\
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    \4\ See Exchange Act Release No. 42400 (February 7, 2000), 65 FR 
7407 (February 14, 2000) (order approving File No. SR-NASD-99-23 to 
amend NASD Rule 4613(e)).
    \5\ Id.
    \6\ Id.
    \7\ Under the current rule, a market participant would be 
prohibited from locking/crossing the market in the ten minute period 
prior to the open unless the actively locking/crossing market 
participant is willing to trade at least 5,000 shares.
    \8\ See note 4, above.
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2. Purpose
    The 5,000 share requirement that is currently in the rule requires 
market makers, ECNs, and customers thereof, who initiate a lock/cross 
to send a Trade-or Move(s) for a total of a least 5,000 shares. This 
requirement applies even if the market maker or ECN is representing an 
agency order for less than 5,000 shares. Therefore, as currently 
written and approved, an ECN, market maker, and customer thereof, may 
not lock/cross the market unless he/she is willing to trade at least 
5,000 shares. Some market participants have raised concerns that NASD 
Rule 4613(e) may exclude certain agency interests from being reflected 
in the pre-opening market if that interest is less than 5,000 
shares.\9\
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    \9\ Id.

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[[Page 30169]]

    In light of these concerns, Nasdaq proposes to amend NASD Rule 
4613(e) to allow a market participant to lock/cross the market for less 
than 5,000 shares if they are representing only agency orders. Under 
the amendment, if between 9:20 a.m. and 9:29:59 a.m., a market 
participant receives an agency order that would lock/cross the market, 
the market participant may lock/cross the market and sent a Trade-or 
Move Message for the ``actual size'' of the agency order, instead of 
5,000 shares. (For purposes of the amended rule, an agency order would 
not include an order for the account of a market maker in the issue, 
but would include orders for individuals, institutions and broker/
dealers whoa re not market makers in the security at issue). In 
essence, agency orders would be ``exempt'' from the 5,000 share 
requirement. Market participant whose proprietary quotes lock/cross the 
market between 9:20 and 9:29:59 a.m., would still be subject to the 
5,000 aggregate share size requirement for Trade-or Move Messages. 
Thus, if a market participant wishes to lock/cross the market while 
acting as principal, the market participant must send an aggregate of 
at least 5,000 shares, through a Trade-or Move Message, to the parties 
being locket/crossed.
    For example, at 9:21 a.m. the market is $20 to $20\1/8\, and MMA is 
alone at the inside offer. ECN1 receives an order from a public 
customer to sell shares at $20\1/8\. Under the current rule, ECN1 would 
be required to lock the market and then send a Trade-or Move Message to 
MMA for 5,000 shares. Under the proposed amendment, ECN1 would be 
required to send MMA a Trade-or Move message for the actual size of the 
agency order--800 shares.\10\ If the order that ECN1 received at 9:21 
a.m. represented an order that was for the account of MMB, ECN1 would 
be prohibited from locking for only 800 shares.
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    \10\ Under the prior language of NASD Rule 4613(e), ECN1 would 
have been required to send 5,000 shares along with its Trade-or Move 
SelectNet message. This 5,000 share size requirement of the Trade-
or-Move SelectNet message would have effectively precluded agency 
orders from participating in the opening market.
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    As a second example, at 9:21 a.m. the market is $20 to $29\1/8\, 
with MMA along at the inside offer. MMG receives an 800 share customer 
limit order to sell at $20\1/4\, which the customer has requested be 
displayed in the pre-opening. MMG also wishes to cross the market at 
the $20\1/4\ price, while acting in a proprietary capacity. Note that 
only the agency interest is exempt from the 5,000 share requirement. 
Accordingly, MMG must send a Trade-or Move Message for at least 5,800 
shares--5,000 covering his proprietary interest and 800 covering the 
customer limit order/agency.\11\ In short a market maker is not 
permitted to meet the 5,000 share requirement by ``free-riding'' off of 
its customer orders that customers specifically have requested be 
displayed and executed in the market prior to the open.
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    \11\ This assumes that the customer has an agreement with MMG 
that its limit order will be represented and potentially executed 
prior to the market's open.
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    The requirement that a market maker send a Trade-or Move Message 
for the actual size of agency interest plus 5,000 shares, only applies 
when a market maker wishes to lock/cross the market proprietary and 
simultaneously is displaying agency interest pursuant to an 
understanding with the customer. This requirement does not apply when 
the marker maker is holding agency interest where there is not 
understanding with the customer to have its order displayed and/or 
executed prior to the market's open, and the market maker otherwise is 
engaging in bona fide market making activity during the pre-opening 
period.
3. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A(b)(6) \12\ and Sections 11A of the 
Act.\13\ Section 15A(b)(6) \14\ requires that the rules of a registered 
national securities association are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principals 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. Section 11A(a)(1)(C) \15\ provides that it is in the public 
interest and appropriate for the protection of investors and the 
maintenance of fair and orderly markets to assure: (1) Economically 
efficient execution of securities transactions; (2) fair competition 
among brokers and dealers; (3) the availability to brokers, dealers and 
investors of information with respect to quotations and transactions in 
securities; (4) and the practicability of brokers executing investors 
orders in the best market; and (5) an opportunity for investors orders 
to be executed without the participation of a dealer.
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    \12\ 15 U.S.C. 78o-3(b)(6).
    \13\ 15 U.S.C. 78k-1(a).
    \14\ 15 U.S.C. 78o-3(b)(6).
    \15\ 15 U.S.C. 78k-1(a)(1)(C).
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    Nasdaq believes that the amendment to NASD Rule 4613(e) is 
consistent with Sections 15A(b)(6) and 11A(a)(1)(C).\16\ The proposed 
amendments create equal access among market participants (market makers 
and ECNs) consistent with Sections 15A(b)(6) and 11A(a)(1)(C).\17\ 
Locked/crossed markets present serious market integrity and investor 
protection issues, as they disrupt the orderly function of the market 
and in turn have an impact on the processing of investor orders. Nasdaq 
believes that by allowing agency orders to be displayed in the market 
at their actual share sizes for purposes of resolving locked/crossed 
markets will increase investor protection by providing; (1) Greater 
access to the market, (2) increased liquidity, and (3) transparency of 
orders in the marketplace. Nasdaq believes that these benefits will 
provide greater trading, processing, and pricing efficiency and 
stability in the pre-opening market. Nasdaq also believes that by 
allowing agency quotes to be sent at ``actual size'' rather than at the 
5,000 share size, market participants will have increased opportunities 
to evaluate and access the depth and liquidity of securities prior to 
the opening of the market.
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    \16\ 15 U.S.C. 78o-3(b)(6) and 15 U.S.C. 78k-1(a)(1)(C).
    \17\ 15 U.S.C. 78o-3(b)(6) and 15 U.S.C. 78k-1(a)(1)(C).
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(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, as amended.

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

    Written comments were neither solicited nor received.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory

[[Page 30170]]

organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the proposal, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-
0609. 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 will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to the File No. SR-NASD-00-18 and 
should be submitted by May 31, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ See 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-11683 Filed 5-9-00; 8:45 am]
BILLING CODE 8010-01-M