[Federal Register Volume 65, Number 110 (Wednesday, June 7, 2000)]
[Notices]
[Pages 36191-36192]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-14250]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42852; File No. SR-NASD-00-17]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc. Relating 
to Minimum Quotation Sizes in the OTC Bulletin Board

May 30, 2000.
    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 April 10, 2000, the National Association of Securities Dealers, Inc. 
(``NASD''), 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. 
The Commission is publishing this notice 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.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq proposes an amendment to NASD Rule 6750 that would modify 
the minimum quotation sizes for securities quoted at a price exceeding 
$200 in the OTC Bulletin Board (``OTCBB''). Below is the text of the 
proposed rule change. Proposed new language is in italic; proposed 
deletions are in brackets.
6750. Minimum Quotation Size Requirements For OTC Equity Securities
    (a) Every member firm that functions as a market maker in OTC 
Equity Securities by entering firm quotations into the OTC Bulletin 
Board Service (OTCBB) (or any other inter-dealer quotation system that 
permits quotation updates on a real-time basis) must honor those 
quotations for the minimum size defined in the table below. In this 
regard, it is the market maker's responsibility to determine the 
minimum size requirement applicable to its firm bid and/or offer in 
each of its registered securities (excluding OTC Equity Securities for 
which the OTCBB will not accept firm quotations). Depending on the 
price level of the bid or offer, a different minimum size can apply to 
each size of the market being quoted by the member firm in a given 
security.

------------------------------------------------------------------------
                                                               Minimum
                   Price  (bid or offer)                      quote size
------------------------------------------------------------------------
0-.50 *....................................................        5,000
.51-1.00...................................................        2,500
1.01-10.00.................................................          500
10.01-100.00...............................................          200
100.01-200.00..............................................          100
[200.01-+..................................................          50]
200.01-500.................................................           25
500.01-1000................................................           10
1000.01-2500...............................................            5
2500.01+...................................................           1
------------------------------------------------------------------------
* The OTCBB can accept bids/offers expressed in fractions as small as 1/
  256 or in decimals up to six places. In applying the price test for
  minimum quotation size, any increment beyond an upper limit in the
  right hand column will trigger application of the minimum quote size
  for the next tier. For example, a bid (or offer) of $.505 must be firm
  for a size of 2,500 shares.

    [A Nasdaq officer at the Executive Vice President level or above, 
within its discretion, may modify the minimum quotation size for those 
securities with a price exceeding $200.]
    (b) 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

1. Purpose
    Nasdaq is proposing to modify the minimum quotation size for 
securities quoted on the OTCBB that exceed a price of $200 per share. 
Nasdaq believes that this modification is necessary to correct a 
previously unforeseen problem with the schedule contained in Rule 6750, 
which presently mandates that securities priced over $200 per share be 
traded in blocks of 50 shares or more.\3\ For certain highly priced 
and/or thinly traded securities, this rule has had an undesired and 
detrimental effect on transparency and liquidity.
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    \3\ The Commission notes that, in SR-NASD-99-32, the NASD added 
a provision to Rule 6750 allowing some Nasdaq officers to modify the 
minimum quotation size for securities with a price greater than $200 
per share. See Exchange Act Release No. 41907 (Sept. 23, 1999), 64 
FR 52817 (Sept. 30, 1999).
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    Rule 6750 was originally approved by the Commission in 1993 \4\ 
during the early stages of the OTCBB service. Prior to implementation 
of the rule, all priced quotations on the OTCBB were required to be 
firm for blocks of 100 shares or more. This approach soon proved 
unworkable for lower priced securities for which a quote of 100 shares 
could represent an insignificant aggregate dollar value commitment to 
the market.
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    \4\ See Exchange Act Release No. 32570 (July 1, 1993), 58 FR 
36725 (July 8, 1993).
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    To remedy this situation, the NASD implemented this minimum 
quotation size rule for securities priced at $200 per share and below 
on a ``graduated'' or ``tired'' basis.\5\ For securities quoted

[[Page 36192]]

at 50 cents per share or less, the market maker quoting such security 
would be required to honor that quotation for a minimum of 5,000 
shares. This approach was extended up to $200 per share, with different 
minimum block sizes at 2,500, 500, 200, and 100 shares. For all 
quotations exceeding $200 per share, the minimum quote size was 
determined to be 50 shares.
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    \5\ This requirement applies only to market makers entering 
priced quotations. Market makers are permitted to enter unpriced 
indications of interest into the OTCBB, see NASD Rule 6520, which 
are not held to the minimum quotation size standard.
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    Since implementation of this rule, there have been unanticipated 
changes to the OTCBB. Among those changes has been the quotation of 
certain securities for thousands of dollars per share, and, in a few 
isolated instances, securities quoted in excess of $100,000 per share. 
The presence of these highly priced securities was not considered when 
Rule 6750 was originally proposed with the smallest minimum quotation 
size of 50 shares. A situation has resulted in which market makers have 
been unwilling to enter priced quotations for such highly priced and 
thinly traded securities for fear of potentially significant liability 
to their proprietary accounts.
    To alleviate the potential exposure of quoting 50 shares of these 
highly priced securities, market makers have ceased entering quotations 
and instead post only indications of interest for these securities into 
the OTCBB. While posting an indication of interest is permitted in the 
OTCBB, the purpose of the OTCBB or any inter-dealer quotation medium is 
to permit multiple market participants to obtain quickly and 
efficiently the best bid or offer in a security and to execute the 
transaction without unnecessary delay. Additionally, priced quotations 
create a more competitive market and foster enhanced price discovery, 
ultimately benefiting the investing public.
    Recognizing these goals and the present problems caused by the lack 
of flexibility in Rule 6750, the NASD recently proposed and was granted 
discretionary authority from the Commission to modify the tier sizes 
for securities quoted in excess of $200.\6\ This authority was 
conferred to alleviate a pressing situation while providing Nasdaq with 
the necessary time to formulate and approve a permanent proposal for 
minimum quotation sizes. Accordingly, Nasdaq now submits this proposal 
to modify permanently the tier sizes for OTCBB securities quoted at 
prices in excess of $200 per share. The proposed new tier sizes were 
formulated to comport with the objectives of the original rule, 
effectively requiring that each quotation represent trading interest of 
approximately $5,000 to $20,000. At the same time, Nasdaq proposes to 
delete from Rule 6750 the provision granting certain officers of the 
Nasdaq discretionary authority to modify tier sizes, as this authority 
will no longer be necessary.
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    \6\ See supra note 3.
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of sections 15A(b)(6) and 15A(b)(11) of the Act.\7\ 
Section 15A(b)(6) requires, in part, that the rules of a registered 
national securities association be designed, among other things, to 
prevent fraudulent and manipulative acts and practices, to promote just 
and equitable principals to 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 15A(b)(11) requires, among other things, that the 
rules of a registered national securities association be designed to 
produce fair and informative quotations, to prevent fictitious or 
misleading quotations, and to promote orderly procedures for 
collecting, distributing, and publishing quotations.
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    \7\ 15 U.S.C. 78o-3(b)(6) and (11).
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    Nasdaq believes that the proposed rule specifically promotes the 
objectives of sections 15A(b)(6) and 15A(b)(11), respectively, by 
facilitating transactions free of impediments to a free and open market 
while producing fair and informative quotations. The rule will 
encourage market makers to display firm quotations in OTCBB securities, 
thereby providing increased transparency, competition, and price 
discovery.

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.

(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 Nasdaq 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 foregoing, including whether the proposed rule 
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 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 File No. SR-NASD-00-17 and should be 
submitted by June 28, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-14250 Filed 6-6-00; 8:45 am]
BILLING CODE 8010-01-M