Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices 3987

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

2 17 CFR 240.19b–4.

3See Securities Exchange Act Release No. 41296

(April 15, 1999), 64 FR 19844. In addition to

providing notice of the current proposal, Securities

Exchange Act Release No. 41296 also re-opened the

comment period for File No. SR–NASD–98–17,

regarding Nasdaq’s proposal to establish an

integrated order delivery and execution system

(‘‘IODES Proposal’’). The IODES Proposal was

published for comment in the Federal Register on

March 12, 1998. See Securities Exchange Act

Release No. 39718 (March 4, 1998), 63 FR 12124.

Subsequently, the Commission extended the

comment period for the IODES Proposal through

May 8, 1998. See Securities Exchange Act Release

No. 39794 (March 25, 1998), 63 FR 15471 (March

31, 1998).

4A list of the commenters appears in Appendix

A.

5See letter from Robert E. Aber, General Counsel,

Nasdaq, to Belinda Blaine, Associate Director,

Division of Market Regulation (‘‘Division’’),

Commission, dated August 24, 1999 (‘‘Amendment

No. 1’’); letter from Thomas P. Moran, Assistant

General Counsel, Nasdaq, to Katherine A. England,

Assistant Director, Division, Commission, dated

December 8, 1999 (‘‘Amendment No. 2’’); and letter

from Thomas P. Moran, Assistant General Counsel,

Nasdaq, to Richard Strasser, Assistant Director,

Division, Commission, dated January 4, 2000

(‘‘Amendment No. 3’’). Amendment Nos. 1 and 2

responded to concerns raised by the commenters.

Specifically, Amendment No. 1 discussed

electronic communication network (‘‘ECN’’)

participation in the proposed Nasdaq National

Market System (‘‘NNMS’’); ECN reserve size

interaction with NNMS; unlisted trading privilege

(‘‘UTP’’) exchange participation in NNMS; the

elimination of SelectNet preferencing; NNMS fees;

order entry firm participation in NNMS; the

timeframe for implementing NNMS; and the

continuation of SelectNet. Amendment No. 2

discussed the five-second interval delay between

automatic executions; the elimination of SelectNet

liability orders; SelectNet preferencing away from

the inside market; technology concerns; the

potential for manipulative order entry strategies; the

reserve size feature; the maximum order size for

NNMS; and the elimination of the No

Decrementation functionality. Amendment No. 3

revised NASD Rule 4730 (to be renumbered as

NASD Rule 4753) to provide that the delay between

SOES executions during locked and crossed

markets for market makers in SmallCap securities

will remain at five seconds.

6See Securities Exchange Act Release Nos. 21433

(October 29, 1984), 49 FR 44042 (November 1, 1984)

(File No. SR–NASD–84–26) (notice of proposal to

implement SOES); and 21743 (February 12, 1985),

50 FR 7432 (February 22, 1985) (order approving

File No. SR–NASD–84–26).

7See Securities Exchange Act Release No. 25791

(June 9, 1988), 53 FR 22594 (June 16, 1988) (order

approving File No. SR–NASD–88–1) (‘‘1988

Order’’).

8See 1988 Order and NASD Rule 4710(g).

9See NASD Rule 4710(g).

10See 1988 Order and NASD Rule 4611(f).

11The Commission approved SelectNet, which

originally was referred to as the Order Confirmation

Transaction Service, on a permanent basis in 1988.

See Securities Exchange Act Release No. 25690

(May 11, 1988), 53 FR 17523 (May 17, 1988) (order

approving File No. SR–NASD–88–11). See also

Securities Exchange Act Release Nos. 28636

(November 21, 1990), 55 FR 49732 (November 30,

1990) (order approving File No. SR–NASD–90–51)

(implementing enhancements to SelectNet); and

30581 (April 14, 1992), 57 FR 14596 (April 21,

1992) (order approving File No. SR–NASD–91–51)

(expanding SelectNet’s hours of operation to

include a pre-opening session from 9:00 a.m. to 9:30

a.m. Eastern Time and an after-hours session from

4:00 p.m. until 5:15 p.m. Eastern Time).

Commission, and recording secretaries

will attend the closed meeting. Certain

staff members who have an interest in

the matters may also be present.

The General Counsel of the

Commission, or his designee has

certified that, in his opinion, one or

more of the exemptions set forth in 5

U.S.C. 552b(c)(4), (8), (9)(A) and (10)

and 17 CFR 200.402(a)(4), (8), (9)(A) and

(10), permit consideration for the

scheduled matters at the closed meeting.

Commissioner Hunt, as duty officer,

voted to consider the items listed for the

closed meeting in a closed session.

The subject matters of the closed

meeting scheduled for Tuesday, January

25, 2000, will be:

A litigation matter;

Institution and settlement of

injunctive actions; and

Institution and settlement of

administrative proceedings of an

enforcement nature.

At times, changes in Commission

priorities require alterations in the

scheduling of meeting items. For further

information and to ascertain what, if

any, matters have been added, deleted

or postponed, please contact:

The Office of the Secretary at (202)

942–7070.

Dated: January 20, 2000.

Jonathan G. Katz,

Secretary.

[FR Doc. 00–1806 Filed 1–21–00; 2:40 pm]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–42344; File No. SR–NASD–

99–11]

Self-Regulatory Organizations; Order

Approving Proposed Rule Change and

Notice of Filing and Order Granting

Accelerated Approval to Amendment

Nos. 1, 2, and 3 to the Proposed Rule

Change by the National Association of

Securities Dealers, Inc., To Modify the

NASD’s Small Order Execution System

and SelectNet Service

January 14, 2000.

I. Introduction

On February 5, 1999, 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

(‘‘SEC’’ or ‘‘Commission’’) a proposed

rule change pursuant to Section 19(b)(1)

of the Securities Exchange Act of 1934

(‘‘Act’’) 1 and Rule 19b–4 thereunder 2 to

amend the rules governing Nasdaq’s

Small Order Execution System

(‘‘SOES’’) and SelectNet Service

(‘‘SelectNet’’). Notice of the proposed

rule change was published for comment

in the Federal Register on April 22,

1999.3 The Commission received 79

comment letters regarding the

proposal.4 On August 24, 1999,

December 8, 1999, and January 4, 2000,

Nasdaq filed Amendment Nos. 1, 2, and

3 to the proposal.5 This order approves

the proposed rule change, as amended.

II. Description of the Proposal

A. Background

The NASD implemented SOES in

1984 to provide for the automatic

execution of small retail agency orders

at the best bid or offer (the ‘‘inside

market’’).6 Orders entered into SOES

generally are routed automatically on a

rotating basis to the SOES market

makers displaying the best bid or ask

price. SOES also allows market

participants to ‘‘preference’’ (i.e., direct)

an order to a designated market maker.7

SOES currently provides for ‘‘tiered’’

maximum order sizes in Nasdaq

National Market (‘‘NNM’’) securities of

1000, 500, or 200 shares, depending on

the trading characteristics of a security.8

The maximum SOES order size for

Nasdaq SmallCap securities is 500

shares.9 SOES participation is

mandatory for all market makers in

NNM securities 10 and voluntary for

market makers in Nasdaq SmallCap

securities. SOES reports trades for

public dissemination and sends both

sides of a transaction to the applicable

clearing corporations designated for

clearance and settlement.

SelectNet is an electronic, screenbased order routing system that allows

market makers and order entry firms

(referred to collectively as

‘‘participants’’) to negotiate securities

transactions in Nasdaq securities

through computer communications

rather than by telephone.11 Unlike

SOES, SelectNet does not provide

automatic executions. SelectNet allows

participants to negotiate for a larger size

or a price superior to the current inside

quote. In addition, SelectNet

participants may indicate that an order

or counter-offer will be in effect from

between three and 99 minutes, specify

a day order, and indicate whether price

or size are negotiable or whether a

specific minimum quantity is

acceptable. Participants may accept,

price improve, counter, or decline a

3988 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices

12Nasdaq notes that the Firm Quote Rule does not

apply if: (1) prior to the receipt of an order in a

security, a broker or dealer has communicated to its

exchange or association a revised quotation size or

a revised bid or offer; or (2) at the time an order

in a security is presented, a broker or dealer is in

the process of effecting a transaction in that

security, and immediately after the completion of

that transaction, the broker or dealer communicates

to its exchange or association a revised quotation

size or a revised bid or offer for the security.

13See Securities Exchange Act Release No. 38156

(January 10, 1997), 62 FR 2415 (January 16, 1997)

(order approving File No. SR–NASD–96–43).

14See Securities Exchange Act Release No. 38191

(January 22, 1997), 62 FR 4562 (January 30, 1997)

(notice of filing and immediate effectiveness of File

No. SR–NASD–97–02).

15For Nasdaq SmallCap securities, SOES

generally will remain unchanged.

16The current order size maximums for NNM

securities through SOES are 1,000, 500, or 200

shares.

17After SOES executes an unpreferenced market

order or marketable limit order against a SOES

market maker, the market maker currently is not

required to execute another unpreferenced SOES

order in that security at the same bid or offer until

17 seconds have elapsed, absent a quotation update

by the market maker within the 17-second period.

See Securities Exchange Act Release No. 39490

(December 24, 1997), 63 FR 897 (January 7, 1998)

(order approving File No. SR–NASD–97–50).

18Nasdaq filed a proposal with the Commission

that would permit the separate display of customer

orders by market makers in Nasdaq through a

market maker agency identification symbol

(‘‘agency quote’’). See Securities Exchange Act

Release No. 41128 (March 2, 1999), 64 FR 12198

(March 11, 1999) (notice of filing of SR–NASD–99–

09) (‘‘Agency Quote Proposal’’). The Commission

subsequently extended the comment period for the

Agency Quote Proposal. See Securities Exchange

Act Release No. 41243 (April 1, 1999), 64 FR 17428

(April 9, 1999). The Agency Quote Proposal

currently is pending with the Commission.

19 In addition, NNMS’s autoquote refresh function

would allow a market maker whose displayed

proprietary quotation and reserve size have been

decremented to zero due to NNMS executions to

elect to have Nasdaq refresh the market maker’s

quotation (1) at a price interval designated by the

market maker; and (2) to the size level designated

by the market maker or, in the absence of such a

size level designation, to the automatic refresh size.

SelectNet order. If a participant elects to

counter an offer, SelectNet allows the

participants to negotiate by exchanging

counter-offers until they reach an

agreement. After the participants reach

an agreement, the execution is ‘‘locked

in,’’ reported to the tape for public

dissemination, and sent to the clearing

organization for comparison and

settlement.

SelectNet currently allows

participants to broadcast orders to all

market participants or to preference an

order to a designated market maker.

Although SelectNet is an order delivery

service rather than an order execution

service, Nasdaq believes that a

preferenced SelectNet order presented

to a market maker at its displayed quote

generally gives rise to liability under

Exchange Act Rule 11Ac1–1 (‘‘Firm

Quote Rule’’) for the market maker to

execute the transaction at that price.12

As discussed more fully below, Nasdaq

proposes to eliminate most SelectNet

liability orders.

Nasdaq has designated SelectNet as

the link to the electronic

communications networks (‘‘ECNs’’)

pursuant to the Commission’s Order

Handling Rules.13 SelectNet also allows

exchanges that trade Nasdaq securities

on an unlisted trading privilege (‘‘UTP’’)

basis to access Nasdaq market makers.14

As discussed more fully below,

SelectNet will continue to perform both

of these functions under the current

proposal.

Nasdaq maintains that although SOES

and SelectNet provide valuable services

to market participants, the operation of

two separate and independent execution

systems has resulted in the longstanding problem of potential dual

liability for market makers. According to

Nasdaq, multiple access points to a

market maker’s quote, through SOES

and SelectNet as well as a firm’s

internal order delivery and telephone

facilities, can routinely subject market

makers to unintended double liability

for orders that reach a market maker’s

quote at or near the same time through

different systems. Nasdaq asserts that

the potential for unexpected and

increased order liability reduces market

maker incentives to commit capital and

display larger quote sizes, thereby

depriving the Nasdaq market of valuable

liquidity.

Nasdaq proposes to implement a new

trading environment to address these

problems. Specifically, Nasdaq proposes

to modify SOES and SelectNet to (1) Reestablish SelectNet as a non-liability

order delivery and execution system for

NNM securities; and (2) Recast SOES as

it is used to trade NNM securities.15 The

recast SOES will be called the Nasdaq

National Market Execution System

(‘‘NNMS’’). Nasdaq believes that the

proposed changes will reduce instances

of dual liability in the most active

Nasdaq securities while improving the

speed of executions and increasing the

access of all market participants to the

full depth of a security’s trading

interest.

B. NNMS

As proposed, NNMS would: (1)

Increase the maximum order size for

NNM securities that are eligible for

automatic execution to 9,900 shares; 16

(2) Allow market makers and order

entry firms to enter proprietary orders

into NNMS and obtain automatic

executions for proprietary and agency

orders in NNM securities; (3) Reduce

the current 17-second delay between

executions against the same market

maker to five seconds; 17 (4) Enable

NNM orders to interact automatically

with a market maker’s displayed size

and reserve size, including, if approved

by the Commission in a separate

pending proposal, a market maker’s

agency quotes,18 after yielding priority

to displayed quotations at the same

price; (5) Eliminate the No

Decrementation (‘‘No Dec’’) feature for

NNM securities, which currently allows

continuous executions against a market

maker’s quote at the same price without

decrementing the quoted size; and (6)

Eliminate the SOES preferencing feature

for NNM securities. Several of these

changes are discussed in more detail

below.

1. Automatic Executions for Orders of

up to 9,900 Shares in NNM Securities

SOES currently permits the automatic

execution of retail agency orders of 200,

500, or 1,000 shares at the inside

market. NNMS will provide automatic

executions at the inside market for

orders of up to 9,900 shares in NNM

securities. Automatic executions

through NNMS will be available not

only for retail agency orders, but also for

market makers’ proprietary orders and

for the orders of order entry firms.

2. Reserve Size

The NNMS reserve size functionality

would allow a market maker or its

customer to display publicly part of the

full size of its order or interest with the

remainder of its order or interest held in

undisplayed reserve. The undisplayed

portion of the order or interest would be

displayed in whole or in part as the

displayed portion of the order or

interest is executed. To use the reserve

size function, a market maker must

initially display a minimum of 1,000

shares in its quotation, or in its agency

quotation, if the Commission approves

the display of separate agency quotes,

and it must refresh its proprietary or

agency quote to a minimum of 1,000

shares. After a market maker’s or its

customer’s displayed quotation was

decremented to zero due to NNMS

executions, Nasdaq would refresh the

market maker’s or its customer’s

displayed size from reserve size to a

level designated by the market maker or

its customer or, in the absence of such

a designation, to the automatic refresh

size (i.e., 1,000 shares).19 A market

maker that wished to refresh a displayed

proprietary or agency quote at the inside

market at the same price level would be

required to refresh his proprietary or

agency quotation at the level of 1,000

shares or more to continue using reserve

size. A market maker that wished to

refresh and display his proprietary or

agency quote at the same inside price at

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices 3989

20This restriction would not apply for interim

executions against a market maker’s non-updated

proprietary or agency quote. For example, if a

market maker displaying an initial proprietary or

agency quotation of 1,000 shares with 5,000 shares

in reserve were accessed automatically by NNMS

for 300 shares in displayed size, the market maker

or its customer would be allowed to continue to

display its remaining 700 shares and keep 5,000

shares available in reserve size. If the market maker

or its customer subsequently updated either its

displayed or reserve size, or its quoted price, the

market maker would be obligated to increase the

displayed size of its proprietary or agency quote to

1,000 shares to continue to use NNMS’s reserve size

feature.

21Market makers will continue to have the

ability, through Nasdaq’s automatic quote update

facility, to pre-select a tick value and have Nasdaq

refresh the market maker’s proprietary quote away

from the inside market. This capability will not

apply to a market maker’s agency quote because

that quotation would represent agency interest. If a

market maker’s quote is refreshed to a different

price or size level, another order will not be

delivered to that market maker for five seconds after

that quote is refreshed at the new price or size level.

Nasdaq recently proposed an order display facility

(‘‘Order Display Facility Proposal’’) that would

eliminate the 20-day suspension. See Securities

Exchange Act Release No. 42166 (November 22,

1999), 64 FR 69125 (December 6, 1999) (notice of

filing of File No. SR–NASD–99–53). Under the

Order Display Facility Proposal, if a market maker’s

quote/order decremented to zero, and the market

maker did not update its principal quote/order,

transmit an attributable revised quote/order to

Nasdaq, or have another principal (i.e., non-agency

quote) attributable quote/order in the system,

Nasdaq would place the market maker’s quote (both

sides) in a closed state for three minutes. At the end

of that time, if the market maker did not voluntarily

update or withdraw its quote from the market,

Nasdaq would refresh the market maker’s quote/

order to 100 shares at the lowest market maker bid

and highest market maker offer being displayed in

that security at that time and reopen the market

maker’s quote.

22SelectNet will continue to accept orders of any

size (subject to the current 999,999-share system

limit) for Nasdaq SmallCap securities.

23Nasdaq notes that this is not to be understood

to prohibit liability for each of potentially two

quotes displayed by market makers under the

Agency Quote Proposal.

a size less than 1,000 shares would be

permitted to do so, but would not be

permitted to use NNMS’s reserve size

feature.20

Orders entered in NNMS would be

executed automatically against

displayed quotations and reserve size

(including agency quotes, if the

Commission approves the display of

separate agency quotes), in price/time

priority. For quotations at the same

price level, NNMS would yield priority

to all displayed quotations over reserve

size, so that NNMS would execute

against displayed quotations in time

priority and then against reserve size in

time priority.

3. Elimination of the No Dec Feature for

NNM Securities

The No Dec feature allows continuous

executions against a market maker’s

quotation at the same price without

decrementing the quoted size. Nasdaq

proposes to eliminate the No Dec feature

for NNM securities. Nasdaq believes

that the No Dec feature has become less

important because market makers now

are able to manage their quotations by

displaying their actual size. In addition,

Nasdaq believes that the No Dec feature

will become less important in a market

where market makers will have the

ability to refresh their quotations at a

size they determine. Nasdaq also

believes that the No Dec feature inhibits

quote competition among market

participants and discourages the full

display of trading interest.

4. Elimination of SOES Preferencing

Nasdaq proposes to eliminate the

existing SOES preferencing feature for

NNM securities because it is

inconsistent with the processing of

orders in time priority as contemplated

in Nasdaq’s new trading environment.

Nasdaq also believes that preferencing

in an automatic execution system

reduces incentives for market makers to

compete aggressively for orders by

showing the full size and true price of

their trading interest. Moreover, Nasdaq

believes that the preferencing feature

might place the agency quotes of public

customers at a disadvantage.

5. Execution Fees

NNMS would impose a $0.50 per side

fee for each execution. To reduce user

cost and facilitate the use of NNMS’s

reserve size functionality, a

simultaneous and instantaneous

execution against an NNMS

participant’s displayed size and reserve

size would be treated for billing

purposes as a single execution.

6. Penalties for Withdrawals

Like today, under the proposal, a

market maker’s failure to update a fully

exhausted quote would result in the

system placing the market maker’s quote

in a ‘‘closed’’ state that, if not updated

within five minutes, would be cause for

suspension of the market maker’s quote

for 20 business days.21

C. Modifications to SelectNet

Through rule changes requiring the

use of ‘‘oversized’’ preferenced

SelectNet orders, Nasdaq proposes to

eliminate the use of most SelectNet

liability orders and thereby re-establish

SelectNet as an order delivery and

negotiation system. Specifically, subject

to the exceptions discussed below,

Nasdaq proposes to revise its rules to

implement an ‘‘oversized order

requirement,’’ which will prohibit

members from directing a SelectNet

preferenced order to an NNMS market

maker, including the market maker’s

agency quote, if the Commission

approves the display of separate agency

quotes, unless the preferenced order is

designated as either (1) ‘‘All-or-None’’

(‘‘AON’’) of a size that is at least 100

shares greater than the displayed

amount of the NNMS market maker’s

quote to which the order is directed; or

(2) ‘‘Minimum Acceptable Quantity’’

(‘‘MAQ’’) with a MAQ value of at least

100 shares greater than the displayed

amount of the NNMS market maker’s

quote to which the order is directed.

SelectNet will be programmed to reject

preferenced messages that fail to satisfy

these requirements.22 In Nasdaq’s view,

the oversized order requirement will

ensure that market makers are not

subject to liability under the Firm Quote

Rule for SelectNet preferenced orders

directed to them. Accordingly, Nasdaq

believes that the proposal will reduce

instances of dual liability resulting from

the receipt of orders through

asynchronous systems. Nasdaq notes

that the recipient of an oversized NNM

SelectNet order may choose to execute

the incoming order or initiate an

electronic negotiation in response to the

message.23

As discussed below, the oversized

order requirement will not apply to UTP

exchanges, which will be able to send

and receive SelectNet liability orders. In

addition, market participants will

continue to use SelectNet liability

orders to access ECNs that choose to

participate in Nasdaq’s new trading

environment as order entry ECNs.

D. UTP Exchange Participation

Under the proposal, SelectNet will

continue to serve as the primary linkage

between UTP exchanges and Nasdaq.

UTP exchanges will continue to receive

and be obligated to execute preferenced

SelectNet liability orders, and they will

retain their ability to send SelectNet

preferenced liability orders to Nasdaq

market makers. Although a market

maker may be subject to dual liability if

a UTP exchange accesses the market

maker with a SelectNet liability order

and, at the same time, an NNMS market

maker or order entry firm accesses the

market maker via NNMS, Nasdaq

believes that the potential dual liability

will be manageable.

E. ECN Participation

An ECN will be able to participate in

NNMS as either an order entry ECN or

as a full participant ECN. The manner

in which an ECN chooses to participate

in NNMS will be governed by an

3990 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices

24See NASD Rule 4623(b)(3).

25Telephone conversation between Thomas P.

Moran, Assistant General Counsel, Nasdaq, and

Yvonne Fraticelli, Special Counsel, Division,

Commission, on October 5, 1999.

26See Amendment No. 3, supra note 5. The

proposal, as amended, retains proposed changes to

the rule text of renumbered NASD Rule 4753(b)(3)

to clarify that the interval for execution of orders

against the quotations of market makers that have

locked or crossed the market applies to SmallCap

securities as well as NNM securities. Telephone

conversation between Thomas P. Moran, Assistant

General Counsel, Nasdaq, and Ira L. Brandriss,

Division, Commission, on January 14, 2000.

27A list of the commenters appears in Appendix

A.

28The SIA is comprised of over 740 North

American securities firms.

29 29 The ICI is an association of 7,576 mutual

fund companies, 479 closed-end investment

companies, and 8 sponsors of unit investment

trusts.

30See Schwab Letter, Appendix A. 31Thirteen commenters who supported the

proposal are persons associated with a Nasdaq

market maker, the Security Investment Company of

Kansas City. These commenters submitted identical

letters which maintained that the proposal will

provide prompt access to the best prices in the

Nasdaq market, reduce the potential dual liability

of market makers, and improve the speed of

executions. See Halford Letter, Cave Letter, Gaines

Letter, Hook Letter, Kitzmiller Letter, Frankel

Letter, Schmidt Letter, Mytinger Letter, McCann

Letter, Turpin Letter, Malmstrom Letter, Boyle

Letter, Means Letter, and Weisenborn Letter,

Appendix A. The Kansas City Securities

Association (‘‘KCSA’’) submitted a similar letter.

See KCSA Letter, Appendix A.

32See SIA Letter, Appendix A. 33See ICI Letter, Appendix A. 34See Mktmaven Letter, Appendix A. 35See Morgan Stanley Letter, Appendix A.

Morgan Stanley believed that the proposal should

be modified to (1) retain the existing 17-second

delay in executions against a market maker; (2)

retain the No Dec feature for market makers’

proprietary quotations; (3) provide a firm quote

compliance facility that would allow a market

maker to indicate that it has received a telephone

order to trade at its displayed quotation; and (4)

modify the availability of the 9,900-share NNMS

maximum order size.

36See ETA Letter, Appendix A. The ETA is an

association of order entry and other related firms.

37See DLJ Letter, Appendix A. DLJ believed that

Nasdaq should not implement the proposed

changes to SOES and SelectNet prior to the year

2000. In addition, DLJ stated that it would require

at least six months from the time Nasdaq publishes

its changes to the Application Programming

Interface (‘‘API’’) for DLJ to program, test, and

install new systems. As discussed more fully below,

other commenters also expressed concern regarding

the time for implementing the proposed changes.

addendum to the Nasdaq Workstation II

Subscriber Agreement for ECNs.24

An order entry ECN will participate in

Nasdaq in substantially the same

manner as ECNs participate in Nasdaq

today. Market participants will continue

to access order entry ECNs via the

SelectNet linkage and will be able to

send preferenced SelectNet messages (i.e.,

liability orders) of up to 999,999 shares

to order entry ECNs. Unlike a full

participant ECN, an order entry ECN

will not provide automatic executions

for orders received from NNMS

participants. An order entry ECN will be

able to send oversized SelectNet orders

to NNMS market makers and other

ECNs. In addition, an order entry ECN

may request order entry capability in

NNMS, which will allow the ECN to

obtain automatic executions against the

quotations of NNMS market makers,

including agency quotations, if the

Commission approves the display of

separate agency quotes.

A full participant ECN will agree to

provide automatic executions for orders

the ECN receives from other NNMS

participants through NNMS. A full

participant ECN will not receive

SelectNet preferenced liability orders.25

Like an order entry ECN, a full

participant ECN may request order entry

capability in NNMS, which will allow

the ECN to obtain automatic executions

against the quotations of NNMS market

makers, including agency quotations, if

the Commission approves the display of

separate agency quotes.

Due to the time and the technology

constraints affecting some ECNs, Nasdaq

believes that, on an interim basis, ECNs

should have an option regarding their

manner of participation in Nasdaq’s

new system. Accordingly, Nasdaq does

not propose at this time to require all

ECNs to register as full participant

ECNs, although Nasdaq will reconsider

this issue in the future.

F. Nasdaq SmallCap Securities

For Nasdaq SmallCap securities, the

trading rules for automatic execution

through SOES will remain unchanged.

Accordingly, participation in the

automatic execution system for

SmallCap securities will continue to be

voluntary, and automatic executions

will be available only for the small

orders of public customers. The current

maximum order size limits also will

remain in effect. After Nasdaq has had

experience with NNMS, it will consider

whether the functionality of the NNMS

system should be made available for the

trading of SmallCap securities.

Nasdaq originally proposed to revise

NASD Rule 4730(b)(3) (to be

renumbered as NASD Rule 4753(b)(3))

to provide that during locked and

crossed markets, SOES will execute

orders against the quotations of market

makers in SmallCap securities that are

locked or crossed at 17-second intervals,

rather than five-second intervals, as

currently required. Nasdaq amended its

proposal to maintain the current fivesecond delay between SOES executions

during locked and crossed markets.26

G. Technical Amendments

Nasdaq proposes technical, nonsubstantive changes to several rules in

the NASD Rule 4600 Series and

throughout the NASD Manual. In

particular, Nasdaq proposes to revise

NASD Rule 4613, ‘‘Character of

Quotations,’’ to eliminate the references

to SOES tier sizes for the NNM

quotations of market makers. In

addition, Nasdaq will rescind or

conform other rules that refer to SOES,

including NASD Rule 4611(f),

‘‘Registration as a Nasdaq Market

Maker,’’ NASD Rule 4619, ‘‘Withdrawal

of Quotations and Passive Market

Making,’’ NASD Rule 4620, ‘‘Voluntary

Termination of Registration,’’ NASD

Rule 4632, ‘‘Trade Reporting,’’ NASD

Rule 4618(c), ‘‘Clearance and

Settlement,’’ and the NASD Rule 4700

Series (SOES).

III. Summary of Comments

The Commission received 79

comment letters regarding the proposed

rule change. The commenters included

broker-dealers, registered

representatives, ECNs, academics,

professional associations, and a

registered national securities

exchange.27 Nineteen commenters,

including the Trading Committee of the

Securities Industry Association

(’’SIA’’),28 the Investment Company

Institute (‘‘ICI’’),29 and Charles

Schwab,30 supported the proposal.31

The Trading Committee of the SIA, for

example, believed that the proposal

would reduce the problem of dual

liability for market makers and improve

the speed of executions.32 Similarly, the

ICI maintained that the proposal would

increase the speed of executions and

enhance access to the full depth of a

security’s trading interest by all market

participants.33 One trader and investor

believed that the proposal would result

in a more liquid and more transparent

Nasdaq market.34

Fourteen commenters supported the

proposal but voiced concerns with some

aspects of the proposed changes.

Morgan Stanley Dean Witter (‘‘Morgan

Stanley’’), for example, generally

supported the proposed rule change

because it will reduce instances of

double liability for market makers, but

recommended several modifications to

the proposal.35 Similarly, the Electronic

Traders Association (‘‘ETA’’) supported

the proposal but expressed reservations

regarding, among other things, the

operation of the fee system for NNMS.36

Donaldson, Lufkin & Jenrette (‘‘DLJ’’)

believed that the proposal ‘‘can bring

substantial benefits’’ to Nasdaq but

noted that the proposal fails to eliminate

all instances of dual liability.37 The

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices 3991

38See ETG Letter, Appendix A. Among other

things, ETG supported the implementation of a

consolidated order book to provide price protection

and time priority of orders. See also Sierra Nevada

Letter (supporting the proposed changes as an

interim measure).

39 In addition, six comment letters related solely

to Nasdaq’s IODES Proposal. See Lek Letter, USCC

Trading I and II, Hill Letter, and Knight I and II,

Appendix A. As noted above, the notice of filing for

the current proposal also re-opened the comment

period for Nasdaq’s IODES Proposal. See note 3,

supra.

40See A.G. Edwards Letter, Appendix A.

41See Weil Letter I and Weil Letter II, Appendix

A.

42See note 5, supra.

43See, e.g., Chung Letter, Deeney Letter, Erman

Letter, Fennell Letter, King Letter, Lin Letter, Mt.

Pleasant Letter, Mack Letter, Nemcic Letter,

Norman Letter, O’Reilly Letter, Rudd Letter,

Schiller Letter, Swenson Letter, Teitelman Letter,

Vercellone Letter, Wolverton Letter, and Zucker

Letter, Appendix A.

44See e.g., Weintraub Letter, Swenson Letter,

Haber Letter, Deeney Letter, King Letter, Nemcic

Letter, Schiller Letter, Vercellone Letter, Snell

Letter, and Teitelman Letter, Appendix A.

45See Atreya Letter, Appendix A. 46See Atreya Letter, Appendix A. 47See Catrina Letter, Appendix A. Similarly, the

commenters expressed concern that the proposed

rule may require an investor to purchase or sell

more shares than the investor intended to purchase

or sell. See Mack Letter, Lin Letter, and Catrina

Letter, Appendix A. Moreover, the commenters

noted that a short sale on a downtick would violate

the short sale rule. See, e.g., Atreya Letter,

Vercellone Letter, Deeney Letter, Lin Letter, and

Schiller Letter, Appendix A. 48See Whitcomb Letter, Appendix A. Similarly,

the ETA asserted that the failure of market makers

to honor their quotations in a manner consistent

with the Firm Quote Rule would result in

misleading and inaccurate quotations that would

reduce the efficiency of the Nasdaq market and

undermine investor confidence. See ETA Letter,

Appendix A. 49See Whitcomb Letter, Appendix A. 50One commenter asserted, for example, that

market makers ‘‘can and will ignore’’ non-liability

SelectNet orders. See Mount Pleasant Letter,

Appendix A. Another commenter maintained that

it would have no recourse when non-liability

SelectNet orders go unfilled. See ACIM Letter,

Appendix A.

51See Haber Letter, Appendix A. The commenter

noted that a market maker could withdraw its

quotation when the inside market approached the

market maker’s quotation.

52See ETA Letter, Appendix A.

53See ETA Letter, Appendix A.

54See Norman Letter and O’Reilly Letter,

Appendix A.

55See, e.g., DLJ Letter, A.G. Edwards Letter, and

STA Letter, Appendix A. The STA asserted that any

possibility of dual liability must be eliminated.

56See Bloomberg Letter, Appendix A.

57 Double liability could arise due to the time lag

between the execution of an order on the ECN’s

own system and the subsequent receipt of an

execution for the same order from Nasdaq. See

Bloomberg Letter, Appendix A. Other ECNs also

criticized the potential for double liability. See

Instinet Letter and BRUT Letter, Appendix A

(asserting that dual liability is inappropriate for

ECNs because ECNs act solely as agents).

Electronic Trading Group (‘‘ETG’’), a

proprietary trading firm that makes

markets in listed and Nasdaq securities,

‘‘strongly support[ed]’’ the proposal but

maintained that the proposed changes

fail to create a level playing field for all

market participants.38

Forty-one commenters opposed or

noted concerns with the proposal

without expressing general support for

the proposed changes.39 One

commenter stated that it did not support

any of the features in the proposed

system and recommended that Nasdaq

instead adopt its previously proposed

IODES system, excluding the proposed

limit order book.40 Another commenter

urged the Commission to reject the

current proposal.41

Nasdaq responded to the commenters

in Amendment Nos. 1 and 2 to the

proposal.42 The views of the

commenters are discussed below.

A. Elimination of SelectNet Liability

Orders

Thirty-two commenters objected to

the elimination of most preferenced

SelectNet liability orders for NNM

securities. Many of the commenters

asserted that the elimination of

SelectNet liability orders will limit their

ability to obtain executions at quotes

outside the current inside market (i.e.,

the best bid or offer), a capability that

the commenters believed is crucial for

investors.43 In this regard, several

commenters maintained that investors

are willing to forego the inside price for

the ability to access the liquidity outside

the inside market, or to obtain an

execution when a stock’s price is

moving rapidly.44 One commenter

maintained that an order might not be

executable at the current inside price if

a market maker at the inside is slow to

update its 100-share quotation.45

Accordingly, the commenter found it

‘‘imperative that investors be able to

enter orders at prices outside the current

inside market.’’ 46

Other commenters maintained that

the oversized order requirement might

fail to provide an effective means for

accessing a quotation because, in some

instances, it would require an investor

to assume an unwanted short position.

For example, an investor seeking to sell

500 shares would be required to assume

an 800-share short position to SelectNet

preference a market maker quoting 1200

shares.47

Other commenters believed that the

proposed changes could undermine the

integrity of the Nasdaq market. For

example, one commenter feared that the

elimination of SelectNet liability orders

would produce a market that could

permit market makers to refuse to fill an

order and not move their quote.48 The

commenter also asserted that a market

maker would be able to ‘‘hold’’ the

market by repeatedly entering 100-share

quotations at five-second intervals.49

Another commenter stated that market

makers would be able to ‘‘ignore’’

oversized orders preferenced to them

through SelectNet.50 Similarly, another

commenter, asserting that the oversized

order requirement ‘‘opens up numerous

possibilities for [market maker]

manipulation,’’ maintained that market

makers might post artificially inflated

quotes because they will not be required

to trade at their quotations.51

One commenter recommended that

the proposed system be designed to

require a market maker to honor all

orders in a manner consistent with the

Firm Quote Rule at the price and up to

the size the market maker elects to

display until the market maker exhausts

or changes his quotation.52 In addition,

the commenter asserted that the

elimination of SelectNet liability orders

is unnecessary because the existing

exceptions to the Firm Quote Rule

adequately address the issue of potential

double liability when a market maker is

in the process of effecting an execution,

after which he will update his quote.53

Other commenters suggested that

Nasdaq address the issue of dual

liability by retaining SelectNet liability

orders only for quotations outside the

current inside market.54 Because

automatic executions through NNMS

will be available only for quotations at

the inside market, these commenters

believed that retaining SelectNet

liability orders solely for quotations

outside the current inside market would

eliminate the potential for dual liability

while allowing market participants to

continue using the existing SelectNet

preferencing feature for quotations

outside the current inside market.

Other commenters expressed concern

that market makers will continue to be

exposed to potential double liability

through SelectNet liability orders from

UTP exchanges.55

B. ECN Participation

As noted above, the proposal will

allow ECNs to participate in NNMS

either as full participants or as order

entry participants. Several ECNs

criticized both alternatives. One

commenter, for example, asserted that

full participation would disadvantage

an ECN because (1) The ECN’s reserve

quotations would not participate in the

NNMS sweep of the ECN’s top-of-thefile orders; 56 (2) The ECN would be

subject to potential double

executions; 57 and (3) The ECN would be

required to provide access through

NNMS to brokers that pay no ECN

3992 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices

58See Bloomberg Letter, Appendix A.

59See Bloomberg Letter, Appendix A.

60See Instinet Letter, Appendix A.

61See BRUT Letter, Appendix A.

62See Instinet Letter and Archipelago Letter,

Appendix A. See also Bloomberg Letter, Appendix

A.

63See Knight Letter II, Appendix A.

64See Knight Letter II, Appendix A. In the IODES

Proposal, Nasdaq stated that the dichotomy

between market makers, which provide automatic

executions, and ECNs, which do not provide

automatic executions, had resulted in anomalies in

the processing of orders through SOES. Nasdaq

noted that because ECNs and UTP exchanges do not

provide automatic executions, Nasdaq had

implemented systems changes designed to suspend

executions in SOES whenever an ECN or UTP

exchange was alone at the inside market. Nasdaq

noted that because an ECN quote at the inside

effectively halted SOES executions for a security, it

might also cause SOES orders to be rejected back

to the sending firm. Accordingly, Nasdaq stated that

an ECN customer potentially could enter an order

to control the inside price and create an advantage

in SOES for the ECN customer or another order

entry firm to jump ahead of orders that would have

been executed if they had not been returned. The

ECN customer could then change its quote before

the quote could be accessed through SelectNet or

the ECN’s internal system. After a new dealer inside

price had been established, a new SOES order that

entered the system would be executed as the first

order against the first market maker at the new

inside price. Under these circumstances, customer

orders could be disadvantaged because orders

entered earlier in time would be forced to go to the

back of the queue. Nasdaq noted in the IODES

Proposal that it had addressed this problem through

a software modification that holds customer orders

sent through SOES in queue for up to 90 seconds

when an ECN or UTP participant is alone at the

inside, instead of immediately rejecting the order.

In addition, Nasdaq noted in the IODES Proposal

Nasdaq that SOES users had alleged that some

traders might be using ECNs to affect the way that

SOES handles automatic executions. To avoid this

potential problem, Nasdaq proposed to require all

participants receiving orders through the proposed

IODES system, including ECNs, to be subject to

automatic executions. See IODES Proposal, supra

note 3. See also Mack Letter, Appendix A (asserting

that market makers should not be permitted to use

an ECN to block or stop a stock).

65See Knight Letter II, Appendix A.

66See, e.g., ACIM Letter, King Letter, Mack Letter,

and Vercellone Letter, Appendix A.

67See King Letter, Appendix A.

68See ACIM Letter, Appendix A. See also

Vercellone Letter, Appendix A.

69See CHX Letter, Appendix A.

70See CHX Letter, Appendix A.

71See STA Letter, Appendix A.

72See STA Letter, Appendix A. Another

commenter stated that it is unclear whether

Nasdaq’s systems capacity will accommodate the

greater speed of automatic execution. See Morgan

Stanley Letter, Appendix A.

73See ASC Letter, Appendix A. See also BRUT

Letter (noting that the issue of dual liability centers

on Nasdaq’s delay in communicating notices of

SOES executions to market makers, and that the

delay in notification may increase with an increase

in SOES messages), and Archipelago Letter

(maintaining that any Nasdaq routing system must

route messages as quickly as possible), Appendix A.

74See Archipelago Letter, Appendix A. See also

ASC Letter, Appendix A.

75See ASC Letter, Appendix A. The commenter

noted several problems associated with SOES

technology, including the following: (1) The

Permanent Virtual Circuits connecting Nasdaq and

market participants fail to indicate whether the

opposite party is able to receive data, thereby

permitting one party to send messages without

realizing that the other party has not received the

messages due to a malfunctioning application; (2)

due to the lack of automatic re-route facilities,

messages must be re-routed manually when a

circuit is down, which may result in extended

outages; (3) retransmitted messages may be

unrecoverable due to the system’s procedures for

numbering missing messages; (4) the system’s

sequence number field is unable to fully represent

numbers above 9999, so that an application cannot

determine the correct sequence number of a

retransmission once the total messages received

exceeds 10,000; (5) execution messages do not

include a unique identifier to prevent duplicate

trade reports; and (6) due to delays in message

processing, it may take up to 30 minutes to

retransmit a message. See also Archipelago Letter,

Appendix A.

fees.58 On the other hand, the

commenter maintained that order entry

participation would ‘‘marginalize’’ an

ECN by omitting the ECN’s orders from

the NNMS sweep.59

Similarly, another commenter

asserted that an order entry ECN would

be able to execute transactions against

preferenced SelectNet orders but, unlike

market makers and full participant

ECNs, would not be able to interact

automatically with other NNMS orders

on the basis of strict price/time

priority.60 A third commenter believed

that order entry participation is not a

viable alternative because an ECN must

be accessible by widely used order

delivery and execution systems to

remain competitive.61 Several ECNs

recommended that Nasdaq implement

an order delivery system, rather than a

system that provides for automatic

executions.62

On the other hand, other commenters

criticized the proposal for providing two

levels of participation for ECNs. One

commenter asserted that because the

proposal allows ECNs, but not other

market participants, to choose between

two levels of participation in NNMS, the

proposal fails to promote fair

competition between market

participants and therefore is

inconsistent with the Congressional

finding in Section 11A(a)(1)(C) under

the Act.63 In addition, the commenter

expressed concern that lack of uniform

access to ECN quotes would provide

opportunities for manipulative and

fraudulent quotation and order entry

strategies similar to those noted in

Nasdaq’s IODES proposal.64 The

commenter believed that Nasdaq should

revise its proposal to require the full

participation of ECNs and UTP

exchanges in NNMS.65

Other commenters also believed that

Nasdaq should require ECNs to become

full participants in NNMS, and,

accordingly, subject to automatic

executions.66 One commenter expressed

concern that a market maker might post

its quotes in an order entry ECN to

avoid automatic executions,67 and other

commenters asserted that automatic

executions against an ECN’s quotes are

‘‘essential to provide equal access to all

market participants.’’ 68

C. UTP Exchange Participation

The Chicago Stock Exchange (‘‘CHX’’)

asserted that the proposal improperly

excludes the UTP exchanges, including

the CHX, from full participation in

NNMS. 69 The CHX noted that the

proposal will allow UTP specialists to

send preferenced orders through

SelectNet but will not permit them to

use NNMS, which, unlike SelectNet,

provides for automatic executions. The

CHX maintained that the inability of its

specialists to participate in NNMS will

‘‘cripple the CHX’s UTP program.’’ 70

D. Technology Concerns

Several commenters raised technology

issues in connection with the proposal,

including concerns regarding the

capability of Nasdaq’s systems to

promptly deliver messages relating to

the trading process. In this regard, one

commenter recommended that Nasdaq

‘‘demonstrate that it has the capability

to deliver immediately to market makers

and executing broker-dealers

executions, quote updates, size

decrements, and other message traffic

that is critical to the trading process.’’ 71

The commenter maintained that prompt

message delivery is crucial in light of

the proposed reduction in time delays

between executions against a market

maker from 17 seconds to five

seconds.72 Noting that there can be a

time delay of five seconds or more

between the entry of a SOES order and

the market maker’s receipt of notice of

the execution, another commenter

expressed concern that an increase in

messaging traffic resulting from the

proposed changes will increase the

delay in providing notice of an

execution and, accordingly, will

increase the potential for double

liability.73

Two commenters expressed concern

that SOES, which uses technology

inferior to that used by SelectNet, will

replace SelectNet as the primary means

of inter-participant trading.74 One

commenter feared that the impact of

existing problems associated with SOES

technology would be exacerbated by the

increased use of SOES.75

In addition, several commenters noted

that firms must have sufficient time to

modify their computer systems to

implement the proposed changes. In

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices 3993

76See DLJ Letter, Appendix A. See also STA

Letter, ASC Letter (noting that implementation of

the proposed changes will require considerable

effort by market participants), and BancBoston

Letter (noting that Order Audit Trail System,

extended trading hours, Year 2000, and

decimalization have placed significant resource

strains on BancBoston and other market

participants), Appendix A.

77See ACIM Letter, Appendix A.

78See Archipelago Letter, Appendix A. The

commenter maintained that wholesale market

makers and ECNs, the market participants that most

frequently post large quoted sizes, wish to make

quotes fully accessible for the entire size, and,

accordingly, the 9,900-share maximum size is an

impediment to prompt access to liquidity.

79See O’Leary Letter, Appendix A. The

commenter asserted that in fast market conditions,

several 9,900-share orders would absorb the highest

quality executions ahead of an individual investor’s

order.

80See Galchen Letter, Appendix A.

81See Schwab Letter, Appendix A.

82See, e.g., Miller Letter, Whitcomb Letter, ETA

Letter, Sierra Nevada Letter, Mount Pleasant Letter,

and Sudit Letter, Appendix A.

83See Morgan Stanley Letter, Appendix A.

84See, e.g., Samarasinghe Letter, Haber Letter,

and Lin Letter. One commenter supported

executions against a market maker’s reserve size,

but argued that reserve size feature may present

misleading information. See Wilson Letter,

Appendix A.

85See, e.g., King Letter (asserting that the reserve

size feature will foster manipulative and fraudulent

practices), Snell Letter (questioning the

enforcement of the reserve size feature), and

Wolverton Letter (maintaining that the reserve size

feature will permit market makers to ‘‘hide’’ shares

behind their displayed quotes), Appendix A. See

also Sievers Letter.

86See Morgan Stanley Letter, Appendix A. See

also Mack Letter and Wilson Letter, Appendix A.

87See Sievers Letter, Appendix A.

88See Sievers Letter, Appendix A.

89See Morgan Stanley Letter, Appendix A.

Morgan Stanley believed that Nasdaq should retain

the No Dec feature, but that it should be available

only to market makers displaying a size of at least

1,000 shares.

90See Caris Letter, Appendix A.

91See Wilson Letter and Lin Letter, Appendix A.

92See Lin Letter, Appendix A. The commenter

asserted that a market maker at the inside might

repeatedly renew a 100-share quote in an effort to

sustain the price of a stock. The commenter noted

that the repeated renewal of the quotation might

hinder the efforts of other market participants to fill

larger-sized orders in the stock.

93See Lin Letter, Appendix A.

94See ETA Letter, Appendix A.

95 15 U.S.C. 78o–3(b)(6) and (11), and 15 U.S.C.

78k–1(a)(1)(C).

this regard, one commenter estimated

that it would require at least six months

from the time Nasdaq publishes it

changes to the Application

Programming Interface (‘‘API’’) to

program, test, and install new systems.76

E. NNMS System Features

1. Automatic Execution for Orders up to

9,900 Shares

Although many commenters

supported Nasdaq’s proposal to

establish a maximum automatic

execution order entry size of 9,900

shares for NNMS securities, one

commenter maintained that the 9,900-

share order entry size was arbitrary,77

and another asserted that Nasdaq

provided no basis for the 9,900-share

maximum order size.78

Other commenters believed that

allowing automatic executions for

orders of up to 9,900 shares would

drastically reduce small investors’

access to executions 79 and prevent

small investors from competing with

market makers, a purpose inconsistent

with the original purpose for

establishing SOES.80

On the other hand, Charles Schwab

maintained that increasing the

availability of the automatic execution

system would provide market makers

with a crucial tool to access the best

available prices in the market, and,

consequently, to manage risk and obtain

liquidity for customer orders.81

2. Availability of Automatic Execution

Several commenters believed that the

proposed rule change would allow

market makers, but not order entry

firms, to engage in proprietary trading

against market makers’ quotes on

NNMS.82

3. Reducing the Delay Between

Automatic Executions From 17 Seconds

to Five Seconds

Although many commenters

supported the proposed reduction in the

delay between automatic executions

against a market maker from 17 seconds

to five seconds, Morgan Stanley

expressed concern that the reduction

would provide market makers with

insufficient time to react to virtually

continuous executions against their

quotations and would create significant

difficulty for market makers in

maintaining control over their positions

and effectuating a coherent market

making strategy.83

4. Reserve Size Feature

Several commenters supported the

reserve size feature, asserting that it

would increase liquidity and facilitate

more rapid executions of larger-sized

orders.84 Other commenters, however,

expressed concern regarding Nasdaq’s

ability to monitor and ensure the proper

use of the reserve size feature.85 In

addition, some commenters asserted

that reserve size is inconsistent with

market transparency. Morgan Stanley,

for example, stated that ‘‘[r]eserve size

hides the true depth of trading interest

from the marketplace and acts as a

disincentive to display liquidity.’’ 86

Similarly, one market maker maintained

that the reserve size feature would

hinder proprietary trading by market

makers, which make their proprietary

trading decisions based upon the size of

an order being offered.87 Accordingly,

the commenter believed that the

proposal would diminish liquidity on

Nasdaq.88

5. Elimination of the No Dec Feature

Archipelago asserted that Nasdaq

should retain the No Dec feature

because it reduces quote update traffic,

thereby mitigating the capacity strain on

Nasdaq’s network. Morgan Stanley

believed that the No Dec feature serves

as a useful quote maintenance tool that

Nasdaq should retain in a modified

form.89 Another commenter asserted

that the elimination of the No Dec

feature would make it more difficult for

market makers to provide orderly

markets.90

However, two commenters favored

the elimination of the No Dec feature.91

One commenter asserted that the

elimination of the No Dec feature would

prevent a market maker at the inside

from repeatedly renewing a 100-share

quote.92 The commenter believed that

the elimination of the No Dec feature,

combined with the reserve size feature,

would improve the functioning of the

market.93

F. NNMS Fees

One commenter expressed concern

that the fee system for NNMS might

operate in a discriminatory and

anticompetitive manner.94

IV. Discussion

After carefully considering all of the

comments, the Commission finds, for

the reasons discussed below, that the

proposed rule change is consistent with

the Act and the rules and regulations

applicable to the NASD. In particular,

the Commission finds that the proposal

is consistent with the requirements of

Sections 15A(b)(6) and (11), and

11A(a)(1)(C) of the Act.95 Section

15A(b)(6) requires that the rules of a

registered national securities association

be 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. In Section 11A(a)(1)(C),

Congress found that it is in the public

interest and appropriate for the

protection of investors and the

3994 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices

96 In approving the proposal, the Commission has

considered the proposal’s impact on efficiency,

competition, and capital formation. 15 U.S.C. 78c(f).

97See ACIM Letter, Appendix A. See also

Archipelago Letter, Appendix A.

98See O’Leary Letter, Appendix A.

99See Galchen Letter, Appendix A.

100See, e.g., Miller Letter, Whitcomb Letter, ETA

Letter, Sierra Nevada Letter, Mount Pleasant Letter,

and Sudit Letter, Appendix A.

101See Amendment No. 1, supra note 5.

102See Amendment No. 2, supra note 5.

103See Amendment No. 2, supra note 5.

104See Amendment No. 2, supra note 5.

105See, e.g., King Letter, Snell Letter, and

Wolverton Letter, Appendix A.

maintenance of fair and orderly markets

to assure: (1) The 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) 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.96

Specifically, as discussed more fully

below, the Commission finds that the

proposed changes are designed to

protect investors and the public interest

and to assure the economically efficient

execution of securities transactions by

allowing market makers, public

customers, and order entry firms to

obtain automatic executions for orders

of up to 9,900 shares in NNM securities.

By reducing instances of double liability

for market makers in NNM securities,

the proposal potentially may encourage

market makers in NNM securities to

display larger sized quotations, thereby

adding liquidity to the market for NNM

securities and helping to assure the

economically efficient execution of

transactions in NNM securities. In

addition, by reducing the delay between

executions against a market maker from

17 seconds to five seconds, the proposal

may facilitate the price discovery

process and promote quote competition

among market makers, thus helping to

ensure the best execution of customer

orders. The Commission believes that

the proposed changes potentially may

enhance the efficiency and increase the

depth and liquidity of the market for

NNM securities, to the benefit of all

market participants.

A. Automatic Executions for Orders of

up to 9,900 Shares in NNM Securities

SOES currently permits the automatic

execution of retail agency orders of 200,

500, or 1,000 shares at the inside

market. NNMS will provide automatic

executions at the inside market for

orders of up to 9,900 shares in NNM

securities. Automatic executions

through NNMS will be available not

only for retail agency orders, but also for

market makers’ proprietary orders and

for the orders of order entry firms.

Several commenters expressed

concerns regarding the automatic

execution feature of NNMS.

Specifically, the commenters

maintained that the 9,900-share order

entry size was arbitrary,97 that it would

reduce small investors’ access to

executions,98 and that it would prevent

small investors from competing with

market makers, a purpose inconsistent

with the original purpose for

establishing SOES.99 In addition, some

commenters believed that NNMS would

be available for the proprietary trading

of market makers, but not for order entry

firms.100

In response to the concern about the

availability of NNMS, Nasdaq clarified

that NNMS will be available to all

NASD member firms, including order

entry firms.101 In addition, in response

to the concerns regarding the 9,900-

share maximum order size entry in

NNMS, Nasdaq stated that the 9,900-

share maximum is a technological

system constraint of the NNMS

automatic execution platform.102

Nasdaq also maintained that because the

current average size of a SelectNet

execution is 800 shares, the 9,900-share

maximum NNMS order size should be

sufficient to handle the majority of

SelectNet orders that will migrate to

NNMS.103 Nasdaq noted that orders of

over 10,000 shares would be processed

through a combination of NNMS,

SelectNet, and other means.104

The Commission believes that the

proposed automatic execution feature of

NNMS is consistent with Section

15A(b)(6) of the Act because it is

designed to protect investors and the

public interest. In addition, the

Commission believes that the proposed

automatic execution feature of NNMS is

consistent with Congress’s finding in

Section 11A(a)(1)(C)(i) of the Act that it

is in the public interest and appropriate

for the protection of investors and the

maintenance of fair and orderly markets

to assure the economically efficient

execution of securities transactions. In

this regard, the Commission believes

that the immediacy and certainty of

order execution for NNM orders of up

to 9,900 shares should strengthen the

Nasdaq market and benefit market

participants by permitting the prompt,

efficient execution of orders of up to

9,900 shares at the best available price.

Because NNMS will provide automatic

executions against displayed quotations

and against reserve size, NNMS’s

automatic execution feature will

provide prompt access to all of the

available liquidity in a security at the

current inside market.

In addition, the Commission notes

that the proposal will extend the

benefits associated with automatic

executions to order entry firms and to

the proprietary orders of market makers.

The Commission agrees with the NASD

that allowing automatic executions for

broker-dealers’ proprietary trades

potentially may encourage brokerdealers to commit capital to the market,

thereby adding to the depth and

liquidity of the market for NNM

securities.

Further, the Commission believes that

the 9,900-share maximum order size is

reasonable in light of the system

constraint of the NNMS automatic

execution platform. According to the

NASD, the 9,900-share maximum order

size should accommodate the size of the

orders that are likely to be processed

through NNMS.

With regard to small investors’ access

to executions, the Commission notes

that NNMS’s automatic execution

feature will be available equally for the

orders of market makers, order entry

firms, and public customers.

Accordingly, the Commission believes

that the automatic execution feature of

NNMS is reasonably designed to

provide market makers, order entry

firms, and public customers with equal

access to the current inside market in

NNM securities.

B. Reserve Size Feature of NNMS

The reserve size feature of NNMS will

allow an NNMS market maker or its

customer to display publicly part of the

full size of its order or interest with the

remainder held in reserve on an

undisplayed basis to be displayed in

whole or in part as the displayed part

is executed. To use the reserve size

feature, a market maker’s quotation,

including its agency quotation, if the

Commission approves the display of

separate agency quotes, initially must

display a minimum of 1,000 shares, and

the quotation must be refreshed to 1,000

shares to continue using the reserve size

feature.

Several commenters expressed

concerns with the reserve size feature.

In particular, some commenters

questioned Nasdaq’s ability to monitor

and ensure the proper use of the reserve

size feature. 105 One commenter

contended that reserve size is

inconsistent with market transparency

and that reserve size would hide the

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices 3995

106See Morgan Stanley Letter, Appendix A.

107See Sievers Letter, Appendix A.

108See Amendment No. 2, supra note 5.

109See Amendment No. 2, supra note 5.

110See Morgan Stanley Letter, Appendix A.

111See STA Letter, Morgan Stanley Letter, ASC

Letter, and BRUT Letter, Appendix A.

112See Amendment No. 2, supra note 5.

113See Amendment No. 2, supra note 5.

114See Amendment No. 2, supra note 5.

115A market maker that can avoid updating its

quote for a period of time can take advantage of its

temporary ability to avoid NNMS executions and

wait to see how other market makers update their

quotes. This delay could serve to lessen

competition among market makers. See Securities

Exchange Act Release No. 39490 (December 24,

1997), 63 FR 897 (January 7, 1998) (order approving

File No. SR–NASD–97–50).

116See Amendment No. 2, supra note 5.

117See Archipelago Letter, Appendix A.

depth of trading interest and act as a

disincentive to display liquidity.106 One

market maker maintained that reserve

size would hinder proprietary trading

by market makers and, accordingly,

would diminish liquidity on Nasdaq.107

In response to the commenters,

Nasdaq asserted that reserve size would

be likely to increase the amount of

shares market participants commit to

the market because the non-display of

the reserve shares would lessen the

potential negative price impacts

associated with the display of larger

trading interest.108 In addition, Nasdaq

maintained that the requirement that a

market participant seeking to use

reserve size in NNMS display a

minimum of 1,000 shares also would

serve to increase liquidity by providing

an incentive to display a larger

quotation size.109

The Commission believes that the

reserve size feature will encourage

participation in NNMS by providing

market makers and their customers with

greater flexibility in the handling of

large orders. Increased participation in

NNMS should, in turn, enhance the

depth and the liquidity of the market for

NNM securities, to the benefit of all

market participants. The requirement

that a market participant display a

minimum of 1,000 shares to use the

reserve size feature should encourage

market participants to display orders of

at least 1,000 shares, which may reduce

volatility and enhance market depth at

a given price. In addition, because all

displayed quotations in NNMS at the

same price level will have priority over

reserve size quotations at that price

level, NNMS will provide an incentive

for market participants to display their

orders.

The Commission also believes that

reserve size could prove useful to

institutions wishing to minimize the

market impact of their orders. In

addition, the reserve size feature of

NNMS will allow market makers

quoting in Nasdaq to compete more

effectively with alternative trading

systems that provide a reserve size

feature. The Commission expects NASD

Regulation to monitor trading to ensure

the proper use of the reserve size feature

(particularly priority rules) and

compliance with the requirements

applicable to the use of reserve size.

C. Reduction of the 17-Second Delay

Between Executions Against a Market

Maker

Nasdaq proposes to reduce the current

17-second delay between executions

against the same market maker to five

seconds. As noted above, one

commenter believed that the proposed

five-second delay between executions

against a market maker would provide

market makers with insufficient time to

react to executions against their

quotations and would create significant

difficulty for market makers in

maintaining control over their positions

and effectuating a coherent market

making strategy.110 In addition, several

commenters expressed concerns

regarding the ability of Nasdaq’s

systems to promptly notify market

participants of executions against their

quotations.111

In response, Nasdaq maintained that a

five-second interval delay (with an

additional two-second internal Nasdaq

system processing time) is an

appropriate compromise between the

need for fast executions and the need to

provide market makers with adequate

time to manage their capital risk

through monitoring and updating their

quotes in response to rapidly changing

market conditions.112 Nasdaq stated that

it would monitor market performance in

NNMS as it related to the five-second

interval delay and would consider

modifying that time period, in

consultation with Commission staff.113

As discussed more fully in Section IV.I,

infra, Nasdaq stated that proposed

enhancements to its systems, including

a new central message switch that will

provide faster delivery of automatic

execution confirmation messages, will

help to ensure that Nasdaq has the

technological capability to promptly

deliver notices of automatic

executions.114

The Commission believes that the

proposal to reduce the delay between

executions against the same market

maker from 17 seconds to five seconds

will help to ensure that a market maker

has no more time than is necessary after

an execution before it must update its

quotes. This requirement will help to

ensure that a market maker cannot

attempt to avoid its market making

obligations by delaying after an NNMS

execution before entering an updated

quote.115 As a result, the reduced time

delay between executions against a

market maker’s quote should increase a

market maker’s compliance with its

obligation to make continuous, twosided markets and promote quote

competition among market makers.

Such competition among market makers

should, in turn, enhance the integrity of

the Nasdaq market by helping to ensure

the best execution of customer orders

and improving the price discovery

process for NNM securities.

As discussed more fully in Section

IV.I, infra, the Commission believes,

based on Nasdaq’s representations, that

planned enhancements to Nasdaq’s

systems, including the planned

implementation of a new central

message switch in January 2000, should

enable Nasdaq to promptly deliver

execution messages to market

participants.116 Accordingly, based on

Nasdaq’s representations, the

Commission believes that Nasdaq will

have the technological capability to

implement the proposed five-second

delay between executions against a

market maker’s quotation.

D. Elimination of the No Dec Feature for

NNM Securities

Nasdaq proposes to eliminate the No

Dec feature for NNM securities. The No

Dec feature allows continuous

executions against a market maker’s

quotation at the same price without

decrementing the quoted size. Nasdaq

believes that the No Dec feature has

become less important because market

makers are able to manage their

quotations by displaying their actual

size. In addition, Nasdaq believes that

the No Dec feature will become less

important in a market where market

makers will have the ability to refresh

their quotations at a size they

determine.

Several commenters questioned the

elimination of the No Dec feature. One

commenter maintained that Nasdaq

should retain the No Dec feature

because it reduces quote update traffic,

thereby mitigating the capacity strain on

Nasdaq’s network.117 Other commenters

maintained that the No Dec feature

serves as a useful quote maintenance

tool and that the elimination of the No

Dec feature would make it more difficult

3996 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices

118See Morgan Stanley Letter and Caris Letter,

Appendix A.

119See Amendment No. 2, supra note 5.

120See Amendment No. 2, supra note 5.

121The reserve size refresh function will refresh

a market maker’s displayed proprietary or agency

quote, if the Commission approves the display of

separate agency quotes, from its reserve size at the

automatic refresh size or at a size level designated

by the market maker. The autoquote refresh

function will allow a market maker whose

displayed proprietary quotation and reserve size

have been decremented to zero to elect to have

Nasdaq refresh the market maker’s quotation price

by an interval designated by the market maker and

to refresh the market maker’s displayed size to a

level designated by the market maker or to the

automatic refresh size (i.e., 1,000 shares). 122See Amendment No. 2, supra note 5.

123See, e.g., Weintraub Letter, Swenson Letter,

Haber Letter, Deeney Letter, King Letter, Nemcic

Letter, Schiller Letter, Vercellone Letter, Snell

Letter, and Teitelman Letter, Appendix A. See also

Chung Letter, Deeney Letter, Erman Letter, Fennell

Letter, Lin Letter, Mt. Pleasant Letter, Mack Letter,

Norman Letter, O’Reilly Letter, Rudd Letter, and

Zucker Letter, Appendix A. 124See Catrina Letter, Mack Letter, and Lin Letter,

Appendix A. 125See Whitcomb Letter and Haber Letter,

Appendix A. See also ETA Letter, Appendix A. 126See ETA Letter, Appendix A.

127See Norman Letter and O’Reilly Letter,

Appendix A.

128See Mount Pleasant Letter, Appendix A.

129See Whitcomb Letter, Appendix A.

130See Amendment No. 1, supra note 5.

131See Amendment No. 2, supra note 5.

for market makers to provide orderly

markets.118

In response, Nasdaq asserted that the

elimination of the No Dec feature will

allow market participants to more easily

execute multiple customer orders at the

inside and move the market to new

quote levels, thereby aiding the price

discovery process.119 In addition,

Nasdaq maintained that the No Dec

feature is incompatible with the NNMS

processing functions that immediately

access displayed and reserve size and

move through different price levels.

Nasdaq noted that in NNMS the full size

of reserve share amounts will be

immediately and automatically

accessible (after executions against

displayed quotations), while the No Dec

feature makes additional shares

available on a piecemeal basis each time

a quote is accessed and only after an

interval delay between executions.

Thus, Nasdaq concluded that NNMS’s

reserve size feature would speed

executions, while the No Dec feature

would result in slower executions.120

The Commission believes that it is

reasonable for Nasdaq to eliminate the

No Dec feature for NNM securities.

Specifically, the Commission believes

that the elimination of the No Dec

feature should result in quicker

executions and prompt access to the

available liquidity at the current inside

market. The Commission also believes

that the elimination of the No Dec

feature may allow the market to adjust

more quickly to information, thereby

facilitating price discovery and

improving the efficiency of the Nasdaq

market.

The Commission notes that market

makers now have the ability to quote in

actual size, and therefore have an

enhanced ability to manage their

quotations. In addition, NNMS’s reserve

size refresh and autoquote refresh

features should help market makers that

elect to use reserve size to manage their

quotations.121 Because the reserve size

refresh function and the autoquote

refresh function, as well as the ability to

quote actual size, will assist market

makers, the Commission believes that

market makers will be able to manage

their quotations after Nasdaq eliminates

the No Dec feature.

With regard to the commenter’s

concern that the elimination of the No

Dec feature might strain the capacity of

Nasdaq’s network, the Commission does

not believe, based on Nasdaq’s

representations regarding planned

enhancements to its systems 122 (as

discussed more fully in Section IV.I,

infra), that the elimination of the No Dec

feature will result in a capacity strain on

Nasdaq’s network.

E. Elimination of SOES Preferencing for

NNMS Securities

Nasdaq proposes to eliminate the

SOES preferencing feature for NNM

securities because it is inconsistent with

the processing of orders in time priority

and because the preferencing feature

might place the agency quotations of

public customers, if the Commission

approves the display of separate agency

quotes, at a disadvantage. In addition,

Nasdaq believes that preferencing in an

automatic execution system reduces

incentives for market makers to compete

aggressively for orders by showing the

full size and true price of their trading

interest.

The Commission believes that it is

reasonable for Nasdaq to eliminate the

SOES preferencing feature to provide for

the processing of orders in price/time

priority. The processing of orders in

price/time priority should help to

ensure that all orders are processed in

a fair, equal, and orderly manner.

Accordingly, the Commission finds that

the elimination of SOES preferencing is

designed to protect investors and the

public interest by helping Nasdaq to

maintain a fair and orderly market.

F. SelectNet Liability Orders

Nasdaq proposes to revise SelectNet

to require the use of ‘‘oversized’’

preferenced SelectNet Orders. As

discussed above, the proposed oversized

order provisions will allow members to

direct a SelectNet preferenced order to

an NNMS market maker, including the

market maker’s agency quote, if the

Commission approves the display of

separate agency quotes, only if the order

is designated as AON or MAQ for a size

that is at least 100 shares greater than

the displayed amount of the quote to

which the order is directed. The

oversized order requirement is designed

to reduce instances of double liability

for market makers. UTP exchanges,

however, will continue to send and

receive SelectNet liability orders. In

addition, order entry ECNs will be able

to receive SelectNet liability orders.

As discussed above, thirty-two

commenters objected to the elimination

of SelectNet liability orders. Among

other things, the commenters argued

that (1) the ability to preference outside

the current inside market is crucial to

investors who, in some cases, would be

willing to forego the inside price to

access the liquidity outside the current

inside market; 123 (2) the oversized order

requirement might require an investor to

assume an unwanted position;124 (3) the

elimination of SelectNet liability orders

might undermine the integrity of the

Nasdaq market because market

participants will not be required to trade

at their quotations;125 (4) the

elimination of SelectNet liability orders

is unnecessary because the Firm Quote

Rule addresses the issue of potential

double liability when a market maker is

effecting an execution;126 (5) Nasdaq

should retain SelectNet liability orders

for quotations outside the current inside

market;127 (6) market makers will not be

obligated to respond to non-liability

SelectNet orders;128 and (7) a market

maker at the inside would be able to

‘‘hold’’ the market by repeatedly

entering 100-share quotations at fivesecond intervals.129

In response to the commenters,

Nasdaq maintained that the elimination

of SelectNet preferencing was essential

to achieving two of the proposal’s goals,

the reduction of dual liability 130 and

the establishment of a single order

execution system.131 Nasdaq concluded

that neither the Firm Quote Rule nor the

retention of SelectNet liability orders for

quotations outside the inside market

offered viable means for preserving

SelectNet liability orders. Specifically,

Nasdaq asserted that retaining SelectNet

liability orders for quotations outside

the current inside market would create

confusion in a fast-moving market and

could result in significant unanticipated

dual liability for market makers during

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices 3997

132See Amendment No. 1, supra note 5.

133See Amendment No. 2, supra note 5.

134See Amendment No. 1, supra note 5.

135See Amendment No. 2, supra note 5.

136See Amendment No. 2, supra note 5.

137See Amendment No. 2, supra note 5. Nasdaq

also noted that the elimination of SelectNet liability

orders would apply equally to all market

participants. Id.

138See Amendment No. 2, supra note 5.

139Specifically, Nasdaq provided scenarios

indicating that a market maker could not ‘‘hold’’ the

market at a price level. In Nasdaq’s first scenario,

NNMS receives a market order to sell 1,200 shares.

Market maker A (‘‘MMA’’) is alone at the inside bid

of $20 for 100 shares, with 1,100 shares in reserve

(the example assumes a previous partial execution

against MMA’s non-updated quote because reserve

size would not be available unless MMA initially

displayed a minimum of 1,000 shares). In this case,

the order would execute automatically in full at $20

against displayed and reserve size and MMA’s

quote would be decremented to zero and refreshed

or placed in a closed quote status. In the second

scenario, NNMS receives a market order to sell

1,200 shares and MMA is alone at the inside bid

of $20 for 100 shares, with no shares in reserve. In

this case, NNMS would execute against MMA’s

quote and then move immediately to execute

against the quotes at the next lower price level.

Thus, the market would not be held at $20. If the

inside offer moved to $20, MMA would violate

NASD Rule 4613(e) (regarding locked and crossed

markets) if MMA entered a locking bid of $20. See

Amendment No. 2, supra note 5.

140As discussed above, UTP exchanges will

continue to send and receive SelectNet liability

orders. In addition, market participants will access

order entry ECNs through SelectNet liability orders.

141See Whitcomb Letter, ETA Letter, and Haber

Letter, Appendix A.

142See Amendment No. 2, supra note 5.

143See Bloomberg Letter and BRUT Letter,

Appendix A.

periods of rapid price change.132 Nasdaq

also believed that the Firm Quote Rule

would not eliminate the potential for

double liability because Nasdaq

currently maintains two systems, SOES

and SelectNet, that deliver liability

orders. Thus, according to Nasdaq, a

market maker who receives a SelectNet

message at its price and size, followed

immediately by a SOES execution

against its quote, would be obligated to

fill both orders.133

In response to the commenters’

concerns regarding their ability to

access quotations outside the inside

market in the absence of SelectNet

liability orders, Nasdaq stated that

market participants may attempt to

access such quotations through

oversized SelectNet orders or through

traditional means of communication.134

In addition, Nasdaq noted that market

participants will be able to enter limit

orders in NNMS outside the current

inside market that will be entitled to

execution at the limit price or better if

the inside market rises or falls to the

price level of the limit order.135 Nasdaq

also maintained that SelectNet

preferencing outside the inside market

would be inconsistent with the orderly

and fair processing of orders in the

Nasdaq market and that, in light of

NNMS’ reserve size feature, efforts to

access a quotation outside the current

inside market without attempting to

exhaust interest at the inside could be

inconsistent with a broker’s duty of best

execution.136 Nasdaq acknowledged that

market makers will not be obligated to

respond to non-liability SelectNet

messages, but maintained that the

implementation of a single liability/

execution system is essential to reduce

dual liability.137

In response to the commenters who

raised concerns about the potential for

manipulative activity in NNMS, Nasdaq

asserted that NASD Regulation would

closely monitor quotation and order

entry activity to ensure the protection of

all market participants.138 In addition,

in response to the commenter who

believed a market maker would be able

to ‘‘hold’’ the market by repeatedly

renewing a 100-share quotation at fivesecond intervals because market

participants would not be able to use

SelectNet liability orders to exhaust the

market maker’s quotation, Nasdaq

maintained that the commenter’s

description of trading activity was

inaccurate and provided examples

supporting its position.139

The Commission believes that the

oversized order requirement and the

resulting elimination of most SelectNet

liability orders is a reasonable means to

address the problem of double

liability.140 As noted above, Nasdaq has

stated that double liability is a

‘‘significant and ongoing problem’’ and

that reducing double liability is one of

the proposal’s primary goals. The

Commission believes that reducing

double liability may encourage market

makers to display larger sized

quotations, thereby providing greater

liquidity to the market for NNM

securities. The reduction in double

liability also may enhance market

makers’ ability to reflect size in their

quotations based on market and

business factors with less concern for

the potential for double liability. In

addition, by preventing market

participants from preferencing a

quotation outside the current inside

market, the elimination of most

SelectNet liability orders may facilitate

the fair and orderly processing of orders

in the Nasdaq market.

With regard to obtaining access to

liquidity outside the current inside

market, the Commission notes that

market participants may attempt to

access quotations outside the current

inside market through the use of

oversized SelectNet orders or through

traditional means of communication

(e.g., telephone orders). Accordingly,

the Commission believes that the

availability of oversized SelectNet

orders, as well as traditional means of

communication, should provide market

participants with adequate means to

access quotations outside the current

inside market.

As discussed above, several

commenters believed that the proposed

reduction in SelectNet liability orders

would result in misleading or inaccurate

quotations because market makers

would not be required to trade at their

quotations.141 In response, Nasdaq

stated that NASD Regulation would

closely monitor quotation and order

entry activity to ensure the protection of

all market participants.142 The

Commission expects NASD Regulation

to carefully monitor the conduct of

market participants and to bring

appropriate disciplinary action against

any market participant who enters false

or misleading quotations in NNMS or

engages in other conduct that is

inconsistent with just and equitable

principles of trade.

G. ECN Participation in NNMS

Under the proposal, an ECN may

participate in NNMS as either an order

entry ECN or as a full participant ECN.

Market participants will access an order

entry ECN through SelectNet liability

orders, and an order entry ECN will not

provide automatic executions for orders

received from those participants. An

order entry ECN may request order entry

capability in NNMS, which will allow it

to obtain automatic executions against

the quotations of NNMS market makers,

including agency quotes, if the

Commission approves the separate

display of agency quotes.

A full participant ECN will provide

automatic executions for orders the ECN

receives through NNMS. Like an order

entry ECN, a full participant ECN may

request order entry capability in NNMS

to obtain automatic executions for

orders it sends through NNMS.

As discussed more fully above, ECNs

and other market participants criticized

the provisions of the proposal relating to

ECN participation in NNMS. Two ECNs

asserted that order entry participation

would marginalize an ECN and was not

a viable means for participating in

NNMS.143 One ECN maintained that full

participation would disadvantage an

ECN because (1) the ECN’s reserve

quotations would not participate in the

NNMS sweep of the ECN’s top-of-thefile orders; (2) the ECN would be subject

to potential double executions; and (3)

3998 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices

144See Bloomberg Letter, Appendix A.

145See Knight Letter II, Appendix A.

146See Knight Letter II, ACIM Letter, King Letter,

Mack Letter, and Vercellone Letter, Appendix A.

147See Knight II, Appendix A. See also Mack

Letter, Appendix A.

148See King Letter, Appendix A.

149See Amendment No. 1, supra note 5.

150See Amendment No. 1, supra note 5.

151See Amendment No. 1, supra note 5.

152See Amendment No. 1, supra note 5.

153See Amendment No. 1, supra note 5.

154See Amendment No. 2, supra note 5.

155See CHX Letter, Appendix A.

156See Amendment No. 1, supra note 5.

157See Amendment No. 1, supra note 5.

158See STA Letter, Appendix A.

159See STA Letter, Appendix A.

160See ASC Letter, Appendix A. See also BRUT

Letter, Appendix A.

161See ASC Letter, Appendix A. See also BRUT

Letter, Appendix A.

162See DLJ Letter, Appendix A. See also STA

Letter and BancBoston Letter, Appendix A.

163See Amendment No. 1, supra note 5.

the ECN would be required to provide

access through NNMS to brokers that

pay no ECN fees.144

One market maker criticized the

proposal for providing two levels of

participation for ECNs but not for other

market participants.145 Several

commenters believed that Nasdaq

should require ECNs to be full

participants in NNMS and, accordingly,

subject to automatic executions.146 In

addition, one commenter expressed

concern that lack of uniform access to

ECN quotes would provide

opportunities for manipulative and

fraudulent quotation and order entry

strategies. 147 Another commenter

asserted that a market maker might post

its quotes in an order entry ECN to

avoid automatic executions.148

In response to the concerns regarding

ECN participation, Nasdaq stated that it

proposed two levels of ECN

participation after some ECNs indicated

that their systems were not capable of

supporting a full automatic execution

interface with Nasdaq at this time.149 In

addition, Nasdaq indicated that it would

monitor ECN activity in NNMS with a

view towards fully integrating all ECNs

in the future through enhanced

automation.150 Nasdaq maintained that

the proposal balances the benefits of

ECN participation in NNMS with

current technological constraints and

provides maximum flexibility for ECNs

while reducing market makers’ dual

liability concerns.151

With regard to the interaction of an

ECN’s reserve size with NNMS, Nasdaq

stated that ECNs currently do not allow

Nasdaq access to the reserve size share

amounts residing in their systems.152

Nasdaq indicated that to the extent that

an ECN agrees to share its reserve size

information with Nasdaq and subject

the reserved shares to the automatic

execution parameters outlined in the

proposal, Nasdaq would be willing to

program NNMS to interact with the

ECN’s reserve size.153

In response to concerns that NNMS

will provide an opportunity for

manipulative and fraudulent quotation

and order entry activity, Nasdaq stated,

as noted above, that NASD Regulation

would closely monitor quotation and

order entry activity to ensure the

protection of all market participants.154

The Commission finds that Nasdaq’s

proposal for ECN participation in

NNMS provides an effective means for

integrating ECNs into NNMS. By

allowing an ECN to participate in

NNMS either as a full participant ECN

or as an order entry ECN, the proposal

provides ECNs with the flexibility to

determine the method of participation

in NNMS that is most appropriate for

the ECN at this time. The Commission

also believes that providing two options

for ECN participation in NNMS is

reasonable and necessary because,

according to Nasdaq, some ECNs

currently are not capable of supporting

a full automatic execution interface with

Nasdaq. Moreover, it is not likely that

ECNs that choose order entry

participation will be marginalized

because ECNs are frequently at the best

quote in the market. Further, these ECNs

have the ability to obtain automatic

executions against the quotes of NNMS

market makers if they so choose.

With regard to the concern that the

lack of uniform access to ECN quotes

will provide opportunities for

manipulative and fraudulent quotation

and order entry strategies in NNMS, the

Commission expects NASD Regulation

to carefully monitor trading in NNMS to

detect manipulative quotation or order

entry strategies and to bring appropriate

disciplinary action against a market

participant who engages in such

strategies or other conduct that is

inconsistent with just and equitable

principles of trade.

H. UTP Exchange Participation in

NNMS

Under the proposal, SelectNet will

continue to serve as the primary linkage

between UTP exchanges and Nasdaq.

UTP exchanges will receive and be

obligated to execute preferenced

SelectNet liability orders and they will

retain their ability to send SelectNet

preferenced liability orders to Nasdaq

market makers.

The CHX asserted that the proposal

improperly excludes the UTP

exchanges, including the CHX, from full

participation in NNMS.155 The CHX

noted that the proposal would allow

UTP specialists to send preferenced

orders through SelectNet but will not

permit them to use NNMS, which,

unlike SelectNet, provides for automatic

executions.

In response, Nasdaq noted that

Nasdaq market makers currently are not

able to obtain automatic executions

against exchange specialists.156 Nasdaq

asserted that it would be inappropriate

and inconsistent with the fair

competition mandate of the Act for

Nasdaq to provide CHX specialists with

the ability to obtain automatic

executions against Nasdaq members

while the CHX and the other exchanges

decline to provide Nasdaq members

with automatic execution access to the

quotes of exchange specialists through

the Intermarket Trading System.157

The Commission believes that it is

reasonable for Nasdaq to continue to use

SelectNet as the primary linkage

between Nasdaq and the UTP

exchanges, allowing UTP exchange

specialists to access the Nasdaq market

through SelectNet liability orders. The

Commission believes that the use of

SelectNet linkage will provide UTP

exchange specialists with adequate

access to the Nasdaq market.

I. Technology Concerns

Several commenters expressed

concerns regarding Nasdaq’s

technological capability to implement

the proposed changes. In particular, one

commenter noted that Nasdaq’s systems

must be able to promptly deliver critical

message traffic, including messages

relating to executions, size decrements,

and quote updates.158 The commenters

argued that prompt message delivery is

critical in light of the proposed

reduction in time delays between

executions against a market maker from

17 seconds to five seconds,159 and they

noted that a delay in providing notice of

an execution increases the potential for

double liability.160 One commenter

feared that the impact of existing

problems associated with SOES

technology will be exacerbated by the

increased use of SOES under the

proposal.161 In addition, several

commenters noted that firms must have

sufficient time to modify their computer

systems to implement the proposed

changes.162

In response, Nasdaq indicated that it

has and will continue to take all

appropriate steps to assure the adequacy

and sufficiency of the proposed systems

changes.163 Specifically, Nasdaq

represented that its current automatic

execution platform can be expanded

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices 3999

164See Amendment No. 2, supra note 5. 165See Amendment No. 2, supra note 5. 166See Amendment No. 2, supra note 5. 167See Amendment No. 2, supra note 5. 168See Amendment No. 2, supra note 5. 169See Amendment No. 2, supra note 5. 170See Amendment No. 2, supra note 5. 171See Amendment No. 2, supra note 5. 172See Amendment No. 2, supra note 5.

173See Amendment No. 2, supra note 5.

174See ETA Letter, Appendix A.

175See Amendment No. 1, supra note 5.

176See Amendment No. 1, supra note 5.

177See Amendment No. 1, supra note 5.

178See Amendment No. 3, supra note 5.

179See Securities Exchange Act Release No.

38115 (January 3, 1997), 62 FR 1351 (January 9,

1997) (order approving File No. SR–NASD–95–54).

rapidly to add sufficient capacity to

handle the increased volume of message

traffic moving into automatic execution

under NNMS.164 In this regard, Nasdaq

noted that it plans to replace its current

Tandem K-Series host processors with

new Tandem S-Series models, resulting

in an approximate 25% increase in

system capacity and processing

speed.165 Nasdaq stated that this

increase would be augmented further by

software application tuning (e.g., the

addition of more parallel processes to

handle order flow) that will expand

capacity well beyond the needs of

NNMS.166 In addition, because

SelectNet uses more message capacity

than SOES due to SelectNet’s broadcast,

negotiation, and response capabilities,

Nasdaq believes that the movement of

order traffic to the SOES-based

automatic execution platform will

reduce overall network traffic levels,

thereby increasing the speed and

reliability of the entire Nasdaq

market.167

In response to the commenters’

concerns regarding Nasdaq’s ability to

provide prompt notice of an execution,

Nasdaq asserted that the delays in

execution report delivery result from

competition for system resources in the

Nasdaq central message switch.168

Nasdaq maintained that the migration of

message traffic from SelectNet to NNMS

would significantly reduce the message

traffic causing these delays.169 In

addition, Nasdaq indicated that it

expects to roll out an improved central

message switch in January 2000, which

should dramatically increase the speed

of automatic execution confirmation

messages and more closely synchronize

automatic execution transactions with

execution updates to market makers and

ECNs.170

Nasdaq also noted that it is in the

process of testing a Transmission

Control Protocol/Internet Protocol

(‘‘TCP/IP’’)-based, API communications

protocol for NNMS, which Nasdaq

expects to implement by the end of

February 2000.171 Nasdaq stated that the

API would allow NNMS participants to

more seamlessly link their internal

systems with NNMS for trading, risk

management, and regulatory compliance

purposes.172 Nasdaq asserted that the

TCP/IP protocol should increase the

speed and reliability of NNMS and

remove most, if not all, of the

technological objections to NNMS.173

The Commission believes that the

proposed enhancements to Nasdaq’s

systems, including the new Tandem SSeries host processors and software

modifications, the improved central

message switch, and the TCP/IP-based,

API communications protocol for

NNMS, will help to ensure that Nasdaq

has the technological capability to

implement the proposed changes. The

Commission expects that Nasdaq will

implement these changes before it

moves to the new NNMS trading

platform. The Commission also expects

Nasdaq to provide sufficient lead time

for market participants before

implementing NNMS, and to closely

monitor operation of NNMS and to

implement additional technological

changes as necessary.

J. NNMS Fees

One commenter expressed concern

that the fee system for NNMS may

operate in a discriminatory and

anticompetitive manner.174

In response, Nasdaq noted that the

fees to be assessed under NNMS mirror

the current fees for Nasdaq’s automatic

execution facilities (i.e., $0.50 per side)

and SelectNet ($1.00 per execution,

order entry side only).175 Nasdaq will

treat a simultaneous execution against

an NNMS participant’s displayed and

reserve sizes as a single execution. For

example, a 5,000-share NNMS

automatic execution order that interacts

with the quotes of three market

participants will result in a $0.50 fee for

the order entry firm and a $0.50 fee for

each of the three market participants

whose quotes were accessed, regardless

of whether the order also interacted

with any of the market participants’

reserve sizes.176 Nasdaq indicated that it

is reviewing modifications that may

reduce NNMS fees in the future.177

The Commission believes that the

proposed NNMS fees provide for the

equitable allocation of reasonable dues,

fees, and other changes, consistent with

Section 15A(b)(5) of the Act.

K. Executions Against SOES Market

Makers During Locked and Crossed

Markets

The Commission believes that it is

reasonable for Nasdaq to retain the

current five-second delay between SOES

executions against the quotation of

market maker in SmallCap securities

during locked and crossed markets.178

The Commission believes that retaining

the five-second delay between SOES

executions during locked and crossed

markets will help to ensure that locked

or crossed markets are resolved

promptly, thereby improving market

quality, providing more informative

quotation information, and contributing

to the maintenance of a fair and orderly

market. In addition, the Commission

believes, as it has concluded previously,

that the five-second delay between

SOES executions during locked and

crossed markets provides market makers

with a brief period to update their

quotations while encouraging market

makers to quickly remedy a locked or

crossed market.179 Accordingly, the

Commission believes that the proposal

to retain the five-second delay between

SOES executions during locked and

crossed markets is reasonably designed

to protect investors and the public

interest and to remove impediments to

and perfect the mechanism of a free and

open market and a national market

system.

L. Technical Amendments

The Commission believes that the

proposed technical, non-substantive

amendments to the NASD Manual will

clarify the NASD’s rules to reflect the

proposed changes. Because these

changes will reduce confusion and help

to ensure compliance with the NASD’s

rules, the Commission finds that the

changes are designed to protect

investors and the public interest.

The Commission finds good cause for

approving Amendment Nos. 1, 2, and 3

to the proposal prior to the thirtieth day

after the date of publication of notice of

filing thereof in the Federal Register.

Amendment Nos. 1 and 2 respond to the

concerns raised by the commenters,

provide additional representations

concerning the operation of the

proposal, and clarify the proposed

changes. Among other things,

Amendment No. 1 makes clear that

order entry firms will be able to

participate in NNMS and that Nasdaq

would be willing to program NNMS to

interact with an ECN’s reserve size to

the extent that the ECN agrees to share

its reserve size information with Nasdaq

and subject the reserved shares to the

automatic execution parameters

outlined in the proposal. Amendment

No. 2 describes Nasdaq’s technological

capability to implement the proposed

changes and provides additional

4000 Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices

180 15 U.S.C. 78o–3(b)(6) and 78s(b)(2).

181 15 U.S.C. 78s(b)(2). 182 17 CFR 200.30–3(a)(12).

explanations concerning the rationale

for the proposed changes. Amendment

No. 3 strengthens the proposal by

retaining the current five-second delay

between SOES executions during locked

and crossed markets, thereby

encouraging market makers to quickly

correct locked or crossed quotations.

Accordingly, the Commission believes

that granting accelerated approval of

Amendment Nos. 1, 2, and 3 is

appropriate and consistent with

Sections 15A(b)(6) and 19(b)(2) of the

Act.180

V. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment Nos.

1, 2, and 3, including whether

Amendment Nos. 1, 2, and 3 are

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 File No.

SR–NASD–99–11 and should be

submitted by February 15, 2000.

VI. Conclusion

For the reasons discussed above, the

Commission finds that the proposal is

consistent with the Act (specifically,

Sections 11A and 15A of the Act) and

the rules and regulations thereunder

applicable to a national securities

association.

It Is Therefore Ordered, pursuant to

Section 19(b)(2) of the Act,181 that the

proposed rule change (SR–NASD–99–

11), as amended, be and hereby is

approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.182

Margaret H. McFarland,

Deputy Secretary.

Appendix A—Comment Letters

Regarding SR–NASD–99–11

1. Letter from John M. Schaible,

President, NexTrade, to Jonathan G.

Katz, Secretary, SEC, dated May 3, 1999.

2. Letter from Steven Weil to SEC,

dated May 8, 1999 (‘‘Weil Letter I’’).

3. Letter from Steven Weil to Jonathan

G. Katz, Secretary, SEC, dated May 7,

1999. (‘‘Weil Letter II’’).

4. Letter from Kenneth D. Pasternak,

President, and Walter F. Raquet, Chief

Operating Officer, Knight Securities,

Inc., to Jonathan G. Katz, Secretary, SEC,

dated May 21, 1999 (‘‘Knight Letter I’’).

5. Letter from James M. Hensley,

President, Sierra Nevada Securities,

Inc., to Jonathan G. Katz, Secretary, SEC,

dated May 24, 1999 (‘‘Sierra Nevada

Letter’’).

6. Letter from Brent M. Weisenborn,

Chairman, Security Investment

Company of Kansas City (‘‘KCMO’’), to

Jonathan G. Katz, Secretary, SEC, dated

May 25, 1999 (‘‘Weisenborn Letter’’).

7. Letter from Mktmaven to SEC (sent

by e-mail) dated May 24, 1999

(‘‘Mktmaven Letter’’).

8. Letter from Samuel F. Lek, Chief

Executive Officer, Lek Schoenau &

Company, Inc., to Jonathan G. Katz,

Secretary, SEC, dated May 27, 1999

(‘‘Lek Letter’’).

9. Letter from James F. Mytinger,

Treasurer, Kansas City Securities

Association, to Jonathan G. Katz,

Secretary, SEC, dated May 26, 1999

(‘‘KCSA Letter’’).

10. Letter from Christopher Halford,

KCMO, to Jonathan G. Katz, Secretary,

SEC, dated May 27, 1999 (‘‘Halford

Letter’’).

11. Letter from Stuart Cave, KCMO, to

Jonathan G. Katz, Secretary, SEC, dated

May 27, 1999 (‘‘Cave Letter’’).

12. Letter from Ludwell G. Gaines III,

KCMO, to Jonathan G. Katz, Secretary,

SEC, dated May 27, 1999 (‘‘Gaines

Letter’’).

13. Letter from Steven R. Hook,

KCMO, to Jonathan G. Katz, Secretary,

SEC, dated May 27, 1999 (‘‘Hook

Letter’’).

14. Letter from Richard Kitzmiller,

KCMO, to Jonathan G. Katz, Secretary,

SEC, dated May 27, 1999 (‘‘Kitzmiller

Letter’’).

15. Letter from Jeffrey Frankel,

KCMO, to Jonathan G. Katz, Secretary,

SEC, dated May 27, 1999 (‘‘Frankel

Letter’’).

16. Letter from Bruce K. Schmidt,

KCMO, to Jonathan G. Katz, Secretary,

SEC, dated May 27, 1999 (‘‘Schmidt

Letter’’).

17. Letter from James F. Mytinger,

KCMO, to Jonathan G. Katz, Secretary,

SEC, dated May 27, 1999 (‘‘Mytinger

Letter’’).

18. Letter from Trent McCann, KCMO,

to Jonathan G. Katz, Secretary, SEC,

dated May 27, 1999 (‘‘McCann Letter’’).

19. Letter from Lance Turpin, KCMO,

to Jonathan G. Katz, Secretary, SEC,

dated May 27, 1999 (‘‘Turpin Letter’’).

20. Letter from Kyle Malmstrom,

KCMO, to Jonathan G. Katz, Secretary,

SEC, dated May 27, 1999 (‘‘Malmstrom

Letter’’).

21. Letter from Ron F. Boyle III,

KCMO, to Jonathan G. Katz, Secretary,

SEC, dated May 27, 1999 (‘‘Boyle

Letter’’).

22. Letter from Carl L. Means, Jr.,

KCMO, to Jonathan G. Katz, Secretary,

SEC, dated May 27, 1999 (‘‘Means

Letter’’).

23. Letter from Oren Galchen to

Jonathan G. Katz, Secretary, SEC, dated

May 22, 1999 (‘‘Galchen Letter’’).

24. Letter from Richard Y. Roberts,

Thelen Reid & Priest LLP, on behalf of

the Electronic Traders Association

(‘‘ETA’’), to Jonathan G. Katz, Secretary,

SEC, dated May 28, 1999 (‘‘ETA

Letter’’).

25. Letter from Robin Roger, Principal

and Counsel, Morgan Stanley Dean

Witter, to Jonathan G. Katz, Secretary,

SEC, dated May 28, 1999 (‘‘Morgan

Stanley Letter’’).

26. Letter from Dan Liu, Executive

Vice President, et. al., Automated

Securities Clearance Ltd., to Jonathan G.

Katz, Secretary, SEC, dated May 28,

1999 (‘‘ASC Letter’’).

27. Letter from David K. Whitcomb,

Professor of Finance and Economics,

Rutgers University, Faculty of

Management, Department of Finance

and Economics, to Jonathan G. Katz,

Secretary, SEC, dated June 1, 1999

(‘‘Whitcomb Letter’’).

28. Letter from Brian Hyndman,

President, et al., The Brass Utility,

L.L.C., to Jonathan G. Katz, Secretary,

SEC, dated May 28, 1999 (‘‘BRUT

Letter’’).

29. Letter from Diane Murphy,

Managing Director/Nasdaq Trading,

BancBoston Robertson Stephens, to

Jonathan G. Katz, Secretary, SEC, dated

June 1, 1999 (‘‘BancBoston Letter’’).

30. Letter from Bruce Miller, Professor

of Accounting, The Anderson School at

UCLA, to Jonathan G. Katz, Secretary,

SEC, dated May 28, 1999 (‘‘Miller

Letter’’).

Federal Register / Vol. 65, No. 16 / Tuesday, January 25, 2000 / Notices 4001

31. Letter from Timothy J. Wilson to

Jonathan G. Katz, Secretary, SEC, dated

May 23, 1999. (‘‘Wilson Letter’’).

32. Letter from Craig S. Tyle, General

Counsel, Investment Company Institute,

to Jonathan G. Katz, Secretary, SEC,

dated June 1, 1999 (‘‘ICI Letter’’).

33. Letter from Dinuka L.

Samarasinghe to Jonathan G. Katz,

Secretary, SEC, dated May 23, 1999

(‘‘Samarasinghe Letter’’).

34. Letter from Gregg Giaquinto, InHouse Counsel, Electronic Trading

Group, L.L.C. (‘‘ETG’’), to Jonathan G.

Katz, Secretary, SEC, dated June 1, 1999

(‘‘ETG Letter’’).

35. Letter from Paul R. Rudd to

Jonathan G. Katz, Secretary, SEC, dated

May 23, 1999 (‘‘Rudd Letter’’).

36. Letter from William B. Norman to

Jonathan G. Katz, Secretary, SEC, dated

May 25, 1999 (‘‘Norman Letter’’).

37. Letter from Michael O’Reilly to

Jonathan G. Katz, Secretary, SEC, dated

May 25, 1999 (‘‘O’Reilly Letter’’).

38. Letter from Gabriel Levin to

Jonathan G. Katz, Secretary, SEC, dated

May 21, 1999 (‘‘Levin Letter’’).

39. Letter from Jeremy Zucker to

Jonathan G. Katz, Secretary, SEC, dated

March 29, 1999 (‘‘Zucker Letter’’).

40. Letter from David O’Leary to

Jonathan G. Katz, Secretary, SEC,

undated, received June 3, 1999

(‘‘O’Leary Letter’’).

41. Letter from Tolga Erman to

Jonathan G. Katz, Secretary, SEC, dated

May 25, 1999 (‘‘Erman Letter’’).

42. Letter from Piers Fennell to

Jonathan G. Katz, Secretary, SEC, dated

May 28, 1999 (‘‘Fennell Letter’’).

43. Letter from Mike Wolverton to

Jonathan G. Katz, Secretary, SEC, dated

May 28, 1999 (‘‘Wolverton Letter’’).

44. Letter from Neal King to Jonathan

G. Katz, Secretary, SEC, dated May 24,

1999 (‘‘King Letter’’).

45. Letter from Nikhil Atreya to

Jonathan G. Katz, Secretary, SEC, dated

May 27, 1999 (‘‘Atreya Letter’’).

46. Letter from Joel Haber to Jonathan

G. Katz, Secretary, SEC, dated May 28,

1999 (‘‘Haber Letter’’).

47. Letter from Joshua Weintraub to

Jonathan G. Katz, Secretary, SEC,

undated, received June 2, 1999

(‘‘Weintraub Letter’’).

48. Letter from Bryan D. Chung to

Jonathan G. Katz, undated, received

June 2, 1999 (‘‘Chung Letter’’).

49. Letter from Jeffrey A. Deeney to

Jonathan G. Katz, Secretary, SEC, dated

May 28, 1999 (‘‘Deeney Letter’’).

50. Letter from Steven Weil to

Jonathan G. Katz, Secretary, SEC, dated

May 28, 1999 (‘‘Weil Letter III’’).

51. Letter from Bob Sievers, Access

Securities, to SEC, dated June 2, 1999

(‘‘Sievers Letter’’).

52. Letter from Steve Swanson,

President, Mount Pleasant Brokerage

Services, LP, to Jonathan G. Katz,

Secretary, SEC, dated June 1, 1999 (‘‘Mt.

Pleasant Letter’’).

53. Letter from Arthur J. Kearney,

Chairman, and Leopold Korins,

President and CEO, Security Traders

Association (‘‘STA’’) to Jonathan G.

Katz, Secretary, SEC, dated June 3, 1999

(‘‘STA Letter’’).

54. Letter from Howard Teitelman to

Jonathan G. Katz, Secretary, SEC, dated

May 20, 1999 (‘‘Teitelman Letter’’).

55. Letter from Justin Schiller to

Jonathan G. Katz, Secretary, SEC,

undated, received June 4, 1999

(‘‘Schiller Letter’’).

56. Letter from James T. Snell,

Registered Representative, Heartland

Securities, to Jonathan G. Katz,

Secretary, SEC, dated May 24, 1999

(‘‘Snell Letter’’).

57. Letter from Matthew D. Nemcic to

Jonathan G. Katz, Secretary, SEC,

undated, received June 3, 1999

(‘‘Nemcic Letter’’).

58. Letter from Kenneth D. Pasternak,

President, and Walter F. Raquet, Chief

Operating Officer, Knight Securities,

Inc., to Jonathan G. Katz, Secretary, SEC,

dated June 4, 1999 (‘‘Knight Letter II’’).

59. Letter from Richard D.

Schenkman, Executive Vice President,

Instinet Corporation, to Jonathan G.

Katz, Secretary, SEC, dated June 7, 1999

(‘‘Instinet Letter’’).

60. Letter from Paul B. O’Kelly,

Chicago Stock Exchange (‘‘CHX’’), to

Jonathan G. Katz, Secretary, SEC, dated

June 7, 1999 (‘‘CHX Letter’’).

61. Letter from Bernard L. Madoff,

Chairman, Trading Committee,

Securities Industry Association (‘‘SIA’’),

to Jonathan G. Katz, Secretary, SEC,

dated June 2, 1999 (‘‘SIA Letter’’).

62. Letter from Brian L. Mack to

Jonathan G. Katz, Secretary, SEC, dated

May 28, 1999 (‘‘Mack Letter’’).

63. Letter from Jon Vercellone to

Jonathan G. Katz, Secretary, SEC,

undated, received June 4, 1999

(‘‘Vercellone Letter’’).

64. Letter from Yu-Hui J. Lin to

Jonathan G. Katz, Secretary, SEC, dated

May 30, 1999 (‘‘Lin Letter’’).

65. Letter from Cornel Catrina to

Jonathan G. Katz, Secretary, SEC, dated

May 29, 1999 (‘‘Catrina Letter’’).

66. Letter from William H. Sulya,

Senior Vice President and Director of

Nasdaq/OTC Trading, A.G. Edwards &

Sons, Inc. (‘‘A.G. Edwards’’), to Margaret

H. McFarland, Deputy Secretary, SEC,

dated June 7, 1999 (‘‘A.G. Edwards

Letter’’).

67. Letter from Greg Swenson to

Jonathan G. Katz, Secretary, SEC,

undated, received June 8, 1999

(‘‘Swenson Letter’’).

68. Letter from Kevin M. Foley,

Bloomberg L.P. (‘‘Bloomberg’’), to

Jonathan G. Katz, Secretary, SEC, dated

June 4, 1999 (‘‘Bloomberg Letter’’).

69. Letter from Hill, Thompson,

Magid & Co., Inc. (‘‘Hill’’), to Jonathan

G. Katz, Secretary, SEC, dated June 7,

1999 (‘‘Hill Letter’’).

70. Letter from Mike Cormack,

Manager, Equity Trading, American

Century Investment Management

(‘‘ACIM’’), to Jonathan G. Katz,

Secretary, SEC, dated June 3, 1999

(‘‘ACIM Letter’’).

71. Letter from Ephraim F. Sudit,

Ph.D., Professor of Accounting and

Information Systems, Rutgers

University, to Jonathan G. Katz,

Secretary, SEC, dated June 1, 1999

(‘‘Sudit Letter’’).

72. Letter from Matthew D. Lang,

Senior Compliance Officer, USCC

Trading, to Jonathan G. Katz, Secretary,

SEC, dated June 8, 1999 (‘‘USSC Trading

Letter I’’).

73. Letter from Robert L. Padala,

Managing Director, Over-the-Counter

Trading, Donaldson, Lufkin & Jenrette

(‘‘DLJ’’), to Jonathan G. Katz, Secretary,

SEC, dated June 14, 1999 (‘‘DLJ Letter’’).

74. Letter from Gerald D. Putnam,

Chief Executive Officer, Archipelago,

L.L.C. (‘‘Archipelago’’), to Jonathan G.

Katz, Secretary, SEC, dated June 14,

1999 (‘‘Archipelago Letter’’).

75. Letter from Darren Caris, Torrey

Pines Securities, to Jonathan G. Katz,

Secretary, SEC, dated June 16, 1999

(‘‘Caris Letter’’).

76. Letter from Neil C. Feldman,

President, USCC Trading, to Jonathan G.

Katz, Secretary, SEC, dated June 17,

1999 (‘‘USCC Trading Letter II’’).

77. Letter from Lon Gorman,

Executive Vice President, Charles

Schwab (‘‘Schwab’’), to Jonathan G.

Katz, Secretary, SEC, dated June 16,

1999 (‘‘Schwab Letter’’).

78. Letter from Michael T. Dorsey,

Senior Vice President and General

Counsel, Knight Securities, Inc., to

Jonathan G. Katz, Secretary, SEC, dated

June 23, 1999 (‘‘Knight Letter III’’).

79. Letter from Maria A. Silverstein,

The Security Traders Association of

New York, to Jonathan G. Katz,

Secretary, SEC, and Robert Colby,

Deputy Director, Division of Market

Regulation, SEC, dated March 22, 1999.

[FR Doc. 00–1697 Filed 1–24–00; 8:45 am]

BILLING CODE 8010–01–P