[Federal Register Volume 62, Number 20 (Thursday, January 30, 1997)]
[Notices]
[Pages 4562-4563]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2255]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38191; File No. SR-NASD-97-02]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by National Association of 
Securities Dealers, Inc. Relating to Access to Nasdaq's SelectNet 
Service by National Securities Exchanges Trading Nasdaq Securities on 
an Unlisted Trading Privilege Basis

January 22, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on January 
17, 1997, the National Association of Securities Dealers, Inc. 
(``NASD'') or ``Association'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') the proposed rule change as 
described in Items, I, II, and III below, which Items have been 
prepared by the NASD. The Commission is publishing this notice to 
solicit comments on the proposed rule change from interested persons.

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

    The NASD is proposing to grant national securities exchanges 
trading securities listed on The Nasdaq Stock Market (``Nasdaq'') on an 
unlisted trading privilege (``UTP'') basis access to Nasdaq's SelectNet 
Service for those securities in which the exchange disseminates 
quotations through the Nasdaq system.

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

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

A. Self-Regulatory Organizations's Statement of the Purpose of, and 
Statutory Basis of the Proposed Rule Change

    On January 10, 1997, the SEC approve several NASD rule changes 
and a variety of modifications to Nasdaq's Small Order Execution 
System (``SOES'') and SelectNet Service \1\ that are designed to 
integrate the Commission's new order handling and execution 
rules.\2\ In particular, among other things, the SEC approved an 
amendment to SOES that provides that orders entered into SOES will 
be rejected when a UTP exchange is alone at the best bid or offer 
displayed on Nasdaq. Because SOES will not execute orders when a UTP 
exchange is alone at the inside market, the NASD and Nasdaq believe 
it is absolutely critical that NASD members have the ability to 
readily access such superior priced orders displayed by the UTP 
exchange. Accordingly, in order to ensure that the NASD members can 
efficiently access UTP exchanges and that SOES will not reject order 
for more than very brief periods of time when a UTP exchange is 
alone at the inside, Nasdaq proposes to modify SelectNet to provide 
UTP exchanges with the ability to send and receive preferenced and 
broadcast SelectNet orders.\3\ For example, if the inside market in 
stock ABCD is 10-10\1/8\, 10 x 10, and the Chicago Stock Exchange 
(``CHX'') represents the only offer at 10\1/8\ SOES will reject all 
incoming market orders to buy for as long as the CHX is alone at the 
best offer and NASD members will have the ability to send a 
preferenced SelectNet order to the CHX specialist.\4\
---------------------------------------------------------------------------

    \1\ See Securities Exchange At Release No. 38156 (January 10, 
1997) (order partially approving file SR-NASD-96-43).
    \2\ Among others, the new SEC rules include a new rule, SEC Rule 
11Ac1-4 (``Display Rule''), governing the display of customer limit 
orders, and amendments to the SEC's firm quote rule, Rule 11Ac1-1, 
requiring market makers to reflect in their quotes any better priced 
orders that they place into an ECN (``ECN Rule''). The SEC also 
adopted an ``ECN Display Alternative'' that permits market makers to 
comply with the ECN Rule by having an ECN display their orders to 
the marketplace. See Securities Exchange Act Release No. 37619A 
(September 6, 1996), 61 FR 48290 (September 12, 1996).
    \3\ SelectNet permits NASD members to direct buy or sell orders 
in Nasdaq securities to a single market maker (preferenced orders) 
or broadcast the order to all market makers in the security. Nasdaq 
operates SelectNet to provide investors and members with an 
automated means to facilitate the communication of trading interest 
between members, the negotiation of orders with the possibility of 
price improvement, and the dissemination of last sale reports to the 
tape. SelectNet also serves as an effective auxiliary mechanism to 
one-on-one telephone communication between members, especially in 
times of market stress. The service is available for members to 
negotiate and execute orders form 9:00 a.m. until 5:15 p.m., Eastern 
Standard Time.
    \4\ Each exchange currently is permitted to trade up to 500 
Nasdaq National Market securities on a UTP basis. At the present 
time, however, the CHX is the only exchange that trades Nasdaq 
stocks pursuant to UTP. Accordingly, the CHX would be the only 
exchange that would be granted access to SelectNet at this time.
---------------------------------------------------------------------------

    In addition to minimizing the time that SOES will reject orders 
when a UTP exchange is alone at the inside, giving the UTP exchanges 
access to SelectNet will provide Nasdaq market makers and UTP 
specialists with a more efficient means to access each others quotes. 
In this connection, Nasdaq market makers have expressed their desire to 
have a

[[Page 4563]]

more efficient linkage with the CHX because of the impact CHX quotes 
have on their proprietary execution systems. In particular, because 
many firms operate systems that guarantee executions based on the best 
bid or offer on Nasdaq, which includes CHX quotes, these firms want to 
be able to readily access CHX quotes when the CHX is alone at the 
inside price. In addition, among other things, more efficient access to 
CHX quotes will serve to avoid locked and crossed markets. In sum, the 
NASD believes its proposal will serve to promote intermarket 
competition, enhance the price discovery process for Nasdaq securities, 
and dramatically improve the access of Nasdaq market makers to the CHX 
floor and vice versa.
    Accordingly, Nasdaq and the NASD believe that the proposed rule 
change is consistent with Sections 15A(b)(6) and 11A(a)(1)(C) of the 
Act. Among other things, Section 15A(b)(6) requires that the rules of a 
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. Section 11A(a)(1)(C) 
provides that it is in the public interest to, among other things, 
assure the economically efficient execution of securities transactions 
and the availability to brokers, dealers, and investors of information 
with respect to quotations for and transactions in securities. 
Specifically, by improving the access of Nasdaq market makers and UTP 
specialists to each others' quotes, the proposed rule change will serve 
to enhance intermarket competition, the best execution of investors' 
orders, and the price discovery process for Nasdaq securities. 
Moreover, Nasdaq and the NASD believe the proposed rule change will 
serve to benefit small investors because it will help to minimize the 
length of time that SOES will reject orders when a UTP exchange is 
alone at the best bid or offer on Nasdaq. Finally, Nasdaq and the NASD 
believe that providing UTP exchanges access to SelectNet is responsive 
to the Commission's request that Nasdaq and the exchanges create an 
electronic linkage between Nasdaq market makers and exchange 
specialists.\5\
---------------------------------------------------------------------------

    \5\ See Securities Exchange Act Release No. 37772 (October 1, 
1996).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NASD believes that the proposed rule change will not result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    Comments were neither solicited nor received.

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

    The proposed rule change has become effective immediately pursuant 
to Section 19(b)(3)(A)(i) of the Act and subparagraph (e) of Securities 
Exchange Act Rule 19b-4 because, consistent with the standards set 
forth in Rule 19b-4(e)(5), the proposal does not: (1) significantly 
affect the protection of investors or the public interest; (2) impose 
any significant burden on competition; or (3) have the effect of 
limiting the access to or availability of SelectNet. In particular, 
because no operational aspect to SelectNet is being modified by this 
proposal in any way other than an expansion of the scope of market 
participants that will have access to the SelectNet, Nasdaq and the 
NASD believe it is appropriate that the proposal has become effective 
upon filing pursuant to Rule 19b-4(e)(5). In fact, because of the 
intermarket access that will be fostered by the proposal, Nasdaq and 
the NASD believe the proposal will promote the protection of investors 
and enhance competition.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing. 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. 
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 many be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to the file number in the caption 
above and should be submitted by February 20, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
---------------------------------------------------------------------------

    \6\ 17 CFR 200.30-3(a)(12) (1989).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-2255 Filed 1-29-97; 8:45 am]
BILLING CODE 8010-01-M