[Federal Register Volume 62, Number 180 (Wednesday, September 17, 1997)]
[Notices]
[Pages 48912-48913]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-24589]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39049; File No. SR-NASD-97-66]


Self-Regulatory Organization; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by National Association of 
Securities Dealers, Inc. Relating to a Change to its Policy Regarding 
Limit Order Protection

September 10, 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 
September 4, 1997, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by the Nasdaq Stock 
Market, Inc. (``Nasdaq''). The NASD and Nasdaq have designated this 
proposal as one constituting a stated policy and interpretation with 
respect to the meaning of an existing rule under Section 19(b)(3)(A)(i) 
of the Act, which renders the rule effective upon the Commission's 
receipt of this filing. 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 amend an interpretation to its existing 
Limit Order Protection Rule, IM 2110-2.

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

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

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

    The NASD has determined to revise its existing policy 
interpretation regarding a member's trading ahead of a customer limit 
order when the member offers price improvement over that limit order. 
The NASD's Limit Order Protection Rule, IM-2110-2 (commonly referred to 
as the ``Manning Rule''), prohibits any member from trading at the same 
price as, or at a price inferior to, a customer limit order that it 
holds. When the Limit Order Protection Rule was first expanded in 
1995,\1\ members inquired about the effect of this rule on their 
trading activity when the member traded with another customer at a 
price better than the customer limit order. Of particular concern was 
the amount better at which a member could trade without violating the 
Manning Rule. In Notice To Members 95-43, the NASD interpreted the 
Manning Rule to require members to trade at least \1/64\th better than 
the held customer limit order.
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    \1\ See Notice to Members 95-43.
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    Since the statement of this policy in Notice To Members 95-43, 
several significant changes have occurred in The Nasdaq Stock Market, 
including the SEC's adoption of the Order Execution Rules, in 
particular Rule 11Ac1-4, refinements to best execution policies as 
stated in the SEC's release adopting the Order Execution Rules,\2\ and 
the move to quotation increments of sixteenths. These changes to 
improve the treatment of customer orders have resulted in re-evaluation 
by the NASD of its Manning Rule policy regarding price improvement. The 
new policy is set forth below and will be announced to all members in 
Notice To Members 97-57 (September, 1997).
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    \2\ Securities Exchange Act Release No. 37619A (September 6, 
1996), 61 FR 48290 (September 12, 1996).
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    To enable members to understand the new policy the Notice will set 
out the following example:
    <bullet> Nasdaq Inside Market: 20--20\1/4\ (10  x  10).
    <bullet> MMA receives a customer limit order to buy at 20\1/16\ for 
2,000 shares.
    <bullet> MMA changes its quote to 20\1/16\ for 2,000 shares to 
reflect the price of the customer limit order.
    <bullet> MMA receives a market order to sell 2,500 shares.

May MMA offer the market price improvement over the 20\1/16\th limit 
order and execute the market order for its own account? If so, what is 
the minimum amount of price improvement allowable?
    Under the new policy, MMA is allowed to execute the market order at 
a price better than the limit order. However, the NASD and Nasdaq, 
after consultation with the Quality of Markets Committee, believe that 
the minimum amount of price improvement that would permit a market 
maker to avoid a violation of the Manning Rule is \1/16\th, where the 
actual quotation spread is greater than \1/16\th; however, where the 
actual quotation spread is the minimum quotation increment, the minimum 
price improvement is one-half of the normal minimum quote increment. In 
the example above, since the actual spread is 20\1/16\--20\1/4\, the 
minimum price improvement is \1/16\th. Thus, MMA could trade ahead of 
the limit order at 20\1/8\th. If the actual spread were 20\1/16\--20\1/
8\, since the security is priced at more than $10 per share, the 
minimum quote increment is \1/16\th. If the market maker want to trade 
with an incoming market order to sell without

[[Page 48913]]

triggering its Manning obligations to the buy limit order, the market 
maker must buy from the sell order at 20\3/32\nds. Similarly, if the 
security were priced under $10 and quoted at 5\1/32\--5\1/16\, the 
minimum price improvement to avoid a violation of the Manning Rule 
would be \1/64\th better than a buy limit order it holds.
    This represents a change from previous statements regarding price 
improvement. In Notice To Members 95-43, regarding the Manning Rule, 
the NASD and Nasdaq stated that market makers may avoid violating 
Manning if they execute for their own accounts at \1/64\th better than 
the limit order price. This statement no longer is applicable and is 
superseded by this new policy interpretation as of the date of the 
publication of Notice To Members 97-57.
    The NASD and Nasdaq believe that the new interpretation increases 
investor protection by clarifying a member's obligations to customer 
limit orders. Accordingly, the NASD and Nasdaq believe that the 
proposed rule change is consistent with the provisions of Section 
15A(b)(6) of the Act \3\ in that it protects investors and the public 
interest, and is designed to promote just and equitable principles of 
trade.
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    \3\ 15 U.S.C. Sec. 78o-3.
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The NASD and Nasdaq do not believe that the proposed rule change 
will result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended.

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

    Written comments were neither solicited nor received.

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

    The foregoing rule change will become effective when the new 
interpretation appears in NASD Notice To Members 97-57, as it 
constitutes a stated policy and interpretation with respect to the 
meaning of an existing rule under Section 19(b)(3)(A)(i) of the Act and 
Rule 19b-4(e)(1) thereunder.
    At any time within 60 days of the filing of a rule change pursuant 
to Section 19(b)(3)(A) of the Act, the Commission may summarily 
abrogate the rule change if it appears to the Commission that such 
action is necessary or appropriate in the public interest, for the 
protection of investors, or otherwise in furtherance of the purposes of 
the Act.

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 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 the filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to file number SR-NASD-97-66 and 
should be submitted by October 8, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\4\
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    \4\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-24589 Filed 9-16-97; 8:45 am]
BILLING CODE 8010-01-M