51170 Federal Register / Vol. 62, No. 189 / Tuesday, September 30, 1997 / Notices

1See ‘‘Appendix to Report Pursuant to Section

21(a) of the Securities Exchange Act of 1934

Regarding the NASD and The Nasdaq Stock

Market,’’ at p. 98 (‘‘21(a) Report’’) (S.E.C., Aug. 8,

1996).

2 Id. at p. 99.

3 Id.

4See Securities Exchange Act Rel. No. 38180

(January 16, 1997), 62 FR 3725 (‘‘Pilot Program

Approval Order’’). The pilot originally was set to

expire on July 1, 1997, but was extended through

September 30, 1997. See Securities Exchange Act

Rel. No. 38804 (July 1, 1997), 62 FR 36588.

5On February 28, 1997, the SEC approved the

NASD’s proposal to exclude Nasdaq Small-Cap

Securities from the Excess Spread Rule. This rule

change was necessary because, unlike the manner

in which Nasdaq National Market securities are

handled for purposes of the rule, Nasdaq does not

presently calculate and display through the Nasdaq

system the average spread of all market makers in

a particular SmallCap issue or a comparison of the

size of an individual market maker’s quoted spread

relative to the average spread of all market makers.

Thus, Nasdaq does not presently afford market

makers in SmallCap securities with any indication

as to whether they are satisfying the requirements

of the 150% Rule.

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39120; File No. SR–NSAD–

97–70]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change by the National

Association of Securities Dealers, Inc.

Relating to an Extension of the

Effectiveness of the NASD’s Excess

Spread Rule Until October 13, 1997

September 23, 1997.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Exchange Act’’), 15 U.S.C.. 78s(b)(1),

notice is hereby given that on

September 15, 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 Nasdaq

Stock Market, Inc. (‘‘Nasdaq’’). The

Commission is publishing this notice to

solicit comments from interested

persons and to grant accelerated

approval of the proposed rule change.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD proposes to amend NASD

Rule 4613(d) to extend the effectiveness

of its current excess spread rule through

October 13, 1997. The excess spread

rule is applicable to Nasdaq National

Market (‘‘NNM’’) securities and

provides that a registered market maker

in a security listed on Nasdaq shall be

precluded from being a registered

market maker in that issue for twenty

(20) business days if its average spread

in the security over the course of any

full calendar month exceeds 150 percent

of the average of all dealer spreads in

such issue for the month. The text of the

proposed rule change is as follows.

Additions are italicized and deletions

bracketed.

NSAD Rule 4613

(d) Reasonably Competitive

Quotations.

A registered market maker in a

Nasdaq National Market security will be

withdrawn as a registered market maker

and precluded from re-registering as a

market maker in such issue for 20

business days if its average spread in the

security over the course of any full

calendar month exceeds 150 percent of

the average of all dealer spreads in such

issue for the month. This subparagraph

shall not apply to market makers in

Nasdaq SmallCap securities.

(1) If a registered market maker has

not satisfied the average spread

requirement set forth in this

subparagraph (d) for a particular Nasdaq

National Market security, its registration

in such issue shall be withdrawn

commencing on the next business day

following the business day on which the

market maker was sent notice of its

failure to comply with the requirement.

A market maker may request

reconsideration of the withdrawal

notification. Requests for

reconsideration will be reviewed by the

Market Operations Review Committee,

whose decisions are final and binding

on the members. A request for

reconsideration shall not operate as a

stay of the withdrawal or toll the twenty

business day period noted in

subparagraph (d) above.

(2) Grounds for requests for

reconsideration shall be limited to

claims that Nasdaq’s calculation of the

market maker’s average spread for the

month was in error.

(3) This subparagraph (d) shall be in

effect until October 13, 1997 (September

30, 1997).

Self-Regulatory Organization’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 III 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.

Prior to January 20, 1997, the NASD’s

excess spread rule (the ‘‘Rule’’ or the

‘‘Excess Spread Rule’’) provided that

registered market makers in Nasdaq

securities could not enter quotations

that exceeded 125 percent of the average

of the three narrowest market maker

spreads in that issue, provided,

however, that the maximum allowable

spread could never be less than 1⁄4 of a

point (‘‘125% Rule’’). The Rule was

originally designed to bring a measure

of quality to the Nasdaq market by

preventing firms from holding

themselves out as market makers

without having a meaningful quote in

the system. Despite the regulatory

objectives underlying the rule, however,

many market participants believed the

rule produced a variety of unintended

consequences that undermined the

integrity of Nasdaq. Most notably, the

SEC found in its 21(a) Report on the

NASD and Nasdaq that ‘‘the

interdependence of quotes mandated by

the rule may deter market makers from

narrowing their dealer spreads, because,

once the spread is tightened, the rule in

some instances precludes a market

maker from widening the spread to

earlier levels.’’ 1 As a result, the SEC

found that the Excess Spread Rule

created an economic incentive for

market makers to discourage one

another from narrowing their quotes,

thereby interfering with the ‘‘free flow

of prices in the market and imped[ing]

attempts by the market to reach the

optimal competitive spread.’’ 2

Accordingly, the SEC requested that the

NASD ‘‘modify the rule to eliminate its

undesirable effects, or to repeal it.’’ 3

In response to the SEC’s 21(a) Report,

the NASD submitted a proposal, which

was approved by the SEC and which

amended the Excess Spread Rule on a

pilot basis through July 1, 1997.4 Under

the revised Excess Spread Rule, a

registered market marker in a Nasdaq

security is precluded from being a

registered market maker in that issue for

twenty business days if its average

spread in the security over the course of

any full calendar month exceeded 150

percent of the average of all dealer

spreads in such issue for the month

(‘‘150% Rule).5

In formulating the 150% Rule, Nasdaq

Committees and Nasdaq staff felt that it

was important to strike a reasonable

balance between the need to eliminate

any constraints that the Excess Spread
Federal Register / Vol. 62, No. 189 / Tuesday, September 30, 1997 / Notices 51171

6Pilot Program Approval Order, supra note 4.

Rule places on firms to adjust their

quotations and the need to avoid

fostering a market environment where

registered market makers can maintain

inordinately wide spreads and still

receive the benefits of being a market

maker (e.g., affirmative determination

exemption and preferential margin

treatment). Nasdaq also believed it was

critical to transform the Excess Spread

Rule into a performance standard used

to determine market maker eligibility,

instead of a strict regulatory

requirement applicable to every quote

update in a Nasdaq security, violations

of which were punishable by

disciplinary action. Based on its

experience with the Rule, the Nasdaq

Board of Directors in June 1997

approved a resolution to seek

permanent approval of the 150% Rule

‘‘as is,’’ without modifications. In

addition, the NASD ratified the Nasdaq

Board resolution in July of 1997 and

Nasdaq planned to seek permanent

approval shortly thereafter.

However, the Commission has

expressed, and continues to express,

serious concerns about the effects of the

Rule on market maker activity. More

specifically, in its approval order of the

150% Rule, the SEC stated that

‘‘[a]lthough the amended excess spread

rule may reduce some of the

anticompetitive concerns outlined in

the 21(a) Report, the Commission

believes that the amendment * * * may

not completely satisfy the NASD’S

obligations under the Commission’s

Order with regard to the excess spread

rule. Specifically, it may not remove

completely the anticompetitive

incentives for market makers to refrain

from narrowing quotes because the

market makers’ quotation obligation

continues to be dependent to some

extent upon quotations of other market

makers in the stock.’’ 6

Additionally, in recent discussions,

SEC staff has indicated that it believes

that the 150% Rule may not have

completely eliminated the concerns

outlined in the 21(a) Report and may

not completely satisfy the NASD’s

obligations under the Commission’s

Order. SEC staff further has stated that

it believes that the Rule should be

completely eliminated, or at the very

least, be eliminated for stocks with a

small number of market makers.

In light of the foregoing, the NASD is

proposing to extend the Excess Spread

Rule only until October 13, 1997.

Additionally, Nasdaq staff will ask the

Nasdaq Board of Directors (‘‘Board’’) at

its September 23, 1997 board meeting to

reconsider its previous decision to seek

permanent approval of the Rule, in light

of the Commission’s concerns that the

Rule does not remove completely

incentives for market makers to refrain

from narrowing quotes. Nasdaq will

inform the Commission by letter of the

final disposition of the Board’s

reconsideration of this matter as soon as

possible.

The NASD and Nasdaq believe that

the proposed rule change is consistent

with Sections 15A(b)(6), 15A(b)(9),

15A(b)(11) and 11A(a)(1)(C) of the

Exchange 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 15A(b)(9)

provides that the rules of the

Association may not impose any burden

on competition not necessary or

appropriate in furtherance of the

purposes of the Exchange Act. Section

15A(b)(11) empowers the NASD to

adopt rules governing the form and

content of quotations relating to

securities in the Nasdaq market. Such

rules much be designed to produce fair

and informative quotations, prevent

fictitious and misleading quotations,

and promote orderly procedures for

collecting and distributing quotations.

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, the NASD and Nasdaq

believe that the 150% Rule has

promoted the integrity of quotations on

the Nasdaq market and has enhanced

competition among market makers,

thereby contributing to greater market

liquidity, improved price discovery, and

the best execution of customer orders.

The Rule has helped to ensure that all

registered market makers are providing

some threshold level of market making

support in their issues, and has helped

to avoid a market environment where

registered market makers can maintain

inordinately wide spreads and still

receive the benefits of being a market

maker. Thus, a continuation of the Rule

until October 13, 1997, will address the

Commission’s aforementioned concerns

while preserving the Rule’s benefits

(such as ensuring meaningful market

maker quotes) until the Nasdaq Board

reconsiders its previous position on the

Rule. Additionally, the proposed to

extend the pilot program for a limited

period is consistent with the Exchange

Act and will ensure continuity of

regulation until the Nasdaq Board

reconsiders its previous position on the

Rule.

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 Exchange 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. 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

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 number

SR–NASD–97–70 and should be

submitted by October 21, 1997.

IV. Commission’s Findings and Order

Granting Accelerated Approval of

Proposed Rule Change

The Commission has determined to

approve the extension of the 150% Rule

pilot until October 13, 1997. As noted

previously, the Commission has

identified anticompetitive concerns

associated with the 125% Rule in place

prior to January 20, 1997. Further, in the

Pilot Program Approval Order, the

Commission recognized that while the
51172 Federal Register / Vol. 62, No. 189 / Tuesday, September 30, 1997 / Notices

7The Commission notes that a failure to extend

the 150% Rule past the October 13, 1997 date

would result in no excess spread standard for

Nasdaq market makers.

8 17 CFR 200.30–3(a)(12).

1 15 U.S.C. § 78s(b)(1).

2 17 CFR 240.19b–4.

3See Exchange Act Release No. 37810 (October

10, 1997), 61 FR 54481 (October 18, 1996) (‘‘Pilot

Program Approval Order’’).

4See Exchange Act Release No. 37874 (October

28, 1996), 61 FR 213 (November 1, 1996).

5See Exchange Act Release No. 38462 (April 1,

1997), 62 FR 16886 (April 8, 1997). Each option

issue typically has only one symbol associated with

it, unless LEAPs are traded on that issue, in which

case there would usually be two additional symbols

related to the issue, or unless a contract adjustment

is necessary due, for example, to a merger or stock

split, in which case one additional symbol would

usually be added. Previously, the pilot program was

limited to allow up to 3 LMMs to participate and

up to 40 option symbols to be used.

6 17 CFR 240.15c–1.

150% Rule could reduce, to some

degree, the Commission’s concerns

regarding the 125% Rule, the

Commission was not convinced that

permanent approval of the 150% rule

would sufficiently address those

concerns. The Commission believes that

the pilot should continue to operate on

a temporary basis through October 13,

1997, while the Nasdaq Board

reconsiders its position on permanent

approval. Consequently an extension

will ensure that the Rule remains in

effect on an uninterrupted basis until

the Nasdaq Board has had an

opportunity to fully evaluate the most

appropriate permanent solution

regarding the excess spread rule.

In addition, the Commission believes

that the temporary rule can remain

limited to National Market securities.

Due to Nasdaq’s current systems

limitations, market makers in Nasdaq

SmallCap securities are unable to

monitor compliance with the Rule.

However, the NASD has stated that it

anticipates that market makers in

Nasdaq SmallCap securities will be

subject to the same excess spread

requirements, if any, as market makers

in Nasdaq National Market securities

when a permanent resolution is

reached.

Accordingly, the Commission finds

that the NASD’s proposal is consistent

with Sections 11A and 15A of the

Exchange Act and the rules and

regulations thereunder applicable to the

NASD and, in particular, Sections

11A(a)(1)(C), 15A(b)(6), 15A(b)(9), and

15A(b)(11). Further, the Commission

finds good cause for approving the

proposed rule change prior to the

thirtieth day after the date of

publication in the Federal Register. In

addition to the reasons discussed above,

the Commission believes that

accelerated approval of the NASD’s

proposal is appropriate given the fact

that the proposal is a temporary

extension of the 150% Rule that has

been in effect since January 1997. An

uninterrupted application of the 150%

Rule for a short period of time should

be less disruptive to market makers

while the Nasdaq Board reconsiders its

permanent approach to the concerns

raised by the Commission regarding the

excess spread rule.7

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Exchange Act,

that the proposed rule change (SR–

NASD–97–70) is approved through

October 13, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–25794 Filed 9–29–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39106; File No. SR–PCX–

97–32]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Accelerated Approval of Proposed

Rule Change by the Pacific Exchange,

Inc. Relating to an Extension of its

LMM Book Pilot Program for One Year

September 22, 1997.

Pursuant to section 19(b)(1) of the

Securities Exchange Act of 1934

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

notice is hereby given that on August 5,

1997, the Pacific Exchange, Inc. (‘‘PCX’’

or ‘‘Exchange’’) 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 self-regulatory

organization. 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 Exchange is proposing to extend

its LMM Book Pilot Program for one

year. The text of the proposed rule

change is available at the Office of the

Secretary, PCX and at the Commission.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

self-regulatory organization 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 self-regulatory organization 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

On October 11, 1996, the Commission

approved an Exchange proposal to

establish its LMM Book Pilot Program,

under which a limited number of Lead

Market Makers (‘‘LMMs’’.) are able to

assume operational responsibility for

the options limit order book (‘‘Book’’) in

certain options issues.3 Subsequently,

on October 28, 1996, the Commission

approved an Exchange proposal to

adopt a new change applicable to LMMs

who participate in the program.4 In

addition on April 1, 1997, the

Commission approved an Exchange

proposal to expand the scope of the

pilot program to allow up to nine LMMs

to participate and up to 150 symbols to

be used.5 The Exchange is now

proposing to extend the pilot program

for one year, to October 12, 1998.

Under the pilot program, the

approved LMMs manage the Book

function, take responsibility for trading

disputes and errors, set rates for Book

execution, and pay the Exchange a fee

for systems and services. The program

allows LMMs to have greater control

over their operations on the Exchange

floor by allowing them, among other

things, to set their own rates for

execution services provided to

customers. The LMMs who participate

during the pilot program are selected by

the Options Floor Trading Committee

based on certain designated factors.

Approved LMMs must maintain

‘‘minimum net capital,’’ as provided in

SEC Rule 15c–1,6 and must also

maintain a cash or liquid asset position

of at least $500,000, plus $25,000 for

each issue over 5 issues for which they

perform the function of an Order Book

Official. Only multiply-traded option

issues are eligible during the pilot

phase.

The Exchange is requesting a one-year

extension to the pilot program so that it