Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Notices 68327

4 15 U.S.C. 78s(b)(3)(A)(iii).

5 17 CFR 240.19b–4(e)(3).

6 17 CFR 200.30–3(a)(12).

1 15 U.S.C. § 78s(b)(1).

2 17 CFR 240.19b–4.

3Amendment No. 1 amends Exchange Rule 24.13,

‘‘Trading Rotations,’’ Interpretation .03, and

eliminates the 50% fixed test as a factor in the

determination whether an opening rotation in an

index option class may be delayed. See Letter from

Paul E. Dengel, Schiff Hardin & Waite, to Michael

Walinskas, Senior Special Counsel, Division of

Market Regulation, Commission, dated September

10, 1997.

4The Commission notes that this proposed rule

change does not address or impact the Exchange’s

circuit breaker trading halt rule and policy.

However, the proposal makes a conforming change

to Exchange Rule 24.7(c) that amends certain

language cross referencing the Exchange’s circuit

breaker trading halt rule, Exchange Rule 6.3B,

‘‘Trading Halts Due to Extraordinary Market

Volatility.’’

necessary or appropriate in furtherance

of the purposes of the Act.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Written comments were neither

solicited nor received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

The Exchange has designated this

proposal as concerned solely with the

administration of the Exchange under

Section 19(b)(3)(A)(iii) 4 of the Act and

Rule 19b-4(e)(3) 5 thereunder, which

renders the proposal effective upon

filing with the Commission.

At any time within sixty days of the

filing of this proposed rule change, the

Commission may summarily abrogate

such 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, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of CBOE. All submissions should

refer to File No. SR–CBOE–97–61 and

should be submitted by January 21,

1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.6

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–34059 Filed 12–30–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39480; File No. SR–CBOE–

97–36]

Self-Regulatory Organizations;

Chicago Board Options Exchange,

Incorporated; Order Granting Approval

to Proposed Rule Change and Notice

of Filing and Order Granting

Accelerated Approval of Amendment

No. 1 to Proposed Rule Change

Revising the Exchange Rules

Governing the Halting and Resumption

of Trading in Index Options

December 22, 1997.

I. Introduction

On July 25, 1997, the Chicago Board

Options Exchange, Incorporated

(‘‘CBOE’’ or ‘‘Exchange’’) submitted to

the Securities and Exchange

Commission (‘‘Commission’’), pursuant

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

Exchange Act of 1934 (‘‘Act’’) 1 and Rule

19b–4 thereunder,2 a proposed rule

change to revise the Exchange rules

governing the halting and resumption of

trading in index options on the

Exchange.

The proposed rule change was

published for comment in Securities

Exchange Act Release No. 38962 (Aug.

22, 1997), 62 FR 45890 (Aug. 29, 1997).

No comments were received on the

proposal. The Exchange filed

Amendment No. 1 to the proposed rule

change with the Commission on

September 15, 1997.3 This order

approves the proposed rule change

including, on an accelerated basis,

Amendment No. 1.

II. Description of the Proposal

The Exchange seeks to amend

Exchange Rule 24.7, ‘‘Trading Halts or

Suspensions,’’ to eliminate certain fixed

percentage tests that presently apply to

the decision to halt trading in index

options as well as the decision to

resume trading after such a halt. The

proposed rule change also makes certain

conforming changes to related Exchange

rules.4

A. Trading Halts

Currently, under Exchange Rule

24.7(a)(i), one of the enumerated factors

that the designated Exchange officials

may consider in deciding whether to

halt trading in an index option is

whether trading has been halted or

suspended in underlying stocks whose

weighted value presents ‘‘20% or more

of the index value.’’ The Exchange has

expressed concern that by including a

fixed percentage test among those

factors that ‘‘may be considered,’’ the

present rule may imply that it would be

improper for the designated Exchange

officials to consider trading

interruptions in underlying stocks

whose weighted value represents less

than 20% of the index value.

The Exchange believes this

interpretations conflicts with the

purpose of Exchange Rule 24.7, which

grants designated Exchange officials the

discretion to halt index option trading

whenever they ‘‘conclude in their

judgment that such action is appropriate

in the interests of a fair and orderly

market and to protect investors.’’

Because Exchange Rule 24.7(a)(i)–(iv)

sets forth a non-exclusive list of factors

that Exchange officials may consider in

exercising that discretion, the Exchange

contends it would be inappropriate to

forbid those officials from considering

trading disruptions in underlying stocks

that fall below a predetermined level.

Accordingly, the proposed rule change

would clarify that Exchange officials, in

evaluating whether to halt trading in

index options, are not limited to

situations in which 20% of the

underlying stocks have halted, but

rather may consider ‘‘the extent to

which’’ trading is not occurring in the

underlying stocks.

In addition, the proposed rule change

would provide Exchange officials with

the flexibility to consider not only

whether trading in underlying stocks

has been ‘‘halted or suspended,’’ but

also whether such trading is ‘‘not

occurring.’’ The term ‘‘halted or

suspended’’ indicates that Exchange

authorities have taken formal action to

discontinue trading in stock. However,

in deciding whether to continue trading

a derivative instrument like an index
68328 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Notices

5A similar change has been made to Exchange

Rule 6.3(b), ‘‘Trading Halts,’’ which generally

governs the resumption of trading after a trading

halt in an equity option class. As a result, trading

in an equity option class that has been the subject

of a halt may resume only upon a determination by

two Floor Officials that such a resumption is in the

interests of a fair and orderly market. See Securities

Exchange Act Release No. 39292 (Nov. 3, 1997), 62

FR 60738 (Nov. 12, 1997).

6See Securities Exchange Act Release No. 38221

(Jan. 31, 1997), 62 FR 5871 (Feb. 7, 1997).

7 15 U.S.C. § 78f(b).

option, Exchange officials should be

able to consider the full extent to which

underlying stocks are not trading,

whether trading is not occurring

because of formal exchange action,

systemic problems, market emergencies,

or other cause. The proposed rule

change would clarify that in

determining whether to halt index

option trading, Exchange officials may

consider the extent to which ‘‘trading is

not occurring’’ in the underlying stocks,

without limiting that consideration to

formal halts or suspensions.

The Exchange also believes that

Exchange Rule 24.7 may imply that the

Exchange is required to calculate, on an

ongoing basis, the extent to which

stocks underlying a subject index are

trading. The Exchange contends that

such calculations would be difficult to

perform on a real time basis for those

indexes comprised of a large number of

stocks (e.g., the Russell 2000, which

consists of 2000 stocks), or those

indexes for which data on trading halts

is not readily available (e.g., NDX, an

index based on over-the-counter stocks).

The removal of the fixed percentage

tests from Exchange Rule 24.7 is

expected to rectify any misperception

regarding the Exchange’s duty to

maintain and calculate trading

information for stocks underlying an

index on which options are traded.

B. Resumption Of Trading After Trading

Halts

The proposed rule change would

eliminate the provision in Exchange

Rule 24.7(b) that makes trading in a

fixed percentage of stocks underlying an

index a prerequisite to the resumption

of index options trading after a trading

halt. Currently, trading may resume

when the designated Exchange officials

determine either (i) that the conditions

that led to the halt no longer are present;

or (ii) that the interests of a fair and

orderly market are served by a

resumption of trading. However,

Exchange Rule 24.7(b) provides that in

no event may trading resume until the

Exchange has determined that trading is

occurring in underlying stocks whose

weighted value presents more than 50%

of the index value.

The Exchange has represented that it

would continue its practice of assessing

the extent to which underlying stocks

are trading in deciding whether to

resume trading after an index options

trading halt. However, the Exchange

believes it is inappropriate to delay the

resumption of trading until the level of

trading in stocks underlying an index

has reached a predetermined, fixed

level, particularly since it often may be

difficult to make a precise

determination of trading activity for

indexes with a large number of

constituent stocks.

Accordingly, the proposed rule

change would eliminate the 50% fixed

test and instead would specify that one

of the factors that Exchange officials

may consider in determining whether

the ‘‘interests of a fair and orderly

market are served by a resumption of

trading’’ is ‘‘the extent to which trading

is occurring in stocks underlying the

index.’’ According to the Exchange, the

proposed rule change would enable the

Exchange to resume trading as soon as

conditions warrant, without interposing

an artificial barrier that might result

from a fixed percentage test. The

Exchange believes the proposed rule

change continues to provide Exchange

officials with the opportunity to give

appropriate weight to the extent to

which underlying stocks are trading.

In addition, the proposed rule change

would clarify that index options trading

may resume only upon a determination

by the designated Exchange officials

that such a resumption is in the

interests of a fair and orderly market.

The present form of Exchange Rule

24.7(b) allows trading to resume (subject

to the 50% requirement) when the

designated Exchange officials determine

either (i) that the conditions that led to

the halt no longer are present; or (ii) that

a resumption of trading would serve the

interests of a fair and orderly market.

Read literally, Exchange Rule 24.7(b)

would permit trading to resume if the

conditions that led to the halt no longer

are present, even if a resumption of

trading would be contrary to the

interests of a fair and orderly market.

Such an interpretation would conflict

with the Exchange’s practice and run

counter to the Act. Accordingly, the

proposed rule change would state that:

(1) index options trading may resume

only if the designated Exchange officials

determine that such a resumption

would be in the interests of a fair and

orderly market,5 and (2) the fact that the

conditions leading to the halt no longer

are present is one of several factors

which Exchange officials may consider

in determining whether the interests of

a fair and orderly market would be

served by a resumption of trading.

The proposed rule change also

conforms the cross reference to

Exchange Rule 6.3B that appears in

Exchange Rule 24.7(c) to the current

language of the referenced rule.

Exchange Rule 6.3B sets forth the

Exchange’s circuit breaker trading halt

policy, the text of which was recently

amended.6

Finally, the proposed rule change

would add Interpretation .02 to

Exchange Rule 24.7 to address the

manner in which trading is to resume

after a trading halt. This topic is not

directly addressed under current

Exchange Rule 24.7, although the last

sentence of existing Exchange Rule

24.7(b) contemplates that a rotation will

be used. Proposed Interpretation .02

would adopt the identical procedure

that now governs the resumption of

trading after a circuit breaker halt. The

procedure is set forth in Interpretation

.02 to Exchange Rule 6.3B and provides

that trading will resume by a rotation

after a trading halt unless the designated

Exchange officials conclude that a

different method of reopening is

appropriate under the circumstances.

The officials may determine, among

other things, not to employ a rotation,

to use an abbreviated rotation, or

otherwise to vary the manner of the

rotation. The Exchange seeks to adopt

proposed Interpretation .02 so that

comparable rules govern the resumption

of trading after circuit breaker halts as

well as halts effected for other reasons.

III. Discussion

For the reasons discussed below, the

Commission finds that the proposed

rule change is consistent with the

requirements of the Act and the rules

and regulations thereunder applicable to

a national securities exchange, and with

the requirements of Section 6(b).7 In

particular, the Commission believes the

proposed rule change is consistent with

the Section 6(b)(5) requirements that the

rules of an exchange be designed to

promote just and equitable principles of

trade, 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.

While the current language of

Exchange Rule 24.7(a) states that the

20% fixed test is one of several factors

that may be considered in determining

whether to halt index options trading,

the Exchange has expressed concern

that the test may be interpreted as

having a mandatory rather than
Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Notices 68329

8Uncertainty regarding the nature of the 20%

fixed test dates back to 1988 when the Commission

approved a proposed rule change that modified

Exchange Rule 24.7. The Commission allowed the

Exchange to revise its trading halt policy so that the

20% benchmark would no longer be the primary

test but, instead, one of the facts to be considered

when deciding whether to halt trading in index

options. Although the Commission permitted the

Exchange to reconfigure Exchange Rule 24.7 to

make the 20% fixed test permissive, rather than

mandatory, the Commission said it ‘‘believes the

proposed amendment does not reflect a change in

CBOE’s trading halt policy.’’ See Securities

Exchange Act Release No. 26198 (Oct. 19, 1988), 53

FR 41637 (Oct. 24, 1988).

9The October 1987 Market Break: A Report by the

Division of Market Regulation, February, 1988, at 8–

22. 10 15 U.S.C. § 78f(b)(5).

permissive application.8 The

Commission finds that the Exchange is

justified in its efforts to clarify Exchange

policy regarding the halting of index

options trading. Market participants

should possess a clear understanding of

the rules and procedures which the

Exchange is bound to observe when

considering the halting of trading in

index options.

The Exchange currently may halt

trading in index options classes when

the designated Exchange officials have

determined that ‘‘such action is

appropriate in the interests of a fair and

orderly market and to protect

investors.’’ The 20% fixed test

represents one of several non-exhaustive

factors that may be considered by

Exchange officials when determining

whether to halt trading pursuant to

Exchange Rule 24.7. It provides

Exchange officials and market

participants notice that it may be

appropriate to effect a trading halt in

index options trading whenever a

number of component securities

underlying a substantial value of the

index are not trading. The proposed rule

change continues to provide such

notice, albeit without a specific

numerical guideline.

Accordingly, the Commission believes

it is appropriate for the Exchange to

replace the 20% fixed test with language

indicating that Exchange officials may

consider the extent to which ‘‘trading is

not occurring’’ in stocks underlying an

index when deciding whether to halt

index options trading. The revised

language properly reflects that in

determining whether to halt index

options trading pursuant to Exchange

Rule 24.7, Exchange officials may

consider all types of events that disrupt

trading including, for example, formal

halts or suspensions, systemic

problems, market emergencies, or

natural disasters.

The Commission also believes it is

reasonable for the Exchange to remove

the mandatory 50% fixed test from

Exchange Rule 24.7(b) and include ‘‘the

extent to which trading is occurring in

stocks underlying the index’’ as a factor

to be considered when deciding

whether to resume index options

trading. The Exchange believes that the

determination whether trading should

resume after a halt can be made without

regard to fixed thresholds by evaluating

whether key stocks have reopened, and

by examining the speed with which

stocks in general are reopening. The

Commission recognizes that adherence

to a mandatory, fixed percentage test

prevents the Exchange from relying

primarily on such indicators. As a

result, the Exchange could remain

closed to market participants longer

than desirable. The revised language

permits Exchange officials to use their

expert judgment in determining whether

to resume trading from a halt. Exchange

Rule 24.7 will continue to require

Exchange officials to consider the extent

to which trading is occurring in the

stocks underlying the index, but absent

the strict 50% fixed test.

Although the Commission recognizes

the Exchange’s need for flexible trading

halt rules, it expects the Exchange to

apply revised Exchange Rule 24.7 in a

manner which ensures that trading is

occurring in a substantial number of

stocks underlying an index before

trading in index options is allowed to

resume. As the Commission has

previously noted, ‘‘[i]t is questionable

whether fair markets can be maintained

in derivative index products when

many of the index’s component

securities are not trading’’ 9 The

Commission is concerned that unless a

substantial number of stocks underlying

an index are trading, the related index

options may be mispriced and fail to

accurately reflect the current market

value of all underlying stocks. While it

would be counterproductive for the

Commission to define ‘‘substantial’’ in

numerical terms, or discuss what

constitutes an acceptable level of

trading in stocks underlying an index,

the Commission nonetheless expects the

Exchange to maintain fair markets in its

index option products.

The Commission further believes it is

reasonable for the Exchange to establish

procedures governing the resumption of

trading in index options after a trading

halt. Although the current text of

Exchange Rule 24.7(b) contemplates the

use of a rotation in such circumstances,

the Commission recognizes the need for

definite procedures, particularly

because confusion may still linger from

the event that precipitated the trading

halt. Furthermore, by adopting the

identical procedure that currently

governs the resumption of trading

following a circuit breaker halt, the

Exchange’s policies and rules will be

consistent with respect to the

resumption of trading after halts.

The Commission finds good cause for

approving proposed Amendment No. 1

prior to the thirtieth day after the date

of publication of notice of filing thereof

in the Federal Register. The

Commission notes that Amendment No.

1 makes a conforming change to

Exchange Rule 24.13, ‘‘Trading

Rotations,’’ Interpretation .03, that is

consistent with the Exchange’s decision

to eliminate fixed percentage thresholds

from the determination whether index

options trading should be halted or

resumed. In place of a 50% fixed test,

Amendment No. 1 substitutes ‘‘the

extent to which trading is not

occurring’’ as a factor in deciding

whether to delay an opening rotation in

index options. The Commission believes

that Amendment No. 1 helps establish

uniformity among the Exchange’s rules

and procedures relating to halts and

delays in index options trading.

Accordingly, the Commission believes it

is consistent with Section 6(b)(5) of the

Act 10 to approve Amendment No. 1 to

the proposed rule change on an

accelerated basis.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning Amendment No.

1 to the proposed rule change. 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 submissions, 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 persons, 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

Section, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of the Exchange. All submissions

should refer to File No. SR–CBOE–97–

36 and should be submitted by January

21, 1998.
68330 Federal Register / Vol. 62, No. 250 / Wednesday, December 31, 1997 / Notices

11 15 U.S.C. § 78s(b)(2).

12 17 CFR 200.30–3(a)(12).

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

2See letter from Robert E. Aber, Vice President

and General Counsel, Nasdaq, to Katherine

England, Assistant Director, SEC, dated Dec. 11,

1997 (‘‘Amendment No. 1’’). The Exchange initially

submitted the proposal on December 4, 1997.

However, at the Commission’s request, the

Exchange filed Amendment No. 1 to the proposed

rule change on December 12, 1997. Amendment No.

1 corrects a typographical error in the SOES tiersize classification criteria used by the Nasdaq.

Amendment No. 1 also clarifies that, despite the

typographical error, the correct criteria set out in

NASD Rules 4613(a)(2) and 4710(g) was used by

Nasdaq in reclassifying the SOES tier sizes. The

correction was also made in the Notice to Members

97–90.

3The classification criteria are set forth in NASD

Rule 4613(a)(2) and the footnote to NASD Rule

4710(g). 4 15 U.S.C. § 78o–3.

V. Conclusion

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,11 that the

proposed rule change (SR–CBOE–97–

36), as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.12

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–34060 Filed 12–30–97; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–39482; File No. SR–NASD–

97–86]

Self—Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change by the

National Association of Securities

Dealers, Inc. Relating to Small Order

Execution System Tier Classification

December 22, 1997.

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

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

December 12, 1997, the National

Association of Securities Dealers

(‘‘NASD’’ or Association) 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 self-regulatory

organization.2 The Commission is

publishing this notice to solicit

comments on the proposed rule change,

as amended, from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD is submitting this filing to

effectuate The Nasdaq Stock Market,

Inc.’s (‘‘Nasdaq’’) periodic

reclassification of Nasdaq National

Market (‘‘NNM’’) securities into

appropriate tier sizes for purposes of

determining the maximum size order for

a particular security eligible for

execution through Nasdaq’s Small Order

Execution System (‘‘SOES’’).

Specifically, under the proposal, 544

NNM securities will be reclassified into

a different SOES tier size effective

January 1, 1998. Since the NASD’s

proposal is an interpretation of existing

NASD rules, there are no language

changes.

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

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

and a copy of the Notice-to-Members

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 Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The purpose of the rule change is to

effectuate Nasdaq’s periodic

reclassification of NNM securities into

appropriate tier sizes for purposes of

determining the maximum size order for

a particular security eligible for

execution through SOES. Nasdaq

periodically reviews the SOES tier size

applicable to each NNM security to

determine if the trading characteristics

of the issue have changed so as to

warrant a tier size adjustment. Such a

review was conducted using data as of

September 30, 1997, pursuant to the

following established criteria.3

NNM securities with an average daily nonblock volume of 3,000 shares or more a day,

a bid price less than or equal to $100, and

three or more market makers are subject to

a minimum quotation size requirement of

1,000 shares and a maximum SOES order

size of 1,000 shares;

NNM securities with an average daily nonblock volume of 1,000 shares or more a day,

a bid price less than or equal to $150, and

two or more market makers are subject to a

minimum quotation size requirement of 500

shares and a maximum SOES order size of

500 shares; and

NNM securities with an average daily nonblock volume of less than 1,000 shares a day,

a bid price less than or equal to $250, and

two or more market makers are subject to a

minimum quotation size requirement of 200

shares and a maximum SOES order size of

200 shares.

Pursuant to the application of this

classification criteria, 544 NNM

securities will be reclassified effective

January 1, 1998. These 544 NNM

securities are set out in the NASD’s

Notice to Members 97–90 (December,

1997).

In ranking NNM securities pursuant

to the established classification criteria,

Nasdaq followed the changes dictated

by the criteria with three exceptions.

First, an issue was not moved more than

one tier size level. For example, if an

issue was previously categorized in the

1,000-share tier size, it would not be

permitted to move to the 200-share tier

even if the reclassification criteria

showed that such a move was

warranted. In adopting this policy,

Nasdaq was attempting to maintain

adequate public investor access to the

market for issues in which the tier size

level decreased and help ensure the

ongoing participation of market makers

in SOES for issues in which the tier size

level increased. Second, for securities

priced below $1 where the reranking

called for a reduction in tier size, the

tier size was not reduced. Third, for the

top 50 Nasdaq securities based on

market capitalization, the SOES tier

sizes were not reduced regardless of

whether the reranking called for a tiersize reduction.

2. Statutory Basis

The NASD believes the proposed rule

change is consistent with Section

15A(b)(6) of the Act.4 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.

Specifically, the NASD believes that the

reassignment of NNM securities within

SOES tier size levels will further these

ends by providing an efficient

mechanism for small, retail investors to

execute their orders on Nasdaq and by

providing investors with the assurance

that they can effect trades up to a certain

size at the best prices quoted on Nasdaq.