Federal Register / Vol. 62, No. 36 / Monday, February 24, 1997 / Notices 8289

10 15 U.S.C. 78s(b)(2).

11 17 CFR 200.30–3(a)(12).

1 15 U.S.C. § 78s(b)(1).

2See Securities Exchange Act Release No.

37619A (September 6, 1996); 61 FR 48290

(September 12, 1996) (Order Handling Rules

Adopting Release).

3See Securities Exchange Act Release No. 38175

(January 23, 1997); 62 FR 3548.

IV. Conclusion

For the foregoing reasons, the

Commission finds that the proposed

rule change is consistent with the Act

and the rules and regulations

thereunder applicable to the CBOE, and

in particular Section 6(b)(5).

It is therefore ordered, Pursuant to

Section 19(b)(2) of the Act,10 that the

proposed rule change (File No. SR–

CBOE–96–70) be and hereby is

approved.

For the Commission by the Division

of Market Regulation, pursuant to

delegated authority.11

[FR Doc. 97–4387 Filed 2–21–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38294; File No. SR–NASD–

97–07]

Self-Regulatory Organizations; Notice

of Filing and Order Granting

Temporary Accelerated Approval of

Proposed Rule Change by the National

Association of Securities Dealers, Inc.

Relating to Rule 4612, Primary Nasdaq

Market Maker Standards Through

October 1, 1997

February 14, 1997.

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

Securities Exchange Act of 1934

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

January 31, 1997, the Nasdaq Stock

Market, Inc. (‘‘Nasdaq’’) filed with the

Securities and Exchange Commission

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

rule change as described in Items I and

II below, which Items have been

prepared by Nasdaq. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons and to grant

accelerated approval to the proposal.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

Pursuant to the provisions of Section

19(b)(1) under the Act, Nasdaq, a wholly

owned subsidiary of the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’), is herewith

filing a proposed rule change to

temporarily suspend the use of the

Primary Nasdaq Market Maker

qualification criteria found in Rule 4612

(a) and (b) of the Nasdaq Market Maker

Requirements of the NASD Rules for all

Nasdaq National Market securities for

the remainder of the current pilot period

of the Nasdaq Short Sale Rule or until

such earlier time when new primary

market maker qualification criteria can

be devised and adopted.

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

After the first week of trading under

the new SEC rules regarding a Nasdaq

market maker’s order handling

obligations, i.e., Rule 11Ac1–4 (the

customer limit order display rule) and

amended Rule 11Ac1–1 (amendments to

the firm quote rule regarding the display

of priced orders entered by market

makers or specialists into electronic

communications networks (‘‘ECNs’’)),2

Nasdaq has re-evaluated its existing

qualification criteria in the primary

market maker standards rule, Rule 4612

(a) and (b), in those stocks that are not

subject to the primary market maker

standard suspension approved in SR–

NASD–96–55.3 In that rule filing,

Nasdaq noted that because of the

potential changes in quotation and

trading activity in Nasdaq securities

when the new SEC Rules became

effective, the existing numerical criteria

used to qualify a registered market

maker as a primary market maker would

be significantly affected. Because the

precise effects on market maker quotes

and trades were not possible to predict

until Nasdaq could develop practical

experience with new patterns of activity

under the new rules, Nasdaq believed

that it should attempt to minimize the

possible harmful unintended

consequences that could occur by

leaving the current standards in place.

Accordingly, Nasdaq proposed, and the

SEC approved, that the existing

standards would be temporarily

suspended on the same schedule for the

phase in of the SEC Rules requirements.

However, based upon trading

experience in the first week of trading

under the new SEC and NASD Rules,

Nasdaq believes that the primary market

maker standards should be suspended

immediately for all National Market

securities and all registered market

makers in those securities should be

designated as primary market makers.

Nasdaq bases this proposed rule change

on three factors that were not readily

apparent at the time it filed SR–NASD–

96–55: (1) many market makers have

voluntarily chosen to display customer

limit orders in their quotes even though

the SEC’s Limit Order Display Rule does

not yet require it; (2) SOES

decrementation for all Nasdaq stocks

has significantly affected market maker

ability to meet several of the primary

market maker standards; and (3) with

the inability to meet the existing criteria

for a larger number of securities, a

market maker may be prevented from

registering as a primary market maker in

an initial public offering because it fails

to meet the 80% primary market maker

test contained in Rule 4612(g)(2)(B).

Under existing Rule 4612, a registered

Nasdaq Market Maker may be deemed to

be a Primary Market Maker in National

Market securities if the market maker

meets two of three criteria: (1) the

market maker maintains the best bid or

best offer as shown on Nasdaq no less

than 35% of the time; (2) a market

maker maintains a spread no greater

than 102% of the average dealer spread;

and (3) no more than 50% of a market

maker’s quotation changes occur

without a trade execution. In addition,

if a registered market maker meets only

one of the above criteria, it may

nevertheless qualify as a primary market

maker if the market maker accounts for

volume at least 11⁄2 times its

proportionate share of overall volume in

the stock. The review period for meeting

any of these criteria is one calendar

month. Nasdaq notifies a market maker

at the beginning of the new calendar

month if it does not meet the tests, and

one business day following the

notification, Nasdaq withdraws the ‘‘p’’

designator.

The changes to market maker

quotation and trading activities have

been dramatic in the first week of

trading in the new environment. To

provide their customers with the greater

transparency, many market makers have

begun to display customer limit orders

in all Nasdaq securities, not only those

subject to the phase-in of the Limit

Order Display Rule, Rule 11Ac1–4. With

the voluntary display of customer limit

orders in stocks not yet subject to Rule

11Ac1–4, Nasdaq market makers are

changing their quotes when they are in
8290 Federal Register / Vol. 62, No. 36 / Monday, February 24, 1997 / Notices

4 Id.

5As with the primary market maker standards,

there is also a dealer spread test that is part of the

NASD’s ‘‘excess spread rule,’’ Rule 4613(d). The

Commission recently approved a proposed rule

change on a pilot basis through July 1, 1997,

providing that a registered market maker in a

security listed on the Nasdaq stock market shall be

precluded from being a registered market maker in

that issue for twenty business days if its average

receipt of customer limit orders that

improve upon their current quotations.

Because more dealer quotes are now

being driven not merely by the market

maker’s proprietary interests, but also

the interests of customers that place

limit orders with the market maker,

Nasdaq believes that a market maker’s

ability to meet the 102% of average

dealer spread test may be more difficult

to meet. For example, because a quote

of a market maker driven by a customer

limit order is indistinguishable from

that of a quote driven by a customer

order, it is impossible to tell when

market maker quote changes are being

driven by customer interests that are

entered and then subsequently canceled

without any execution. In addition, the

test regarding the percentage of time in

which the market maker’s quote is at the

inside will also be driven to some extent

by customer limit order interest.

Moreover, the SOES decrementation

feature is having a significant impact on

individual market maker quotations.

Under the new SOES rules, which apply

to all securities, when SOES executes

against a quotation, whether it is on

behalf of a customer or not, Nasdaq’s

system decreases the quotation size. If

the quote is decreased to zero, and the

market maker has the Nasdaq autorefresh feature turned on, the market

maker’s quote is changed pursuant to

that execution, However, because the

auto-refresh moves only one side of the

market maker’s quote, the market

maker’s quote is spread wider than

many market makers want. Therefore,

market makers then change the quote to

a narrower spread. While Nasdaq

believes that narrower spreads are

beneficial for investors overall, in this

instance, the quote movement without a

corresponding trade causes the market

maker to exceed the 50% quote to trade

ratio established in the primary market

maker standards. If the market maker,

on the other hand, chooses not to

narrow its quote after the auto-refresh,

that market maker runs the risk that it

may not meet the 102% of the average

spread test. Finally, Nasdaq notes that if

a market maker fails to meet the

standards and falls below the test

regarding being a primary market maker

in 80% or more of the securities for

which it is registered as a market maker,

it will not be allowed to register as a

primary market maker in an initial

public offering, even if it is an

underwriter of that security and may be

required to play an important liquidity

providing role in that stock’s initial

trading activity.

Nasdaq believes that it is in the public

investor’s best interests to temporarily

suspend the operation of the primary

market maker standards that currently

exist. If the standards are not

suspended, the significant shift in the

patterns of quotation and executions

that Nasdaq is beginning to experience

is going to cause primary market makers

operating under the existing standards

to lose that status. Loss of the

designation would mean that market

makers without the designator would

not be permitted to avail themselves of

the short sale exemption for primary

market makers. If a significant number

of registered market makers were to lose

the short sale exemption, or if a single

market maker that handled a significant

portion of the order flow in a security

were to lose the exemption, liquidity in

that particular stock could be seriously

harmed.

Therefore, as of February 3, 1997, any

registered market maker would be able

to avail itself of the short sale exemption

for qualified market makers found in

Rule 3350(c)(1). In seeking to

temporarily suspend the use of the

primary market maker qualification

criteria, Nasdaq believes that the

suspension of the criteria is an

appropriate balance between the need

for limitations on the market maker

short sale exemption and the potential

for loss of liquidity and market

disruption in a period when new

patterns and practices of trading are first

being developed. Nasdaq believes that

the period of time in which the new

SEC Rules are first being implemented

may be a period of uncertainty for

market makers and investors alike and

that the prudent course of action would

be to identify and eliminate as many

potential areas for increasing that

uncertainty as possible. Nasdaq has

identified this issue as a critical area of

uncertainty and believes that the

suspension of the market maker

qualification standards on a temporary

basis is an appropriate market quality

response. This relief will enable Nasdaq

market makers to better satisfy investor

liquidity demands and could help to

promote pricing efficiency.

Nasdaq also plans to develop new

standards as soon as practicable so that

Nasdaq can obtain experience with the

manner in which the new SEC Rules

affect market makers. The plan is to

analyze the data from January and

February and discuss the practices

among staff and with the Quality of

Markets Committee.

Nasdaq believes that the proposed

rule change is consistent with Section

15A(b)(6) of the Act in that it is

designed to prevent fraudulent and

manipulative acts and facilities

transactions in securities. In particular,

this temporary amendment to the

existing rule should provide market

makers with certainty regarding whether

they are entitled to an exemption under

the rule which should promote market

efficiency and enhance the orderliness

of the market during a transition period.

It should also help in reducing investor

confusion at this time and thereby

promote efficient and fair markets.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

Nasdaq does 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. Commission’s Findings and Order

Granting Temporary Accelerated

Approval of Proposed Rule Change

The Commission has reviewed

carefully Nasdaq’s proposed rule change

and believes, for the reasons set forth

below, that the proposed rule change is

consistent with the requirements of the

Act and the rules and regulations

thereunder applicable to the NASD and,

in particular, the requirements of

Section 15A(b)(6), 15A(b)(9), and

15A(b)(11). In addition, the Commission

finds that the rule change is consistent

with the Congressional objectives for the

equity markets, set out in Section 11A

of the Act, of achieving more efficient

and effective market operation, fair

competition among brokers and dealers,

and economically efficient execution of

investor orders in the best market. In

particular, this temporary amendment to

the existing rule should avoid

frustrating the operation of the Order

Handling Rules in light of the existence

of market factors not readily apparent at

the time the NASD requested more

limited relief with respect to the

suspension of primary market maker

standards.4 The Commission is

approving the rule change on a pilot

basis through October 1, 1997. During

this time, however, the Commission

expects that, as with the NASD’s excess

spread rule,5 the NASD must develop
Federal Register / Vol. 62, No. 36 / Monday, February 24, 1997 / Notices 8291

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.

See Securities Exchange Act Release No. 38180

(January 16, 1997), 62 FR 3725. Although the

Commission approved the proposed rule change on

a temporary basis to facilitate compliance with the

Commission’s Order Handling Rules, the

Commission stated that during this time period, the

NASD should monitor the effects of the pilot, as

well as study alternative methods that would

enhance market making performance while

completely fulfilling the NASD’s obligation

regarding the excess spread rule before the August

8, 1997, deadline contained in the Commission’s

Order Instituting Public Proceedings Pursuant to

Section 19(h)(1) of the Securities Exchange Act of

1934, Making Findings and Imposing Remedial

Sanctions, Securities Exchange Act Release No.

37538 (August 8, 1996).

6The Division of Market Regulation issued an

interim no-action letter to the NASD and Nasdaq

with respect to the enforcement of the NASD’s

primary market maker standards during the

consideration of this proposed rule change. The

approval of this rule change supersedes that noaction position. See Letter from Howard Kramer,

Associate Director, Division of Market Regulation,

SEC, to Eugene A. Lopez, Assistant General

Counsel, Nasdaq, dated February 3, 1997.

7 15 U.S.C. 78s(b)(2).

8 17 U.S.C. 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3Securities Exchange Act Release No. 37782 (Oct.

3, 1996), 61 FR 53254.

4See Letter from Theresa McCloskey, Vice

President, Regulatory Services, Phlx, to Sharon

Lawson, Senior Special Counsel, Division of Market

Regulation, Office of Market Supervision, SEC,

dated January 23, 1997, and letter from Theresa

McCloskey, Vice President, Regulatory Services,

Phlx, to Sharon Lawson, Senior Special Counsel,

Division of Market Regulation, Office of Market

Supervision, SEC, dated January 29, 1997

(collectively ‘‘Amendment No. 1’’). Amendment No.

1 withdraws that portion of the proposal seeking

‘‘interim authority’’ to utilize the ICE system value.

Interim authority, in this case, refers to the

Exchange’s ability to continue to utilize the ICE

system during that interim time period after a

temporary operational problem at the designated

reporting authority is corrected, but before receiving

Commission approval to appoint a different

reporting authority. In addition, Amendment No. 1

clarifies that designation of ICE as the reporting

authority for a particular options product must be

filed pursuant to Section 19(b) of the Act and that

the Phlx’s request for using ICE as the reporting

authority for FLEX options will be incorporated

into the FLEX options proposal (SR-Phlx–96–38).

5Any request to utilize ICE as the permanent

reporting authority for a particular options product

will have to be submitted to the Commission for

approval under Section 19(b) of the Act. See

Amendment No. 1, supra note 4.

new primary market maker standards

well before the expiration of the pilot.

Nasdaq has requested that the

Commission find good cause pursuant

to Section 19(b)(2) for approving the

proposed rule change prior to the 30th

day after publication in the Federal

Register. The Commission finds good

cause for approving the proposed rule

change prior to the 30th day after the

date of publication of notice of filing

thereof in that accelerated approval will

accommodate the Order Handling Rules,

which went into effect January 20,

1997.6

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, NW.,

Washington, DC 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 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–97–07 and should be

submitted by March 17, 1997.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,7 that the

proposed rule change be, and hereby is,

approved on an accelerated basis,

effective February 14, 1997 through

October 1, 1997.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–4445 Filed 2–21–97; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–38292; File No. SR–Phlx–

96–36]

Self-Regulatory Organizations;

Philadelphia Stock Exchange, Inc.;

Order Granting Approval to Proposed

Rule Change and Notice of Filing of,

and Order Granting Accelerated

Approval to, Amendment No. 1 to the

Proposed Rule Change Relating to

Index Value Calculations by the Index

Calculation Engine (‘‘ICE’’) System

February 14, 1997.

On October 3, 1996, the Philadelphia

Stock Exchange, Inc. (‘‘Phlx’’ or

‘‘Exchange’’) submitted to the Securities

and Exchange Commission (‘‘SEC’’ or

‘‘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

permit the Phlx to act as the reporting

authority for its index options under

certain circumstances.

The proposed rule change was

published for comment in the Federal

Register on October 10, 1996.3 No

comments were received on the

proposal. Subsequently, the Phlx

amended the proposed rule change.4

This order approves the proposal,

including Amendment No. 1 on an

accelerated basis.

Currently, three market (broad-based)

index options, seven industry (narrowbased or sector) index options, and the

Super Cap Index option trade on the

Exchange. The reporting authority for

each index option is currently Bridge

Data. For each index option listed on

the Exchange, the specifications and

descriptions filed with the Commission

detail how the index value is calculated

and that the calculation is conducted by

Bridge.

In the course of reviewing

inconsistencies in index value

calculations, as well as the disaster

recovery implications of using a single,

outside reporting authority, the

Exchange decided to create its own

internal system for the calculation and

dissemination of index values—the

Index Calculation Engine (‘‘ICE’’)

system. Recently, this system was

completed, tested, and implemented as

a surveillance tool for Phlx Regulatory

Services and Market Surveillance staff

monitoring Exchange index options

trading. In an effort to make use of the

capabilities of the ICE system, the Phlx

proposes to utilize the ICE system value

as the official index value in two

situations.

First, the ICE system value would act

as the official index value in the event

the reporting authority designated by

the Phlx is experiencing difficulties in

disseminating an accurate value (e.g.,

computer failure, line problem). Under

these circumstances, the Exchange

would automatically switch to using the

ICE system value as the official index

value, but only for the time period that

is necessary for the designated agent to

correct its problem.

Second, the Phlx, when determining

which entity to utilize as the permanent

reporting authority for its index options,

would like to be able to select the ICE

system as the designated reporting

authority.5 Economic and efficiency

considerations are the impetus for this

request.

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, in particular, with the