69084 Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices

24 15 U.S.C. 78s(b)(2).

25See Amendment No. 1, supra note 4.

26 15 U.S.C. 78f(b)(5).

27 15 U.S.C. 78s(b)(2).

28 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3Exhibit 3 to Amendment No. 8 contains a

summary of how the NASD intends that the

SuperMontage will operate. The summary

incorporates and reconciles the original rule

proposal and the subsequent proposed

amendments, including Amendment No. 8. Exhibit

3 is available for public inspection in the

Commission’s Public Reference Room.

4See Securities Exchange Act Release No. 42166

(Nov. 22, 1999), 64 FR 69125.

5See letter from Richard G. Ketchum, President,

NASD, to Belinda Blaine, Associate Director,

Division of Market Regulation (‘‘Division’’),

Commission (March 15, 2000) (‘‘Amendment No.

3’’). In Amendment No. 3, the NASD responded to

comment letters and submitted substantive,

clarifying, and technical amendments to the

proposal.

6See Securities Exchange Act Release No. 42573

(March 23, 2000), 65 FR 16981 (‘‘Amendment No.

4’’).

7See Letter from Richard G. Ketchum, President,

NASD, to Belinda Blaine, Associate Director,

Division, Commission (May 16, 2000)

(‘‘Amendment No. 5’’).

8See letter from Richard G. Ketchum, President,

NASD, to Belinda Blaine, Associate Director,

Division, Commission (July 6, 2000) (‘‘Amendment

No. 6’’).

9See letter from Richard G. Ketchum, President,

NASD, to Belinda Blaine, Associate Director,

Division, Commission (August 7, 2000)

(‘‘Amendment No. 7’’).

10See Securities Exchange Act Release No. 43133

(August 10, 2000), 65 FR 149842 (‘‘August 15, 2000

Notice’’).

11The amended rule language contained in this

notice reflects the Commission’s approval of SR–

NASD–99–11, regarding the estabishment of the

Nasdaq National Market System (‘‘NNMS’’). See

Securities Exchange Act Release No. 42344 (January

14, 2000), 65 FR 3987 (January 25, 2000) (Order for

File No. SR–NASD–99–11 functionally integrating

the Small Order Execution System (‘‘SOES’’) and

SelectNet system to become the foundation of the

NNMS). In addition, the amended rule language

replaces, in the entirety, the rule language

contained in the original filing, as well as

Amendment Nos. 1 through 7.

the vast majority of which enter orders

for less than seventy-five contracts—by

making the RAES system less reliable.

Finally, the Commission finds good

cause for approving Amendment No. 1

prior to the 30th day after notice of the

Amendment is published in the Federal

Register pursuant to section 19(b)(2) of

the Act.24 Amendment No. 1 makes

technical changes to the proposed rule

text to reflect changes to Interpretation

.03 to Rule 8.51 made in the filing of the

proposed change. In addition,

Amendment No. 1 clarifies that the

DPM or another member of the trading

crowd may determine to reflect the

price of a market maker or other

proprietary broker-dealer order in the

displayed quote, even if that order is for

less than the firm quote requirement (in

the case of broad-based index options)

or if the order is for less than ten

contracts (in the case of all other option

contracts.) 25 The Commission believes

that the proposal may increase price

transparency at the Exchange by

expanding the kinds of orders eligible to

be reflected in the Exchange’s displayed

quote. The Commission finds that

accelerated approval of Amendment No.

1 is appropriate in order to permit the

opportunity for increased transparency

for market-maker orders or other

proprietary broker-dealer orders.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

1, including whether it is consistent

with the Act. Persons making written

submissions should file six copies

thereof with the Secretary, Securities

and Exchange Commission, 450 Fifth

Street, NW., Washington, DC 20549–

0609. 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 CBOE. All

submissions should refer to File No.

SR–CBOE–99–51 and should be

submitted by December 6, 2000.

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 a national

securities exchange, and, in particular,

with section 6(b)(5). 26

It Is Therefore Ordered, pursuant to

section 19(b)(2) of the Act,27 that the

proposed rule change (SR–CBOE–51) is

approved, and Amendment No. 1 is

approved on an accelerated basis.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority. 28

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–29187 Filed 11–14–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43514; No. SR–NASD–99–

53]

Self-Regulatory Organizations; Notice

of Filing of Amendment No. 8 to

Proposed Rule Change by the National

Association of Securities Dealers, Inc.

Relating to the Establishment of

Nasdaq Order Display Facility and to

Modifications of the Nasdaq Trading

Platform

November 3, 2000.

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

Securities Exchange Act of 1934

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

notice is hereby given that on October

23, 2000, the National Association of

Securities Dealers, Inc. (‘‘NASD’’),

through its subsidiary, The Nasdaq

Stock Market, Inc. (‘‘Nasdaq’’), filed

with the Securities and Exchange

Commission (‘‘SEC’’ or ‘‘Commission’’)

Amendment No. 8 to the proposed rule

change as described in Items I, II, and

III below, which Items have been

prepared by the NASD.3 The proposed

rule change and Amendment Nos. 1 and

2 were published for comment in the

Federal Register on December 6, 1999.4

On March 16, 2000, the NASD filed

Amendment No. 3 to the proposal.5 On

March 30, 2000, Amendment No. 4 was

published for comment in the Federal

Register.6 On May 16, 2000, the NASD

filed Amendment No. 5 to the

proposal.7 On July 6, 2000, the NASD

filed Amendment No. 6 to the

proposal.8 On August 7, 2000, the

NASD filed Amendment No. 7 to the

proposal.9 On August 15, 2000

Amendment Nos. 5, 6, and 7 were

published for comment in the Federal

Register.10 The Commission is

publishing this notice to solicit

comments on Amendment No. 8 from

interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The NASD, through its subsidiary

Nasdaq, is filing substantive and

technical amendments to File No. SR–

NASD–99–53, which proposes to

establish the Nasdaq Order Display

Facility (‘‘NODF’’) and make changes to

the Nasdaq National Market System

(‘‘NNMS’’).11 Because the NASD is

proposing alternative approaches to

preferenced orders, there are two

versions of the proposed rule text

reflecting Alternative A and Alternative

B. Except for the provisions relating to

Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices 69085

preferenced orders, Alternative A and

Alternative B are identical.

A. Proposed Rule Language for File

No. NASD–99–53 containing Alternative

A. Proposed additions are italicized and

proposed deletions are placed in

[brackets].

4720. SelectNet Service—Deleted

* * * * *

4611. Registration as a Nasdaq Market

Maker

(a)–(e) No Change.

(f) Unless otherwise specified by the

Association, each Nasdaq market maker

that is registered as a market maker in

a Nasdaq[National Market security]-

listed security shall also at all times be

registered as a market maker in the

Nasdaq National Market Execution

System (NNMS) with respect to that

security and be subject to the NNMS

Rules as set forth in the Rule 4700

Series. [Participation in the Small Order

Execution System (SOES) shall be

voluntary for any Nasdaq market maker

registered to make a market in a Nasdaq

SmallCap security.]

(g) No Change.

* * * * *

4613. Character of Quotations

(a) Two-Sided Quotations

(1) For each security in which a

member is registered as a market maker,

the member shall be willing to buy and

sell such security for its own account on

a continuous basis and shall enter and

maintain a two-sided quotation[s]

(‘‘Principal Quote’’), which is attributed

to the market maker by a special maker

participant identifier (‘‘MMID’’) and is

displayed in the Nasdaq Quotation

Montage [in The Nasdaq Stock Market]

at all times, subject to the procedures

for excused withdrawal set forth in Rule

4619.

(A) A registered market maker in a

Nasdaq-listed security [listed on The

Nasdaq Stock Market] must display a

quotation size for at least one normal

unit of trading (or a larger multiple

thereof) when it is not displaying a limit

order in compliance with SEC Rule

11Ac1–4, provided, however, that a

registered market maker may augment

its displayed quotation size to display

limit orders priced at the market

maker’s quotation. Unless otherwise

designated, a ‘‘normal unit of trading’’

shall be 100 shares. 

(b) Agency Quote—Amendments

Pending Pursuant to SR–NASD–99–09.

(c)–(e) No Change.

IM–4613. Autoquote Policy—No Change

4618. Clearance and Settlement

(a)–(b) No Changes.

(c) All transactions through the

facilities of the Nasdaq National Market

Execution System[, SOES, and SelectNet

services] shall be cleared and settled

through a registered clearing agency

using a continuous net settlement

system.

* * * * *

4619. Withdrawal of Quotations and

Passive Market Making

(a)–(b) No Change.

(c) Excused withdrawal status may be

granted to a market maker that fails to

maintain a clearing arrangement with a

registered clearing agency or with a

member of such an agency and is

withdrawn from participation in the

Automated Confirmation Transaction

service, thereby terminating its

registration as a market maker in Nasdaq

issues. Provided however, that if the

Association finds that the market

maker’s failure to maintain a clearing

arrangement is voluntary, the

withdrawal of quotations will be

considered voluntary and unexcused

pursuant to Rule 4620[, the Rules for the

Small Order Execution System, as set

forth in the Rule 4750 Series,] and the

Rule 4700 Series governing the

Nasdaq[’s] National Market Execution

System.

(d) No Change.

* * * * *

4620. Voluntary Termination of

Registration

(a) A market maker may voluntarily

terminate its registration in a security by

withdrawing its Principal [quotations]

Quote from The Nasdaq Stock Market. A

market maker that voluntarily

terminates its registration in a security

may not re-register as a market maker in

that security for twenty (20) business

days. Withdrawal from participation as

a market maker in a Nasdaq [National

Market]-listed security in the Nasdaq

National Market Execution System shall

constitute termination of registration as

a market maker in that security for

purposes of this Rule; provided,

however, that a market maker that fails

to maintain a clearing arrangement with

a registered clearing agency or with a

member of such an agency and is

withdrawn from participation in the

Automated Confirmation Transaction

System and thereby terminates its

registration as a market maker in

Nasdaq-listed [National Market and

SmallCap] issues may register as a

market maker at any time after a

clearing arrangement has been

reestablished and the market maker has

complied with ACT participant

requirements contained in Rule 6100.

* * * * *

4632. Transaction Reporting

(a)–(d) No Change.

(e) Transactions Not Required To Be

Reported

The following types of transactions

shall not be reported:

(1) Transactions executed through the

Computer Assisted Execution System

(CAES), or the facilities of the Nasdaq

National Market Execution System

(‘‘NNMS’’)[, or the SelectNet service];

(2)–(6) No Change.

(f) No Change.

4642. Transaction Reporting

(a)–(d) No Change.

(e) Transactions Not Required To Be

Reported

The following types of transactions

shall not be reported:

(1) Transactions executed through the

Computer Assisted Execution System

(CAES)[; the Small Order Execution

System (SOES) or the SelectNet service]

or facilities of the Nasdaq National

Market Execution System (‘‘NNMS’’). 

(2)–(5) No Change.

(f) No Change.

* * * * *

4700. NASDAQ NATIONAL MARKET

EXECUTION SYSTEM (NNMS)

4701. Definitions—Unless stated

otherwise, the terms described below

shall have the following meaning: 

[(d)] (a) The term ‘‘active NNMS

securities’’ shall mean those NNMS

eligible securities in which at least one

NNMS Market Maker is currently active

in NNMS.

[(i)] (b) The term ‘‘Agency Quote’’

shall mean the quotation that a

registered NNMS Market Maker is

permitted to display pursuant to the

requirements of NASD Rule 4613(b).

(c) The term ‘‘Attributable Quote/

Order’’ shall have the following

meaning: 

(1) For NNMS Market Makers and

NNMS ECNs, a bid or offer Quote/Order

that is designated for display (price and

size) next to the participant’s MMID in

the Nasdaq Quotation Montage once

such Quote/Order becomes the

participant’s best attributable bid or

offer. 

(2) For UTP Exchanges, the best bid

and best offer quotation with price and

size that is transmitted to Nasdaq by the

UTP Exchange, which is displayed next

to the UTP Exchange’s MMID in the

Nasdaq Quotation Montage. 

[(h)] (d) The term ‘‘Automated

Confirmation Transaction’’ service or

‘‘ACT’’ shall mean the automated

69086 Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices

system owned and operated by The

Nasdaq Stock Market, Inc. which

compares trade information entered by

ACT Participants and submits ‘‘lockedin’’ trades to clearing.

[(g)] (e) The term ‘‘automatic refresh

size’’ shall mean the default size to

which an NNMS Market Maker’s quote

will be refreshed pursuant to NASD

Rule 4710(b)(2), if the market maker

elects to utilize the Quote Refresh

Functionality and does not designate to

Nasdaq an alternative refresh size,

which must be at least one normal unit

of trading. The [maximum order]

automatic refresh size default [size]

amount shall be 1,000 shares.

(f) The term ‘‘Directed Order’’ shall

mean an order that is entered into the

system by an NNMS participant that is

directed to a particular Quoting Market

Participant at any price, through the

Directed Order process described in

Rule 4710(c). This term shall not

include the ‘‘Preferenced Order’’

described in subparagraph (aa) of this

rule.

(g) The term ‘‘Displayed Quote/

Order’’ shall mean both Attributable

and Non-Attributable (as applicable)

Quotes/Orders transmitted to Nasdaq by

Quoting Market Participants.

(h) The term ‘‘Firm Quote Rule’’ shall

mean SEC Rule 11Ac1–1.

(i) The term ‘‘Immediate or Cancel’’

shall mean, for limit orders so

designated, that if after entry into the

NNMS a marketable limit order (or

unexecuted portion thereof) becomes

non-marketable, the order (or

unexecuted portion thereof) shall be

canceled and returned to the entering

participant.

(j) The term ‘‘Liability Order’’ shall

mean an order that when delivered to a

Quoting Market Participant imposes an

obligation to respond to such order in a

manner consistent with the Firm Quote

Rule.

(k) The term ‘‘limit order’’ shall mean

an order to buy or sell a stock at a

specified price or better.

(l) The term ‘‘market order’’ shall

mean an unpriced order to buy or sell

a stock at the market’s current best

price.

(m) The term ‘‘marketable limit

order’’ shall mean a limit order to buy

that, at the time it is entered into the

NNMS, is priced at the current inside

offer or higher, or a limit order to sell

that, at the time it is entered into the

NNMS, is priced at the inside bid or

lower.

(n) The term ‘‘mixed lot’’ shall mean

an order that is for more than a normal

unit of trading but not a multiple

thereof.

(o) The term ‘‘Non-Attributable

Quote/Order’’ shall mean a bid or offer

Quote/Order that is entered by a Nasdaq

Quoting Market Participant and is

designated for display (price and size)

on an anonymous basis in the Nasdaq

Order Display Facility.

(p) The term ‘‘Non-Directed Order’’

shall mean an order that is entered into

the system by an NNMS Participant and

is not directed to any particular Quoting

Market Participant, and shall also

include Preferenced Orders as described

in subparagraph (aa) of this rule.

(q) The term ‘‘Non-Liability Order’’

shall mean an order that when delivered

to a Quoting Market Participant imposes

no obligation to respond to such order

under the Firm Quote Rule.

[(a)] (r) The term ‘‘Nasdaq National

Market Execution System,’’ [or]

‘‘NNMS,’’ or ‘‘system’’ shall mean the

automated system owned and operated

by The Nasdaq Stock Market, Inc. which

enables NNMS Participants to execute

transactions in active NNMS authorized

securities; to have reports of the

transactions automatically forwarded to

the National Market Trade Reporting

System, if required, for dissemination to

the public and the industry, and to

‘‘lock in’’ these trades by sending both

sides to the applicable clearing

corporation(s) designated by the NNMS

Participant(s) for clearance and

settlement; and to provide NNMS

Participants with sufficient monitoring

and updating capability to participate in

an automated execution environment.

[(c)] (s) The term ‘‘NNMS eligible

securities’’ shall mean designated

Nasdaq-listed [National Market (NNM)]

equity securities.

(t) The term ‘‘NNMS ECN’’ shall mean

a member of the Association that meets

all of the requirements of NASD Rule

4623, and that participates in the NNMS

with respect to one or more NNMS

eligible securities.

(1) The term ‘‘NNMS Auto-Ex ECN’’

shall mean an NNMS ECN that

participates in the automatic-execution

functionality of the NNMS system, and

accordingly executes Non-Directed

Orders via automatic execution for the

purchase or sale of an active NNMS

security at the Nasdaq inside bid and/

or offer price. 

(2) The term ‘‘NNMS Order-Delivery

ECN’’ shall mean an NNMS ECN that

participates in the order-delivery

functionality of the NNMS system,

accepts delivery of Non-Directed Orders

that are Liability Orders, and provides

an automated execution of NonDirected Orders (or an automated

rejection of such orders if the price is no

longer available) for the purchase or

sale of an active NNMS security at the

Nasdaq inside bid and/or offer price. 

[(e)] (u) The term ‘‘NNMS Market

Maker’’ shall mean a member of the

Association that is registered as a

Nasdaq Market Maker and as a Market

Maker for purposes of participation in

NNMS with respect to one or more

NNMS eligible securities, and is

currently active in NNMS and obligated

to execute orders through the

automatic-execution functionality of the

NNMS system for the purchase or sale

of an active NNMS security at the

Nasdaq inside bid and/or [ask] offer

price.

[(b)] (v) The term ‘‘NNMS Participant’’

shall mean [either] an NNMS Market

Maker, NNMS ECN, UTP Exchange, or

NNMS Order Entry Firm registered as

such with the Association for

participation in NNMS.

[(f)] (w) The term ‘‘NNMS Order Entry

Firm’’ shall mean a member of the

Association who is registered as an

Order Entry Firm for purposes of

participation in NNMS which permits

the firm to enter orders [of limited size]

for execution against NNMS Market

Makers.

(x) The term ‘‘Nasdaq Quotation

Montage’’ shall mean the portion of the

Nasdaq WorkStation presentation that

displays for a particular stock two

columns (one for bid, one for offer),

under which is listed in price/time

priority the MMIDs for each NNMS

Market Maker, NNMS ECN, and UTP

Exchange registered in the stock and the

corresponding quote (price and size)

next to the related MMID. 

(y) The term ‘‘Nasdaq Quoting Market

Participant’’ shall include only the

following: (1) NNMS Market Makers; or

(2) NNMS ECNs. 

(z) The term ‘‘odd-lot order’’ shall

mean an order that is for less than a

normal unit of trading. 

(aa) The term ‘‘Preferenced Order’’

shall mean an order that is entered into

the Non-Directed Order Process and is

designated to be delivered to or

executed against a particular Quoting

Market Participant’s Attributable Quote/

Order when such Preferenced Order is

the next in line to be executed or

delivered. Preferenced Orders shall be

executed subject to the conditions set

out in Rule 4710(b).

(bb) The term ‘‘Quote/Order’’ shall

mean a single quotation or shall mean

an order or multiple orders at the same

price submitted to Nasdaq by a Nasdaq

Quoting Market Participant that is

displayed in the form of a single

quotation. Unless specifically referring

to a UTP Exchange’s Agency Quote/

Order (as set out in Rule 4710(f)(2)(b)),

when this term is used in connection

Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices 69087

with a UTP Exchange, it shall mean the

best bid and/or the best offer quotation

transmitted to Nasdaq by the UTP

Exchange. 

(cc) The term ‘‘Quoting Market

Participant’’ shall include any of the

following: (1) NNMS Market Makers; (2)

NNMS ECNs; and (3) UTP Exchange

Specialists.

(dd) The term ‘‘Reserve Size’’ shall

mean the system-provided functionality

that permits a Nasdaq Quoting Market

Participant to display in its Displayed

Quote/Order part of the full size of a

proprietary or agency order, with the

remainder held in reserve on an

undisplayed basis to be displayed in

whole or in part after the displayed part

is executed. 

(ee) The term ‘‘Nasdaq Order Display

Facility’’ shall mean the portion of the

Nasdaq WorkStation presentation that

displays, without attribution to a

particular Quoting Market Participant’s

MMID, the three best price levels in

Nasdaq on both the bid and offer side

of the market and the aggregate size of

Attributable and Non-Attributable

Quotes/Orders at each price level.

(ff) The term ‘‘UTP Exchange’’ shall

mean any registered national securities

exchange that elects to participate in

the NNMS and that has unlisted trading

privileges in Nasdaq National Market

securities pursuant to the Joint SelfRegulatory Organization Plan Governing

the Collection, Consolidation and

Dissemination Of Quotation and

Transaction Information For ExchangeListed Nasdaq/National Market System

Securities Traded On Exchanges On An

Unlisted Trading Privilege Basis

(‘‘Nasdaq UTP Plan’’).

4705. NNMS Participant Registration

(a) Participation in NNMS as an

NNMS Market Maker requires current

registration as such with the

Association. Such registration shall be

conditioned upon the NNMS Market

Maker’s initial and continuing

compliance with the following

requirements:

(1) execution of an NNMS Participant

application agreement with the

Association;

(2) membership in, or access

arrangement with, a clearing agency

registered with the Commission which

maintains facilities through which

NNMS compared trades may be settled;

(3) registration as a market maker in

The Nasdaq Stock Market pursuant to

the Rule 4600 Series and compliance

with all applicable rules and operating

procedures of the Association and the

Commission;

(4) maintenance of the physical

security of the equipment located on the

premises of the NNMS Market Maker to

prevent the improper use or access to

Nasdaq systems, including

unauthorized entry of information into

NNMS; and

(5) acceptance and settlement of each

NNMS trade that NNMS identifies as

having been effected by such NNMS

Market Maker, or if settlement is to be

made through another clearing member,

guarantee of the acceptance and

settlement of such identified NNMS

trade by the clearing member on the

regularly scheduled settlement date.

(b) Pursuant to Rule 4611(f),

participation as an NNMS Market Maker

is required for any Nasdaq market maker

registered to make a market in an NNMS

security.

(c) Participation in NNMS as an

NNMS Order Entry Firm requires

current registration as such with the

Association. Such registration shall be

conditioned upon the NNMS Order

Entry Firm’s initial and continuing

compliance with the following

requirements:

(1) execution of an NNMS Participant

application agreement with the

Association;

(2) membership in, or access

arrangement with, a clearing agency

registered with the Commission which

maintains facilities through which

NNMS compared trades may be settled;

(3) compliance with all applicable

rules and operating procedures of the

Association and the Securities and

Exchange Commission;

(4) maintenance of the physical

security of the equipment located on the

premises of the NNMS Order Entry Firm

to prevent the improper use or access to

Nasdaq systems, including

unauthorized entry of information into

NNMS; and

(5) acceptance and settlement of each

NNMS trade that NNMS identifies as

having been effected by such NNMS

Order Entry Firm or if settlement is to

be made through another clearing

member, guarantee of the acceptance

and settlement of such identified NNMS

trade by the clearing member on the

regularly scheduled settlement date.

(d) Participation in NNMS as an

NNMS ECN requires current registration

as an NASD member and shall be

conditioned upon the following:

(1) the execution of an NNMS

Participant application agreement with

the Association;

(2) compliance with all requirements

in NASD Rule 4623 and all other

applicable rules and operating

procedures of the Association and the

Securities and Exchange Commission;

(3) membership in, or access

arrangement with, a clearing agency

registered with the Commission which

maintains facilities through which

NNMS-compared trades may be settled;

(4) maintenance of the physical

security of the equipment located on the

premises of the NNMS ECN to prevent

the improper use or access to Nasdaq

systems, including unauthorized entry

of information into NNMS; and

(5) acceptance and settlement of each

trade that is executed through the

facilities of the NNMS, or if settlement

is to be made through another clearing

member, guarantee of the acceptance

and settlement of such identified NNMS

trade by the clearing member on the

regularly scheduled settlement date.

[(d)](e) The registration required

hereunder will apply solely to the

qualification of an NNMS Participant to

participate in NNMS. Such registration

shall not be conditioned upon

registration in any particular eligible or

active NNMS securities.

[(e)](f) Each NNMS Participant shall

be under a continuing obligation to

inform the Association of

noncompliance with any of the

registration requirements set forth

above.

(g) The Association and its

subsidiaries shall not be liable for any

losses, damages, or other claims arising

out of the NNMS or its use. Any losses,

damages, or other claims, related to a

failure of the NNMS to deliver, display,

transmit, execute, compare, submit for

clearance and settlement, or otherwise

process an order, Quote/Order, message,

or other data entered into, or created by,

the NNMS shall be absorbed by the

member, or the member sponsoring the

customer, that entered the order, Quote/

Order, message, or other data into the

NNMS.

4706. Order Entry Parameters

(a) Non-Directed Orders —

(1) General. The following

requirements shall apply to NonDirected Orders Entered by NNMS

Market Participants:

(A) An NNMS Participant may enter

a Non-Directed Order into the NNMS in

order to access the best bid/best offer as

displayed in Nasdaq; provided however,

that an NNMS Participant may enter a

Preferenced Order through the NonDirected Order process to access a

particular Quoting Market Participant

without regard to the best bid/best offer

as displayed in Nasdaq.

(B) A Non-Directed Order must be a

market or marketable limit order, must

be a round lot or a mixed lot, must

indicate whether it is a buy, short sale,

short-sale exempt, or long sale, and if

entered by a Quoting Market Participant

69088 Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices

may be designated as Immediate or

Cancel.

(C) The system will not process a NonDirected Order to sell short if the

execution of such order would violate

NASD Rule 3350.

(D) Non-Directed Orders will be

processed as described in Rule 4710.

(E) The NNMS shall not accept NonDirected Orders that are All-or-None, or

have a minimum size of execution.

(2) Entry of Non-Directed Orders by

NNMS Order Entry Firms—In addition

to the requirements in paragraph (a)(1)

of this rule, the following conditions

shall apply to Non-Directed Orders

entered by NNMS Order-Entry Firms:

(A) All Non-Directed orders shall be

designated as Immediate or Cancel. As

such, if after entry into the NNMS of a

Non-Directed Order that is marketable,

the order (or the unexecuted portion

thereof) becomes non-marketable, the

system will return the order (or

unexecuted portion thereof) to the

entering participant.

(B) A Non-Directed Order that is a

limit order may be entered prior to the

market’s open. Such orders will be held

in queue, and if not marketable on the

market’s open, will be returned to the

entering participant.

(b) Directed Orders—A participant

may enter a Directed Order into the

NNMS to access a specific Attributable

Quote/Order displayed in the Nasdaq

Quotation Montage, subject to the

following conditions and requirements:

(1) Unless the Quoting Market

Participant to which a Directed Order is

being sent has indicated that it wishes

to receive Directed Orders that are

Liability Orders, a Directed Order must

be a Non-Liability Order, and as such,

at the time of entry must be designated

as:

(A) an ‘‘All-or-None’’ order (‘‘AON’’)

that is at least one normal unit of

trading (e.g. 100 shares) in excess of the

Attributable Quote/Order of the Quoting

Market Participant to which the order is

directed; or

(B) a ‘‘Minimum Acceptable

Quantity’’ order (‘‘MAQ’’), with a MAQ

value of at least one normal unit of

trading in excess of Attributable Quote/

Order of the Quoting Market Participant

to which the order is directed. Nasdaq

will append an indicator to the quote of

a Quoting Market Participant that has

indicated to Nasdaq that it wishes to

receive Directed Orders that are Liability

Orders.

(2) A Directed Order may have a time

in force of 1 to 99 minutes.

(3) Directed Orders shall be processed

pursuant to Rule 4710(c).

(c) Entry of Agency and Principal

Orders—NNMS Participants are

permitted to enter into the NNMS both

agency and principal orders for delivery

and execution processing.

(d) Order Size—Any round or mixed

lot order up to 999,999 shares may be

entered into the NNMS for normal

execution processing. Odd-lot orders,

and the odd-lot portion of a mixed lot,

are subject to a separate execution

process, as described in Rule 4710(e).

(e) Open Quotes—The NNMS will

only deliver an order or an execution to

a Quoting Market Participant if that

participant has an open quote.

(f) Odd-Lot Orders—The system will

accept odd-lot orders for processing

through a separate facility. Odd-lot

orders must be Non-Directed Orders,

and may be market, marketable limit or

limit orders. The system shall accept

odd-lot orders at a rate no faster than

one order per/second from any single

participant. Odd-lot orders, and the

odd-lot portion of a mixed lot order,

shall be processed as described in Rule

4710(e).

4707. Entry and Display of Quotes/Orders

(a) Entry of Quotes/Orders—Nasdaq

Quoting Market Participants may enter

Quotes/Orders into the NNMS subject to

the following requirements and

conditions:

(1) Nasdaq Quoting Market

Participants shall be permitted to

transmit to the NNMS multiple

Principal and Agency Quotes/Orders at

a single as well as multiple price levels.

Such Quote/Order shall indicate

whether it is an ‘‘Attributable Quote/

Order’’ or ‘‘Non-Attributable Quote/

Order,’’ and the amount of Reserve Size

(if applicable).

(2) Upon entry of a Quote/Order into

the system, the NNMS shall time-stamp

it, which time-stamp shall determine the

ranking of the Quote/Order for purposes

of processing Non-Directed Orders as

described in Rule 4710(b). For each

subsequent size increase received for an

existing quote at a given price, the

system will maintain the original timestamp for the original quantity of the

quote and assign a separate time-stamp

to that size increase.

(3) Consistent with Rule 4613, an

NNMS Market Maker is obligated to

maintain a two-sided Attributable

Quote/Order (other than an Agency

Quote) at all times, for at least one

normal unit of trading.

(4) Nasdaq Quoting Market

Participants may continue to transmit to

the NNMS only their best bid and best

offer Attributable Quotes/Orders.

Notwithstanding NASD Rule 4613 and

subparagraph (a)(1) of this rule, nothing

in these rules shall require a Nasdaq

Quoting Market Participant to transmit

to the NNMS multiple Quotes/Orders.

(b) Display of Quotes/Orders in

Nasdaq—The NNMS will display a

Nasdaq Quoting Market Participant’s

Quotes/Orders as follows:

(1) Attributable Quotes/Orders—The

price and size of a Nasdaq Quoting

Market Participant’s best priced

Attributable Quote/Order on both the

bid and offer side of the market will be

displayed in the Nasdaq Quotation

Montage under the Nasdaq Quoting

Market Participant’s MMID, and also

will be displayed in the Nasdaq Order

Display Facility as part of the aggregate

trading interest at a particular price

when the price of such Attributable

Quote/Order falls within the best three

price levels in Nasdaq on either side of

the market. Upon execution or

cancellation of the Nasdaq Quoting

Market Participant’s best-priced

Attributable Quote/Order on a

particular side of the market, the NNMS

will automatically display the

participant’s next best Attributable

Quote/Order on that side of the market.

(2) Non-Attributable Quotes/Orders—

The price and size of a Nasdaq Quoting

Market Participant’s Non-Attributable

Quote/Order on both the bid and offer

side of the market will be displayed in

the Nasdaq Order Display Facility as

part of the aggregate trading interest at

a particular price when the price of such

Non-Attributable Quote/Order falls

within the best three price levels in

Nasdaq on either side of the market. A

Non-Attributable Order will not be

displayed in the Nasdaq Quotation

Montage under the Nasdaq Quoting

Market Participant’s MMID. NonAttributable Quotes/Orders that are the

best priced Non-Attributable bids or

offers in the system will be displayed in

the Nasdaq Quotation Montage under

an anonymous MMID, which shall

represent and reflect the aggregate size

of all Non-Attributable Quotes/Orders in

Nasdaq at that price level. Upon

execution or cancellation of a Nasdaq

Quoting Market Participant’s NonAttributable Quote/Order, the NNMS

will automatically display a NonAttributable Quote/Order in the Nasdaq

Order Display Facility (consistent with

the parameters described above) if it

falls within the best three price levels in

Nasdaq on either side of the market.

(c) Reserve Size—Reserve Size shall

not be displayed in Nasdaq, but shall be

electronically accessible as described in

Rule 4710(b).

(d) Summary Scan—The ‘‘Summary

Scan’’ functionality, which is a queryonly non-dynamic functionality,

displays without attribution to Quoting

Market Participants’ MMIDs the

Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices 69089

aggregate size of Attributable and NonAttributable Quotes/Orders for all levels

(on both the bid and offer side of the

market) below the three price levels

displayed in the Nasdaq Order Display

Facility.

(e) NQDS Prime—‘‘NQDS Prime’’ is a

separate data feed that Nasdaq will

make available for a fee that is

approved by the Securities and

Exchange Commission. This separate

data feed will display with attribution to

Quoting Market Participants’ MMIDs all

Attributable Quotes/Orders on both the

bid and offer side of the market for the

price levels that are disseminated in the

Nasdaq Order Display Facility.

4710. Participant Obligations in NNMS

(a) Registration—Upon the

effectiveness of registration as a NNMS

Market Maker, NNMS ECN, or NNMS

Order Entry Firm, the NNMS Participant

may commence activity within NNMS

for exposure to orders or entry of orders,

as applicable. The operating hours of

NNMS may be established as

appropriate by the Association. The

extent of participation in Nasdaq by an

NNMS Order Entry Firm shall be

determined solely by the firm in the

exercise of its ability to enter orders into

Nasdaq.

(b) [Market Makers] Non-Directed

Orders

(1) [An NNMS Market Maker] General

Provisions—A Quoting Market

Participant in an NNMS Security shall

be subject to the following requirements

for Non-Directed Orders:

(A) Obligations For each NNMS

security in which it is registered [as an

NNMS Market Maker, the market

maker], a Quoting Market Participant

must accept and execute individual

Non-Directed Orders against its

quotation including its Agency Quote (if

applicable), in an amount equal to or

smaller than the combination of the

Displayed [quotation] Quote/Order and

Reserve Size (if applicable) of such

[quotation(s)] Quote/Order, when the

Quoting Market Participant is at the best

bid/best offer in Nasdaq. [For purposes

of this rule, the term ‘‘reserved size’’

shall mean that a NNMS Market Maker

or a customer thereof wishes to display

publicly part of the full size of its order

or interest with the remainder held in

reserve on an undisplayed basis to be

displayed in whole or in part as the

displayed part is executed. To utilize

the reserve size function, a minimum of

1,000 shares must initially be displayed

in the market maker’s quote (including

the Agency Quote), and the quotation

must be refreshed to 1,000 shares

consistent with subparagraph (b)(2)(A)

of this rule.] Quoting Market

Participants shall participate in the

NNMS as follows:

(i) NNMS Market Makers and NNMS

Auto-Ex ECNs shall participate in the

automatic-execution functionality of the

NNMS, and shall accept the delivery of

an execution up to the size of the

participant’s Displayed Quote/Order

and Reserve Size.

(ii) NNMS Order-Delivery ECNs shall

participate in the order-delivery

functionality of the NNMS, and shall

accept the delivery of an order up to the

size of the NNMS Order-Delivery ECN’s

Displayed Quote/Order and Reserve

Size. The NNMS Order-Delivery ECN

shall be required to execute such order

in a manner consistent with the Firm

Quote Rule.

(iii) UTP Exchanges that choose to

participate in the NNMS shall do so as

described in subparagraph (f) of this

rule and as otherwise described in the

NNMS rules and the UTP Plan.

(B) Processing of Non-Directed

Orders—Upon entry of a Non-Directed

Order into the system, the NNMS will

ascertain who the next Quoting Market

Participant in queue to receive an order

is (based on the algorithm selected by

the entering participant, as described in

subparagraph (b)(B)(i)–(iii) of this rule),

and shall deliver an execution to

Quoting Market Participants that

participate in the automatic-execution

functionality of the system, or shall

deliver a Liability Order to Quoting

Market Participants that participate in

the order-delivery functionality of the

system; provided however, that the

system always shall deliver an order (in

lieu of an execution) to the Quoting

Market Participant next in queue when

the participant that entered the NonDirected Order into the system is a UTP

Exchange that does not provide

automatic execution against its Quotes/

Orders for Nasdaq Quoting Market

Participants and NNMS Order Entry

Firms. Non-Directed Orders entered into

the NNMS system shall be delivered to

or automatically executed against

Quoting Market Participants’ Displayed

[quotations] Quotes/Orders and Reserve

Size, including Agency Quotes (if

applicable), in strict price/time priority,

as described in the algorithm contained

in subparagraph (b)(B)(i) of this rule

[For quotes at the same price, the system

will yield priority to all displayed

quotations over reserve size, so that the

system will execute against Displayed

quotations in time priority and then

against reserve size in time priority].

Alternatively, an NNMS Market

Participant can designate that its NonDirected Orders be executed based on a

price/time priority that considers ECN

quote-access fees, as described in

subparagraphs (b)(B)(ii) of this rule, or

executed based on price/size/time

priority, as described in subparagraph

(b)(B)(iii) of this rule.

(i) Default Execution Algorithm—

Price/Time—The system will default to

a strict price/time priority within

Nasdaq, and will attempt to access

interest in the system in the following

priority and order:

(a) Displayed Quotes/Orders of NNMS

Market Makers, NNMS ECNs, and NonAttributable Agency Quotes/Orders of

UTP Exchanges (as permitted by

subparagraph (f) of this rule), in time

priority between such participants’

Quotes/Orders.

(b) Reserve Size of Nasdaq Quoting

Market Participants, in time priority

between such participants’ Quotes/

Orders; and

(c) Principal Quotes/Orders of UTP

Exchanges, in time priority between

such participants’ Quotes/Orders.

(ii) Price/Time Priority Considering

Quote-Access Fees—If this options is

chosen, the system will attempt to

access interest in the system in the

following priority and order:

(a) Displayed Quotes/Orders of NNMS

Market Makers, NNMS ECNs that do not

charge a separate quote-access fee to

non-subscribers, and Non-Attributable

Agency Quotes/Orders of UTP

Exchanges (as permitted by

subparagraph (f) of this rule), as well as

Quotes/Orders from NNMS ECNs that

charges a separate quote-access fee to

non-subscribers where the ECN entering

such Quote/Order indicates that the

price improvement offered by the

specific Quote/Order is equal to or

exceeds the separate quote-access fee

the ECN charges, in time priority

between such participants’ Quotes/

Orders;

(b) Displayed Quotes/Orders of NNMS

ECNs that charge a separate quoteaccess fee to non-subscribers, in time

priority between such participants’

Quotes/Orders;

(c) Reserve Size of NNMS Market

Makers and NNMS ECNs that do not

charge a separate quote-access fee to

non-subscribers, as well as Reserve Size

of Quotes/Orders from NNMS ECNs that

charges a separate quote-access fee to

non-subscribers where the ECN entering

such Quote/Order has indicated that the

price improvement offered by the

specific Quote/Order is equal to or

exceeds the separate quote-access fee

the ECN charges, in time priority

between such participants’ Quotes/

Orders;

(d) Reserve Size of NNMS ECNs that

charge a separate quote-access fee to

non-subscribers, in time priority

69090 Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices

between such participants’ Quotes/

Orders; and

(e) Principal Quotes/Orders of UTP

Exchanges, in time priority between

such participants’ Quotes/Orders.

(iii) Price/Size Priority—If this option

is chosen, Non-Directed Orders shall be

execute in price/size/time priority

against:

(a) Displayed Quotes/Orders of NNMS

Market Makers, NNMS ECNs, and NonAttributable Agency Quotes/Orders of

UTP Exchanges (as permitted by

subparagraph (f) of this rule), in price/

size/time priority between such

participants’ Quotes/Orders:

(b) the Reserve Size of Nasdaq

Quoting Market Participants, in price/

size/time priority between such

participants’ Quotes/Orders, which size

priority shall be based on the size of the

Displayed Quote/Order, and not on the

amount held in Reserve Size; and

(c) Principal Quotes/Orders of UTP

Exchanges, in price/size/time priority

between such participants’ Quotes/

Orders.

(iv) Exceptions—The following

exceptions shall apply to the above

execution parameters:

(a) If a Nasdaq Quoting Market

Participant enters a Non-Directed Order

into the system, before sending such

Non-Directed Order to the next Quoting

Market Participants in queue, the NNMS

will first attempt to match off the order

against the Nasdaq Quoting Market

Participant’s own Quote/Order if the

participant is at the best bid/best offer

in Nasdaq.

(b) If an NNMS Market Participant

enters a Preferenced Order, the order

shall be executed against (or delivered

in an amount equal to) both the

Displayed Quote/Order and Reserve

Size at the displayed price of the

Quoting Market Participant to which the

order is being directed, without regard

to whether the Quoting Market

Participant is at the best bid/best offer,

with any unexecuted portion being

returned to the entering NNMS Market

Participant.

(C) Decrementation Procedures—The

size of a [displayed quotation] Quote/

Order displayed in the Nasdaq Order

Display Facility and/or the Nasdaq

Quotation Montage will be decremented

upon the delivery of a Liability Order or

the delivery of an execution of a[n

NNMS] Non-Directed [o]Order or

Preferenced Order in an amount equal

to [or greater than one normal unit of

trading] the system-delivered order or

execution; provided, however, that [the

execution of] if an NNMS order that is

a mixed lot, the system will only deliver

a Liability Order or an execution for the

number of round lots contained in the

mixed lot order, and will only

decrement [a displayed quotation’s] the

size of a Displayed Quote/Order by the

number of shares represented by the

number of round lots contained in the

mixed lot order. The odd-lot portion of

the mixed lot will be executed at the

same price against the NNMS Market

Maker next in the odd lot rotation, as

described in subparagraph (e) of this

rule.

(i) If an NNMS Auto-Ex ECN has its

bid or offer Attributable Quote/Order

and Reserve Size decremented to zero

without transmission of another

Attributable Quote/Order to Nasdaq, the

system will zero out the side of the quote

that is exhausted. If both the bid and

offer are decremented to zero without

transmission of a revised Attributable

Quote/Order, the ECN will be placed

into an excused withdrawal state until

the ECN transmits to Nasdaq a revised

Attributable Quote/Order.

(ii) If an NNMS Order-Delivery ECN

declines or partially fills a Non-Directed

Order without immediately transmitting

to Nasdaq a revised Attributable Quote/

Order that is at a price inferior to the

previous price, or if an NNMS OrderDelivery ECN fails to respond in any

manner within 30 seconds of order

delivery, the system will cancel the

delivered order and send the order (or

remaining portion thereof) back into the

system for immediate delivery to the

next Quoting Market Participant in

queue. The system then will zero out the

ECN’s Quote/Orders at that price level

on that side of the market, and the

ECN’s quote on that side of the market

will remain at zero until the ECN

transmits to Nasdaq a revised

Attributable Quote/Order. If both the

bid and offer are zeroed out, the ECN

will be placed into an excused

withdrawal state until the ECN

transmits to Nasdaq a revised

Attributable Quote/Order.

(iii) If an NNMS ECN’s Quote/Order

has been zeroed out or if the ECN has

been placed into excused withdrawal as

described in subparagraphs (b)(1)(C)(i)

and (ii) of this rule, the system will

continue to access the ECN’s NonAttributable Quotes/Orders that are in

the NNMS, as described in Rule 4707

and subparagraph (b) of this rule.

(iv) If an NNMS ECN regularly fails to

meet a 5-second response time (as

measured by the ECN’s Service Delivery

Platform) over a period of orders, such

that the failure endangers the

maintenance of a fair and orderly

market, Nasdaq will place that ECN’s

quote in a closed-quote state. Nasdaq

will lift the closed-quote state when the

NNMS ECN certifies that it can meet the

5-second response time requirement

with regularity sufficient to maintain a

fair and orderly market.

(D) Interval Delay—After the NNMS

system has executed all Displayed

Quotes/Orders and Reserve Size interest

at a price level [an order against a

market maker’s displayed quote and

reserve size (if applicable), that market

maker shall not be required to execute

another order at its bid or offer in the

same security until a predetermined

time period has elapsed from the time

the order was executed, as measured by

the time of execution in the Nasdaq

system. This period of time shall

initially be established as 5 seconds, but

may be modified upon Commission

approval and appropriate notification to

NNMS participants.], the following will

occur:

(i) If the NNMS system cannot execute

in full all shares of a Non-Directed

Order against the Displayed Quotes/

Orders and Reserve Size interest at the

initial price level and at price two

minimum trading increments away, the

system will pause for 5 seconds before

accessing the interest at the next price

level in the system; provided, however,

that once the Non-Directed Order can be

filled in full within two price levels,

there will be no interval delay between

price levels and the system will execute

the remainder of order in full; or

(ii) If the Non-Directed Orders is

specially designated by the entering

market participant as a ‘‘sweep order,’’

the system will execute against all

Displayed Quotes/Orders and Reserve

Size at the initial price level and the two

price levels being displayed in the

Nasdaq Order Display Facility without

pausing between the displayed price

levels. Thereafter, the system will pause

5 seconds before moving to the next

price level, until the Non-Directed Order

is executed in full.

(iii) The interval delay described in

this subparagraph may be modified

upon Commission approval and

appropriate notification to NNMS

Participants.

(E) All entries in NNMS shall be made

in accordance with the requirements set

forth in the NNMS User Guide, as

published from time to time by Nasdaq.

(2) Refresh Functionality

(A) Reserve Size Refresh—Once a

Nasdaq Quoting Market Participant’s

[an NNMS Market Maker’s displayed

quotation] Displayed Quote/Order size

on either side of the market in the

security has been decremented to zero

due to NNMS [executions] processing

Nasdaq will refresh the [market maker’s]

displayed size out of Reserve Size to a

size-level designated by the Nasdaq

Quoting Market Participant [NNMS

Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices 69091

Market Maker], or in the absence of such

size-level designation, to the automatic

refresh size. [If the market maker is

using the reserve size function for its

proprietary quote or Agency Quote the

NNMS Market Maker must refresh to a

minimum of 1,000 shares, consistent

with subparagraph (b)(1)(A) of this rule].

To utilize the Reserve Size functionality,

a minimum of 1,000 shares must

initially be displayed in the Nasdaq

Quoting Market Participant’s Displayed

Quote/Order, and the Displayed Quote/

Order must be refreshed to at least 1,000

shares. This functionality will not be

available for use by UTP Exchanges.

(B) [Auto q]Quote Refresh (‘‘QR’’)—

Once an NNMS Market Maker’s

Displayed Quote/Order [quotation] size

and Reserve Size on either side of the

market in the security has been

decremented to zero due to NNMS

executions, the NNMS Market Maker

may elect to have The Nasdaq Stock

Market refresh the market maker’s

quotation as follows:

(i) Nasdaq will refresh the market

maker’s quotation price on the bid or

offer side of the market, whichever is

decremented to zero, by a[n] price

interval designated by the NNMS

Market Maker; and

(ii) Nasdaq will refresh the market

maker’s displayed size to a level

designated by the NNMS Market Maker,

or in the absence of such size level

designation, to the automatic refresh

size. [A Market Maker’s Agency

Quotation shall not be subject to the

functionality described in this

subparagraph.]

(iii) This functionality shall produce

an Attributable Quote/Order. In

addition, if an NNMS Market Maker is

utilizing the QR functionality but has an

Attributable Quote/Order in the system

that is priced at or better than the quote

that would be created by the QR, the

NNMS will display the Attributable

Quote/Order, not the QR-produced

quote.

(iv) An NNMS Market Maker’s Agency

Quote shall not be subject to the

functionality described in this

subparagraph, nor shall this

functionality be available to Quoting

Market Participants other than NNMS

Market Makers.

(3) Entry of Locking/Crossing Quotes/

Orders [Except as otherwise provided in

subparagraph (b)(10) of this rule, at any

time a locked or crossed market, as

defined in Rule 4613(e), exists for an

NNMS security, a market maker with a

quotation for that security (including an

Agency Quote) that is causing the

locked or crossed market may have

orders representing shares equal to the

size of the bid or offer that is locked or

crossed executed by the NNMS system

against the market maker’s quote

(including an Agency Quote) at the

quoted price if that price is the best

price. During locked or crossed markets,

the NNMS system will execute orders

against those market makers that are

locked or crossed in predetermined time

intervals. This period of time initially

shall be established as five (5) seconds,

but may be modified upon approval by

the Commission and appropriate

notification to NNMS participants.] The

system shall process locking/crossing

Quotes/Orders as follows:

(A) Locked/Crossed Quotes/Orders

During Market Hours—If during market

hours, a Quoting Market Participant

enters into the NNMS a Quote/Order

that will lock/cross the market (as

defined in NASD Rule 4613(e)), the

system will not display the Quote/Order

as a quote in Nasdaq; instead the system

will treat the Quote/Order as a

marketable limit order and enter it into

the system as a Non-Directed Order for

processing (consistent with

subparagraph (b) of this rule) as follows:

(i) For locked-market situations, the

order will be routed to the Quoting

Market Participant next in queue who

would be locked, and the order will be

executed (or delivered for execution) at

the lock price;

(ii) For crossed-market situations, the

order will be entered into the system

and routed to the next Quoting Market

Participants in queue who would be

crossed, and the order will be executed

(or delivered for execution) at the price

of the Displayed Quote/Order that

would have been crossed.

Once the lock/cross is cleared, if the

participant’s order is not completely

filled, the system will reformat the order

and display it in Nasdaq (consistent

with the parameters of the Quote/Order)

as a Quote/Order on behalf of the

entering Quoting Market Participant.

(B) Locked/Crossed Quotes/Orders at

the Open—If the market is locked or

crossed at 9:30 a.m., Eastern Time, the

NNMS will clear the locked and/or

crossed Quotes/Order by executing (or

delivering for execution) the oldest

bid(offer) against the oldest offer(bid)

against which it is marketable at the

price of the oldest Quote/Order. Nasdaq

then will begin processing Non-Directed

Orders as described in subparagraph (b)

of this rule.

[(4) For each NNM security in which

a market maker is registered, the market

maker may enter orders into the NNMS

for its proprietary account as well as on

an agency or riskless principal basis.]

[(5)] (4) An NNMS Market Maker may

terminate its obligation by keyboard

withdrawal (or its equivalent) from

NNMS at any time. However, the market

maker has the specific obligation to

monitor its status in NNMS to assure

that a withdrawal has in fact occurred.

Any transaction occurring prior to the

effectiveness of the withdrawal shall

remain the responsibility of the market

maker.

[(6)] (5) [An NNMS Market Maker will

be suspended from NNMS if its bid or

offer has been decremented to zero due

to NNMS executions and will be

permitted a standard grace period, the

duration of which will be established

and published by the Association,

within which to take action to restore a

two-sided quotation in the security for

at least one normal unit of trading. An

NNMS Market Maker that fails to

reenter a two-sided quotation within the

allotted time will be deemed to have

withdrawn as a market maker (‘‘Timed

Out of the Box’’). Except as provided

below in this subparagraph and in

subparagraph (b)(7) of this rule, an

NNMS Market Maker that withdraws in

an NNM security may not re-register as

a market maker in that security for

twenty (20) business days.] If an NNMS

Market Maker’s Attributable Quote/

Order is reduced to zero on one side of

the market due to NNMS executions, the

NNMS will close the Market Maker’s

quote in the NNMS with respect to both

sides of its market, and the NNMS

Market Maker will be permitted a grace

period of three minutes within which to

take action to restore its Attributable

Quote/Order, if the market maker has

not authorized use of the QR

functionality or does not otherwise have

an Attributable Quote/Order on both

sides of the market in the system. An

NNMS Market Maker that fails to

transmit an Attributable Quote/Order in

a security within the allotted time will

have its quotation restored by the

system at the lowest bid price and the

highest offer price in that security.

Except as provided in subparagraph

(b)(6) of this rule, an NNMS Market

Maker that withdraws from a security

may not re-register in the system as a

market maker in that security for twenty

(20) business days. The requirements of

this subparagraph shall not apply to a

market maker’s Agency Quote.

[(A) Notwithstanding the above, a

market maker can be reinstated if:

(i) the market maker makes a request

for reinstatement to Nasdaq Market

Operations as soon as practicable under

the circumstances, but within at least

one hour of having been Timed Out of

the Box, and immediately thereafter

provides written notification of the

reinstatement request;

(ii) it was a Primary Market Maker at

the time it was Timed Out of the Box;

69092 Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices

(iii) the market maker’s firm would

not exceed the following reinstatement

limitations:

a. for firms that simultaneously made

markets in less than 250 stocks during

the previous calendar year, the firm can

receive no more than four (4)

reinstatements per year;

b. for firms that simultaneously made

markets in 250 or more but less than 500

stocks during the previous calendar

year, the firm can receive no more than

six (6) reinstatements per year;

c. for firms that simultaneously made

markets in 500 or more stocks during

the previous calendar year, the firm can

receive no more than twelve (12)

reinstatements per year; and

(iv) the designated Nasdaq officer

makes a determination that the

withdrawal was not an attempt by the

market maker to avoid its obligation to

make a continuous two-sided market. In

making this determination, the

designated Nasdaq officer will consider,

among other things:

a. whether the market conditions in

the issue included unusual volatility or

other unusual activity, and/or the

market conditions in other issues in

which the market maker made a market

at the time the firm was Timed Out of

the Box;

b. the frequency with which the firm

has been Timed Out of the Box in the

past;

c. procedures the firm has adopted to

avoid being inadvertently Timed Out of

the Box; and

d. the length of time before the market

maker sought reinstatement.

(B) If a market maker has exhausted

the reinstatement limitations in

subparagraph (b)(6)(A)(iii) above, the

designated Nasdaq officer may grant a

reinstatement request if he or she finds

that such reinstatement is necessary for

the protection of investors or the

maintenance of fair and orderly markets

and determines that the withdrawal was

not an attempt by the market maker to

avoid its obligation to make a

continuous two-sided market in

instances where:

(i) a member firm experiences a

documented problem or failure

impacting the operation or utilization of

any automated system operated by or on

behalf of the firm (chronic system

failures within the control of the

member will not constitute a problem or

failure impacting a firm’s automated

system) or involving an automated

system operated by Nasdaq;

(ii) the market maker is a manager or

co-manager of a secondary offering from

the time the secondary offering is

announced until ten days after the

offering is complete; or

(iii) absent the reinstatement, the

number of market makers in a particular

issue is equal to two (2) or less or has

otherwise declined by 50% or more

from the number that existed at the end

of the prior calendar quarter, except that

if a market maker has a regular pattern

of being frequently Timed Out of the

Box, it may not be reinstated

notwithstanding the number of market

makers in the issue.]

[(7)] (6) Notwithstanding the

provisions of subparagraph [(6)] (5)

above:

(A) an NNMS Market Maker that

obtains an excused withdrawal pursuant

to Rule 4619 prior to withdrawing from

NNMS may reenter NNMS according to

the conditions of its withdrawal; and

(B) a NNMS Market Maker that fails

to maintain a clearing arrangement with

a registered clearing agency or with a

member of such an agency, and is

thereby withdrawn from participation in

ACT and NNMS for NNMS securities,

may reenter NNMS after a clearing

arrangement has been reestablished and

the market maker has compiled with

ACT participant requirements. Provided

however, that if the Association finds

that the ACT market maker’s failure to

maintain a clearing arrangement is

voluntary, the withdrawal of quotations

will be considered voluntary and

unexcused.

[(8)] (7) The Market Operations

Review Committee shall have

jurisdiction over proceedings brought by

market makers seeking review of their

removal from NNMS pursuant to

subparagraph[s] (b)(5)[(6) or (b)(7)] of

this rule.

[(9)] (8) In the event that a

malfunction in the [NNMS Market

Maker’s] Quoting Market Participant’s

equipment occurs, rendering [on-line]

communications with NNMS

inoperable, the [NNMS Market Maker]

Quoting Market Participant is obligated

to immediately contact Nasdaq Market

Operations by telephone to request

withdrawal from NNMS and a closedquote status, and if the Quoting Market

Participants is an NNMS Market Maker

an excused withdrawal from Nasdaq[.

Such request must be made] pursuant to

Rule 4619. If withdrawal is granted,

Nasdaq Market Operations personnel

will enter the withdrawal notification

into NNMS from a supervisory terminal

and shall close the quote. Such manual

intervention, however, will take a

certain period of time for completion

and, unless otherwise permitted by the

Association pursuant to its authority

under Rule 11890, the [NNMS Market

Maker] Quoting Market Participants will

continue to be obligated for any

transaction executed prior to the

effectiveness of [his] the withdrawal

and closed-quote status.

[(10) In the event that there are no

NNMS Market Makers at the best bid

(offer) disseminated by Nasdaq, market

orders to sell (buy) entered into NNMS

will be held in queue until executable,

or until 90 seconds has elapsed, after

which such orders will be rejected and

returned to their respective order entry

firms.]

(c) Directed Order Processing—A

participant may enter a Directed Order

into the NNMS to access a specific

Quote/Order in the Nasdaq Quotation

Montage and to begin the negotiation

process with a particular Quoting

Market Participant. The system will

deliver an order (not an execution) to

the Quoting Market Participant

designated as the recipient of the order.

Upon delivery, the Quoting Market

Participant shall owe no liability under

the Firm Quote Rule to that order,

unless the Quoting Market Participant

to which a Directed Order is being sent

has indicated that it wishes to receive

Directed Orders that are Liability Orders

(as described in Rule 4706(b)).

Additionally, upon delivery, the system

will not decrement the receiving

Quoting Market Participant’s Quote/

Order. This provision shall not apply to

Preferenced Orders.

[(c)] (d) NNMS Order Entry Firms

All entries in NNMS shall be made in

accordance with the procedures and

requirements set forth in the NNMS

User Guide. Orders may be entered in

NNMS by the NNMS Order Entry Firm

through either its Nasdaq terminal or

computer interface. The system will

transmit to the firm on the terminal

screen and printer, if requested, or

through the computer interface, as

applicable, an execution report

generated immediately following the

execution.

[(d) Order Entry Parameters

(1) NNMS will only accept market

and marketable limit orders for

execution and will not accept market or

marketable limit orders designated as

All-or-None (‘‘AON’’) orders; provided,

however, that NNMS will not accept

any limit orders, marketable or

unmarketable, prior to 9:30 a.m., Eastern

Time. For purposes of this

subparagraph, an AON order is an order

for an amount of securities equal to the

size of the order and no less.

(2) Additionally, the NNMS will only

accept orders that are unpreferenced,

thereby resulting in execution in

rotation against NNMS Market Makers,

and will not accept preferenced orders.

(3) NNMS will not accept orders that

exceed 9,900 shares, and no participant

in the NNMS system shall enter an

Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices 69093

order into the system that exceeds

9,900.]

[(e) Electronic Communication

Networks

An Electronic Communications

Networks, as defined in SEC Rule

11Ac1–1(a)(8), may participate in the

NNMS System if it complies with NASD

Rule 4623 and executes with the

Association a Nasdaq Workstation

Subscriber Agreement, as amended, for

ECNs.]

(e) Odd-Lot Processing

(1) Participation in Odd-Lot Process—

All NNMS Market Makers may

participate in the Odd-Lot Process for

each security in which the market

maker is registered.

(2) Execution Process

(A) Odd-lot orders will be executed

against an NNMS Market Maker only if

it has an odd-lot exposure limit in an

amount that would fill the odd-lot order.

A NNMS Market Maker may, on a

security-by-security basis, set an odd-lot

exposure limit from 0 to 999,999 shares.

(B) An odd-lot order shall be executed

automatically against the next available

NNMS Market Maker when the odd-lot

order becomes executable (i.e., when the

best price in Nasdaq moves to the price

of the odd-lot limit order). Such odd-lot

orders will execute at the best price

available in the market, in rotation

against NNMS Market Makers who have

an exposure limit that would fill the

odd-lot order.

(C) For odd lots that are part of a

mixed lot, once the round-lot portion is

executed, the odd-lot portion will be

executed at the round-lot price against

the next NNMS Market Maker in

rotation (as described in subparagraph

(e)(2)(b) of this rule) even if the roundlot price is no longer the best price in

Nasdaq.

(D) Odd-lot executions will decrement

the odd-lot exposure limit of an NNMS

Market Maker but will not decrement

the size of NNMS Market Maker’s

Displayed Quote/Order.

(E) After the NNMS system has

executed an odd lot against an NNMS

Market Maker, the system will not

deliver another odd-lot order against the

same market maker until a

predetermined time period has elapsed

from the time the last execution was

delivered, as measured by the time of

execution in the Nasdaq system. This

period of time shall initially be

established as 5 seconds, but may be

increased upon Commission approval

and appropriate notification to NNMS

Participants or may be decreased to an

amount less than five seconds by the

NNMS Market Maker.

(f) UTP Exchanges

Participation in the NNMS by UTP

Exchanges is voluntary. If a UTP

Exchange elects to participate in the

system, Nasdaq shall endeavor to

provide fair and equivalent access to the

Nasdaq market for UTP Exchanges, as

a UTP Exchange provides to its market

for Nasdaq Quoting Market Participants

and NNMS Order Entry Firms. The

following provisions shall apply to UTP

Exchanges that choose to participate in

the NNMS:

(1) Order Entry—UTP Exchanges that

elect to participate in the system shall

be permitted to enter Directed and NonDirected Orders into the system subject

to the conditions and requirements of

Rules 4706. Directed and Non-Directed

Orders entered by UTP Exchanges shall

be processed (unless otherwise

specified) as described in

subparagraphs (b) and (c) of this rule.

(2) Display of UTP Exchange Quotes/

Orders in Nasdaq

(A) UTP Exchange Principal Orders/

Quotes—UTP Exchanges that elect to

participate in the system shall be

permitted to transmit to the NNMS a

single bid Quote/Order and a single

offer Quote/Order. Upon transmission of

the Quote/Order to Nasdaq, the system

shall time stamp the Quote/Order,

which time stamp shall determine the

ranking of the Quote/Order for purposes

of processing Non-Directed Orders. The

NNMS shall display the best bid and

best offer Quote/Order transmitted to

Nasdaq by a UTP Exchange in the

Nasdaq Quotation Montage under the

MMID for the UTP Exchange, and shall

also display such Quote/Order in the

Nasdaq Order Display Facility as part of

the aggregate trading interest when the

UTP Exchange’s best bid/best offer

Quote/Order falls within the best three

price levels in Nasdaq on either side of

the market.

(B) UTP Exchange Agency Quotes/

Orders

(i) A UTP Exchange that elect to

participate in the system may transmit

to the NNMS Quotes/Orders at a single

as well as multiple price levels that meet

the following requirements: are not for

the benefit of a broker and/or dealer

that is with respect to the UTP Exchange

a registered or designated market

maker, dealer or specialist in the

security at issue; and are designated as

Non-Attributable Quotes/Orders (‘‘UTP

Agency Order/Quote’’).

(ii) Upon transmission of a UTP

Agency Quote/Order to Nasdaq, the

system shall time stamp the order,

which time stamp shall determine the

ranking of these Quote/Order for

purposes of processing Non-Directed

Orders, as described in subparagraph

(b) of this rule. A UTP Agency Quote/

Order shall not be displayed in the

Nasdaq Quotation Montage under the

MMID for the UTP Exchange. Rather,

UTP Agency Quotes/Orders shall be

reflected in the Nasdaq Order Display

Facility and Nasdaq Quotation Montage

in the same manner in which NonAttributable Quotes/Orders from

Nasdaq Quoting Market Participants are

reflected in Nasdaq, as described in

Rule 4707(b)(2).

(3) Non-Directed Order Processing

(a) UTP Exchanges that elect to

participate in the system and that agree

to provide automatic execution against

their Quotes/Orders for Nasdaq Quoting

Market Participants and NNMS Order

Entry Firms, shall accept an execution

of an order up to the size of the UTP

Exchange’s displayed Quote/Order, and

shall have Non-Directed Orders they

enter into the system processed as

described in subparagraph (b) of this

rule.

(b) UTP Exchanges that elect to

participate in the system but that do not

provide automatic execution against

their Quotes/Orders for Nasdaq Quoting

Market Participants and NNMS Order

Entry Firms, shall accept the delivery of

an order up to the size of the UTP

Exchange’s Displayed Quote/Order, and

shall have Non-Directed Orders they

enter into the system processed as

described in subparagraph (b) of this

rule. If such a UTP Exchange declines

or partially fills a Non-Directed Order

without immediately transmitting to

Nasdaq a revised Quote/Order that is at

a price inferior to the previous price, or

if such a UTP Exchange fails to respond

in any manner within 30 seconds of

order delivery, the NNMS will send the

order (or remaining portion thereof)

back into the system for delivery to the

next Quoting Market Participant in

queue. The system will then move the

side of such UTP Exchange’s Quote/

Order to which the declined or partiallyfilled order was delivered, to the lowest

bid or highest offer price in Nasdaq, at

a size of 100 shares.

(4) Directed Order Processing—UTP

Exchanges that elect to participate in

the system shall participate in the

Directed Order processing as described

in subparagraph (c) of this rule.

(5) Decrementation—UTP Exchanges

shall be subject to the decrementation

procedures described in subparagraph

(b) of this rule.

(6) Scope of Rules ‘‘ Nothing in these

rules shall apply to UTP Exchanges that

elect not to participate in the system.

69094 Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices

4711–4714—No Change

4718. Termination of System Service

The Association or its subsidiaries

may, upon notice, terminate system

service to a participant in the event that

a participant fails to abide by any of the

rules or operating procedures of the

System or any other relevant rule or

requirement, or fails to pay promptly for

services rendered.

* * * * *

4750. SMALLCAP SMALL ORDER

EXECUTION SYSTEM (SOES)

4751–4757—Deleted

B. Proposed Rule Language for File

No. NASD–99–53 containing Alternative

B Proposed additions are in italics and

proposed deletions are placed in

[brackets].

4720. SelectNet Service—Deleted

* * * * *

4611. Registration as a Nasdaq Market

Maker

(a)–(e) No Change.

(f) Unless otherwise specified by the

Association, each Nasdaq market maker

that is registered as a market maker in

a Nasdaq[National Market security]-

listed security shall also at all times be

registered as a market maker in the

Nasdaq National Market Execution

System (NNMS) with respect to that

security and be subject to the NNMS

Rules as set forth in the Rule 4700

Series. [Participation in the Small Order

Execution System (SOES) shall be

voluntary for any Nasdaq market maker

registered to make a market in a Nasdaq

SmallCap security.]

* * * * *

(g) No Change.

4613. Character of Quotations

(a) Two-Sided Quotations

(1) For each security in which a

member is registered as a market maker,

the member shall be willing to buy and

sell such security for its own account on

a continuous basis and shall enter and

maintain a two-sided quotation[s]

(‘‘Principal Quote’’), which is attributed

to the market maker by a special maker

participant identifier (‘‘MMID’’) and is

displayed in the Nasdaq Quotation

Montage [in The Nasdaq Stock Market]

at all times, subject to the procedures

for excused withdrawal set forth in Rule

4619.

(A) A registered market maker in a

Nasdaq-listed security [listed on The

Nasdaq Stock Market] must display a

quotation size for at least one normal

unit of trading (or a larger multiple

thereof) when it is not displaying a limit

order in compliance with SEC Rule

11Ac1–4, provided, however, that a

registered market maker may augment

its displayed quotation size to display

limit orders priced at the market

maker’s quotation. Unless otherwise

designated, a ‘‘normal unit of trading’’

shall be 100 shares.

(b) Agency Quote—Amendments

Pending Pursuant to SR–NASD–99–09.

(c)–(e) No Change.

IM–4613. Autoquote Policy—No Change

4618. Clearance and Settlement

(a)–(b) No Changes.

(c) All transactions through the

facilities of the Nasdaq National Market

Execution System[, SOES, and SelectNet

services] shall be cleared and settled

through a registered clearing agency

using a continuous net settlement

system.

* * * * *

4619. Withdrawal of Quotations and

Passive Market Making

(a)–(b) No Change.

(c) Excused withdrawal status may be

granted to a market maker that fails to

maintain a clearing arrangement with a

registered clearing agency or with a

member of such an agency and is

withdrawn from participation in the

Automated Confirmation Transaction

service, thereby terminating its

registration as a market maker in Nasdaq

issues. Provided however, that if the

Association finds that the market

maker’s failure to maintain a clearing

arrangement is voluntary, the

withdrawal of quotations will be

considered voluntary and unexcused

pursuant to Rule 4620[, the Rules for the

Small Order Execution System, as set

forth in the Rule 4750 Series,] and the

Rule 4700 Series governing the

Nasdaq[’s] National Market Execution

System.

(d) No Change.

* * * * *

4620. Voluntary Termination of

Registration

(a) A market maker may voluntarily

terminate its registration in a security by

withdrawing its Principal [quotations]

Quote from The Nasdaq Stock Market. A

market maker that voluntarily

terminates its registration in a security

may not re-register as a market maker in

that security for twenty (20) business

days. Withdrawal from participation as

a market maker in a Nasdaq [National

Market]-listed security in the Nasdaq

National Market Execution System shall

constitute termination of registration as

a market maker in that security for

purposes of this Rule; provided,

however, that a market maker that fails

to maintain a clearing arrangement with

a registered clearing agency or with a

member of such an agency and is

withdrawn from participation in the

Automated Confirmation Transaction

System and thereby terminates its

registration as a market maker in

Nasdaq-listed [National Market and

SmallCap] issues may register as a

market maker at any time after a

clearing arrangement has been

reestablished and the market maker has

complied with ACT participant

requirements contained in Rule 6100.

* * * * *

4632. Transaction Reporting

(a)–(d) No Change.

(e) Transactions Not Required To Be

Reported

The following types of transactions

shall not be reported:

(1) Transactions executed through the

Computer Assisted Execution System

(CAES), or the facilities of the Nasdaq

National Market Execution System

(‘‘NNMS’’)[, or the SelectNet service];

(2)–(6) No Change.

(f) No Change.

4642. Transaction Reporting

(a)–(d) No Change.

(e) Transactions Not Required To Be

Reported

The following types of transactions

shall not be reported:

(1) Transactions executed through the

Computer Assisted Execution System

(CAES)[; the Small Order Execution

System (SOES) or the SelectNet service]

or facilities of the Nasdaq National

Market Execution System (‘‘NNMS’’).

(2)–(5) No Change.

(f) No Change.

* * * * *

4700. NASDAQ NATIONAL MARKET

EXECUTION SYSTEM (NNMS)

4701. Definitions—Unless stated

otherwise, the terms described below

shall have the following meaning:

[(d)] (a) The term ‘‘active NNMS

securities’’ shall mean those NNMS

eligible securities in which at least one

NNMS Market Maker is currently active

in NNMS.

[(i)] (b) The term ‘‘Agency Quote’’

shall mean the quotation that a

registered NNMS Market Maker is

permitted to display pursuant to the

requirements of NASD Rule 4613(b).

(c) The term ‘‘Attributable Quote/

Order’’ shall have the following

meaning:

(1) For NNMS Market Makers and

NNMS ECNs, a bid or offer Quote/Order

that is designated for display (price and

Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices 69095

size) next to the participant’s MMID in

the Nasdaq Quotation Montage once

such Quote/Order becomes the

participant’s best attributable bid or

offer.

(2) For UTP Exchanges, the best bid

and best offer quotation with price and

size that is transmitted to Nasdaq by the

UTP Exchange, which is displayed next

to the UTP Exchange’s MMID in the

Nasdaq Quotation Montage.

[(h)] (d) The term ‘‘Automated

Confirmation Transaction’’ service or

‘‘ACT’’ shall mean the automated

system owned and operated by The

Nasdaq Stock Market, Inc. which

compares trade information entered by

ACT Participants and submits ‘‘lockedin’’ trades to clearing.

[(g)] (e) The term ‘‘automatic refresh

size’’ shall mean the default size to

which an NNMS Market Maker’s quote

will be refreshed pursuant to NASD

Rule 4710(b)(2), if the market maker

elects to utilize the Quote Refresh

Functionality and does not designate to

Nasdaq an alternative refresh size,

which must be at least one normal unit

of trading. The [maximum order]

automatic refresh size default [size]

amount shall be 1,000 shares.

(f) The term ‘‘Directed Order’’ shall

mean an order that is entered into the

system by an NNMS participant that is

directed to a particular Quoting Market

Participant at any price, through the

Directed Order process described in

Rule 4710(c). This term shall not

include the ‘‘Preferenced Order’’

described in subparagraph (aa) of this

rule.

(g) The term ‘‘Displayed Quote/

Order’’ shall mean both Attributable

and Non-Attributable (as applicable)

Quotes/Orders transmitted to Nasdaq by

Quoting Market Participants.

(h) The term ‘‘Firm Quote Rule’’ shall

mean SEC Rule 11Ac1–1.

(i) The term ‘‘Immediate or Cancel’’

shall mean, for limit orders so

designated, that if after entry into the

NNMS a marketable limit order (or

unexecuted portion thereof) becomes

non-marketable, the order (or

unexecuted portion thereof) shall be

canceled and returned to the entering

participant.

(j) The term ‘‘Liability Order’’ shall

mean an order that when delivered to a

Quoting Market Participant imposes an

obligation to respond to such order in a

manner consistent with the Firm Quote

Rule.

(k) The term ‘‘limit order’’ shall mean

an order to buy or sell a stock at a

specified price or better.

(l) The term ‘‘market order’’ shall

mean an unpriced order to buy or sell

a stock at the market’s current best

price.

(m) The term ‘‘marketable limit

order’’ shall mean a limit order to buy

that, at the time it is entered into the

NNMS, is priced at the current inside

offer or higher, or a limit order to sell

that, at the time it is entered into the

NNMS, is priced at the inside bid or

lower.

(n) The term ‘‘mixed lot’’ shall mean

an order that is for more than a normal

unit of trading but not a multiple

thereof.

(o) The term ‘‘Non-Attributable

Quote/Order’’ shall mean a bid or offer

Quote/Order that is entered by a Nasdaq

Quoting Market Participant and is

designated for display (price and size)

on an anonymous basis in the Nasdaq

Order Display Facility.

(p) The term ‘‘Non-Directed Order’’

shall mean an order that is entered into

the system by an NNMS Participant and

is not directed to any particular Quoting

Market Participant, and shall also

include Preferenced Orders as described

in subparagraph (aa) of this rule.

(q) The term ‘‘Non-Liability Order’’

shall mean an order that when delivered

to a Quoting Market Participant imposes

no obligation to respond to such order

under the Firm Quote Rule.

[(a)] (r) The term ‘‘Nasdaq National

Market Execution System,’’ [or]

‘‘NNMS,’’ or ‘‘system’’ shall mean the

automated system owned and operated

by The Nasdaq Stock Market, Inc. which

enables NNMS Participants to execute

transactions in active NNMS authorized

securities; to have reports of the

transactions automatically forwarded to

the National Market Trade Reporting

System, if required, for dissemination to

the public and the industry, and to

‘‘lock in’’ these trades by sending both

sides to the applicable clearing

corporation(s) designated by the NNMS

Participant(s) for clearance and

settlement; and to provide NNMS

Participants with sufficient monitoring

and updating capability to participate in

an automated execution environment.

[(c)] (s) The term ‘‘NNMS eligible

securities’’ shall mean designated

Nasdaq-listed [National Market (NNM)]

equity securities.

(t) The term ‘‘NNMS ECN’’ shall mean

a member of the Association that meets

all of the requirements of NASD Rule

4623, and that participates in the NNMS

with respect to one or more NNMS

eligible securities.

(1) The term ‘‘NNMS Auto-Ex ECN’’

shall mean an NNMS ECN that

participates in the automatic-execution

functionality of the NNMS system, and

accordingly executes Non-Directed

Orders via automatic execution for the

purchase or sale of an active NNMS

security at the Nasdaq inside bid and/

or offer price.

(2) The term ‘‘NNMS Order-Delivery

ECN’’ shall mean an NNMS ECN that

participates in the order-delivery

functionality of the NNMS system,

accepts delivery of Non-Directed Orders

that are Liability Orders, and provides

an automated execution of NonDirected Orders (or an automated

rejection of such orders if the price is no

longer available) for the purchase or

sale of an active NNMS security at the

Nasdaq inside bid and/or offer price.

[(e)] (u) The term ‘‘NNMS Market

Maker’’ shall mean a member of the

Association that is registered as a

Nasdaq Market Maker and as a Market

Maker for purposes of participation in

NNMS with respect to one or more

NNMS eligible securities, and is

currently active in NNMS and obligated

to execute orders through the

automatic-execution functionality of the

NNMS system for the purchase or sale

of an active NNMS security at the

Nasdaq inside bid and/or [ask] offer

price.

[(b)] (v) The term ‘‘NNMS Participant’’

shall mean [either] an NNMS Market

Maker, NNMS ECN, UTP Exchange, or

NNMS Order Entry Firm registered as

such with the Association for

participation in NNMS.

[(f)] (w) The term ‘‘NNMS Order Entry

Firm’’ shall mean a member of the

Association who is registered as an

Order Entry Firm for purposes of

participation in NNMS which permits

the firm to enter orders [of limited size]

for execution against NNMS Market

Makers.

(x) The term ‘‘Nasdaq Quotation

Montage’’ shall mean the portion of the

Nasdaq WorkStation presentation that

displays for a particular stock two

columns (one for bid, one for offer),

under which is listed in price/time

priority the MMIDs for each NNMS

Market Maker, NNMS ECN, and UTP

Exchange registered in the stock and the

corresponding quote (price and size)

next to the related MMID.

(y) The term ‘‘Nasdaq Quoting Market

Participant’’ shall include only the

following: (1) NNMS Market Makers; or

(2) NNMS ECNs.

(z) The term ‘‘odd-lot order’’ shall

mean an order that is for less than a

normal unit of trading.

(aa) The term ‘‘Preferenced Order’’

shall mean an order that is entered into

the Non-Directed Order Process and is

designated to be delivered to or

executed against a particular Quoting

Market Participant’s Attributable Quote/

Order if the Quoting Market Participant

is at the best bid/best offer when the

69096 Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices

Preferenced Order is the next in line to

be executed or delivered. Preferenced

Orders shall be executed subject to the

conditions set out in Rule 4710(b).

(bb) The term ‘‘Quote/Order’’ shall

mean a single quotation or shall mean

an order or multiple orders at the same

price submitted to Nasdaq by a Nasdaq

Quoting Market Participant that is

displayed in the form of a single

quotation. Unless specifically referring

to a UTP Exchange’s Agency Quote/

Order (as set out in Rule 4710(f)(2)(b)),

when this term is used in connection

with a UTP Exchange, it shall mean the

best bid and/or the best offer quotation

transmitted to Nasdaq by the UTP

Exchange.

(cc) The term ‘‘Quoting Market

Participant’’ shall include any of the

following: (1) NNMS Market Makers; (2)

NNMS ECNs; and (3) UTP Exchange

Specialists.

(dd) The term ‘‘Reserve Size’’ shall

mean the system-provided functionality

that permits a Nasdaq Quoting Market

Participant to display in its Displayed

Quote/Order part of the full size of a

proprietary or agency order, with the

remainder held in reserve on an

undisplayed basis to be displayed in

whole or in part after the displayed part

is executed.

(ee) The term ‘‘Nasdaq Order Display

Facility’’ shall mean the portion of the

Nasdaq WorkStation presentation that

displays, without attribution to a

particular Quoting Market Participant’s

MMID, the three best price levels in

Nasdaq on both the bid and offer side

of the market and the aggregate size of

Attributable and Non-Attributable

Quotes/Orders at each price level.

(ff) The term ‘‘UTP Exchange’’ shall

mean any registered national securities

exchange that elects to participate in

the NNMS and that has unlisted trading

privileges in Nasdaq National Market

securities pursuant to the Joint SelfRegulatory Organization Plan Governing

the Collection, Consolidation and

Dissemination Of Quotation and

Transaction Information For ExchangeListed Nasdaq/National Market System

Securities Traded On Exchanges On An

Unlisted Trading Privilege Basis

(‘‘Nasdaq UTP Plan’’).

4705. NNMS Participant Registration

(a) Participation in NNMS as an

NNMS Market Maker requires current

registration as such with the

Association. Such registration shall be

conditioned upon the NNMS Market

Maker’s initial and continuing

compliance with the following

requirements:

(1) execution of an NNMS Participant

application agreement with the

Association;

(2) membership in, or access

arrangement with, a clearing agency

registered with the Commission which

maintains facilities through which

NNMS compared trades may be settled;

(3) registration as a market maker in

The Nasdaq Stock Market pursuant to

the Rule 4600 Series and compliance

with all applicable rules and operating

procedures of the Association and the

Commission;

(4) maintenance of the physical

security of the equipment located on the

premises of the NNMS Market Maker to

prevent the improper use or access to

Nasdaq systems, including

unauthorized entry of information into

NNMS; and

(5) acceptance and settlement of each

NNMS trade that NNMS identifies as

having been effected by such NNMS

Market Maker, or if settlement is to be

made through another clearing member,

guarantee of the acceptance and

settlement of such identified NNMS

trade by the clearing member on the

regularly scheduled settlement date.

(b) Pursuant to Rule 4611(f),

participation as an NNMS Market Maker

is required for any Nasdaq market maker

registered to make a market in an NNMS

security.

(c) Participation in NNMS as an

NNMS Order Entry Firm requires

current registration as such with the

Association. Such registration shall be

conditioned upon the NNMS Order

Entry Firm’s initial and continuing

compliance with the following

requirements:

(1) execution of an NNMS Participant

application agreement with the

Association;

(2) membership in, or access

arrangement with, a clearing agency

registered with the Commission which

maintains facilities through which

NNMS compared trades may be settled;

(3) compliance with all applicable

rules and operating procedures of the

Association and the Securities and

Exchange Commission;

(4) maintenance of the physical

security of the equipment located on the

premises of the NNMS Order Entry Firm

to prevent the improper use or access to

Nasdaq systems, including

unauthorized entry of information into

NNMS; and

(5) acceptance and settlement of each

NNMS trade that NNMS identifies as

having been effected by such NNMS

Order Entry Firm or if settlement is to

be made through another clearing

member, guarantee of the acceptance

and settlement of such identified NNMS

trade by the clearing member on the

regularly scheduled settlement date.

(d) Participation in NNMS as an

NNMS ECN requires current registration

as an NASD member and shall be

conditioned upon the following:

(1) the execution of an NNMS

Participant application agreement with

the Association;

(2) compliance with all requirements

in NASD Rule 4623 and all other

applicable rules and operating

procedures of the Association and the

Securities and Exchange Commission;

(3) membership in, or access

arrangement with, a clearing agency

registered with the Commission which

maintains facilities through which

NNMS-compared trades may be settled;

(4) maintenance of the physical

security of the equipment located on the

premises of the NNMS ECN to prevent

the improper use or access to Nasdaq

systems, including unauthorized entry

of information into NNMS; and

(5) acceptance and settlement of each

trade that is executed through the

facilities of the NNMS, or if settlement

is to be made through another clearing

member, guarantee of the acceptance

and settlement of such identified NNMS

trade by the clearing member on the

regularly scheduled settlement date.

[(d)] (e) The registration required

hereunder will apply solely to the

qualification of an NNMS Participant to

participate in NNMS. Such registration

shall not be conditioned upon

registration in any particular eligible or

active NNMS securities.

[(e)] (f) Each NNMS Participant shall

be under a continuing obligation to

inform the Association of

noncompliance with any of the

registration requirements set forth

above.

(g) The Association and its

subsidiaries shall not be liable for any

losses, damages, or other claims arising

out of the NNMS or its use. Any losses,

damages, or other claims, related to a

failure of the NNMS to deliver, display,

transmit, execute, compare, submit for

clearance and settlement, or otherwise

process an order, Quote/Order, message,

or other data entered into, or created by,

the NNMS shall be absorbed by the

member, or the member sponsoring the

customer, that entered the order, Quote/

Order, message, or other data into the

NNMS.

4706. Order Entry Parameters

(a) Non-Directed Orders—

(1) General. The following

requirements shall apply to NonDirected Orders Entered by NNMS

Market Participants:

Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices 69097

(A) An NNMS Participant may enter

into the NNMS a Non-Directed Order in

order to access the best bid/best offer as

displayed in Nasdaq.

(B) A Non-Directed Order must be a

market or marketable limit order, must

be a round lot or a mixed lot, must

indicate whether it is a buy, short sale,

short-sale exempt, or long sale, and if

entered by a Quoting Market Participant

may be designated as Immediate or

Cancel.

(C) The system will not process a NonDirected Order to sell short if the

execution of such order would violate

NASD Rule 3350.

(D) Non-Directed Orders will be

processed as described in Rule 4710.

(E) The NNMS shall not accept NonDirected Orders that are All-or-None, or

have a minimum size of execution.

(2) Entry of Non-Directed Orders by

NNMS Order Entry Firms ‘‘ In addition

to the requirements in paragraph (a)(1)

of this rule, the following conditions

shall apply to Non-Directed Orders

entered by NNMS Order-Entry Firms:

(A) All Non-Directed orders shall be

designated as Immediate or Cancel. As

such, if after entry into the NNMS of a

Non-Directed Order that is marketable,

the order (or the unexecuted portion

thereof) becomes non-marketable, the

system will return the order (or

unexecuted portion thereof) to the

entering participant.

(B) A Non-Directed Order that is a

limit order may be entered prior to the

market’s open. Such orders will be held

in queue, and if not marketable on the

market’s open, will be returned to the

entering participant.

(b) Directed Orders A participant may

enter a Directed Order into the NNMS

to access a specific Attributable Quote/

Order displayed in the Nasdaq

Quotation Montage, subject to the

following conditions and requirements:

(1) Unless the Quoting Market

Participant to which a Directed Order is

being sent has indicated that it wishes

to receive Directed Orders that are

Liability Orders, a Directed Order must

be a Non-Liability Order, and as such,

at the time of entry must be designated

as:

(A) an ‘‘All-or-None’’ order (‘‘AON’’)

that is at least one normal unit of

trading (e.g. 100 shares) in excess of the

Attributable Quote/Order of the Quoting

Market Participant to which the order is

directed; or

(B) a ‘‘Minimum Acceptable

Quantity’’ order (‘‘MAQ’’), with a MAQ

value of at least one normal unit of

trading in excess of Attributable Quote/

Order of the Quoting Market Participant

to which the order is directed. Nasdaq

will append an indicator to the quote of

a Quoting Market Participant that has

indicated to Nasdaq that it wishes to

receive Directed Orders that are Liability

Orders.

(2) A Directed Order may have a time

in force of 1 to 99 minutes.

(3) Directed Orders shall be processed

pursuant to Rule 4710(c).

(c) Entry of Agency and Principal

Orders—NNMS Participants are

permitted to enter into the NNMS both

agency and principal orders for delivery

and execution processing.

(d) Order Size—Any round or mixed

lot order up to 999,999 shares may be

entered into the NNMS for normal

execution processing. Odd-lot orders,

and the odd-lot portion of a mixed lot,

are subject to a separate execution

process, as described in Rule 4710(e).

(e) Open Quotes—The NNMS will

only deliver an order or an execution to

a Quoting Market Participant if that

participant has an open quote.

(f) Odd-Lot Orders—The system will

accept odd-lot orders for processing

through a separate facility. Odd-lot

orders must be Non-Directed Orders,

and may be market, marketable limit or

limit orders. The system shall accept

odd-lot orders at a rate no faster than

one order per/second from any single

participant. Odd-lot orders, and the

odd-lot portion of a mixed lot order,

shall be processed as described in Rule

4710(e).

4707. Entry and Display of Quotes/Orders

(a) Entry of Quotes/Orders—Nasdaq

Quoting Market Participants may enter

Quotes/Orders into the NNMS subject to

the following requirements and

conditions:

(1) Nasdaq Quoting Market

Participants shall be permitted to

transmit to the NNMS multiple

Principal and Agency Quotes/Orders at

a single as well as multiple price levels.

Such Quote/Order shall indicate

whether it is an ‘‘Attributable Quote/

Order’’ or ‘‘Non-Attributable Quote/

Order,’’ and the amount of Reserve Size

(if applicable).

(2) Upon entry of a Quote/Order into

the system, the NNMS shall time-stamp

it, which time-stamp shall determine the

ranking of the Quote/Order for purposes

of processing Non-Directed Orders as

described in Rule 4710(b). For each

subsequent size increase received for an

existing quote at a given price, the

system will maintain the original timestamp for the original quantity of the

quote and assign a separate time-stamp

to that size increase.

(3) Consistent with Rule 4613, an

NNMS Market Maker is obligated to

maintain a two-sided Attributable

Quote/Order (other that an Agency

Quote) at all times, for at least one

normal unit of trading.

(4) Nasdaq Quoting Market

Participants may continue to transmit to

the NNMS only their best bid and best

offer Attributable Quotes/Orders.

Notwithstanding NASD Rule 4613 and

subparagraph (a)(1) of this rule, nothing

in these rules shall require a Nasdaq

Quoting Market Participant to transmit

to the NNMS multiple Quotes/Orders.

(b) Display of Quotes/Orders in

Nasdaq—The NNMS will display a

Nasdaq Quoting Market Participant’s

Quotes/Orders as follows:

(1) Attributable Quotes/Orders—The

price and size of a Nasdaq Quoting

Market Participant’s best priced

Attributable Quote/Order on both the

bid and offer side of the market will be

displayed in the Nasdaq Quotation

Montage under the Nasdaq Quoting

Market Participant’s MMID, and also

will be displayed in the Nasdaq Order

Display Facility as part of the aggregate

trading interest at a particular price

when the price of such Attributable

Quote/Order falls within the best three

price levels in Nasdaq on either side of

the market. Upon execution or

cancellation of the Nasdaq Quoting

Market Participant’s best-priced

Attributable Quote/Order on a

particular side of the market, the NNMS

will automatically display the

participant’s next best Attributable

Quote/Order on that side of the market.

(2) Non-Attributable Quotes/Orders—

The price and size of a Nasdaq Quoting

Market Participant’s Non-Attributable

Quote/Order on both the bid and offer

side of the market will be displayed in

the Nasdaq Order Display Facility as

part of the aggregate trading interest at

a particular price when the price of such

Non-Attributable Quote/Order falls

within the best three price levels in

Nasdaq on either side of the market. A

Non-Attributable Order will not be

displayed in the Nasdaq Quotation

Montage under the Nasdaq Quoting

Market Participant’s MMID. NonAttributable Quotes/Orders that are the

best priced Non-Attributable bids or

offers in the system will be displayed in

the Nasdaq Quotation Montage under

an anonymous MMID, which shall

represent and reflect the aggregate size

of all Non-Attributable Quotes/Orders in

Nasdaq at that price level. Upon

execution or cancellation of a Nasdaq

Quoting Market Participant’s NonAttributable Quote/Order, the NNMS

will automatically display a NonAttributable Quote/Order in the Nasdaq

Order Display Facility (consistent with

the parameters described above) if it

falls within the best three price levels in

Nasdaq on either side of the market.

69098 Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices

(c) Reserve Size—Reserve Size shall

not be displayed in Nasdaq, but shall be

electronically accessible as described in

Rule 4710(b).

(d) Summary Scan—The ‘‘Summary

Scan’’ functionality, which is a queryonly non-dynamic functionality,

displays without attribution to Quoting

Market Participants’ MMIDs the

aggregate size of Attributable and NonAttributable Quotes/Orders for all levels

(on both the bid and offer side of the

market) below the three price levels

displayed in the Nasdaq Order Display

Facility.

(e) NQDS Prime—‘‘NQDS Prime’’ is a

separate data feed that Nasdaq will

make available for a fee that is

approved by the Securities and

Exchange Commission. This separate

data feed will display with attribution to

Quoting Market Participants’ MMIDs all

Attributable Quotes/Orders on both the

bid and offer side of the market for the

price levels that are disseminated in the

Nasdaq Order Display Facility.

4710. Participant Obligations in NNMS

(a) Registration—Upon the

effectiveness of registration as a NNMS

Market Maker, NNMS ECN, or NNMS

Order Entry Firm, the NNMS Participant

may commence activity within NNMS

for exposure to orders or entry of orders,

as applicable. The operating hours of

NNMS may be established as

appropriate by the Association. The

extent of participation in Nasdaq by an

NNMS Order Entry Firm shall be

determined solely by the firm in the

exercise of its ability to enter orders into

Nasdaq.

(b) [Market Makers] Non-Directed

Orders

(1) [An NNMS Market Maker] General

Provisions—A Quoting Market

Participant in an NNMS Security shall

be subject to the following requirements

for Non-Directed Orders:

(A) Obligations—For each NNMS

security in which it is registered [as an

NNMS Market Maker, the market

maker], a Quoting Market Participant

must accept and execute individual

Non-Directed Orders against its

quotation including its Agency Quote (if

applicable), in an amount equal to or

smaller than the combination of the

Displayed [quotation] Quote/Order and

Reserve Size (if applicable) of such

[quotation(s)] Quote/Order, when the

Quoting Market Participant is at the best

bid/best offer in Nasdaq. [For purposes

of this rule, the term ‘‘reserved size’’

shall mean that a NNMS Market Maker

or a customer thereof wishes to display

publicly part of the full size of its order

or interest with the remainder held in

reserve on an undisplayed basis to be

displayed in whole or in part as the

displayed part is executed. To utilize

the reserve size function, a minimum of

1,000 shares must initially be displayed

in the market maker’s quote (including

the Agency Quote), and the quotation

must be refreshed to 1,000 shares

consistent with subparagraph (b)(2)(A)

of this rule.] Quoting Market

Participants shall participate in the

NNMS as follows:

(i) NNMS Market Makers and NNMS

Auto-Ex ECNs shall participate in the

automatic-execution functionality of the

NNMS, and shall accept the delivery of

an execution up to the size of the

participant’s Displayed Quote/Order

and Reserve Size.

(ii) NNMS Order-Delivery ECNs shall

participate in the order-delivery

functionality of the NNMS, and shall

accept the delivery of an order up to the

size of the NNMS Order-Delivery ECN’s

Displayed Quote/Order and Reserve

Size. The NNMS Order-Delivery ECN

shall be required to execute such order

in a manner consistent with the Firm

Quote Rule.

(iii) UTP Exchanges that choose to

participate in the NNMS shall do so as

described in subparagraph (f) of this

rule and as otherwise described in the

NNMS rules and the UTP Plan.

(B) Processing of Non-Directed

Orders—Upon entry of a Non-Directed

Order into the system, the NNMS will

ascertain who the next Quoting Market

Participant in queue to receive an order

is (based on the algorithm selected by

the entering participant, as described in

subparagraph (b)(B) (i)–(iii) of this rule),

and shall deliver an execution to

Quoting Market Participants that

participate in the automatic-execution

functionality of the system, or shall

deliver a Liability Order to Quoting

Market Participants that participate in

the order-delivery functionality of the

system; provided however, that the

system always shall deliver an order (in

lieu of an execution) to the Quoting

Market Participant next in queue when

the participant that entered the NonDirected Order into the system is a UTP

Exchange that does not provide

automatic execution against its Quotes/

Orders for Nasdaq Quoting Market

Participants and NNMS Order Entry

Firms. Non-Directed Orders entered into

the NNMS system shall be delivered to

or automatically executed against

Quoting Market Participants’ Displayed

[quotations] Quotes/Orders and Reserve

Size, including Agency Quotes (if

applicable), in strict price/time priority,

as described in the algorithm contained

in subparagraph (b)(B)(i) of this rule

[For quotes at the same price, the system

will yield priority to all displayed

quotations over reserve size, so that the

system will execute against Displayed

quotations in time priority and then

against reserve size in time priority].

Alternatively, an NNMS Market

Participant can designate that its NonDirected Orders be executed based on a

price/time priority that considers ECN

quote-access fees, as described in

subparagraphs (b)(B)(ii) of this rule, or

executed based on price/size/time

priority, as described in subparagraph

(b)(B)(iii) of this rule.

(i) Default Execution Algorithm—

Price/Time—The system will default to

a strict price/time priority within

Nasdaq, and will attempt to access

interest in the system in the following

priority and order:

(a) Displayed Quotes/Orders of NNMS

Market Makers, NNMS ECNs, and NonAttributable Agency Quotes/Orders of

UTP Exchanges (as permitted by

subparagraph (f) of this rule), in time

priority between such participants’

Quotes/Orders.

(b) Reserve Size of Nasdaq Quoting

Market Participants, in time priority

between such participants’ Quotes/

Orders; and

(c) Principal Quotes/Orders of UTP

Exchanges, in time priority between

such participants’ Quotes/Orders.

(ii) Price/Time Priority Considering

Quote-Access Fees—If this options is

chosen, the system will attempt to

access interest in the system in the

following priority and order:

(a) Displayed Quotes/Orders of NNMS

Market Makers, NNMS ECNs that do not

charge a separate quote-access fee to

non-subscribers, and Non-Attributable

Agency Quotes/Orders of UTP

Exchanges (as permitted by

subparagraph (f) of this rule), as well as

Quotes/Orders from NNMS ECNs that

charges a separate quote-access fee to

non-subscribers where the ECN entering

such Quote/Order indicates that the

price improvement offered by the

specific Quote/Order is equal to or

exceeds the separate quote-access fee

the ECN charges, in time priority

between such participants’ Quotes/

Orders;

(b) Displayed Quotes/Orders of NNMS

ECNs that charge a separate quoteaccess fee to non-subscribers, in time

priority between such participants’

Quotes/Orders;

(c) Reserve Size of NNMS Market

Makers and NNMS ECNs that do not

charge a separate quote-access fee to

non-subscribers, as well as Reserve Size

of Quotes/Orders from NNMS ECNs that

charges a separate quote-access fee to

non-subscribers where the ECN entering

such Quote/Order has indicated that the

price improvement offered by the

Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices 69099

specific Quote/Order is equal to or

exceeds the separate quote-access fee

the ECN charges, in time priority

between such participants’ Quotes/

Orders;

(d) Reserve Size of NNMS ECNs that

charge a separate quote-access fee to

non-subscribers, in time priority

between such participants’ Quotes/

Orders; and

(e) Principal Quotes/Orders of UTP

Exchanges, in time priority between

such participants’ Quotes/Orders.

(iii) Price/Size Priority—If this option

is chosen, Non-Directed Orders shall be

executed in price/size/time priority

against:

(a) Displayed Quotes/Orders of NNMS

Market Makers, NNMS ECNs, and NonAttributable Agency Quotes/Orders of

UTP Exchanges (as permitted by

subparagraph (f) of this rule), in price/

size/time priority between such

participants’ Quotes/Orders:

(b) the Reserve Size of Nasdaq

Quoting Market Participants, in price/

size/time priority between such

participants’ Quotes/Orders, which size

priority shall be based on the size of the

Displayed Quote/Order, and not on the

amount held in Reserve Size; and

(c) Principal Quotes/Orders of UTP

Exchanges, in price/size/time priority

between such participants’ Quotes/

Orders.

(iv) Exceptions—The following

exceptions shall apply to the above

execution parameters:

(a) If a Nasdaq Quoting Market

Participant enters a Non-Directed Order

into the system, before sending such

Non-Directed Order to the next Quoting

Market Participants in queue, the NNMS

will first attempt to match off the order

against the Nasdaq Quoting Market

Participant’s own Quote/Order if the

participant is at the best bid/best offer

in Nasdaq.

(b) If an NNMS Market Participant

enters a Preferenced Order, the order

shall be executed against (or delivered

in an amount equal to) both the

Displayed Quote/Order and Reserve

Size of the Quoting Market Participant

to which the order is being directed, if

that Quoting Market Participant is at the

best bid/best offer when the Preferenced

Order is next in line to be delivered (or

executed). Any unexecuted portion of a

Preferenced Order shall be returned to

the entering NNMS Market Participant.

If the Quoting Market Participant is not

at the best bid/best offer when the

Preferenced Order is next in line to be

delivered (or executed), the Preferenced

Order shall be returned to the entering

NNMS Market Participant.

(C) Decrementation Procedures—The

size of a [displayed quotation] Quote/

Order displayed in the Nasdaq Order

Display Facility and/or the Nasdaq

Quotation Montage will be decremented

upon the delivery of a Liability Order or

the delivery of an execution of a[n

NNMS] Non-Directed [o]Order or

Preferenced Order in an amount equal

to [or greater than one normal unit of

trading] the system-delivered order or

execution; provided, however, that [the

execution of] if an NNMS order that is

a mixed lot, the system will only deliver

a Liability Order or an execution for the

number of round lots contained in the

mixed lot order, and will only

decrement [a displayed quotation’s] the

size of a Displayed Quote/Order by the

number of shares represented by the

number of round lots contained in the

mixed lot order. The odd-lot portion of

the mixed lot will be executed at the

same price against the NNMS Market

Maker next in the odd lot rotation, as

described in subparagraph (e) of this

rule.

(i) If an NNMS Auto-Ex ECN has its

bid or offer Attributable Quote/Order

and Reserve Size decremented to zero

without transmission of another

Attributable Quote/Order to Nasdaq, the

system will zero out the side of the quote

that is exhausted. If both the bid and

offer are decremented to zero without

transmission of a revised Attributable

Quote/Order, the ECN will be placed

into an excused withdrawal state until

the ECN transmits to Nasdaq a revised

Attributable Quote/Order.

(ii) If an NNMS Order-Delivery ECN

declines or partially fills a Non-Directed

Order without immediately transmitting

to Nasdaq a revised Attributable Quote/

Order that is at a price inferior to the

previous price, or if an NNMS OrderDelivery ECN fails to respond in any

manner within 30 seconds of order

delivery, the system will cancel the

delivered order and send the order (or

remaining portion thereof) back into the

system for immediate delivery to the

next Quoting Market Participant in

queue. The system then will zero out the

ECN’s Quote/Orders at that price level

on that side of the market, and the

ECN’s quote on that side of the market

will remain at zero until the ECN

transmits to Nasdaq a revised

Attributable Quote/Order. If both the

bid and offer are zeroed out, the ECN

will be placed into an excused

withdrawal state until the ECN

transmits to Nasdaq a revised

Attributable Quote/Order.

(iii) If an NNMS ECN’s Quote/Order

has been zeroed out or if the ECN has

been placed into excused withdrawal as

described in subparagraphs (b)(1)(C)(i)

and (ii) of this rule, the system will

continue to access the ECN’s NonAttributable Quotes/Orders that are in

the NNMS, as described in Rule 4707

and subparagraph (b) of this rule.

(iv) If an NNMS ECN regularly fails to

meet a 5-second response time (as

measured by the ECN’s Service Delivery

Platform) over a period of orders, such

that the failure endangers the

maintenance of a fair and orderly

market, Nasdaq will place that ECN’s

quote in a closed-quote state. Nasdaq

will lift the closed-quote state when the

NNMS ECN certifies that it can meet the

5-second response time requirement

with regularity sufficient to maintain a

fair and orderly market.

(D) Interval Delay—After the NNMS

system has executed all Displayed

Quotes/Orders and Reserve Size interest

at a price level [an order against a

market maker’s displayed quote and

reserve size (if applicable), that market

maker shall not be required to execute

another order at its bid or offer in the

same security until a predetermined

time period has elapsed from the time

the order was executed, as measured by

the time of execution in the Nasdaq

system. This period of time shall

initially be established as 5 seconds, but

may be modified upon Commission

approval and appropriate notification to

NNMS participants.], the following will

occur:

(i) If the NNMS system cannot execute

in full all shares of a Non-Directed

Order against the Displayed Quotes/

Orders and Reserve Size interest at the

initial price level and at price two

minimum trading increments away, the

system will pause for 5 seconds before

accessing the interest at the next price

level in the system; provided, however,

that once the Non-Directed Order can be

filled in full within two price levels,

there will be no interval delay between

price levels and the system will execute

the remainder of order in full; or

(ii) If the Non-Directed Orders is

specially designated by the entering

market participant as a ‘‘sweep order,’’

the system will execute against all

Displayed Quotes/Orders and Reserve

Size at the initial price level and the two

price levels being displayed in the

Nasdaq Order Display Facility without

pausing between the displayed price

levels. Thereafter, the system will pause

5 seconds before moving to the next

price level, until the Non-Directed Order

is executed in full.

(iii) The interval delay described in

this subparagraph may be modified

upon Commission approval and

appropriate notification to NNMS

Participants.

(E) All entries in NNMS shall be made

in accordance with the requirements set

69100 Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices

forth in the NNMS User Guide, as

published from time to time by Nasdaq.

(2) Refresh Functionality

(A) Reserve Size Refresh—Once a

Nasdaq Quoting Market Participant’s

[an NNMS Market Maker’s displayed

quotation] Displayed Quote/Order size

on either side of the market in the

security has been decremented to zero

due to NNMS [executions] processing

Nasdaq will refresh the [market maker’s]

displayed size out of Reserve Size to a

size-level designated by the Nasdaq

Quoting Market Participant [NNMS

Market Maker], or in the absence of such

size-level designation, to the automatic

refresh size. [If the market maker is

using the reserve size function for its

proprietary quote or Agency Quote the

NNMS Market Maker must refresh to a

minimum of 1,000 shares, consistent

with subparagraph (b)(1)(A) of this rule].

To utilize the Reserve Size functionality,

a minimum of 1,000 shares must

initially be displayed in the Nasdaq

Quoting Market Participant’s Displayed

Quote/Order, and the Displayed Quote/

Order must be refreshed to at least 1,000

shares. This functionality will not be

available for use by UTP Exchanges.

(B) [Auto q]Quote Refresh (‘‘QR’’)—

Once an NNMS Market Maker’s

Displayed Quote/Order [quotation] size

and Reserve Size on either side of the

market in the security has been

decremented to zero due to NNMS

executions, the NNMS Market Maker

may elect to have The Nasdaq Stock

Market refresh the market maker’s

quotation as follows:

(i) Nasdaq will refresh the market

maker’s quotation price on the bid or

offer side of the market, whichever is

decremented to zero, by a[n] price

interval designated by the NNMS

Market Maker; and

(ii) Nasdaq will refresh the market

maker’s displayed size to a level

designated by the NNMS Market Maker,

or in the absence of such size level

designation, to the automatic refresh

size. [A Market Maker’s Agency

Quotation shall not be subject to the

functionality described in this

subparagraph.]

(iii) This functionality shall produce

an Attributable Quote/Order. In

addition, if an NNMS Market Maker is

utilizing the QR functionality but has an

Attributable Quote/Order in the system

that is priced at or better than the quote

that would be created by the QR, the

NNMS will display the Attributable

Quote/Order, not the QR-produced

quote.

(iv) An NNMS Market Maker’s Agency

Quote shall not be subject to the

functionality described in this

subparagraph, nor shall this

functionality be available to Quoting

Market Participants other than NNMS

Market Makers.

(3) Entry of Locking/Crossing Quotes/

Orders [Except as otherwise provided in

subparagraph (b)(10) of this rule, at any

time a locked or crossed market, as

defined in Rule 4613(e), exists for an

NNMS security, a market maker with a

quotation for that security (including an

Agency Quote) that is causing the

locked or crossed market may have

orders representing shares equal to the

size of the bid or offer that is locked or

crossed executed by the NNMS system

against the market maker’s quote

(including an Agency Quote) at the

quoted price if that price is the best

price. During locked or crossed markets,

the NNMS system will execute orders

against those market makers that are

locked or crossed in predetermined time

intervals. This period of time initially

shall be established as five (5) seconds,

but may be modified upon approval by

the Commission and appropriate

notification to NNMS participants.] The

system shall process locking/crossing

Quotes/Orders as follows:

(A) Locked/Crossed Quotes/Orders

During Market Hours—If during market

hours, a Quoting Market Participant

enters into the NNMS a Quote/Order

that will lock/cross the market (as

defined in NASD Rule 4613(e)), the

system will not display the Quote/Order

as a quote in Nasdaq; instead the system

will treat the Quote/Order as a

marketable limit order and enter it into

the system as a Non-Directed Order for

processing (consistent with

subparagraph (b) of this rule) as follows:

(i) For locked-market situations, the

order will be routed to the Quoting

Market Participant next in queue who

would be locked, and the order will be

executed (or delivered for execution) at

the lock price;

(ii) For crossed-market situations, the

order will be entered into the system

and routed to the next Quoting Market

Participants in queue who would be

crossed, and the order will be executed

(or delivered for execution) at the price

of the Displayed Quote/Order that

would have been crossed.

Once the lock/cross is cleared, if the

participant’s order is not completely

filled, the system will reformat the order

and display it in Nasdaq (consistent

with the parameters of the Quote/Order)

as a Quote/Order on behalf of the

entering Quoting Market Participant.

(B) Locked/Crossed Quotes/Orders at

the Open—If the market is locked or

crossed at 9:30 a.m., Eastern Time, the

NNMS will clear the locked and/or

crossed Quotes/Order by executing (or

delivering for execution) the oldest

bid(offer) against the oldest offer(bid)

against which it is marketable at the

price of the oldest Quote/Order. Nasdaq

then will begin processing Non-Directed

Orders as described in subparagraph (b)

of this rule.

[(4) For each NNM security in which

a market maker is registered, the market

maker may enter orders into the NNMS

for its proprietary account as well as on

an agency or riskless principal basis.]

[(5)] (4) An NNMS Market Maker may

terminate its obligation by keyboard

withdrawal (or its equivalent) from

NNMS at any time. However, the market

maker has the specific obligation to

monitor its status in NNMS to assure

that a withdrawal has in fact occurred.

Any transaction occurring prior to the

effectiveness of the withdrawal shall

remain the responsibility of the market

maker.

[(6)] (5) [An NNMS Market Maker will

be suspended from NNMS if its bid or

offer has been decremented to zero due

to NNMS executions and will be

permitted a standard grace period, the

duration of which will be established

and published by the Association,

within which to take action to restore a

two-sided quotation in the security for

at least one normal unit of trading. An

NNMS Market Maker that fails to

reenter a two-sided quotation within the

allotted time will be deemed to have

withdrawn as a market maker (‘‘Timed

Out of the Box’’). Except as provided

below in this subparagraph and in

subparagraph (b)(7) of this rule, an

NNMS Market Maker that withdraws in

an NNM security may not re-register as

a market maker in that security for

twenty (20) business days.] If an NNMS

Market Maker’s Attributable Quote/

Order is reduced to zero on one side of

the market due to NNMS executions, the

NNMS will close the Market Maker’s

quote in the NNMS with respect to both

sides of its market, and the NNMS

Market Maker will be permitted a grace

period of three minutes within which to

take action to restore its Attributable

Quote/Order, if the market maker has

not authorized use of the QR

functionality or does not otherwise have

an Attributable Quote/Order on both

sides of the market in the system. An

NNMS Market Maker that fails to

transmit an Attributable Quote/Order in

a security within the allotted time will

have its quotation restored by the

system at the lowest bid price and the

highest offer price in that security.

Except as provided in subparagraph

(b)(6) of this rule, an NNMS Market

Maker that withdraws from a security

may not re-register in the system as a

market maker in that security for twenty

(20) business days. The requirements of

Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices 69101

this subparagraph shall not apply to a

market maker’s Agency Quote.

[(A) Notwithstanding the above, a

market maker can be reinstated if:

(i) the market maker makes a request

for reinstatement to Nasdaq Market

Operations as soon as practicable under

the circumstances, but within at least

one hour of having been Timed Out of

the Box, and immediately thereafter

provides written notification of the

reinstatement request;

(ii) it was a Primary Market Maker at

the time it was Timed Out of the Box;

(iii) the market maker’s firm would

not exceed the following reinstatement

limitations:

a. for firms that simultaneously made

markets in less than 250 stocks during

the previous calendar year, the firm can

receive no more than four (4)

reinstatements per year;

b. for firms that simultaneously made

markets in 250 or more but less than 500

stocks during the previous calendar

year, the firm can receive no more than

six (6) reinstatements per year;

c. for firms that simultaneously made

markets in 500 or more stocks during

the previous calendar year, the firm can

receive no more than twelve (12)

reinstatements per year; and

(iv) the designated Nasdaq officer

makes a determination that the

withdrawal was not an attempt by the

market maker to avoid its obligation to

make a continuous two-sided market. In

making this determination, the

designated Nasdaq officer will consider,

among other things:

a. whether the market conditions in

the issue included unusual volatility or

other unusual activity, and/or the

market conditions in other issues in

which the market maker made a market

at the time the firm was Timed Out of

the Box;

b. the frequency with which the firm

has been Timed Out of the Box in the

past;

c. procedures the firm has adopted to

avoid being inadvertently Timed Out of

the Box; and

d. the length of time before the market

maker sought reinstatement.

(B) If a market maker has exhausted

the reinstatement limitations in

subparagraph (b)(6)(A)(iii) above, the

designated Nasdaq officer may grant a

reinstatement request if he or she finds

that such reinstatement is necessary for

the protection of investors or the

maintenance of fair and orderly markets

and determines that the withdrawal was

not an attempt by the market maker to

avoid its obligation to make a

continuous two-sided market in

instances where:

(i) a member firm experiences a

documented problem or failure

impacting the operation or utilization of

any automated system operated by or on

behalf of the firm (chronic system

failures within the control of the

member will not constitute a problem or

failure impacting a firm’s automated

system) or involving an automated

system operated by Nasdaq;

(ii) the market maker is a manager or

co-manager of a secondary offering from

the time the secondary offering is

announced until ten days after the

offering is complete; or

(iii) absent the reinstatement, the

number of market makers in a particular

issue is equal to two (2) or less or has

otherwise declined by 50% or more

from the number that existed at the end

of the prior calendar quarter, except that

if a market maker has a regular pattern

of being frequently Timed Out of the

Box, it may not be reinstated

notwithstanding the number of market

makers in the issue.]

[(7)] (6) Notwithstanding the

provisions of subparagraph [(6)] (5)

above:

(A) an NNMS Market Maker that

obtains an excused withdrawal pursuant

to Rule 4619 prior to withdrawing from

NNMS may reenter NNMS according to

the conditions of its withdrawal; and

(B) a NNMS Market Maker that fails

to maintain a clearing arrangement with

a registered clearing agency or with a

member of such an agency, and is

thereby withdrawn from participation in

ACT and NNMS for NNMS securities,

may reenter NNMS after a clearing

arrangement has been reestablished and

the market maker has compiled with

ACT participant requirements. Provided

however, that if the Association finds

that the ACT market maker’s failure to

maintain a clearing arrangement is

voluntary, the withdrawal of quotations

will be considered voluntary and

unexcused.

[(8)] (7) The Market Operations

Review Committee shall have

jurisdiction over proceedings brought by

market makers seeking review of their

removal from NNMS pursuant to

subparagraph[s] (b)(5)[(6) or (b)(7)] of

this rule.

[(9)] (8) In the event that a

malfunction in the [NNMS Market

Maker’s] Quoting Market Participant’s

equipment occurs, rendering [on-line]

communications with NNMS

inoperable, the [NNMS Market Maker]

Quoting Market Participant is obligated

to immediately contact Nasdaq Market

Operations by telephone to request

withdrawal from NNMS and a closedquote status, and if the Quoting Market

Participants is an NNMS Market Maker

an excused withdrawal from Nasdaq[.

Such request must be made] pursuant to

Rule 4619. If withdrawal is granted,

Nasdaq Market Operations personnel

will enter the withdrawal notification

into NNMS from a supervisory terminal

and shall close the quote. Such manual

intervention, however, will take a

certain period of time for completion

and, unless otherwise permitted by the

Association pursuant to its authority

under Rule 11890, the [NNMS Market

Maker] Quoting Market Participants will

continue to be obligated for any

transaction executed prior to the

effectiveness of [his] the withdrawal and

closed-quote status.

[(10) In the event that there are no

NNMS Market Makers at the best bid

(offer) disseminated by Nasdaq, market

orders to sell (buy) entered into NNMS

will be held in queue until executable,

or until 90 seconds has elapsed, after

which such orders will be rejected and

returned to their respective order entry

firms.]

(c) Directed Order Processing—A

participant may enter a Directed Order

into the NNMS to access a specific

Quote/Order in the Nasdaq Quotation

Montage and to begin the negotiation

process with a particular Quoting

Market Participant. The system will

deliver an order (not an execution) to

the Quoting Market Participant

designated as the recipient of the order.

Upon delivery, the Quoting Market

Participant shall owe no liability under

the Firm Quote Rule to that order,

unless the Quoting Market Participant

to which a Directed Order is being sent

has indicated that it wishes to receive

Directed Orders that are Liability Orders

(as described in Rule 4706(b)).

Additionally, upon delivery, the system

will not decrement the receiving

Quoting Market Participant’s Quote/

Order. This provision shall not apply to

Preferenced Orders.

[(c)] (d) NNMS Order Entry Firms

All entries in NNMS shall be made in

accordance with the procedures and

requirements set forth in the NNMS

User Guide. Orders may be entered in

NNMS by the NNMS Order Entry Firm

through either its Nasdaq terminal or

computer interface. The system will

transmit to the firm on the terminal

screen and printer, if requested, or

through the computer interface, as

applicable, an execution report

generated immediately following the

execution.

[(d) Order Entry Parameters

(1) NNMS will only accept market

and marketable limit orders for

execution and will not accept market or

69102 Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices

marketable limit orders designated as

All-or-None (‘‘AON’’) orders; provided,

however, that NNMS will not accept

any limit orders, marketable or

unmarketable, prior to 9:30 a.m., Eastern

Time. For purposes of this

subparagraph, an AON order is an order

for an amount of securities equal to the

size of the order and no less.

(2) Additionally, the NNMS will only

accept orders that are unpreferenced,

thereby resulting in execution in

rotation against NNMS Market Makers,

and will not accept preferenced orders.

(3) NNMS will not accept orders that

exceed 9,900 shares, and no participant

in the NNMS system shall enter an

order into the system that exceeds

9,900.]

[(e) Electronic Communication

Networks

An Electronic Communications

Networks, as defined in SEC Rule

11Ac1–1(a)(8), may participate in the

NNMS System if it complies with NASD

Rule 4623 and executes with the

Association a Nasdaq Workstation

Subscriber Agreement, as amended, for

ECNs.]

(e) Odd-Lot Processing

(1) Participation in Odd-Lot Process—

All NNMS Market Makers may

participate in the Odd-Lot Process for

each security in which the market

maker is registered.

(2) Execution Process

(A) Odd-lot orders will be executed

against an NNMS Market Maker only if

it has an odd-lot exposure limit in an

amount that would fill the odd-lot order.

A NNMS Market Maker may, on a

security-by-security basis, set an odd-lot

exposure limit from 0 to 999,999 shares.

(B) An odd-lot order shall be executed

automatically against the next available

NNMS Market Maker when the odd-lot

order becomes executable (i.e., when the

best price in Nasdaq moves to the price

of the odd-lot limit order). Such odd-lot

orders will execute at the best price

available in the market, in rotation

against NNMS Market Makers who have

an exposure limit that would fill the

odd-lot order.

(C) For odd lots that are part of a

mixed lot, once the round-lot portion is

executed, the odd-lot portion will be

executed at the round-lot price against

the next NNMS Market Maker in

rotation (as described in subparagraph

(e)(2)(b) of this rule) even if the roundlot price is no longer the best price in

Nasdaq.

(D) Odd-lot executions will decrement

the odd-lot exposure limit of an NNMS

Market Maker but will not decrement

the size of NNMS Market Maker’s

Displayed Quote/Order.

(E) After the NNMS system has

executed an odd lot against an NNMS

Market Maker, the system will not

deliver another odd-lot order against the

same market maker until a

predetermined time period has elapsed

from the time the last execution was

delivered, as measured by the time of

execution in the Nasdaq system. This

period of time shall initially be

established as 5 seconds, but may be

increased upon Commission approval

and appropriate notification to NNMS

Participants or may be decreased to an

amount less than five seconds by the

NNMS Market Maker.

(f) UTP Exchanges

Participation in the NNMS by UTP

Exchanges is voluntary. If a UTP

Exchange elects to participate in the

system, Nasdaq shall endeavor to

provide fair and equivalent access to the

Nasdaq market for UTP Exchanges, as

a UTP Exchange provides to its market

for Nasdaq Quoting Market Participants

and NNMS Order Entry Firms. The

following provisions shall apply to UTP

Exchanges that choose to participate in

the NNMS:

(1) Order Entry—UTP Exchanges that

elect to participate in the system shall

be permitted to enter Directed and NonDirected Orders into the system subject

to the conditions and requirements of

Rules 4706. Directed and Non-Directed

Orders entered by UTP Exchanges shall

be processed (unless otherwise

specified) as described subparagraphs

(b) and (c) of this rule.

(2) Display of UTP Exchange Quotes/

Orders in Nasdaq

(A) UTP Exchange Principal Orders/

Quotes—UTP Exchanges that elect to

participate in the system shall be

permitted to transmit to the NNMS a

single bid Quote/Order and a single

offer Quote/Order. Upon transmission of

the Quote/Order to Nasdaq, the system

shall time stamp the Quote/Order,

which time stamp shall determine the

ranking of the Quote/Order for purposes

of processing Non-Directed Orders. The

NNMS shall display the best bid and

best offer Quote/Order transmitted to

Nasdaq by a UTP Exchange in the

Nasdaq Quotation Montage under the

MMID for the UTP Exchange, and shall

also display such Quote/Order in the

Nasdaq Order Display Facility as part of

the aggregate trading interest when the

UTP Exchange’s best bid/best offer

Quote/Order falls within the best three

price levels in Nasdaq on either side of

the market.

(B) UTP Exchange Agency Quotes/

Orders

(i) A UTP Exchange that elect to

participate in the system may transmit

to the NNMS Quotes/Orders at a single

as well as multiple price levels that meet

the following requirements: are not for

the benefit of a broker and/or dealer

that is with respect to the UTP Exchange

a registered or designated market

maker, dealer or specialist in the

security at issue; and are designated as

Non-Attributable Quotes/Orders (‘‘UTP

Agency Order/Quote’’).

(ii) Upon transmission of a UTP

Agency Quote/Order to Nasdaq, the

system shall time stamp the order,

which time stamp shall determine the

ranking of these Quote/Order for

purposes of processing Non-Directed

Orders, as described in subparagraph

(b) of this rule. A UTP Agency Quote/

Order shall not be displayed in the

Nasdaq Quotation Montage under the

MMID for the UTP Exchange. Rather,

UTP Agency Quotes/Orders shall be

reflected in the Nasdaq Order Display

Facility and Nasdaq Quotation Montage

in the same manner in which NonAttributable Quotes/Orders from

Nasdaq Quoting Market Participants are

reflected in Nasdaq, as described in

Rule 4707(b)(2).

(3) Non-Directed Order Processing

(a) UTP Exchanges that elect to

participate in the system and that agree

to provide automatic execution against

their Quotes/Orders for Nasdaq Quoting

Market Participants and NNMS Order

Entry Firms, shall accept an execution

of an order up to the size of the UTP

Exchange’s displayed Quote/Order, and

shall have Non-Directed Orders they

enter into the system processed as

described in subparagraph (b) of this

rule.

(b) UTP Exchanges that elect to

participate in the system but that do not

provide automatic execution against

their Quotes/Orders for Nasdaq Quoting

Market Participants and NNMS Order

Entry Firms, shall accept the delivery of

an order up to the size of the UTP

Exchange’s Displayed Quote/Order, and

shall have Non-Directed Orders they

enter into the system processed as

described in subparagraph (b) of this

rule. If such a UTP Exchange declines

or partially fills a Non-Directed Order

without immediately transmitting to

Nasdaq a revised Quote/Order that is at

a price inferior to the previous price, or

if such a UTP Exchange fails to respond

in any manner within 30 seconds of

order delivery, the NNMS will send the

order (or remaining portion thereof)

back into the system for delivery to the

next Quoting Market Participant in

queue. The system will then move the

side of such UTP Exchange’s Quote/

Order to which the declined or partiallyfilled order was delivered, to the lowest

bid or highest offer price in Nasdaq, at

a size of 100 shares.

Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices 69103

12For example, Nasdaq is committed to the

creation of SuperMontage fee structure that does

not discriminate between Nasdaq market

participants that interact with the system on an

order-delivery versus an automatic execution basis.

Nasdaq shall also endeavor to avoid systemic

biases, including biases that result from differential

fees or incentives between quotes and orders,

whether they are directed, non-directed, or

preferenced. 13 Generally, a non-direct order is an order that

is not designated to be sent to a particular market

or ECN.

14We note that Commission staff and at least one

commentator raised concerns about ECN fees and

best execution. See e.g., ITG Letter.

(4) Directed Order Processing—UTP

Exchanges that elect to participate in

the system shall participate in the

Directed Order processing as described

in subparagraph (c) of this rule.

(5) Decrementation—UTP Exchanges

shall be subject to the decrementation

procedures described in subparagraph

(b) of this rule.

(6) Scope of Rules—Nothing in these

rules shall apply to UTP Exchanges that

elect not to participate in the system.

4711–4714—No Change.

4718. Termination of System Service

The Association or its subsidiaries

may, upon notice, terminate system

service to a participant in the event that

a participant fails to abide by any of the

rules or operating procedures of the

System or any other relevant rule or

requirement, or fails to pay promptly for

services rendered.

* * * * *

4750. SMALLCAP SMALL ORDER

EXECUTION SYSTEM (SOES)

4751–4757—Deleted.

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

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

As stated in the original filing, some

of the primary goals of the Nasdaq Order

Display Facility (also known as the

‘‘SuperMontage’’) are to expand the

amount of market information available

to the investing public, and to make that

trading interest more accessible. The

SuperMontage seeks to reduce market

fragmentation and address the

informational and competitive

disparities that exist in the NASD’s

current market structure. As an open

and competitive market, the NASD is

committed to creating a trading

environment where diverse pools of

liquidity can be viewed and accessed on

fair and equal terms.12 To achieve this

goal, Nasdaq has crafted a system that

fairly balances the needs and business

models of all market participants. In

response to comments received on

Amendment No. 7, the NASD proposes

the following changes and modifications

to the SuperMontage. The NASD

believes that the proposed amendments

will further enhance the information

available to market participants, and

provide greater choice for market

participants.

a. Non-Directed Order Processing. 1.

History. As originally proposed, the

SuperMontage would execute nondirected orders in general price/time

priority.13 In response to concerns

raised by SEC staff relating to best

execution, the NASD proposed to

change the Order Execution Algorithm

to account for ECNs fees in Amendment

No. 4.14 Specifically, in Amendment

No. 4, The NASD proposed that within

a price level, a non-directed order

would be executed against ECNs, market

makers, UTP Exchange agency interest,

in strict time priority, unless an ECN

charged separate quote-access fee

(‘‘charging ECNs’’). Pursuant to

Amendment No.4, charging-ECNs

would be executed after market makers,

ECNs that do not charge a quote-access

fee (‘‘non-charging ECNs’’), and agency

interest of UTP Exchanges. The logic

behind Amendment No. 4 was that an

ECN’s fee represents an increase in

trading costs and thus the quote of the

access-fee charging ECN represents an

inferior price when compared to samepriced quotes of market participants that

do not charge a fee.

In response to Amendment No. 4,

some commenters claimed that charging

ECNs should not be prioritized in the

aforementioned manner because this

was generally unfair. In response to

these comments, the Commission

suggested that ECNs could address the

quote-access fee issue by reflecting the

access fee in their public quote. As a

result, in Amendment No. 6, the NASD

proposed to give ECNs that include the

separate quote-access fee in their quote

equal priority to same-priced orders

representing market makers, noncharging ECNs, and the agency interest

of UTP Exchanges assuming the related

legal, technology, and policy issues

were resolved. In response to

Amendment No. 6, however, some ECNs

claimed that including the fee in the

quote would not completely resolve

their concerns, in part, because ECNs

may offer price improvement above the

quote as a result of rounding.

Accordingly, in Amendment No. 7, the

NASD proposed to give charging ECNs

the ability to indicate on an order-byorder basis whether the price

improvement offered by the order

exceeded the quote-access fee charged.

Pursuant to Amendment No. 7, if the

price improvement exceeded the quoteaccess fee, Nasdaq would rank that

order, for execution purposes, with the

same-priced orders of market makers,

non-charging ECNs, and nonattributable agency interest of UTP

Exchanges. In Amendment No. 8, the

NASD clarifies that if the price

improvement is equal to or exceeds the

separate quote-access fee, Nasdaq would

rank that quote/order with equally

priced quotes/orders from Nasdaq

Quoting Market Participants that do not

charge a separate quote access fee. Some

commenters to Amendment Nos. 6 and

7 still were not satisfied with the

proposed two solutions regarding ECN

quote-access fees.

2. Proposed Changes to Non-Directed

Order Process. The NASD understands

that factors other than cost or quoteaccess fees may be important to a

market participant in making

investment decisions. Further, the

NASD believes that market participants

should be given a choice in determining

how to best execute their customer or

proprietary orders. With this in mind,

and in response to the comments to

Amendment No. 7, the NASD proposes

to amend the Order Execution

Algorithm for non-directed orders. The

NASD proposes a more flexible

approach—one that should empower

market participants to make an

informed choice about how best to

interact with the market. The goal of

this aspect of Amendment No. 8 is to

give market participants more choice

and flexibility as to how their customer

and proprietary orders should be

processed. While best execution

concerns drove the changes to the Order

Execution Algorithm in previous

amendments, the NASD realizes that a

‘‘one-size-fits-all’’ approach may not

meet every market participant’s needs in

all situations. While some commenters

continue to advocate a single Order

Execution Algorithm where strict price/

69104 Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices

15 Directed orders are orders that are delivered to

a single market participant that is designated by the

sender of the order. Directed orders are always

delivered for response (accept or decline), as

opposed to an automatic execution via Nasdaq

system against the receiving market participant’s

quote. Directed orders are processed independent of

the non-directed order queue. 16As stated previously, the original purpose of

requiring directed orders to be non-liability orders

was to eliminate the dual liability that currently

exists in Nasdaq. As previously proposed, a

directed order was required to be designated as: (1)

All-or-None and be at least 100 shares greater than

the size of the displayed quote/order of the market

participant to which the order is directed; or (2) a

Minimum Acceptable Quantity order (‘‘MAQ’’) with

an MAQ value of at least 100 shares greater than

the displayed amount of the quote/order of the

participant to which the order is directed. Because

of these conditions, when presented to a market

participant’s quote a directed order would impose

no obligation under the SEC and NASD’s firm quote

rules.

17Both ECNs and market makers would continue

to receive liability orders via the non-directed order

process.

time priority is the rule, the NASD is

initially concerned that this type of

algorithm might impose a needlessly

rigid structure similar to a central limit

order book (‘‘CLOB’’). To be sure, the

SuperMontage is not a CLOB.

Additionally, a strict price/time priority

(without choice) would force the public

investor to pay ECN quote-access fees,

thus squashing the voice of the investor

and competition. The NASD believes

that market participants and investors

would be best served, and in fact

empowered, by a market model that

gives participants a choice of how their

orders are to be processed. The NASD

believes that choice is key.

To be more specific, the NASD

proposes to give the SuperMontage

participants that enter non-directed

orders three options as to how their

order would interact with the quotes/

orders in Nasdaq. Specifically, orders

could be executed on: (1) Strict price/

time priority; (2) price/size/time

priority; and (3) price/time priority that

accounts for ECN quote-access fees.

Pursuant to Amendment No. 8, the

SuperMontage would be programmed to

a default Order Execution Algorithm

based on strict price/time priority

within Nasdaq. Thus, unless a market

participant overrode the default

algorithm by selecting one of the

alternative algorithms (with specific

instructions), non-directed orders would

be executed as follows: (1) Displayed

quotes/order of market makers, ECNs,

and non-attributable agency interest of

UTP Exchanges, in time priority

between such interest; (2) reserve size of

market makers and ECNs in time

priority between such interest; and (3)

principal quotes of UTP Exchanges, in

time priority between such interest.

As a second option, a market

participant would be able to indicate

that their orders be executed on a price/

size/time basis. Under the second

option, non-directed orders at a

particular price level would execute

against displayed quotes and then

reserve size based on the size of the

displayed quote, and then time if there

is a tie in size. Reserve size would be

executed based on the size of the related

displayed quote, not the total amount

held in reserve. Under this option,

orders would be processed as followed:

(1) Displayed quotes/orders of market

makers, ECNs, and agency interest of

UTP Exchanges in price/size/time

priority between such interest; (2)

reserve size of market makers and ECNs,

in price/size/time priority of such

interest, with size priority based on the

size of the related displayed quote/

order; and (3) principal quotes of UTP

Exchanges, in price/size/time priority

between such interest.

As a third choice, a market participant

would be able to indicate that their

order should be executed in a manner

that accounts for an ECN’s separate

quote-access fee. This algorithm is

similar to the algorithm proposed in

Amendment No. 7. If a market

participant selects this option, nondirected orders would be executed as

follows: (1) Displayed quotes/orders of

market makers, ECNs that do not charge

a separate quote-access fee, and nonattributable agency interest of UTP

Exchanges, as well as quotes/orders of

ECNs that charges a separate quoteaccess fee where the ECN indicates that

the price improvement offered by the

quote/order is equal to or exceeds the

quote-access fee, in time priority

between such interest; (2) displayed

quotes/orders of ECNs that charge a

separate quote-access fee to nonsubscribers; (3) reserve size of market

makers and ECNs that do not charge a

separate quote-access fee to nonsubscribers, as well as reserve size of

quotes/orders from ECNs that charge a

separate quote-access fee to nonsubscribers where the ECN entering

such quote/order has indicated that the

price improvement offered is equal to or

exceeds the quote-access fee, in time

priority between such interest; (4)

reserve size of ECNs that charge a

separate quote-access fee to nonsubscribers, in time priority between

such interest; and (5) principal interest

of UTP Exchanges, in time priority

between such interest.

With all three algorithms, the system

would make an exception for nondirected orders entered by a market

maker or an ECN (‘‘Nasdaq Quoting

Market Participant’’) when that Nasdaq

Quoting Market Participant is also at the

inside market. In that case, the system

will match off the non-directed order to

buy/sell against a Nasdaq Quoting

Market Participant’s inside quote/order

to sell/buy, in lieu of sending it to the

participant next in the queue.

Additionally, there would be an

exception for ‘‘Preferenced Orders’’

described below.

b. Directed Orders. The NASD intends

to retain the changes to the directed

order process that were proposed in

Amendment No. 7. By way of review,

some commenters to the original

proposal claimed that the directed

order 15 process was an ineffective way

to access liquidity held in a specific

market maker or ECN. This was because,

as originally proposed, all directed

orders were required to be designated as

non-liability or negotiation orders.

Originally, the purpose of this

requirement was to limit the potential

for dual liability that results from

having two (non-linked) points for

delivering Liability Orders against the

same market maker quote.16 In

Amendment No. 7, the NASD proposes

to change the directed order process, so

that ECNs and market makers can elect

to receive Liability Orders against their

quote through the directed order

process.17 As proposed in Amendment

No. 7, a market maker or ECN could

choose to receive against its quote a

directed order that is also a Liability

Order, or could also choose to accept

only non-Liability directed orders. If a

Nasdaq Quoting Market Participant or a

UTP Exchange chooses to accept

Liability Orders, the NASD will append

an indicator to the MMID, showing that

the Nasdaq Quoting Market Participant

or UTP Exchange is available to receive

directed Liability Orders.

c. Preferenced Orders. The NASD

proposes to create a new class of order

called a ‘‘preferenced order.’’ The NASD

is proposing two possible approaches to

preferenced orders: Alternative A—

Preferenced Orders with No Price

Restrictions (‘‘Alternative A’’); and

Alternative B—Preferenced Orders with

Price Restrictions (‘‘Alternative B’’). The

NASD requests that commenters express

their views as to which approach they

believe is most appropriate.

Commenters should note that the NASD

is not proposing that the SuperMontage

include both Alternative A and

Alternative B approaches to preference

orders. Rather, the NASD proposes that

the system, include one of the

alternatives—either Alternative A or

Alternative B.

1. General Processing of Preferenced

Orders Under Both Alternatives.

Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices 69105

18Nasdaq has determined to take a similar

approach to SuperMontage reserve size.

SuperMontage’s rules regarding reserve size apply

equally to market makers and ECNs and the system

will execute reserve share amounts based on these

objective rules. Nasdaq will not use information

about the source and scope of a reserve size quote

to influence reserve size execution priority within

SuperMontage system, or provide optimized reserve

size executions based on information residing

solely in SuperMontage.

Preferenced orders would be processed

as follows for both Alternative A and

Alternative B.

A preferenced order would be entered

into the non-directed order process, and

would be considered a liability order.

Preferenced orders would be processed

in the same ‘‘queue’’ as non-directed

orders. Additionally, like non-directed

orders, a preferenced order would be

delivered as an order to a market

participant that does not participate in

the automatic execution functionality of

the system, or as an execution against

market participants that choose to

accept automatic executions. The

market participant entering the

preferenced order must designate by a

market participant identification symbol

(‘‘MMID’’) the quoting market

participant against which the order is to

be executed or delivered. When a

preferenced order is next to be executed

within the non-directed order queue,

the SuperMontage would execute

against (or deliver an order in an

amount up to or equal to) both the

displayed quote/order and reserve size

of the quoting market participant to

which the order is being preferenced

(‘‘preferenced quoting market

participant’’). Any unexecuted portion

could be returned to the entering market

participant.

2. Alternative A—Preferenced Orders

With No Price Restrictions. Under

Alternative A, there would be no price

restriction for preferenced orders. That

is, when a preferenced order is next to

be executed within the non-directed

order queue, the preferenced order

would execute (or deliver for execution)

at the preferenced quoting market

participant’s price, regardless of

whether the quoting market participant

is at the best bid/best offer (‘‘BBO’’). The

execution would occur at the

preferenced quoting market

participant’s quoted price. Thus, under

Alternative A, preferenced orders could

be executed at the BBO or outside the

BBO.

The purpose of the Alternative A-type

preferenced order is to maintain a

function within the SuperMontage

similar to that which currently exists in

Nasdaq. That is, today market

participants often use the SelectNet

service (i.e., order delivery) to

preference orders to market makers or

ECNs who are quoting at the BBO or

away from the BBO. Market participants

sometime preference away from the

BBO in an attempt to ‘‘sweep the street’’

or access liquidity at or near the inside

market. A market maker that is

‘‘working’’ an institutional order may

also send a preferenced SelectNet

message to a market maker or ECN who

is quoting away from the inside. This

may occur if the market maker believes

the ‘‘preferenced’’ market participant

has greater size to offer, and thus will

result in a more efficient execution for

the institutional customer. The NASD

wishes to emphasize, however, that

even if the SuperMontage ultimately

provides the Alternative A type of

preference order, as is the case today,

market participants would be required

to comply with their duty of best

execution. Such a function would in no

way obviate a market participant’s best

execution obligations.

3. Alternative B—Preferenced orders

with price restrictions. Under

Alternative B, there would be price

restrictions for preferenced orders. That

is, if a preferenced order was next to be

executed within the non-directed order

queue, the preferenced order would be

executed (or delivered for execution)

against the preferenced quoting market

participant to which the order is being

directed only if the quoting market

participant is at the BBO (up to the

displayed and reserve size). If the

quoting market participant to which the

order is being directed is not at the BBO

when the preferenced order is next to be

delivered or executed, the preferenced

order will be returned to the entering

participant. Thus, under this approach,

preferenced orders only would be

executed at the BBO, and only if the

preferenced quoting market participant

is quoting at the BBO at the time of

order delivery (or execution).

Once again, recognizing that there

may be differing views as to whether

market participants should be permitted

to have preferenced orders executed

away from the BBO or only at the BBO

price, the NASD specifically requests

that commenter submit their views on

the alternative approaches described

above.

4. Comparison of directed orders and

preferenced orders. The directed order

and preferenced order features provide

different options for order processing.

The directed order process will operate

much like SelectNet operates in the

current environment. Directed orders

will be delivered to a single market

participant that is designated by MMID

by the sender of the order. Directed

orders are always delivered for response

(e.g., accept or decline), as opposed to

an automatic execution via the Nasdaq

system against the receiving market

participant’s quote. Directed orders will

not decrement a quote. As noted above,

preferenced orders would function

almost exactly like non-directed orders,

in that they would be processed in time

sequence, would be delivered to a

quote/order or would automatically

execute against a quote/order of a

market participant, and would

decrement the size of a quote/order.

Unlike ‘‘regular-way’’ non-directed

orders, however, preferenced orders

would not be processed pursuant to one

of the three Order Execution Algorithms

described above.

d. Increased Dissemination of

Quotation Information. In order to bring

more transparency to the market and

give market participants greater

information in making order-routing

decisions, the NASD has determined to

expand its dissemination of quotation

information to the investing public. To

accomplish this goal, the NASD would

create and make available a new vendor

data feed called ‘‘NQDS Prime.’’ NQDS

Prime would provide, on a real-time

basis, all individual attributable quote/

order information at the three best price

levels displayed in the SuperMontage

(i.e., Order Display Facility). By using

NQDS Prime, vendors will be able to

integrate this expanded quote and order

information with SuperMontage data

and distribute it in a consolidated

format that would eliminate any

purported informational advantage

accruing to the SuperMontage system

from the retention of this information.18

In the future, should the NASD

determine to display more than three

dynamically displayed price levels in

the SuperMontage, an equal expansion

of price level information through

NQDS Prime would be provided. With

this additional information, market

participants would have the choice of

using Nasdaq’s facility to access

liquidity or would be able to use nonNasdaq systems (such as proprietary

links) to access liquidity where it

resides. Again, the goal is to give market

participants and investors choice and

the tools to make efficient and informed

trading decisions.

The NASD proposes to make this

information available through a

dedicated data feed. To recoup the

technology costs associated with the

provision of expanded individual

attributable quote and order

information, the NASD would assess a

separate, additional vendor data fee for

quote and order information away from

the inside. (The fee for NQDS Prime

data feed would be filed separately with

69106 Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices

the Commission for public comment.)

On an ongoing basis, the NASD would

evaluate the demand for away-from-theinside market data and reserve the right

(after consultation with the

Commission) to cease the distribution of

such information if such distribution

does not generate sufficient revenue to

cover the cost of assembling and

distributing the NQDS Prime product. If

the costs of NQDS Prime are covered,

the NASD commits to continue to

provide the product regardless of the

total number of subscribers.

e. Identity of Parties Entering Orders.

The NASD is committed to assisting

market participants in their efforts to

manage operational and credit risk that

they perceive as potentially arising from

their participation in the SuperMontage.

In that vein, the NASD wishes to clarify

that the SuperMontage would preserve

the ability of recipients of orders to

determine the identity of the sender of

such orders. The NASD would affix the

MMID of the sender, to all delivered

directed orders (both liability and nonliability), non-directed orders, and

preferenced orders. Identification of

these orders would allow market

participants to decline to trade with

participants that are genuinely

perceived to pose general credit risks

(consistent with SEC guidance and

interpretation of its firm quote rule and

this issue).

As with Nasdaq’s current automatic

execution system (SOES), the

SuperMontage would generate an

immediate execution report, for

preferenced or non-directed Orders, that

identifies the parties to the trade. Such

a report would be generated if a nondirected order was executed against an

attributable order or a non-attributable

order (i.e., orders that are aggregated

under the SIZE MMID).

f. Preservation of Time Priority for

Size Increases to Quotes/Orders. The

NASD also proposes to modify the

SuperMontage to protect the time

priority of a market participant that

changes its displayed trading interest by

increasing its displayed size. As

currently proposed, if a market

participant chooses to give Nasdaq a

quote instead of order detail, the market

participant would lose time priority

(i.e., a new time stamp would be

established) when the market

participant adds size to its quote. (A

decrease in size would not result in

change in time priority.) For example,

assume a Nasdaq Quoting Market

Participant is displaying 5,000 shares at

the best price and is first in time as

between two other market participants

at the same price. If the Nasdaq Quoting

Market Participant subsequently

receives a second customer limit order

for an additional 2,000 shares, and

updates its quote to reflect the

additional shares, the participant would

lose its original time priority. Such an

outcome has the unintended

consequence of disadvantaging market

participants that update their quotes to

display additional size to the market.

This outcome is inconsistent with one

of the important goals of the

SuperMontage—encouraging market

participants to display greater sized

quotes.

The NASD proposes to amend the

SuperMontage to ensure that a market

participant will not lose time priority if

it updates its displayed trading interest

to show greater size. This change in

priority rules would apply equally to

market makers and ECNs. As proposed,

quote entries would receive a time

stamp from the system which would be

used in determining their ranking in the

execution algorithm relative to other

quotes/orders at that price level. If a size

increment is received for an existing

quote at a given price, the system will

maintain the original time stamp for the

original quantity and separately assign a

separate timestamp for the

augmentation, thus protecting the time

priority of the originally-entered

quantity. Additional size increments

will be treated similarly. Thus a single

quote at a single price level could be

tracked in individually-prioritized

components corresponding to the

original quantity entered at that price

plus size increments sent separately.

Subsequent decreases in size will be

deducted from individually-stamped

components in reverse time priority

(i.e., the last entered size component

will be exhausted first). Once a market

participant’s displayed size is

diminished to zero, however, the market

participant no longer retains time

priority, even though it may be using

the Quote Refresh function to

automatically refresh its displayed size.

g. Order Delivery and Responsiveness

Time Frames. Some market participants

have objected to the proposal to retrieve

a delivered non-directed order and zero

out an ECN’s quote if an ECN does not

respond (in any manner) within 7

seconds to orders delivered to them by

the system. Some commenters asserted

that this standard was too short. They

also claimed that this approach did not

distinguish between system

performances of Nasdaq versus an

ECN’s internal systems, and thus could

result in an ECN’s quote being

improperly zeroed out for system issues

outside of the ECN’s control.

In response to these concerns, the

NASD proposes to alter its approach to

monitoring ECN responsiveness. First,

the NASD will amend its SuperMontage

rules to establish a 30 second (as

opposed to seven seconds) maximum

time period for an ECN to respond to

any given order. That is, if an ECN fails

to respond within 30 seconds of the

time a particular order is dispatched

from the Nasdaq system to the ECN,

Nasdaq will ‘‘zero out’’ the affected side

of the unresponsive ECN’s quote until

the ECN transmits a revised attributable

quote/order.

Second, the NASD proposes to

establish a shorter uniform turn-around

time for a maximum of five seconds.

The purpose of this change is to

establish a general standard (as opposed

to an order-by-order standard) that

measures whether an ECN is providing

an automated response in a time period

that ensures market quality. Thus, the

NASD proposes to monitor an ECN’s

order turnaround time based on

information received from the ECN’s

Nasdaq Service Delivery Platform

(‘‘SDP’’). (Each subscriber to the Nasdaq

Workstation II has an SDP that connects

to the Nasdaq Enterprise Wide Network

II via a T1 line. SDPs exist at the very

outer edge of Nasdaq’s network and link

directly to the systems of ECNs and

other market participants. Orders cannot

reach the SDP until they have traveled

the full length of Nasdaq’s network and

are also the point at which an ECN’s

order response first returns to the

Nasdaq system.) Nasdaq will use SDPs

linked to ECNs to assign a time-stamp

for when an order is delivered to the

ECN. Nasdaq will also capture the timestamp via the SDP of when the ECN

sends a response (e.g., accept, decline,

or partially execute) to the delivered

order. Nasdaq will then calculate and

monitor, on a real-time basis, the

difference between the two time-stamps

and determine whether the ECN is

meeting the 5-second maximum orderresponse standard. On an ongoing basis,

Nasdaq will monitor ECN response

times and provide individual ECNs their

own order responsiveness time

statistics. (This information will not be

made public.)

In the event that an ECN regularly

fails to meet the five-second response

time over a period of orders, Nasdaq

will place that ECN’s quote in a closedquote state. The NASD believes that this

measure is necessary in order to

maintain a fair and orderly market and

to ensure prompt, reliable, and nondiscriminatory access to the best prices

in its market. The closed-quote state

will be lifted when the ECN can certify

that it can meet the five-second

response time requirement.

Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices 69107

19 15 U.S.C. 78o–3(b)(6).

20 15 U.S.C. 78k–1(a)(1)(C), (a)(1)(D).

21 15 U.S.C. 78o–3(b)(6).

22 15 U.S.C. 78k–1(a)(1)(C).

23 15 U.S.C. 78k–1(a)(1)(D).

24 15 U.S.C. 78o–3(b)(6).

25 15 U.S.C. 78k–1.

26 15 U.S.C. 78o–3(b)(6).

27 15 U.S.C. 78k–1(a)(1)(C) and (a)(1)(D).

28 15 U.S.C. 78o–3(b)(6).

By measuring SDP time, this approach

measures an ECN’s responsiveness

based on the performance of systems it

controls, and in effect factors out

Nasdaq system time. The NASD believes

that this new approach to measuring

and evaluating ECN performance

responds to ECN desires that their

systems be judged individually and that

their quotes not be inappropriately or

prematurely precluded from receiving

orders through the SuperMontage. At

the same time, the proposal provides

Nasdaq with a uniform, electronic

method to ensure that investor orders

are not repeatedly sent to market

participants that cannot timely process

them.

h. Unexecuted Marketable Limit

Order Processing. Under the current

SuperMontage Proposal, marketable

limit orders entered into the system that

become unmarketable prior to execution

are held in queue within the

SuperMontage for a period of 90

seconds. The purpose of this feature of

the proposal was to provide an

additional opportunity for an execution

to take place should another market

participant subsequently enter a quote

that would allow the limit order to

execute. In response to concerns about

the uncertainty that the retention of

such orders may engender, the NASD

proposes to modify the SuperMontage

so that all marketable limit orders

entered by order-entry firms shall be

designated as ‘‘immediate or cancel’’

orders. Accordingly, if a marketable

limit order becomes non-marketable

after entry into the system, Nasdaq will

return the order (or the unexecuted

portion thereof) to the entering party.

i. UTP Exchanges. The NASD also

proposes certain clarifying amendments

to the proposal regarding UTP

Exchanges. At the outset, the rules

specifically state that participation in

the SuperMontage is completely

voluntary. The proposed rules relating

to UTP Exchanges would only apply if

the UTP Exchange agrees to participate

in the system. In addition, the NASD

has amended the definition of agency

orders. As proposed in Amendment No.

4, a UTP Exchange that chooses to

participate in the system could provide

Nasdaq with agency orders at multiple

price levels. Such orders would receive

equal priority in our price/time

execution algorithms with orders of

market makers and ECNs that do not

charge a quote access fee. In

Amendment No. 4, the NASD defined

‘‘agency order’’ as an order that is for

the benefit of the account of a natural

person and that is not for the benefit of

a broker and/or dealer. The intent of the

latter provision was to distinguish

orders that are for the account of a

broker/dealer that is registered with or

designated by their UTP Exchange as a

specialist, market maker or dealer in the

underlying security. The NASD

understands that certain market centers

receive orders that are for the account of

institutions or broker/dealers that are

not registered with the UTP Exchange as

a specialist, market maker, or dealer in

the security. The NASD believes these

orders should also be included within

the meaning of agency orders, for

purposes of the SuperMontage rules.

Accordingly, the NASD proposes to

define an agency order as ‘‘an order that

is not for the benefit of a broker/dealer

that is, with respect to the UTP

Exchange, a registered market maker,

dealer or specialist in the security at

issue.’’

2. Statutory Basis

The NASD believes that the proposed

amendments are consistent with the

provisions of sections 15A(b)(6) of the

Act,19 as well as sections 11A(a)(1)(C)

and 11A(a)(1)(D) of the Act.20 Section

15A(b)(6) of the Act 21 requires that the

rules of a registered 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; and

are not designed to permit unfair

discrimination between customers,

issuers, brokers, or dealers. Section

11A(a)(1)(C) of the Act states that it is

in the public interest and appropriate

for the protection of investors and the

maintenance of fair and order markets to

assure (1) economically efficient

execution of securities transactions; (2)

fair competition among brokers and

dealers; (3) the availability to brokers,

dealers and investors of information

with respect to quotations and

transactions in securities; (4) the

practicability of brokers executing

investors’ orders in the best market; and

(5) an opportunity for investors’ orders

to be executed without the participation

of a dealer.22 Section 11A(a)(1)(D) states

that Congress finds that the linking of

all markets for qualified securities

through communication and data

processing facilities will foster

efficiency, enhance competition,

increase the information available to

brokers, dealers, and investors, facilitate

the offsetting of investors’ orders, and

contribute to best execution of such

orders.23

The NASD believes that the proposed

rule changes to the Order Execution

Algorithm, the addition of new order

types (i.e., preferenced orders and

directed orders that impose firm-quote

liability), and the NQDS Prime feed are

consistent with section 15A(b)(6),24 as

they promote just and equitable

principles of trade, remove

impediments to and perfect the

mechanism of a free and open market

and a national market system, and

protect investors and the public interest.

These added features would give market

participants greater flexibility in

determining how their orders will be

executed. The additional information

provided by NQDS Prime would give

market participants greater information

about where liquidity is concentrated,

and thus is consistent with section

11A,25 as well as section 15A(b)(6).26

NQDS Prime, combined with the

changes to the order execution

algorithm and the expansion of order

types and preferencing capabilities, will

give market participants greater

flexibility in making order-routing

decisions. In turn, market participants

should be better able to manage their

customer and proprietary orders, which

is consistent with sections 11A(a)(1)(C)

and 11A(a)(1)(D).27

The NASD also believes that the

changes regarding order-delivery

response times for ECNs, and

unexecuted marketable limit orders, and

the identity of sent (executed) orders,

promote just and equitable principles of

trade, facilitate transactions in

securities, perfect the mechanism of a

free and open market and a national

market system, and protect investors

and the public interest. Thus, the NASD

believes these parts of the proposal are

consistent with section 15(b)(6) of the

Act.28

The NASD believes that the proposed

amendments represent a procompetitive development that offers

increased price competition, flexibility,

and choice to investors and to market

participants that will spur further

competition and innovation among

69108 Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices

29 15 U.S.C. 78k–1(a)(1)(C).

30 15 U.S.C. 78k–1(a)(1)(D).

31 15 U.S.C. 78k–1(a)(1)(C)(ii).

32See 17 CFR 240.11Ac1–1 and 240.11Ac1–4. 33 15 U.S.C. 78k–1(a)(1)(C)(ii).

market centers and market participants.

The NASD believes that the

SuperMontage enhances competition by

creating a central forum in which

buying and selling interest from a broad

array of market centers and market

participants will be given the

opportunity to interact. The resulting

enhancement in price discovery and

competition, together with the increase

in transparency, are competitive goals

espoused by section 11A(a)(1)(C) of the

Act.29 In addition, by bringing together

quotes and orders from diverse sources,

the SuperMontage furthers the

development of the national market

system and is consistent with section

11A(a)(1)(D) of the Act. 30

The NASD also believes that the

SuperMontage should promote

competition by increasing the investor’s

choices on how to interact with the

market. These choices occur at several

levels: from whether to submit

preferenced, directed, or non-directed

orders, to choosing any of three

algorithms for the execution of nondirected orders. The ability to choose

between the alternative algorithms for

automatic execution of non-directed

orders should allow investors and

market participants to elect how to

interact with Nasdaq and participating

market centers based on criteria that is

important to the system’s order-entry

participant. Giving the investor the

choice of selecting his or her criteria for

interaction with the market represents

not only a significant means of investor

protection, but also is consistent with

the goal of section 11A(a)(1)(C)(ii) of the

Act to ensure fair competition.31

Choice and flexibility in the

SuperMontage also characterize

Nasdaq’s interaction with market

participants. Although participation in

the SuperMontage should benefit a

market participant in various ways such

as enabling market participants to

satisfy their obligations under Exchange

Act Rules 11Ac1–1 and 11Ac1–4 32

(‘‘Order Handling Rules’’) in a simple

and efficient manner, participation in

the SuperMontage is entirely voluntary.

A market participant such as an ECN

may elect not to participate at all, and

could choose to satisfy its obligations

under the Order Handling Rules through

a number of other means, including by

sending its best bid and offer to other

market centers, such as the Chicago

Stock Exchange or the Cincinnati Stock

Exchange, and in the future, the Pacific

Exchange as well as others. Indeed, it is

completely voluntary as to whether a

UTP Exchange wishes to participate in

the SuperMontage.

If a market maker or ECN elects to

participate in the SuperMontage, it will

continue to have the option of limiting

its participation to only satisfy its duties

under the Order Handling Rules. Thus,

for example, an ECN or market maker

may elect only to send its best bid and

offer to the SuperMontage, and

withhold the remainder of its order

book from display on the

SuperMontage.

The NASD believes that the

voluntariness of participation in the

SuperMontage means that competing

market centers and market participants

will retain the ability to develop

alternative means of establishing links

between market centers. Thus, the

market for creating a ‘‘market for market

centers,’’ like the SuperMontage,

remains fully contestable. Consequently,

the SuperMontage not only preserves,

but furthers the incentives for Nasdaq’s

competitors to undertake technological

and structural innovation.

Some commenters have argued that

the SuperMontage discriminates

unfairly against UTP Exchanges because

the algorithms governing the execution

of non-directed orders place principal

quotes from UTP Exchanges at the end

of the execution priority even if they

enjoy time priority compared to

similarly priced quotes from market

makers and ECNs. The NASD believes

that this ordering is consistent with the

requirements of the Act and with the

Commission’s past approach to this

issue. First, the non-attributable agency

interest of UTP Exchanges receives the

same priority enjoyed in all three

algorithms by similarly priced quotes

from market makers and ECNs. Thus,

only principal quotes from UTP

Exchanges are placed at the end of the

execution queue.

Second, the NASD believes that the

SuperMontage’s treatment of principal

interest from UTP Exchanges is

consistent with the fair competition

requirement of Section 11A(1)(a)(C)(ii)

of the Act.33 In this regard, the NASD

believes that it would be inappropriate

and inconsistent with the fair

competition mandate of the Act for

Nasdaq to provide UTP Exchange

specialists with the ability to enjoy

parity with Nasdaq Quoting Market

Participants in the SuperMontage when

UTP Exchanges generally require a

sweep of their own floor before orders

may access the quotes of a competing

market center. Even so, the NASD has

stated that it is willing to provide

automated executions against its market

(i.e., access that is equivalent to that

which is offered to NASD members) if

the relevant exchange is willing to

provide automated execution against its

quotes. In the same vein, if an exchange

is willing to provide order delivery to its

quotes, the NASD will provide order

delivery against Nasdaq quotes. The

NASD believes its willingness to

provide such equivalent and reciprocal

access is unprecedented, and should

foster competition and greater market

efficiency, in furtherance of the goals of

the Act.

Some commenters have also

questioned the SuperMontage’s procompetitiveness by suggesting that its

Order Execution Algorithm for nondirected orders discriminates against

ECNs that charge non-subscribers fees

for accessing their quotes. The NASD

maintains that the previously proposed

algorithm was not unfairly

discriminatory. Nevertheless, as stated

above, consistent with the NASD’s

philosophy of, and commitment to,

maintaining and promoting a fair and

open structure for all market

participants, and consistent with the

NASD’s efforts to increase investor

choice, the proposed amendments offer

the pro-competitive solution of offering

several different algorithms for the

investor to choose from. As described

above, one of these algorithms places

quotes from access fee-charging ECNs

on time priority with quotes from

market participants, non-fee-charging

ECNs, and the non-attributable interest

of UTP Exchanges. Thus, investors now

have the opportunity to interact with

the SuperMontage based on whether

ECN access fees are significant to them.

The NASD believes that the availability

of order execution alternatives is an

important means of furthering both the

Act’s mandate of investor protection,

fair competition, and enabling the

achievement of best execution, and of

its requirement of assuring fair

competition.

(B) Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD 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.

(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.

Federal Register / Vol. 65, No. 221 / Wednesday, November 15, 2000 / Notices 69109

34Letter from Frank G. Zarb, Chairman and Chief

Executive Officer, NASD to Arthur Levitt,

Chairman, Commission, dated October 30, 2000.

35 17 CFR 11Aa3–1.

36 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3See letter from Hassan Abedi, Attorney,

Regulatory Policy, PCX, to Nancy Sanow, Assistant

Director, Division of Market Regulation,

Commission, dated November 1, 2000

(‘‘Amendment No. 1’’). In Amendment No. 1, the

PCX made a correction to Rule 6.3 by adding the

word ‘‘must’’ which had inadvertently been left out.

The PCX also clarified that the removal of the

phrase ‘‘or other appropriately designated forms’’

from Rule 6.3 was not approved by Securities

Exchange Act Release No. 41083 (February 22,

1999), 64 FR 10052 (March 1, 1999) (SR–PCX–98–

52). The phrase is being removed because Equity

Trading Permit (‘‘ETP’’) Holders, Equity ASAP

Holders, and ETF Firms are only required to submit

SEC Form X–17A–5.

4The rules of the PCX that governed the equities

trading business of the Exchange were amended

and renumbered when the PCXE was created. See

Securities Exchange Act Release No. 42759 (May 5,

2000), 65 FR 30654 (May 12, 2000). Thus, the PCX

rules that govern the equities business are now

referred to as PCXE rules.

5Language was changed mainly to refer to ‘‘ETP

Holders, Equity ASAP Holders, and ETP Firms’’ (in

the PCXE rules) instead of ‘‘members or member

organizations’’ (in the PCX rules), and to refer to the

‘‘Corporation’’ (in the PCXE rules) instead of

‘‘Exchange’’ (in the PCX rules).

6See Securities Exchange Act Release No. 42998

(June 30, 2000), 65 FR 42412 (July 10, 2000).

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

A. By order approve such proposed

rule change, or

B. Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Commission Discussion

The Commission notes that, by

separate letter, the NASD has agreed to

provide an alternative quotation and

transaction reporting facility for NASD

members that effect transactions in the

over-the-counter market but that choose

not to participate in the

SuperMontage.34 Specifically, the

NASD has committed to provide a

quotation reporting facility that meets

the Association’s statutory obligations

under the Act, and to operate a

transaction reporting facility pursuant to

an effective transaction reporting plan

filed in accordance with the Exchange

Act Rule 11Aa3–1.35 The facility would

be designed to allow NASD members to

meet their obligations under the SEC’s

Order Handling Rules and Regulation

ATS as well as any transaction reporting

obligations imposed by the NASD rules.

This facility would provide an

electronic linkage to the Nasdaq

marketplace and would be operational

contemporaneously with SuperMontage.

V. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning Amendment No.

8, including whether Amendment No. 8

is consistent with the Act. Persons

making written submissions should file

six copies thereof with the Secretary,

Securities and Exchange Commission,

450 Fifth Street, NW., Washington, DC

20549–0609. 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 Amendment

No. 8 to File No. NASD–99–53 and

should be submitted by [insert date 21

days from the date of publication].

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.36

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–29020 Filed 11–14–00; 8:45 am]

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43526 File No. SR–PCX–

00–35]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change and

Amendment No. 1 to the Proposed

Rule Change by the Pacific Exchange,

Inc. Relating to Equity Housekeeping

Amendments

November 7, 2000.

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 October

24, 2000, the Pacific Exchange, Inc.

(‘‘PCX’’ or ‘‘Exchange’’), on behalf of its

wholly-owned subsidiary, PCX Equities,

Inc. (‘‘PCXE’’), 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 PCX. On November 2,

2000, the PCX submitted Amendment

No. 1 to the proposed rule change.3 The

Commission is publishing this notice to

solicit comments on the proposed rule

change and Amendment No. 1 to 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 proposes to make

various housekeeping and technical

changes to certain previously approved

PCX rules by making minor conforming

changes to the existing language in

order to incorporate those changes into

the PCXE rules. 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

Exchange 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

Exchange 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 Exchange is proposing to make

the following changes below to

incorporate previously approved

changes to the rules of the PCX into the

PCXE rules.4 Specifically, the Exchange

is proposing to apply the PCX rule

language to ETP Holders, Equity ASAP

Holders, and ETP Firms by

incorporating such rule language into

the PCXE rules.5

a. PCXE Rule 2—Equity Trading

Permits. Mandatory Decimal Price

Testing—The Exchange proposes to add

PCXE Rule 2.25, based upon PCX Rule

1.15(b).6 Minor conforming changes