[Federal Register Volume 65, Number 221 (Wednesday, November 15, 2000)]
[Notices]
[Pages 69084-69109]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-29020]


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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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Exhibit 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.
    \4\ See Securities Exchange Act Release No. 42166 (Nov. 22, 
1999), 64 FR 69125.
    \5\ See 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.
    \6\ See Securities Exchange Act Release No. 42573 (March 23, 
2000), 65 FR 16981 (``Amendment No. 4'').
    \7\ See Letter from Richard G. Ketchum, President, NASD, to 
Belinda Blaine, Associate Director, Division, Commission (May 16, 
2000) (``Amendment No. 5'').
    \8\ See letter from Richard G. Ketchum, President, NASD, to 
Belinda Blaine, Associate Director, Division, Commission (July 6, 
2000) (``Amendment No. 6'').
    \9\ See letter from Richard G. Ketchum, President, NASD, to 
Belinda Blaine, Associate Director, Division, Commission (August 7, 
2000) (``Amendment No. 7'').
    \10\ See Securities Exchange Act Release No. 43133 (August 10, 
2000), 65 FR 149842 (``August 15, 2000 Notice'').
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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

[[Page 69085]]

preferenced orders, Alternative A and Alternative B are identical.
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    \11\ The 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.
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    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

[[Page 69086]]

system owned and operated by The Nasdaq Stock Market, Inc. which 
compares trade information entered by ACT Participants and submits 
``locked-in'' 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 Non-Directed 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

[[Page 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 Self-Regulatory Organization Plan Governing the 
Collection, Consolidation and Dissemination Of Quotation and 
Transaction Information For Exchange-Listed 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 Non-Directed 
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 Non-Directed 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

[[Page 69088]]

may be designated as Immediate or Cancel.
    (C) The system will not process a Non-Directed 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 Non-Directed 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 
time-stamp 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. Non-Attributable 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 Non-Attributable Quote/Order, the NNMS 
will automatically display a Non-Attributable 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 
query-only non-dynamic functionality, displays without attribution to 
Quoting Market Participants' MMIDs the

[[Page 69089]]

aggregate size of Attributable and Non-Attributable 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 Non-Directed 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 Non-Directed 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 
Non-Attributable 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 
quote-access 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

[[Page 69090]]

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 
Non-Attributable 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 Order-Delivery 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 Non-Attributable 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

[[Page 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;

[[Page 69092]]

    (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 
closed-quote 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

[[Page 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 round-lot 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 Non-Directed 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 Non-Attributable 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 partially-filled 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.

[[Page 69094]]

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

[[Page 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 ``locked-in'' 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 Non-Directed 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

[[Page 69096]]

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 Self-Regulatory Organization Plan Governing the 
Collection, Consolidation and Dissemination Of Quotation and 
Transaction Information For Exchange-Listed 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 Non-Directed 
Orders Entered by NNMS Market Participants:

[[Page 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 Non-Directed 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 Non-Directed 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 
time-stamp 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. Non-Attributable 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 Non-Attributable Quote/Order, the NNMS 
will automatically display a Non-Attributable 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.

[[Page 69098]]

    (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 
query-only non-dynamic functionality, displays without attribution to 
Quoting Market Participants' MMIDs the aggregate size of Attributable 
and Non-Attributable 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 Non-Directed 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 Non-Directed 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 
Non-Attributable 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 
quote-access 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

[[Page 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 
Non-Attributable 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 Order-Delivery 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 Non-Attributable 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

[[Page 69100]]

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

[[Page 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 
closed-quote 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

[[Page 69102]]

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 round-lot 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 Non-Directed 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 Non-Attributable 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 partially-filled order 
was delivered, to the lowest bid or highest offer price in Nasdaq, at a 
size of 100 shares.

[[Page 69103]]

    (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.
---------------------------------------------------------------------------

    \12\ For 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.
---------------------------------------------------------------------------

    a. Non-Directed Order Processing. 1. History. As originally 
proposed, the SuperMontage would execute non-directed 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 same-priced quotes of market participants that do not 
charge a fee.
---------------------------------------------------------------------------

    \13\ Generally, a non-direct order is an order that is not 
designated to be sent to a particular market or ECN.
    \14\ We note that Commission staff and at least one commentator 
raised concerns about ECN fees and best execution. See e.g., ITG 
Letter.
---------------------------------------------------------------------------

    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, non-charging 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-by-order 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 quote-access 
fee, Nasdaq would rank that order, for execution purposes, with the 
same-priced orders of market makers, non-charging ECNs, and non-
attributable 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 quote-access 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/

[[Page 69104]]

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, non-directed orders would be executed as follows: (1) 
Displayed quotes/orders of market makers, ECNs that do not charge a 
separate quote-access fee, and non-attributable agency interest of UTP 
Exchanges, as well as quotes/orders of ECNs that charges a separate 
quote-access 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 non-subscribers; (3) 
reserve size of market makers and ECNs that do not charge a separate 
quote-access fee to non-subscribers, as well as reserve size of quotes/
orders from ECNs that charge a separate quote-access fee to non-
subscribers 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 non-subscribers, 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 
non-directed 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.
---------------------------------------------------------------------------

    \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.
    \16\ As 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.
    \17\ Both ECNs and market makers would continue to receive 
liability orders via the non-directed order process.
---------------------------------------------------------------------------

    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.

[[Page 69105]]

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 non-Nasdaq 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.
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    \18\ Nasdaq 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.
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    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

[[Page 69106]]

the Commission for public comment.) On an ongoing basis, the NASD would 
evaluate the demand for away-from-the-inside 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 non-liability), 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 non-directed 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 time-stamp 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 order-response 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 closed-quote state. The NASD believes that this measure is 
necessary in order to maintain a fair and orderly market and to ensure 
prompt, reliable, and non-discriminatory 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.

[[Page 69107]]

    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\
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    \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).
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    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\
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    \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).
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    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\
---------------------------------------------------------------------------

    \28\ 15 U.S.C. 78o-3(b)(6).
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    The NASD believes that the proposed amendments represent a pro-
competitive development that offers increased price competition, 
flexibility, and choice to investors and to market participants that 
will spur further competition and innovation among

[[Page 69108]]

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\
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    \29\ 15 U.S.C. 78k-1(a)(1)(C).
    \30\ 15 U.S.C. 78k-1(a)(1)(D).
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    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 non-directed 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\
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    \31\ 15 U.S.C. 78k-1(a)(1)(C)(ii).
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    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.
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    \32\ See 17 CFR 240.11Ac1-1 and 240.11Ac1-4.
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    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.
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78k-1(a)(1)(C)(ii).
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    Some commenters have also questioned the SuperMontage's pro-
competitiveness by suggesting that its Order Execution Algorithm for 
non-directed 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.

[[Page 69109]]

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.
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    \34\ Letter from Frank G. Zarb, Chairman and Chief Executive 
Officer, NASD to Arthur Levitt, Chairman, Commission, dated October 
30, 2000.
    \35\ 17 CFR 11Aa3-1.
---------------------------------------------------------------------------

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\
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    \36\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-29020 Filed 11-14-00; 8:45 am]
BILLING CODE 8010-01-P