Federal Register / Vol. 65, No. 228 / Monday, November 27, 2000 / Notices 70749

9 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

impose any significant burden on

competition, or (3) significantly have

the effect of limiting the access to or

availability of the system. At any time

within 60 days of the filing of such

proposed rule change, the Commission

may summarily abrogate such rule

change if it appears to the Commission

that such action is necessary or

appropriate in the public interest, for

the protection of investors, or otherwise

in furtherance of the purpose of the Act.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule is

consistent with the Act. Persons making

written submissions should file six

copies thereof with the Secretary,

Securities and Exchange Commission,

450 Fifth Street, N.W., Washington, D.C.

20549–0609. 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 the file

number in the caption above and should

be submitted by December 18, 2000.

For the Commission, by the Division

of Market Regulation, pursuant to

delegated authority. 9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–30134 Filed 11–24–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43564; File No. SR–NASD–

00–61]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the National Association of Securities

Dealers, Inc. Relating to the Penalty for

Market Makers That Voluntarily or

Accidentally Withdraw Their Quotes or

Fail To Refresh Their Quotes and the

Time Period Market Makers Have To

Apply To Reinstate Their Quotes

November 15, 2000.

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

Securities Exchange Act of 1934

(‘‘Exchange Act’’),1 and Rule 19b–4

thereunder,2 notice is hereby given that

on October 18, 2000, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’), through its

wholly-owned subsidiary, Nasdaq Stock

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

Securities and Exchange Commission

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

rule change as described in Items I, II,

and III below, which Items have been

prepared by Nasdaq. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

Nasdaq is filing this proposed rule

change to amend NASD Rules 4620 and

4730 to reduce the penalty for market

makers that voluntarily or accidentally

withdraw their quotes or fail to refresh

their quotes in a timely manner. The

proposal would also increase the time

period market makers have to apply to

reinstate their quotes.

The text of the proposed rule change

follows. Proposed new rule language is

in italics; proposed deletions are in

brackets.

4620. Voluntary Termination of Registration

(a) A market maker may voluntarily

terminate its registration in a security by

withdrawing its quotations 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)] ten

(10) business days. Withdrawal from SOES

participation as a market maker in a Nasdaq

National Market security 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 National Market 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.

(b) Notwithstanding the above, a market

maker that accidentally withdraws as a

market maker may be reinstated if:

(1) The market maker notified Market

Operations of the accidental withdrawal as

soon as practicable under the circumstances,

but no later than 7:00 p.m. Eastern Time on

the same day [within at least one hour] of

such withdrawal, and immediately thereafter

provided written notification of the

withdrawal and reinstatement request;

* * * * *

4730. Participant Obligations in SOES

* * * * *

(b) Market Makers

* * * * *

(6) In the case of an NNM security, a

Market Maker will be suspended from SOES

if its bid or offer has been decremented to

zero due to SOES 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. A Market Maker that fails to

reenter a two-sided quotation in a NNM

security within the allotted time will be

deemed to have withdrawn as a Market

Maker (‘‘SOESed out of the Box’’). Except as

provided below in this subparagraph and in

subparagraph (7), a Market Maker that

withdraws in an NNM security may not

reenter SOES as a Market Maker in the

security for [twenty (20)] ten (10) business

days.

(A) Notwithstanding the above, a market

maker can be reinstated if:

(i) the market maker makes a request for

reinstatement to Market Operations as soon

as practicable under the circumstances, but

no later than 7:00 p.m. Eastern Time on the

same day [within at least one hour] of having

been SOESed out of the Box, and

immediately thereafter provides written

notification of the reinstatement request;

* * * * *

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the commission,

Nasdaq included statements concerning

the purpose of, and basis for, the

proposed rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. Nasdaq has prepared

summaries, set forth in Sections A, B,

and C below, of the most significant

aspects of such statements.

70750 Federal Register / Vol. 65, No. 228 / Monday, November 27, 2000 / Notices

3NASD Rule 4730(b)(6).

4See Securities Exchange Act Release No. 27591

(June 9, 1988), 53 FR 22594 (June 16, 1988).

5This proposal does not address the situation

when a market maker is SOESed-out-of-the-Box for

a SmallCap security. To encourage market makers

to participate in SOES for SmallCap securities, the

NASD filed with the Commission a proposal to

completely eliminate the 20 day penalty when a

market maker is SOESed-out-of-the-Box for a

SmallCap security. See SR–NASD–99–73 (filed

December 16, 1999).

6See NASD Rules 4620 and 4730.

7 Id.

8 Id.

9 Id.

10 Id.

11 Id.

12 15 U.S.C. 78o–3(b)(6) and 15 U.S.C. 78k–1.

13 15 U.S.C. 78k–1(1)(1)(C).

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

(a) Penalty for Withdrawing Quotes

NASD Rule 4620 permits a market

maker to voluntarily terminate its

registration in a security by

withdrawing its quote from the market

or by withdrawing from the Small Order

Execution System (‘‘SOES’’). A market

maker that voluntarily terminates its

registration in an issue may not

reregister as a market maker in that

security for twenty business days (‘‘20

days penalty’’).

Under NASD Rule 4730, the 20 day

penalty also applies to market makers in

Nasdaq National Market (‘‘NNM’’)

securities that fail to update their quotes

in a timely manner after their displayed

size is reduced to zero. Presently, all

market makers in NNM securities must

be registered as SOES market makers.

For NNM securities, SOES

automatically executes unpreferenced

orders in rotation against those market

makers who are at the best quoted bid

or offer on Nasdaq at the time the order

is entered. If a market maker’s displayed

size in an NNM security is reduced to

zero, the quote is placed in a ‘‘closed

quote’’ status and re-ranked at the

bottom of the quotes displayed in the

Nasdaq montage. If the market maker

does not update its quote size or price

in a NNM security within five minutes,

the quote is placed in a SOES

suspended state (i.e., the market maker

has been ‘‘SOESed-out-of-the-Box’’).

Market Makers that are SOESed-out-ofthe-Box for a security may not reenter

SOES as a market maker in that security

for twenty business days.3

The purpose of the twenty day period

is to prevent market makers from

withdrawing from the market without

consequence.4 A market maker that is

prohibited from making a market for a

security is penalized economically by

the lost transaction revenue, and also

sustains damage to its reputation, which

can lead to future economic losses. The

NASD believes, however, that a ten day

penalty will now achieve the same

deterrent effect as the 20 day penalty.

The penalty was set twenty days in

1988, when the daily average share

volume was approximately 122.5

million shares a day. As of September

7, 2000, the daily average share volume

for this year is approximately 1.63

billion shares a day. With the increase

in trading on Nasdaq, the 20 day period

is a much greater penalty now than in

1988. Therefore, the NASD proposes to

reduce the penalty period to ten

business days.

Under the proposal, a market maker

that voluntarily or accidentally

withdraws its quotes (in either a NMS

or SmallCap security), or is SOESed-outof-the-Box for a NNM security, may

reregister (or reenter in the case of

SOES-out) as a market maker after ten

business days.5

(b) Applying to Reinstate Quotes

To avoid the 20 day penalty, market

makers that accidentally withdraw their

quotes or are SOESed-out-of-the-Box

can apply to be reinstated within one

hour from the time their quote lapse.6 A

Nasdaq officer (or staff when the

withdrawal is accidental) can grant the

reinstatement if he or she determines

that the SOES-out or accidental

withdrawal was not an attempt by the

market maker to avoid its obligation to

make a continuous, two-sided market.7

In making his or her decision, the

Nasdaq officer or staff will consider,

among other things, whether the market

conditions in the issue or other issues

in which the market maker makes a

market included unusual volatility or

other unusual activity.8 The Nasdaq

officer (or staff) also will consider the

number of accidental withdrawals or the

frequency with which the firm has been

SOESed-out-of-the-Box.9 There are

limits, however, to the number of

reinstatements a firm can receive within

a calendar year. The number varies

based on the number of markets made

by the firm the previous year.10 A

decision by a Nasdaq officer or staff to

not reinstate a market maker can be

appealed by the firm to the Market

Operations Review Committee

(‘‘Committee’’).11

As discussed earlier, trading volumes

on Nasdaq have increased enormously.

One result of the increase in trading

volumes is that market makers must

actively manage their quotes and trading

in many securities, which increases the

chances a market maker may fail to

comply with the one hour deadline,

especially when the quotes lapse in less

actively traded securities. Nasdaq

cannot consider a reinstatement

application that is untimely filed.

Therefore, a market maker that

otherwise would be reinstated (because

it was not trying to avoid its market

making obligations) cannot be reinstated

because of its failure to comply with a

procedural requirement of the rule. In

this situation, the market maker is

subject to the 20 day penalty. As such,

the liquidity in these less actively

traded securities can be decreased even

further because there is one less market

maker during the penalty period. For

these reasons, the NASD is requesting to

permit market makers until 7:00 p.m.

Eastern Time on the day they

accidentally withdrew their quotes or

were SOESed-out-of-the-Box to apply

for reinstatement.

2. Statutory Basis

Nasdaq believes that the proposed

rule change is consistent with the

provisions of Section 15A(b)(6) and

Section 11A of the Exchange Act. 12

Section 15A(b)(6) 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

principals 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. In

addition, the rules must not be designed

to permit unfair discrimination between

customers, issuers, brokers, or dealers.

Section 11A(a)(1)(C) of the Exchange

Act 13 states that it is the public interest

and appropriate for the protection of

investors and the maintenance of fair

and orderly markets to assure (1)

economically efficient executions 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.

The NASD believes establishing a 10

day penalty period for market makers

that voluntarily or accidentally

Federal Register / Vol. 65, No. 228 / Monday, November 27, 2000 / Notices 70751

14 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3Nasdaq originally submitted the proposal on

October 19, 2000. On November 8, 2000, Nasdaq

submitted a letter from Sara Nelson Bloom,

Assistant General Counsel, Nasdaq, to Katherine

England, Assistant Director, Division of Market

Regulation (‘‘Division’’), Commission, amending the

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

Nasdaq made several corrections to its rule text and

designated the proposed rule change as effective

pursuant to Section 19(b)(3)(A)(i) of the Act, and

Rule 19b–4(f)(3) thereunder. 15 U.S.C.

78s(b)(3)(A)(i), 17 CFR 240.19b–4(f)(3). Because of

the nature of the Amendment, the Commission

deems the filing date to be November 8, 2000, the

date of the final amendment.

withdraw their quotes or are SOESedout-of-the-Box is consistent with

Sections 15A(b)(6 and 11A of the

Exchange Act because the 10 day period

will continue to penalize market makers

that fail to keep quotes in the market.

Reducing the period to 10 days will not

diminish the deterrent effect of the

penalty because market makers will

continue to be penalized economically

through the lost trade revenue and will

continue to suffer harm to their

reputation. In addition, because of the

enormous increase in trading on Nasdaq

since the 20 day penalty was

established, the NASD believes that a 10

day penalty period today may be more

severe than the 20 day penalty was in

1988.

Based on the daily average share

volume in 1988, which was 122.5

million shares per day, the average

share volume on a single day on Nasdaq

is equal to approximately 13 days

average share volume in 1988. While the

daily average share volume is not a

direct measure of the amount of

business any one particular market

maker may lose during a penalty period,

the number does not demonstrate the

extraordinary increase in trading on

Nasdaq. Therefore, the NASD believes

that a 10 day penalty period will

continue to serve as a significant

deterrent. As such, the NASD believes

the proposed penalty will continue to

promote just and equitable principles of

trade, prevent fraudulent and

manipulative acts and practices, protect

investors and the public interest, and

promote the maintenance of fair and

orderly markets.

The NASD also believes that allowing

market makers until 7:00 p.m. Eastern

Time on the day in which they

accidentally withdrew their quotes or

were SOESed-out-of-the-Box to apply

for reinstatement is consistent with

Sections 15A(b)(6) and 11A of the

Exchange Act. As discussed earlier, the

volume of trading on Nasdaq has

increased significantly over the past few

years. This surge in volume requires

market makers to actively manage their

quotes and trading in many securities.

Due to these increased demands, it is

likely that a market maker cannot file a

request for reinstatement within one

hour from the time its quotes lapse,

especially when the quotes lapse in a

less actively traded security.

The direct benefit of extending the

deadline is that market makers would

have more of an opportunity to have

their requests considered on the

substantive merits. Furthermore, this

proposal does not diminish the

standards that an applicant must meet

to be reinstated. Applications that

comply with the new filing deadline

will continue to be reviewed in

accordance with the standards codified

in NASD Rules 4620 and 4730.

Another potential benefit would be to

maintain liquidity in some less actively

traded stocks by reducing the potential

that a market maker will be subject to

the penalty period for procedural

reasons only, and, thus, be prohibited

from making a market in a stock. For

these reasons, the NASD believes that

the proposal will promote just and

equitable principles of trade, prevent

fraudulent and manipulative acts and

practices, protect investors and the

public interest, and promote the

maintenance of fair and orderly markets.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

Nasdaq does not believe that the

proposed rule change will impose 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

Nasdaq neither solicited nor received

written comments.

III. Date of Effectiveness of the

Proposed Rule Change and timing for

Commission Act

Within 35 days of the 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 Nasdaq consents, the

Commission will:

(A) By order approve the proposed

rule change, or

(B) Institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposal is

consistent with the Exchange Act.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549–0609. 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 at

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File No.

SR–NASD–00–61 and should be

submitted by December 18, 2000.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.14

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 00–30135 Filed 11–24–00; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–43583; File No. SR–NASD–

00–62]

Self-Regulatory Organizations; Notice

of Filing and Immediate Effectiveness

of Proposed Rule Change and

Amendment No. 1 Thereto by the

National Association of Securities

Dealers, Inc., Relating to the Removal

of Duplicative Provisions

November 17, 2000.

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

Securities Exchange Act of 1934

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

notice is hereby given that on October

19, 2000, the National Association of

Securities Dealers, Inc. (‘‘NASD’’ or

‘‘Association’’), through its wholly

owned subsidiary, the Nasdaq Stock

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

Securities and Exchange Commission

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

rule change as described in Items I, II,

and III below, which Items have been

prepared by the NASD.3 The

Commission is publishing this notice to