Federal Register / Vol. 63, No. 108 / Friday, June 5, 1998 / Notices 30791

16U.S.C. 78o–3.

17 15 U.S.C. 78c(f).

18 15 U.S.C. 78s(b)(2).

19 17 CFR 200.30–3(a)(12).

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

disputes. Thus, the commission finds

good causes to accelerate approval of

the Association’s proposal.

V. Conclusion

The Commission believes that the

proposed rule change is consistent with

the Act, and, particularly, with Section

15A thereof.16 In approving the

proposal, the Commission has

considered its impact on efficiency,

competition, and capital formation.17

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,18 that the

proposed rule change (SR–NASD–98–

34), as amended, is approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.19

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–14920 Filed 6–4–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40047; File No. SR–NASD–

98–09]

Self-Regulatory Organizations; Notice

of Proposed Rule Change and

Amendment No. 1 by the National

Association of Securities Dealers, Inc.

Relating to Trade Reporting Rules

May 29, 1998.

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

Securities Exchange Act of 1934

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

February 2, 1998, 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’’)

a proposed rule change. Nasdaq filed an

amendment to the proposed rule change

on May 19, 1998. The proposed rule

change, as amended, is 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 proposing to amend various

trade reporting rules of the Association.

Specifically the proposal would: (1)

Implement a new trade report modifier

to identify trades effected at a prior

reference price; (2) eliminate the 10,000

share limitation on individual trades

that may be ‘‘bunched’’ for trade

reporting purposes; (3) require

electronic communications networks

(‘‘ECNs’’) to be responsible for reporting

all trades executed within the ECN; and

(4) address riskless principal trades

involving exchange-listed securities

traded in the Third Market. Below is the

text of the proposed rule change.

Proposed new language is in italics;

proposed deletion are in brackets.

* * * * *

4623. Electronic Communications

Networks

(a) No Change.

(b) An electronic communications

network that seeks to utilize the Nasdaqprovided means to comply with the

electronic communications network

display alternative shall:

(1)–(5) No Change.

(6) report all transactions executed by

or through the electronic

communications network, with the

exception of transactions executed

through an automated execution system

operated by Nasdaq (e.g., SelectNet).

* * * * *

4632. Transaction Reporting

(a)(1) through (a)(8) No Change.

(9) All members shall append a trade

report modifier as designated by the

Association to transaction reports that

reflect a price different from the current

market when the execution is based on

a prior reference point in time, which

shall be accompanied by the prior

reference time.

(b) through (f)(1)(C) No Change.

(D) Orders received or initiated by the

reporting member which are impractical

to report individually and are executed

at the same price within 60 seconds of

execution of the initial transaction;

provided however, that no individual

order of 10,000 shares or more may be

aggregated in a transaction report and

that the aggregated transaction report

shall be made within 90 seconds of the

initial execution reported therein.

Furthermore, it is not permissible for a

member to withhold reporting a trade in

anticipation of aggregating the

transaction with other transactions. The

limitation on aggregating individual

orders of 10,000 shares or more for a

particular security shall not apply on

the first day of secondary market

trading of an IPO for that security.

Examples: No Changes.

(2) No Change.

* * * * *

4642. Transaction Reporting

(a)(1) through (a)(8) No Change.

(9) All members shall append a trade

report modifier as designated by the

Association to transaction reports that

reflect a price different from the current

market when the execution is based on

a prior reference point in time, which

shall be accompanied by the prior

reference time.

(b) through (f)(1)(C) No Change.

(D) Orders received or initiated by the

reporting member which are impractical

to report individually and are executed

at the same price within 60 seconds of

execution of the initial transaction;

provided however, that no individual of

10,000 shares or more may be

aggregated in a transaction report and

that the aggregated transaction report

shall be made within 90 seconds of the

initial execution reported therein.

Furthermore, it is not permissible for a

member to withhold reporting a trade in

anticipation of aggregating the

transaction with other transactions. The

limitation on aggregating individual

orders of 10,000 shares or more for a

particular security shall not apply on

the first day of secondary market

trading of an IPO for that security.

(2) No Change.

* * * * *

4652. Transaction Reporting

(a)(1) through (a)(7) No Change.

(8) All members shall append a trade

report modifier as designated by the

Association to transaction reports that

reflect a price different from the current

market when the execution is based on

a prior reference point in time, which

shall be accompanied by the prior

reference time.

(b) through (f) No Change.

* * * * *

6420. Transaction Reporting

(a) through (d)(3)(A) No Change.

(B) Exception: A ‘‘riskless’’ principal

transaction in which a member [that is

not a market maker in the security] after

having received from a customer an

order to buy, purchases the security as

principal from another member or

customer to satisfy the order to buy or,

after having received from a customer

an order to sell, sells the security as

principal to another member or

customer to satisfy the order to sell,

shall be reported as one transaction in

the same manner as an agency

transaction, excluding the mark-up or

mark-down. A riskless principal

transaction in which a member

purchases or sells the security on an

exchange to satisfy a customer’s order

will be reported by the exchange and

the member shall not report.
30792 Federal Register / Vol. 63, No. 108 / Friday, June 5, 1998 / Notices

2See Letter from Robert L.D. Colby, Deputy

Director, Division of Market Regulation, SEC, to

Richard G. Ketchum, Vice President, NASD, dated

August 11, 1997.

3See Exchange Act Release No. 18602 (March 26,

1982), 47 FR 14642 (April 5, 1982) (notice of filing

and order granting accelerated approval of File No

SR–NASD–82–4).

4See Exchange Act Release No. 21202 (August 3,

1984), 49 FR 31971 (August 9, 1984) (order

approving File No. SR–NASD–84–12).

Examples: No Change.

(e) No Change.

* * * * *

6620. Transaction Reporting

(a)(1) through (a)(5) No Change.

(6) All members shall append a trade

report modifier as designated by the

Association to transaction reports that

reflect a price different from the current

market when the execution is based on

a prior reference point in time, which

shall be accompanied by the prior

reference time.

(b) through (3) No. Change.

* * * * *

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission,

Nasdaq included statements concerning

the purpose of, and basis for, the

proposed rule change and discussed any

comments it received on the proposed

rule change. The text of these statements

may be examined at the places specified

in Item IV below. Nasdaq has prepared

summaries, set forth in Sections A, B,

and C below, of the most significant

aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

I. New modifier for trades based on

prior reference price. Nasdaq

recommends the implementation of a

trade report modifier for firms to

append to certain trade reports to more

accurately identify transactions that are

at a price based on a prior reference

point in time. The modifier would apply

to trade reports in Nasdaq securities

(both Nasdaq National Market and

SmallCap) as well as non-Nasdaq OTC

Equity Securities (e.g., OTC Bulletin

Board and Pink Sheets). It would not,

however, apply to exchange-listed

securities traded in the Third Market.

Recently, there have been situations

where members execute certain

transactions that, although reported

timely, actually relate to an obligation to

trade that arose at an earlier point in the

day or that refer to a prior reference

price. These situations include

obligations to trade arising from a

preferenced SelectNet order that was

not executed timely, orders that are

owned the opening or closing price

(‘‘market on open’’ or ‘‘market on

close’’) but that are not executed within

90 seconds of the open or close,

respectively, and orders that may have

been lost or misplaced. In effect, these

trades are late executions, not late

reports of executions.

After earlier discussions with SEC

staff it was agreed that the .SLD

modifier could be used to refer to these

‘‘out of sequence’’ trade reports on an

interim basis, but that Nasdaq should

develop a separate identifier to

accurately reflect these types of trades.2

A separate identifier would provide

better information to market

participants and the public as to what

these trades actually represent. Because

it would be used to indicate that the

price is based on an earlier reference

point, the modifier would identify

trades whose pries may bear no

relationship to the current market.

Accordingly, Nasdaq is proposing a

rule change to implement a new trade

report modifier (‘‘.P’’ for discussion

purposes). This modifier must be

appended to trade reports that reflect a

price that is different from the current

market because the execution is based

on a prior reference point in time. This

would be coupled with a requirement to

input the prior reference time. Until a

separate time filed in ACT can be

established, Nasdaq staff envision that

members can use the execution time

field to insert the prior reference time

for these trades.

In proposing the rule change, Nasdaq

intends that the following be made

clear:

• Such modifier does not apply to

‘‘stopped’’ stock situations.

• By using the modifier, a member is

not absolved of its obligation to provide

best execution, in terms of both price

and timely execution.

• The modifier would not be required

to be used if the report was made within

90 seconds of the prior reference time.

The following are some specific

examples of when the .P modifier would

be used:

1. A member receives a preferenced

SelectNet order at the member’s quote

(‘‘liability order’’) at 11:00. The member

fails to execute the trade. Thirty minutes

later, at 11:30, this is brought to the

attention of the receiving member, who

agrees that the trade should have taken

place at that time at the price existing

then. The receiving member then

executes a trade at that price. The

member appends .P to the trade report

and inputs the time ‘‘11:00.’’

2. A member receives a large number

of customer orders prior to the open, to

be executed at the opening print. Once

that price can be identified, the

member’s system begins executing each

trade at that price. Amy such trade that

is executed at the opening but due to

heavy volume is not printed until after

9:31:30 should be identified with the

.SLD identifier. If, however, at 9:45 the

member discovers that a customer’s

order that should have been executed at

the open has not yet been executed, it

would be appropriate to execute that

customer’s order and append the .P

modifier with the time ‘‘9:30.’’ This tells

market participants that the execution

price represents a price that relates to an

earlier point in time (in this case, the

open), and thus may not bear any

relation to the current market, which

may have moved in the interim.

The text of the proposed rule changes

to implement the new modifier is

contained in NASD Rules 4632(a)(9),

4642(a)(9), 4652(a)(8), and 6620(a)(6).

II. Eliminating the 10,000 share

limitation on aggregating trades in

Nasdaq securities that may be bunched

for trade reporting. Nasdaq is proposing

to eliminate the 10,000 share limitations

on the maximum number of shares in an

individual trade that can be aggregated

for purposes of reporting a ‘‘bunched’’

trade in Nasdaq securities, but only in

the context of IPOs.

Rules governing the reporting of

transactions in Nasdaq securities (both

National Market and SmallCap)

currently permit the aggregation of

transactions into a ‘‘bunched’’ trade

report in a variety of situations. Most

notably, there is a provision whereby a

firm may aggregate transactions at the

same price that would be impractical to

report individually, provided that no

individual order of 10,000 shares or

more may be aggregated. Such reports

are appealed with a ‘‘.B’’ modifier by the

reporting firm and are disseminated to

the Nasdaq tape and vendors. This rule

was originally adopted in 1982 with a

limitation of 5,000 shares.3 It was

subsequently increased to 10,000 shares

in 1984, but has remained at that level

ever since.4

Nasdaq believes that it would be

appropriate to remove the 10,000 share

limitation for bunching on the first day

of secondary market trading following

an IPO. Bunching would remain

optional. This would facilitate more

efficient and timely reporting of large

numbers of trades in the IPO

aftermarket. Nasdaq does not believe
Federal Register / Vol. 63, No. 108 / Friday, June 5, 1998 / Notices 30793

5 It is believed, however, that the exchange count

these re-printed component trades toward their

shares of revenue allocation for market data fees.

6Should a transaction occur between two ECNs,

the ‘‘receiving ECN’’ would be responsible for

reporting the trade.

that eliminating the 10,000 share limit

will result in any relevant loss in either

the amount of value of information

disseminated to the public. Also, as it is

today, the individual transaction data

will continue to be captured for clearing

and regulatory purposes.

Nasdaq notes that there are currently

no limits in place with respect to

bunching on the exchanges. It is

Nasdaq’s understanding, however, that

some exchanges, unlike Nasdaq, reprint

all the component trades to a bunched

report later in the day. While these

individual reports to SIAC, Nasdaq

understands that most vendors do not

re-disseminate them to public.5

The text of the proposed rule changes

to implement the proposed bunching

provision is contained in rules

4632(f)(1)(D) and 4642(f)(1)(D).

III. Requirement that ECNs report on

behalf of subscribers. Nasdaq is

proposing a rule requiring ECNs to

report all trades executed within the

ECN on behalf on its subscribers.

The reporting of trades involving an

ECN is inconsistent today, in that not all

ECNs assume responsibility for

reporting all trades within the ECN.

Instead, an NASD member may be

responsible for reporting some trades.

For example, in these situations, after an

ECN executes a trade, it must determine

which participant, if any, had the trade

reporting obligation, and them notify

that participant. That participant would

then put up the trade report.

Nasdaq believes that it is more

effective and timely for ECNs to be

responsible for centrally reporting every

trade that takes place through the ECN.6

Accordingly, Nasdaq is proposing that it

be mandated by rule, and that the ECN

be held responsible for reporting

properly and timely. The text of the rule

change is contained in proposed rule

4623(b)(6).

IV. Trade reporting rules for riskless

principal trades in the Third Market.

Nasdaq is proposing changes to the

trade reporting rules for exchange listed

securities traded in the Third Market to

ensure that all riskless principal trades,

including those effected by market

makers, are reported only once. This

was determined to be necessary for

several reasons, including (1)

misinterpretation by some of the rules

relating to the reporting of Third Market

trades of exchange-listed securities

involving an execution on an exchange;

(2) the new SEC Order Handling Rules,

which require market makers to match

certain orders in an agency-like fashion

as opposed to trading at risk as

principal; (3) the impact of SEC

Transaction Fees (Section 31 Fees); and

(4) the potential for the erroneous

perception that Third Market trade

reporting may be inflated due to

‘‘double reporting.’’

The rules for reporting trades in the

Third Market have long existed in their

current form. The rules were broadly

designed to capture all trading activity

by broker-dealers, both dealer to dealer

trades and trades with customers. These

rules, and the trade reports that result,

serve several important purposes. They

form the basis for public dissemination

of ‘‘last sale’’ transaction prices to the

tape, thus providing transparency.

Trade reports also are an integral part of

the audit trail used by the NASD in its

regulatory efforts to surveil and regulate

firms’ activities. Given the historical

structure of the dealer market and the

need to provide a comprehensive view

of all trading, and because market

makers were always deemed to be ‘‘at

risk,’’ NASD trade reporting rules

always have required the reporting of all

principal trades by market makers.

Non-market makers, however,

generally do not report all principal

trades under current rules, to the extent

the trades are defined as ‘‘riskless,’’ that

is, they involve a trade with another

member, usually a market maker, which

is used to offset a trade with a customer.

This ‘‘riskless principal exception’’

results in one trade report even though

the non-market maker firm is involved

in two separate trades against its

principal account.

Nasdaq sees no significant reason to

continue this distinction between

market makers and non-market makers

in the context of exchange-listed

securities, and thus believes it to be

appropriate now to extend this riskless

principal exception where possible to

market makers as well. This

determination was reached given the

evolution and growth of the Third

Market, advances in technology at the

firm level, and particularly in light of

the new SEC Order Handling Rules. IN

short, this would ensure that only one

trade report results for transactions that

are clearly one trade. As indicated

above, current rules mandate that

market makers report all principal

trades, notwithstanding that such trades

may, in effect, be ‘‘riskless’’ to the

market maker (i.e., although the market

maker may execute two offsetting trades

against its principal account, the

economic reality is that these may be

viewed as one trade without risk to the

market maker).

V. Extending riskless principal

treatment to transactions in exchangelisted securities in the Third Market.

Nasdaq believes that the exception

applicable to non-market makers (which

treats riskless principal trades as one

trade for reporting purposes) should be

extended to market makers in exchangelisted stocks. For example, if a market

maker in an exchange-listed security

does not assume a risk position on an

ITS commitment sent to another market,

the market maker should not be

reprinting it in its own market when it

receives confirmation of an execution

on the commitment. The fact that the

firm is a market maker is irrelevant.

Nasdaq also believes that this analysis

should apply to transactions that result

from orders sent to the floor even when

sent outside of the ITS linkage (e.g.,

through a floor broker or other

automated execution system of the

exchange).

a. Definition of riskless principal. To

implement the above interpretation, a

specific definition of ‘‘riskless

principal’’ for reporting purposes would

be necessary. A riskless principal trade

generally is one that involves a

conditional order rather than one

immediately executable by the firm as

principal. Such condition may involve a

customer order whose execution is

dependent upon finding the other side,

or a transaction dependent upon the

execution of a part of the order placed

with another firm or market. For

example, after receiving an order to buy

500 shares, a firm sends an order to an

exchange for 1,000 shares. The 1,000

share order is executed, and the member

then satisfies the 500 share order. The

1,000 share execution is reported by the

exchange; the 500 share execution by

the firm should not be printed again in

the Third Market.

To the extent that the transaction

being triggered is greater than the first

leg, only that portion offset by the first

leg is deemed riskless; the balance

would be ‘‘at risk’’ and reported as a

separate trade. For example, after having

received an order for 1,000 shares, the

firm obtains an execution on an

exchange for 500 shares. The exchange

reports 500 shares; the firm only reports

500 shares in the Third Market because

the other 500 shares are deemed

riskless.

b. ‘‘Marker’’ orders. Nasdaq also

considered the extent to which the

definition would apply in situations

where the first leg is really just a

‘‘marker’’ order. These orders, usually of

nominal size, are used to trigger

obligations to other orders the firm may

be holding. Marker orders serve as a

mechanism to notify the market maker
30794 Federal Register / Vol. 63, No. 108 / Friday, June 5, 1998 / Notices

7 15 U.S.C. 78o–3. 8 17 CFR 200.30–3(a)(12).

that the market has traded at that price

and that the conditional order has now

become executable in accord with the

firm’s understanding with its customer.

Such orders generally are not intended

to offset to any significant degree other

executions by the market maker.

Under the definition above, these

executions would appear to merit

riskless principal treatment to the extent

of the size of the marker order.

However, given the purpose for which

such marker orders are used, Nasdaq

believe that these should not require the

breakup of the order into two separate

components to distinguish between a

risk and riskless portion, provided the

marker order is no larger than 10% of

the size of an execution or group of

executions that it would trigger. It was

felt that the nominal size of the marker

order did not to any material extent

change the overall risk profile of the

order.

For example, after receiving an order

for 5000 shares, a firm places a marker

order of 500 shares on an exchange. The

marker order, which is executed, then

triggers the 5000 share order. The firm

would report the 5000 shares in its

entirety. In another example, the marker

order triggers 10 different orders of 500

shares each for a total of 5000 shares.

Similarly, each of these 500 share

executions also are reported.

Another example involves how an

order of 2500 shares would be reported

if 2400 shares were sent to the floor and

had been executed. The 2400 shares

would be reported by the exchange, and

thus the 100 shares would be separately

reported as a risk trade by the market

maker.

Accordingly, Nasdaq is proposing a

rule change and corresponding

interpretations as described above to

ensure that all riskless principal trades,

including those effected by market

makers, are reported only once.

Specifically, the text of the proposed

rule change is in the form of

amendments to NASD Rule

6420(d)(3)(B).

2. Statutory Basis

Nasdaq believes that the proposed

rule change is consistent with the

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

Act 7 in that the proposed rule change

will result in more accurate, reliable,

and informative information regarding

last sale transaction reports. 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; and are not designed to

permit unfair discrimination between

customers, issuers, brokers, or dealers.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

Nasdaq does not believe that the

proposed rule change will result in any

burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act, as amended.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Written comments were neither

solicited nor received.

III. 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. Solicitation of Comments

Interested persons are invited to

submit written data, views, and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

Persons making written submission

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room. 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 number

SR–NASD–98–08 and should be

submitted by June 26, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.8

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–14921 Filed 6–4–98; 8:45 am]

BILLING CODE 8010–01–M

SOCIAL SECURITY ADMINISTRATION

The Chief Information Officer of the

Social Security Administration Grants

to the Social Security Administration a

Waiver From the Use of Certain

Federal Information Processing

Standards

AGENCY: Social Security Administration

(SSA).

ACTION: Notice.

SUMMARY: The Chief Information Officer

of the Social Security Administration

grants to SSA a waiver from the use of

the following Federal Information

Processing Standards (FIPS):

1. The Secure Hashing Standard (FIPS

180–1);

2. The Digital Signature Standard

(FIPS 186); and

3. The Data Encryption Standard

(FIPS 46–2).

This waiver is granted pursuant to

authority granted to the Secretary of

Commerce by 40 U.S.C. section 1441,

and delegated to the Commissioner of

Social Security in the above referenced

FIPS Publications. This authority was

redelegated by the Commissioner of

Social Security to the Agency’s Chief

Information Officer. This waiver is

granted to allow SSA to use commercial

off-the-shelf cryptographic products

such as those produced by RSA Data

Security, Inc., in lieu of products

conforming with the above-cited FIPS.

DATES: This waiver was effective

January 26, 1998, and will remain in

effect until the commercial off-the-shelf

cryptographic products selected by SSA

come under a FIPS or until it is

rescinded by the Agency’s Chief

Information Officer.

FOR FURTHER INFORMATION CONTACT: Joan

Hash, Systems Security Officer, Social

Security Administration, Room 3206

Annex Building, 6401 Security