[Federal Register Volume 63, Number 128 (Monday, July 6, 1998)]
[Notices]
[Pages 36466-36467]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17784]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40139; File No. SR-NASD-97-26]


Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Order Granting Accelerated Approval 
to Amendment No. 5 Relating to an Extension of the Pilot for the NASD's 
Rule Permitting Market Makers To Display Their Actual Quotation Size

June 26, 1998.

I. Background

    On June 25, 1998, the National Association of Securities Dealers, 
Inc. (``NASD''), through its wholly-owned subsidiary, The Nasdaq Stock 
Market, Inc. (``Nasdaq''), filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC'') Amendment No. 5 to a proposed 
rule change pursuant to Section 19(b)(1) of the Securities Exchange Act 
of 1934 (``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ to amend 
NASD Rule 4613(a)(1)(C), seeking to extend through July 31, 1998, the 
pilot program in which market makers may quote their actual size (i.e., 
one normal unit of trading) in 150 Nasdaq stocks (``Actual Size 
Rule'').
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The Commission is publishing this notice to solicit comments from 
interested persons and is approving Amendment No. 5 on an accelerated 
basis.

II. Proposed Rule Change

    The NASD proposes to amend NASD Rule 4613(a)(1)(C) to extend the 
Actual Size Rule through July 31, 1998. The text of the proposed rule 
change is as follows. (Additions are italicized; deletions are 
bracketed.)
* * * * *

4613. Character of Quotations

(a) Two-Sided Quotations
(1) No Change
    (A)-(B) No Change
    (C) As part of a pilot program implemented by The Nasdaq Stock 
Market, during the period January 20, 1997 through at least [June 30, 
1998] July 31, 1998, a registered market maker in a security listed on 
the Nasdaq Stock Market that became subject to mandatory compliance 
with SEC Rule 11Ac1-4 on January 20, 1997 or identified by Nasdaq as 
being otherwise subject to the pilot program as expanded and approved 
by the Commission 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.
* * * * *

III. Discussion

    On August 29, 1996, the Commission promulgated a new rule, the 
Limit Order Display Rule \3\ and adopted amendments to the Quote 
Rule,\4\ which together are designed to enhance the quality of 
published quotations for securities and promote competition and pricing 
efficiency in U.S. securities markets (collectively, the ``Order 
Handling Rules'').\5\ To facilitate implementation of the Order 
Handling Rules and accommodate changes in the Nasdaq market that these 
rules brought about, the Commission later approved a variety of 
amendments to NASD Rules concerning Nasdaq's Small Order Execution 
System (``SOES'') and the SelectNet Service (``SelectNet'').\6\
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    \3\ 17 CFR 240.11Ac1-4.
    \4\ 17 CFR 240.11Ac1-1.
    \5\ See Exchange Act Release No. 37619A (September 6, 1997) 64 
FR 48290 (September 12, 1996).
    \6\ See Exchange Act Release No. 38156 (January 10, 1997) 62 FR 
2415 (January 16, 1997) (order partially approving SR-NASD-96-43).
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    In particular, the Commission temporarily approved a pilot program 
\7\ whereby Nasdaq market makers in the first 50 stocks subject to the 
Commission's Order Handling Rules were only required to display a 
minimum quotation size of one normal unit of trading when quoting 
solely for their own proprietary accounts.\8\ For non-pilot Nasdaq 
stocks, the minimum quotations size requirements of 1,000, 500, or 200 
shares remained the same.\9\
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    \7\ Id.
    \8\ The Actual Size Rule does not affect a market maker's 
obligation to display the full size of a customer limit order. If a 
market maker is required to display a customer limit order for 200 
or more shares, it must display a quote size reflecting the size of 
the customer's order, absent an exception from the Limit Order 
Display Rule. Market makers may display a greater quotation size if 
they so choose or if required to do so by the Limit Order Display 
Rule.
    \9\ See NASD Rule 4613(a)(2).
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    Although the first 50 stocks were chosen to provide a broad cross 
section of the most liquid Nasdaq stocks, on October 29, 1997, the 
Commission approved an NASD proposal to amend NASD Rule 4613(a)(1)(C) 
to expand the pilot program to 150 Nasdaq stocks. The Commission also 
extended the pilot until March 28, 1998.\10\ The additional 100 stocks 
were part of an enhanced sample designed to better represent the entire 
Nasdaq market. The Commission approved the expansion in response to 
comment letters suggesting that the first 50 stocks did not 
sufficiently represent the Nasdaq market because all 20 of the largest 
Nasdaq stocks were subject to the 100 share minimum. Thus, some 
commenters suggested that it was difficult to gauge the Actual Size 
Rule's effect on large Nasdaq stocks since there were no sufficiently 
large non-pilot stocks with which to compare those in the pilot.
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    \10\ See Exchange Act Release No. 39285 (October 29, 1997), 62 
FR 59932 (November 5, 1997).
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    The NASD has concluded an analysis of an expanded pilot, and on 
March 5, 1998, it filed with the Commission a proposed rule change to 
apply permanently the Actual Size Rule to all Nasdaq Stocks.\11\ As 
part of that filing, the NASD published a 127-page economic study of 
the 150-stock pilot (``March 1998 Study'').
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    \11\ See Exchange Act Release No. 39760 (March 16, 1998) 63 FR 
13894 (March 23, 1998) (SR-NASD-98-21).
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    In the March 1998 Study, the NASD concluded that:
    <bullet> The Actual Size Rule did not affect the market quality--in 
terms of spreads, volatility, depth, or liquidity--of pilot stocks.
    <bullet> The Actual Size Rule has not altered the ability of 
investors to access market maker capital. For pilot stocks,

[[Page 36467]]

retail investors continued to have substantial and reasonable access to 
dealer capital via both SOES and marker maker proprietary automatic 
execution systems.
    <bullet> There was no evidence of any material difference in market 
quality of pilot stocks and peer non-pilot stocks during the market 
stress on October 27 and 28, 1997.
    To provide the Commission with sufficient time to review the public 
comments before determining whether to expand the Actual Size Rule to 
all Nasdaq stocks on a permanent basis, the NASD proposes to extend the 
current 150-stock pilot through July 31, 1998.

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 Exchange Act. Persons making written 
submissions should file six copies thereof with the Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Washington, 
DC 20549. Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the NASD. All submissions should refer to File No. 
SR-NASD-97-26 and should be submitted by July 27, 1998.

V. Commission's Findings and Order Granting Accelerated Approval of 
Amendment No. 5 to the Proposed Rule Change

    The Commission approved the Actual Size Rule on a pilot basis so 
that its effects could be assessed. In doing so, the Commission stated 
that it believed that a reduction in the quotation size requirement 
could reduce the risks that market makers must take, produce accurate 
and informative quotations, and encourage market makers to maintain 
competitive prices even in the changing market conditions resulting 
from the Order Handling Rules.
    As discussed above, the NASD has produced an extensive economic 
analysis of the pilot. The data appears to suggest that the pilot has 
not resulted in harm to the Nasdaq market. Indeed, as discussed above, 
the Actual Size Rule appears to be an appropriate adjustment of market 
making obligations in light of the changing market dynamics resulting 
from the Order Handling Rules. Nevertheless, the pilot report is 
lengthy and the Commission has received hundreds of comment letters on 
both the report and the NASD's proposal to adopt permanently the Actual 
Size Rule.\12\ Extending the pilot through July 31, 1998, should 
provide the Commission with sufficient time to review the public 
comments before determining whether to expand the Actual Size Rule to 
all Nasdaq stocks on a permanent basis.
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    \12\ Id.
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    For the reasons discussed above, the Commission finds that the 
NASD's proposal is consistent with the Exchange Act and the rules and 
regulations thereunder applicable to a national securities association 
and has determined to approve the extension of the pilot through July 
31, 1998. The Commission finds good cause for approving the proposed 
rule change prior to the thirtieth day after the date of publication of 
notice of the filing in the Federal Register to permit the NASD to 
continue the pilot on an uninterrupted basis for an additional month.
    Accordingly, the Commission believes that the proposed rule change 
(SR-NASD-97-26) is consistent with Sections 15A(b)(6) and (b)(9) of the 
Exchange Act \13\ and
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    \13\ In approving this rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. The proposed rule change will provide the 
Commission with additional time to review the public comments before 
determining whether to expand the Actual Size Rule to all Nasdaq 
stocks on a permanent basis. Since the Commission believes that the 
data discussed above indicates that the pilot has not harmed the 
Nasdaq market thus far, the net effect of approving the proposed 
rule change will be positive. 15 U.S.C. 78c(f).
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    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\14\ that the proposed rule change, SR-NASD-97-26, be and 
hereby is approved through July 31, 1998.

    \14\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-17784 Filed 7-2-98; 8:45 am]
BILLING CODE 8010-01-M