Federal Register / Vol. 60, No. 100 / Wednesday, May 24, 1995 / Notices 27579

8 15 U.S.C. 78s(b)(2) (1988).

9 17 CFR 200.30(a)(12) (1994).

1 15 U.S.C. 78s(b)(1) (1988).

2 17 CFR 240.19b–4 (1994).

3Securities Exchange Act Release No. 33938

(Apr. 20, 1994), 59 FR 22033 (Apr. 28, 1994) (notice

of original proposal and Amendment No. 1).

4Securities Exchange Act Release No. 35428 (Feb.

28, 1995), 60 FR 12583 (Mar. 7, 1995) (notice of

Amendment No. 2).

5Securities Exchange Act Release No. 25263 (Jan.

11, 1988), 53 FR 1430 (Jan. 19, 1988) (order

approving SelectNet, previously referred to as the

Order Confirmation Transaction Service, on a

temporary, accelerated basis). See also, Securities

Exchange Act Release No. 25523 (Mar. 28, 1988), 53

FR 10965 (Apr. 4, 1988) (order extending temporary

approval of SelectNet); Securities Exchange Act

Release No. 25690 (May 11, 1988), 53 FR 17523

(May 17, 1988) (order granting permanent approval

of SelectNet).

6 In contrast, directed orders will continue to

identify the participant transmitting an order to

another participant.

It is therefore ordered, pursuant to

Section 19(b)(2) of the Act,8 that the

proposed rule change (File No. SR–

CSE–95–04) be and hereby is approved,

effective June 7, 1995.

For the Commission by the Division of

Market Regulation, pursuant to delegated

authority.9

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–12697 Filed 5–23–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35732; File No. SR–NASD–

94–9]

Self-Regulatory Organizations;

National Association of Securities

Dealers, Inc.; Order Approving

Proposed Rule Change to Provide

Non-member Viewing Access to

SelectNet and that the Transmission of

Broadcast Orders Through SelectNet

be Solely on an Anonymous Basis

May 18, 1995.

I. Introduction

On January 30, 1995, the National

Association of Securities Dealers, Inc.

(‘‘NASD’’ or ‘‘Association’’) filed with

the Securities and Exchange

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

a proposed rule change pursuant to

Section 19(b)(1) of the Securities

Exchange Act of 1934 (‘‘Act’’) 1 and Rule

19b–4 thereunder.2 The NASD seeks to

amend SelectNet in two ways: (a) to

provide real-time access to nonmembers to view all ‘‘broadcast’’ orders

in SelectNet; and (b) to provide that the

transmission of broadcast orders

through SelectNet be solely on an

anonymous basis.

Notice of the proposed rule change

appeared in the Federal Register on

April 28, 1994 3 and March 7, 1995.4

The Commission received letters from

four commenters in response to the

NASD’s proposal. For the reasons

discussed below, the Commission is

approving the proposed rule change.

II. Background

Originally referred to as the Order

Confirmation Transaction Service

(‘‘OCT’’) and approved by the

Commission in January 1988,5 the

NASD developed SelectNet in response

to the difficulties experienced in the

Nasdaq market during the market break

of October 1987. SelectNet is an

electronic screen-based order routing

system allowing market makers and

order-entry firms (collectively referred

to as ‘‘participants’’) to negotiate

securities transactions in Nasdaq

securities through computer

communications rather than relying on

the telephone.

To enter an order in SelectNet, a

participant enters the normal trade

information: security symbol, side (buy

or sell), transaction size, and price.

Participants may enter orders priced at,

above or below the inside bid or ask

and, thus, SelectNet offers the

opportunity to negotiate for a price

superior to the current inside quote. In

addition, participants may provide that

an order or counter-offer will be in

effect for anywhere from 3 to 99

minutes, specify a day order, or indicate

whether price or size are negotiable or

whether a specific minimum quantity is

acceptable. Participants may accept,

counter, or decline a SelectNet order. In

the event that a participant elects to

counter an offer, the service allows

negotiations to be conducted between

the participants by exchanging counteroffers until an agreement is reached.

Once agreement is reached, the

execution is ‘‘locked-in’’ and reported to

the tape.

Through SelectNet, participants may

either direct an order to a particular

market maker in the security, broadcast

to all market makers in the security, or

broadcast to all participants watching a

particular security (a feature known as

‘‘all call’’). The participants then may

negotiate the terms of the order through

counter-offers entered into the system.

SelectNet’s default setting provides

anonymity for broadcast orders.

However, a participant currently

entering a broadcast order may elect to

identify itself. After an anonymous

broadcast order is executed, each

participant to the transaction learns the

identity of the other. In contrast,

directed orders always display to the

receiving participant the identity of the

participant entering the order.

III. Description of the Rule Change

The NASD seeks to modify SelectNet

in two ways. First, it proposes to permit

non-member viewing access to orders

broadcast through SelectNet. Second,

the NASD proposes to require that

broadcast orders be entered on an

anonymous basis only.

A. Non-member Viewing Access to

Broadcast Orders

Under the NASD’s proposal, nonmembers will be permitted to view on

a real-time basis all orders broadcast

through SelectNet. Specifically, nonmembers will be able to view all

unexecuted broadcast SelectNet orders,

including the security name, the side of

the order (buy or sell), the quantity

available, the order price, the original

size of the order, the outstanding

portion, and the duration of the order

(from 3 to 99 minutes or all day). The

NASD will provide this information via

the Level 2 Nasdaq Workstation service,

to which non-members may subscribe.

In addition, the NASD will provide a

data feed of the broadcast SelectNet

information to data vendors who in turn

may provide the information to nonmembers. Under either alternative,

dissemination of SelectNet information

will be provided on a real-time basis.

Non-members, however, will not be

permitted to interact through SelectNet

with the order or be provided access to

orders directed from one participant to

another. Moreover, because the NASD’s

proposal will restrict all broadcast

orders to an anonymous basis, neither

members nor non-members will be able

to determine the identity of the

participant entering a broadcast order.

B. All Broadcast Orders will be on an

Anonymous Basis

As currently configured, SelectNet

allows a participant broadcasting an

order to elect either to identify itself or

to send the order anonymously. Under

this proposal, however, participants will

be limited to entering broadcast orders

on an anonymous basis.6 If two firms

begin negotiating the terms of a

broadcast order, however, the

participant that entered the order may

choose to identify itself to the contra

side.

IV. Comments

As noted above, the Commission

received letters from four commenters

in response to the proposal. Three of the

commenters addressed the proposal to

provide non-member viewing access,

with one of these commenters

supporting the proposal and the other

two opposing it; the fourth commenter
27580 Federal Register / Vol. 60, No. 100 / Wednesday, May 24, 1995 / Notices

7Securities Exchange Act Release No. 35428 (Feb.

28, 1995), 60 FR 12583 (Mar. 7, 1995) (notice of

Amendment No. 2).

8Letter from Richard Ketchum, Executive Vice

President & Chief Operating Officer, NASD, to

Jonathan G. Katz, Secretary, SEC (Apr. 28, 1995).

9Letters from James E. Buck, Senior Vice

President and Secretary, NYSE (June 2, 1994),

Daniel Parker Odell, Assistant Secretary, NYSE

(Mar. 28, 1995), and Craig S. Tyle, Vice President

& Senior Counsel, Investment Company Institute

(May 19, 1994), to Jonathan G. Katz, Secretary, SEC.

10Securities Exchange Act Release No. 35428

(Feb. 28, 1995), 60 FR 12583 (Mar. 7, 1995) (notice

of Amendment No. 2). In response to this

amendment, the Investment Company Institute

submitted a second comment letter, expressing its

support for the proposal. Letter from Craig S. Tyle,

Vice President & Senior Counsel, Investment

Company Institute, to Jonathan G. Katz, Secretary,

SEC (Mar. 28, 1995).

11 17 CFR 240.11Ac1–1.

12The NYSE also notes in its comment letters that

the SelectNet rules are contained in the SelectNet

User Guide, but are not included in the NASD

Manual. See SelectNet User Guide (Nov. 1990). The

NASD has committed to submit to the Commission

a package of SelectNet rules by the end of 1995.

Letter from Richard Ketchum, Executive Vice

President & Chief Operating Officer, NASD, to

Jonathan G. Katz, Secretary, SEC (Apr. 28, 1995).

13The NASD represents that SelectNet orders are

usually either executed immediately or expire after

three minutes. Thus, the NASD further argues,

SelectNet orders fall within the exception that

allows the NASD to exclude from the best bid or

offer calculation an order which is executed

immediately. 17 CFR 240.11Ac1–1(b)(1)(ii).

14Under rules promulgated pursuant to the Act,

‘‘indications of interest’’ are not considered bids or

offers. 17 CFR 240.11Ac1–1(a)(8).

15Letter from John C. Helmer, President, Caldwell

Securities Incorporated, to Jonathan G. Katz,

Secretary, SEC (Mar. 15, 1994).

16 17 CFR 240.11Ac1–1 and NASD Manual,

Schedules to the By-Laws, Schedule D, Sec. 2(a)

and (b), (CCH) ¶ 1819.

17 Indeed, the Commission and the NASD also

have expressed concern that other types of market

conditioning may violate just and equitable

principles of trade. See, e.g., NASD Manual, Rules

of Fair Practice, Art. III, Sec. 6, (CCH) ¶ 2156 (no

member shall offer to buy or sell a security unless

the member is prepared at the time to honor the

offer).

18 15 U.S.C. § 78k–1(a)(1)(B).

19 Id. 78k–1(a)(C)(ii) and (iii).

expressed opposition to the proposal to

require anonymity for broadcast orders.

The NASD responded to these

comments in Amendment No. 2 7 and by

a letter dated April 8, 1995.8

Commenters responding to the

NASD’s original proposal criticized it

because it would have limited nonmember viewing access to Nasdaq

WorkStation Level 2 subscribers.9 These

commenters argued that the NASD

should provide this access through a

vendor data feed. In response, the NASD

amended its filing to provide to vendors

a separate data feed of broadcast

orders.10

The NYSE and American Stock

Exchange (‘‘Amex’’) generally opposed

the proposal because of their concerns

about the broader policy issues

surrounding SelectNet. Specifically, the

NYSE and Amex argue that ‘‘orders’’

entered in SelectNet are actually

quotations for purposes of the Quote

Rule11 and, therefore, the NASD should

include them for dissemination in the

calculation of the best bid and offer.12

In response, the NASD argues that

SelectNet orders lack the characteristics

that trigger an obligation to include an

order in the calculation of the best bid

or offer in a Nasdaq security.

Specifically, the NASD contends that

unlike quotes, SelectNet orders are

generally limited in duration13 and

subject to price and size negotiation.

The NASD concludes that classifying

SelectNet orders as ‘‘indications of

interest’’ would be more appropriate

than treating them as bids or offers.14

Moreover, the NASD argues that

reassessing whether market maker

orders broadcast through SelectNet

should be reflected in the market

maker’s quote would necessarily

include a similar assessment concerning

market maker orders entered in Instinet.

One commenter opposed the NASD’s

proposal to modify the operation of

SelectNet to provide that all broadcast

orders be entered anonymously.15 This

commenter argued that it identifies

itself regularly with the hope that

market makers will contact it to

negotiate the order further. This

commenter noted that it often wishes to

be associated with certain buy or sell

interest and that, paradoxically, the

NASD’s proposal to provide more

information to non-members will result

in less information to members.

In response, the NASD reiterated the

two concerns set forth in its original

filing as the basis for the proposal. First,

the NASD believes that orders entered

on an anonymous basis will act to

maintain the incentives for dealers to

continue to make markets that provide

needed liquidity. The depth and

liquidity of the Nasdaq market is

dependent upon the presence of market

makers who, among other duties, are

required to maintain firm, continuous,

two-sided quotations and participate in

automated execution systems.16 The

NASD is concerned about allowing

order-entry firms to advertise buy and

sell interest without having to satisfy

these obligations. Specifically, the

NASD believes that it would be

inappropriate to allow a firm to pose as

a dealer by posting identified positions

in SelectNet without registering as a

market maker. To allow this, the NASD

argues, would reduce the incentive for

firms to undertake market making

responsibilities and consequently

adversely affect market liquidity.

Second, the NASD is concerned that

allowing a participant to identify itself

provides the opportunity for the

participant to condition or influence the

market in one direction or another. For

example, in the situation where a

particular participant is considered a

lead market maker or a major

institutional block positioner in a

security, if it were interested in buying

shares in the stock, it might broadcast a

sell order in SelectNet and identify

itself. The influence associated with the

participant’s name might trigger a

decrease in the bid in reaction to the sell

interest. This reaction would allow the

participant to purchase the security at a

lower price than would otherwise have

been the case, simply because it was

advertising its name, or conditioning the

market.17

Finally, the NASD noted that once

two firms begin negotiating an order, the

firm entering the order may choose to

identify itself to the contra side. Thus,

two participants negotiating an order

that find the need to continue

negotiations over the telephone rather

than through SelectNet may arrange to

do so.

V. Discussion

The Commission believes that the rule

change is consistent with the

requirements of Sections 11A and 15A

of the Act and the rules and regulations

thereunder applicable to the NASD and,

therefore, has determined to approve the

proposal.

Section 11A sets forth the

Congressional goal of achieving more

efficient and effective market operations

and the economically efficient

execution of transactions through new

data processing and communications

techniques.18 Section 11A also

expresses the Congressional finding that

the public interest, the protection of

investors and the maintenance of fair

and orderly markets are enhanced by

assuring: (a) fair competition among

brokers and dealers, and (b) the

availability to brokers, dealers, and

investors of information with respect to

quotations for and transactions in

securities.19 Section 15A requires that

the rules of the NASD, among other

things, 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
Federal Register / Vol. 60, No. 100 / Wednesday, May 24, 1995 / Notices 27581

20 Id. 78o–3(b)(6).

21 Market 2000: An Examination of Current

Equity Market Developments, Division of Market

Regulation, United States Securities and Exchange

Commission (Jan. 1994).

22 Id. at IV–7.

23 Id. at 19 and IV–7.

24The NASD has represented that SelectNet usage

has grown from a daily average of 3,000

transactions and 6 million shares in the first half

of 1991 to over 10,550 transactions and more than

12.6 million shares in the first quarter of 1995. 25 17 CFR 200.30–3(a)(12).

open market, and, in general, to protect

investors and the public interest.20

A. Non-member Viewing Access

In its Market 2000 report,21 the

Commission’s Division of Market

Regulation (‘‘Division’’) expressed

concern that the limited transparency of

SelectNet orders often conceals from the

broader market the best trading interest

in a security and, in turn, impedes

competition and price discovery.22 The

Division, therefore, recommended that

the NASD consider ways to enhance

SelectNet transparency.23 The

Commission believes that this proposal

is a positive response to the Division’s

recommendation in Market 2000.

The NASD’s proposal to provide nonmembers viewing access to orders

broadcast through SelectNet will help

achieve more efficient and effective

market operations by increasing

transparency of market information.

Increased transparency, in turn, will

facilitate more efficient price discovery

and enhance price competition among

all market participants. This change to

SelectNet will allow non-members to

obtain with relative ease and low cost

important pricing information about

Nasdaq securities. Moreover, investors

will be better able to assess the overall

supply and demand for a particular

Nasdaq security and, thus, effect

transactions in a more cost-effective

manner. They will now be able to view,

although not participate directly in, an

important system for trading Nasdaq

securities.24

In response to the NASD’s proposal,

the NYSE and Amex raised broad policy

concerns about the operation of

SelectNet in the context of the Quote

Rule. The NYSE and Amex argued that

orders broadcast through SelectNet

constitute quotations for purposes of the

Quote Rule and, therefore, should be

reflected in market maker quotations.

The Commission believes that this

issue reaches beyond the broadcast of

SelectNet orders to non-members. For

example, it raises question about

whether the widespread dissemination

of orders through broker-dealer trading

systems, such as Instinet, constitute

quotations for purposes of the Quote

Rule. Thus, the Commission believes

that this issue is beyond the scope of

this proposal and that the policy issue

raised by the NYSE and Amex deserve

continued examination. Moreover, the

Commission believes that this proposal

is a meaningful advance in the effort to

enhance transparency in the Nasdaq

market and, therefore, should not await

further debate of this issue.

B. The Anonymous Display of All

Broadcast Orders

As noted above, the NASD will not

identify the origin of SelectNet orders

when pricing information is made

available through Nasdaq or vendor

facilities. One commenter opposed this

feature for the reasons described above.

The Commission currently believes

the NASD’s proposal incorporating

anonymity in the display of orders

broadcast through SelectNet is

consistent with the goals of the Act. The

Commission believes requiring

anonymity will promote just and

equitable principles of trade by

removing a mechanism for a participant

to induce market movement simply by

associating its name with a particular

order.

In addition, the Commission finds

that the rule change does not impose

any burden on competition not

necessary or appropriate in furtherance

of the purposes of the Act. While the

imposition of the anonymity

requirement may alter certain existing

trading practices, the Commission

believes that the proposal furthers the

purposes of the Act by enhancing

SelectNet transparency for nonmembers. The Commission believes that

expanded dissemination of SelectNet

information will better inform public

investors regarding the prices at which

investors and dealers are willing to

transact business in a particular

security.

VI. Conclusion

For the reasons stated above, the

Commission finds that the proposed

rule change is consistent with the

requirements of the Act.

It is therefore ordered, pursuant to

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

proposed rule change SR–NASD–94–9

be, and hereby is, approved.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.25

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–12698 Filed 5–23–95; 8:45 am]

BILLING CODE 8010–01–M

[Investment Company Act Release No.

21081; 811–0407]

SBM Company; Notice of Application

May 17, 1995.

AGENCY: Securities and Exchange

Commission (‘‘SEC’’).

ACTION: Notice of application for

deregistration under the Investment

Company Act of 1940 (‘‘Act’’).

APPLICANT: SBM Company.

RELEVANT ACT SECTION: Section 8(f).

SUMMARY OF APPLICATION: Applicant

requests an amended order eliminating

prior conditions, thus permitting

applicant to sell substantially all of its

assets, including a subsidiary that is a

registered investment company, to

another company.

FILING DATE: The application was filed

on April 5, 1995.

HEARING OR NOTIFICATION OF HEARING: An

order granting the application will be

issued unless the SEC orders a hearing.

Interested persons may request a

hearing by writing to the SEC’s

Secretary and serving applicant with a

copy of the request, personally or by

mail. Hearing requests should be

received by the SEC by 5:30 p.m. on

June 12, 1995, and should be

accompanied by proof of service on

applicant, in the form of an affidavit or,

for lawyers, a certificate of service.

Hearing requests should state the nature

of the writer’s interest, the reason for the

request, and the issues contested.

Persons who wish to be notified of a

hearing may request such notification

by writing to the SEC’s Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth

Street, N.W., Washington, D.C. 20549.

Applicant, 8400 Normandale Lake

Boulevard, Suite 1150, Minneapolis,

Minnesota 55437.

FOR FURTHER INFORMATION CONTACT:

James J. Dwyer, Staff Attorney, at (202)

942–0581, or Robert A. Robertson,

Branch Chief, at (202) 942–0564

(Division of Investment Management,

Office of Investment Company

Regulation).

SUPPLEMENTARY INFORMATION: The

following is a summary of the

application. The complete application

may be obtained for a fee from the SEC’s

Public Reference Branch.

Applicant’s Representations

1. Applicant, a Minnesota

corporation, is a financial holding

company that also acts as investment

adviser, transfer agent, and dividend

disbursing agent for certain mutual

funds. Applicant’s wholly-owned

subsidiaries are State Bond and