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###### Securities and Exchange Commission

          - [Release No. 34-44365; File No. SR-NASD-2001-35]

                    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 May 10, 2001, the National Association of Securities Dealers, Inc. (“NASD” or “Association”), through its subsidiary,                           ( print page 30253)                        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 Nasdaq. On May 24, 2001, the NASD, through Nasdaq, filed Amendment No. 1 to the proposed rule change.[3]                                          The Commission is publishing this notice to solicit comments on the proposed rule change and Amendment No. 1 from interested persons.                 

## I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change

                    Nasdaq proposes to amend NASD Rule 4710, “Participant Obligations in NNMS,” to: (1) Eliminate the interval delay between executions against the same market maker at the same price level in the Nasdaq National Market Execution System (“NNMS” or “SuperSOES”),[4]                                          and (2) establish rules governing the decrementation of market makers' displayed quotations by odd-lot orders in the NNMS.                

                    Proposed new language is                     *italicized*; proposed deletions are in brackets.                 

* * * * *

## 4710. Participant Obligations in NNMS

#### (a) No Change

#### (b) Market Makers

                    (1) An NNMS Market Maker in an NNM[S] [S]security [5]                                          shall be subject to the following requirements.                

(A) No change.

(B) No change.

                    (C)                     *(i)*                     The size of the displayed quotation will be decremented upon the execution of an NNMS order in an amount equal to or greater than one normal unit of trading[; provided, however that the execution of an NNMS order that is a mixed lot (i.e., an order that is for more than a normal unit of trading but not a multiple thereof) will only decrement a displayed quotation's size] by the member of shares represented by the number of round lots contained in the [mixed lot] order.                

*(ii) The size of the displayed quotation will also be decremented by the number of shares represented by one normal unit of trading when the number of shares executed against a displayed quotation as the result of:*

*a. orders in an amount less than a round lot, and*

*b. the portion of an order for a mixed lot (i.e., an order that is for more than a normal unit of trading but not a multiple thereof) that is in excess of the number of shares represented by the number of round lots contained in such mixed-lot order, equals one normal unit of trading.*

(D) [(1) Except as provided in subparagraphs (2) and (3) below, after the NNMS system has executed 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 5 seconds  has elapsed from the time the order was executed, as measured by the time of execution in the Nasdaq system.]

[(2) For securities included in the Nasdaq 100 Index, after the NNMS system has executed 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 2 seconds has elapsed from the time the order was executed, as measured by the time of execution in the Nasdaq system.]

                    [(3) For both the first day of trading of the securities of initial public offerings and the first day of trading of the securities of secondary offerings,[6]                                          a]                    *A*                    fter the NNMS system has executed an order against a market maker's displayed quote and reserve size (if applicable), that market maker shall be required to execute another order at its posted bid or offer in that same security as soon as the NNMS system delivers another order to that market maker's quote. [After the first day of trading, subsequent multiple executions against the same market maker's quote at the same price level in such securities shall be processed pursuant to subparagraph (D)(2) of this rule if the security is included in the Nasdaq 100 Index, or if not included in that index, multiple executions against the same market maker's quote at the same price level in such securities shall be processed pursuant to subparagraph (D)(1) of this rule.]                

* * * * *

#### (c) Through (e)—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

*Elimination of Interval Delays.*                     Currently, the rules governing the Nasdaq Small Order Execution System establish a delay of 17 seconds (15 seconds for quote management and two seconds for system processing) between executions against the same market maker in the same security at the same price level. It was originally anticipated that with the launch of SuperSOES [7]                                          this delay would be reduced to five seconds (plus two seconds system processing time) for the vast majority of NNM securities. Nasdaq market participants, however, raised concerns that significant order flow could potentially produce queuing within the system, especially for Nasdaq 100 securities and securities that have recently been the subject of initial public offerings or secondary offerings. Accordingly, Nasdaq filed proposals with the Commission to: (i) Reduce the interval delay between executions in Nasdaq 100 securities to two seconds,[8]                                          and (ii) reduce the interval delay between round-lot executions for the first day of trading of all SuperSOES-eligible initial public offerings and                           ( print page 30254)                        secondary offerings to zero seconds (plus system processing time).[9] 

Nasdaq has now determined that it is technically feasible to reduce the interval delay to zero seconds (plus system processing time) for all transactions on SuperSOES. This would mean that a market maker would be available for executions as quickly as the system an transmit instructions between the execution and quote-update engines, an operation that generally requires from one to one an one-half seconds. Nasdaq market participants have indicated to Nasdaq that they would support elimination of the interval delay for all transactions on SuperSOES because this would further minimize the risk of queuing within the system. Accordingly, the proposed rule change would provide that market makers will be required to execute orders against their displayed quotes whenever the SuperSOES system delivers such orders.

*Decrementation of Market Makers' Quotations.*                     The rules governing the NNMS currently provide that an NNMS market maker's displayed quotation will be decremented upon the execution of an NNMS order in an amount equal to or greater than a round lot, and that in the event of the execution of an NNMS order for a mixed lot (                    *i.e.,*                     an order that is for more than a round lot but not a multiple thereof), the displayed quotation size will be decremented only by the number of shares represented by the number of round lots contained in the mixed-lot order.                

The proposed rule change would establish a mechanism for decrementing the displayed quotation size to take account of odd-lot orders and the portion of mixed-lot orders that is not covered by the current rule. Nasdaq has determined that it is technically feasible for SuperSOES to track the number of shares executed against a displayed quotation as the result of: (i) Orders in an amount less than a round lot, and (ii) the portion of an order for a mixed lot that is in excess of the number of shares represented by the number of round lots contained in the mixed-lot order. When the total quantity of such shares equals a round lot, the size of the displayed quotation would then be decremented accordingly. Nasdaq market participants have indicated that they would support this change because it will guard against the possibility that a market participant could execute multiple odd-lot orders against a market maker's quote without the size of the displayed quotation being decremented.

#### 2. Statutory Basis

                    Nasdaq believes that the proposed rule change is consistent with Section 15A(b)(6) [10]                                          of the Act, in that the proposed rule change is designed to promote just and equitable principles of trade, foster cooperation and coordination with persons engaged in processing information with respect to and facilitating transactions in securities, as well as to remove impediments to and perfect the mechanism of a free and open market, and, in general, to protect investors and the public interest.                

Nasdaq believes that eliminating the interval delay between executions on the NNMS will ensure that customer orders are processed in the most expeditious manner possible. Similarly, providing a mechanism for decrementing market makers' displayed quotations for all orders executed against such quotations will allow the NNMS to provide more up-to-date information about the size of displayed quotations. In turn, these improvements in order processing and display will improve market function and aid in the crucial price discovery process.

### 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.

### C. Self-Regulatory Organization's Statement on Comments on the Proposed Rule Change Received From Members, participants or Others

No written comments were solicited or received with respect to the proposed rule change.

## 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, as amended, 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 File No. SR-NASD-2001-35 and should be submitted by June 26, 2001.

                        For the Commission, by the Division of Market Regulation, pursuant to delegated authority.[11] 

Margaret H. McFarland,

Deputy Secretary.

# Footnotes

1.                             15 U.S.C. 78s(b)(1).                    
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2.                             17 CFR 240.19b-4.                    
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3.                                                     *See*                         Letter from John M. Yetter, Assistant General Counsel, Nasdaq, to Katherine A. England, Division of Market Regulation, Commission, dated May 22, 2001 (“Amendment No. 1). In Amendment No. 1, the Nasdaq made a minor technical correction to the rule text of NASD Rule 4710(b)(1).                         *See infra*                         note 5.                    
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4.                             The Commission approved the NNMS, a new platform for trading Nasdaq National Market (“NNM”) securities, on January 14, 2000.                         *See*                         Securities Exchange Act Release No. 42344 (January 14, 2000), 65 FR 3897 (January 25, 2000), (order approving File No. SR-NASD-99-11).                    
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5.                             Nasdaq revised the rule text of NASD Rule 4710(b)(1) to replace the phrase “NNM security” with the phrase “NNMS Security.”                         *See*                         Amendment No. 1,                         *supra*                         note 3.                    
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                        [6.                             In order to obtain immediate processing of executions in secondary offerings, the lead underwriter of the secondary offering shall communicate its request in writing to the Nasdaq Market Operations Department no later than the business day immediately prior to the start of the trading in the secondary offering. Failure to do so may result in the secondary offering being processed pursuant to the interval delay time frames applicable to the currently trading shares of the issuer.]                    
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7.                             The implementation of SuperSOES is currently scheduled for July 9, 2001.                    
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8.                                                     *See*                         Securities Exchange Act Release No. 43720 (December 13, 2000), 65 FR 79909 (December 20, 2000) (notice of filing and immediate effectiveness of File No. SR-NASD-00-67).                    
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9.                                                     *See*                         Securities Exchange Act Release No. 44142 (April 2, 2001), 66 FR 18331 (April 6, 2001) (order approving File No. SR-NASD-01-03.)                    
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10.                             15 U.S.C. 78*o*                        -3(b)(6).                    
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11.                                 17 CFR 200.30-30-3(a)(12).                        
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[FR Doc. 01-14029  Filed 6-4-01; 8:45 am]

BILLING CODE 8010-01-M