4902 Federal Register / Vol. 70, No. 19 / Monday, January 31, 2005 / Notices 

9 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3Amendment No. 1 replaced and superseded the 

originally filed proposed rule change.

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 also will be 

available for inspection and copying at 

the principal offices of the Exchange. 

All comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–Amex–2005–008 and 

should be submitted on or before 

February 22, 2005.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.9

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. E5–352 Filed 1–28–05; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–51078; File No. SR–NASD–

2004–173] 

Self-Regulatory Organizations; Notice 

of Filing of Proposed Rule Change and 

Amendment No. 1 Thereto by the 

National Association of Securities 

Dealers, Inc., To Establish Rules 

Governing the Operation of Nasdaq’s 

Brut Facility 

January 25, 2005. 

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 November 

3, 2004, the National Association of 

Securities Dealers, Inc. (‘‘NASD’’), 

through its subsidiary, The Nasdaq 

Stock Market, Inc. (‘‘Nasdaq’’), filed 

with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change as described in 

Items I, II, and III below, which Items 

have been prepared by Nasdaq. On 

January 24, 2005, Nasdaq submitted 

Amendment No. 1 to the proposed rule 

change.3 The Commission is publishing 

this notice to solicit comments on the 

proposed rule change, as amended, from 

interested persons.

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

Nasdaq proposes to establish rules 

governing the operation of its Brut 

trading facility. Nasdaq will implement 

the proposed rule change, as amended, 

immediately upon approval by the 

Commission. Below is the text of the 

proposed rule change, as amended. 

Proposed new language is italicized;

proposed deletions are in [brackets]. 

4900. BRUT SYSTEM (System) 

4901. Definitions 

Unless stated otherwise, the terms 

described below shall have the following 

meaning:

(a) The term ‘‘System securities’’ shall 

mean Nasdaq Market Center eligible 

securities as that term is defined in 

NASD Rule 4701(s) and exchange-listed 

Intermarket Trading System (ITS) 

eligible securities as defined in NASD 

Rule 5210(c).

(b) The term ‘‘Effective Time’’ shall 

mean, for orders so designated, the time 

at which the order shall become eligible 

for display and potential execution with 

other orders in the System.

(c) The term ‘‘Immediate or Cancel’’

shall mean, for limit orders so 

designated, that if after entry into the 

System the order (or a portion thereof) 

is not marketable, the order (or 

unexecuted portion thereof) shall be 

canceled and returned to the entering 

Participant.

(d) The term ‘‘limit order’’ shall mean 

an order to buy or sell a stock at a 

specified price or better. This order type 

is available for Nasdaq-listed and 

Exchange-listed securities.

(e) The term ‘‘market order’’ shall 

mean an unpriced order to buy or sell 

a stock at the market’s current best 

price. A market order may have a limit 

price beyond which the order shall not 

be executed. This order type is available 

for Nasdaq-listed and Exchange-listed 

securities.

(f) The term ‘‘mixed lot’’ shall mean 

an order that is for more than a normal 

unit of trading but not a multiple 

thereof.

(g) The term ‘‘Nasdaq Market Center’’

shall mean the automated system 

owned and operated by The Nasdaq 

Stock Market, Inc. pursuant to NASD 

Rule 4700 Series.

(h) The term ‘‘The BRUT ECN 

System,’’ or ‘‘System,’’ shall mean the 

automated system owned and operated 

by Brut, which is owned and operated 

by The Nasdaq Stock Market, Inc., 

which enables Participants to execute 

transactions in System securities; to 

have reports of the transactions 

automatically forwarded to the 

appropriate National Market Trade 

Reporting System, if required, for 

dissemination to the public and the 

industry, and to ‘‘lock in’’ these trades 

by sending both sides to the applicable 

clearing corporation(s) designated by 

the System Participant(s) for clearance 

and settlement; and to provide System 

Participants with sufficient monitoring 

and updating capability to participate 

in an automated execution 

environment.

(i) The term ‘‘Participant’’ shall mean 

an NASD member that fulfills the 

obligations contained in Rule 4902 

regarding participation in the System.

(j) The term ‘‘System Book Feed’’ shall 

mean a data feed for System eligible 

securities that Brut will make available 

to Participants and third-party vendors.

(k) The term ‘‘odd-lot order’’ shall 

mean an order that is for less than a 

normal unit of trading.

(l) The term ‘‘Reserve Size’’ shall 

mean the functionality that permits a 

Participant to display a portion of an 

order, with the remainder held in 

reserve on an undisplayed basis.

(m) The term ‘‘Good-till-Cancelled’’

shall mean, for orders so designated, 

that if after entry into the System, the 

order is not fully executed, the order (or 

unexecuted portion thereof) shall 

remain available for potential display 

and/or execution only until 4 p.m. 

Eastern Time on the day they are 

submitted unless cancelled before then 

by the entering party.

(n) The term ‘‘Good-till-CancelledOvernight’’ shall mean, for orders so 

designated, that if after entry into the 

System, the order is not fully executed, 

the order (or unexecuted portion 

thereof) shall remain available for 

potential display and/or execution until 

4 p.m. Eastern Time, after which it shall 

be held by the System in a pending 

state, ineligible for display or execution, 

until the following trading day, when it 

will become eligible for display and 

execution from 7:30 a.m. until 4 p.m. 

Eastern Time on that and all subsequent 

trading days, until a date provided by 

the entering party (or if no such date is 

given, indefinitely) until cancelled by 

the entering party.

(o) The term ‘‘Good-till-Time,’’ shall 

mean, for orders so designated, that if 

after entry into System, the order is not 

fully executed, the order (or unexecuted 

portion thereof) shall remain available 

for potential display and/or execution 

until the time designated by the entering 

party, after which the order will be 

cancelled by the system. This time may 

Federal Register / Vol. 70, No. 19 / Monday, January 31, 2005 / Notices 4903

be relative time (e.g. 30 minutes after 

entry) or an actual time (e.g. 2 p.m.).

(p) The term ‘‘Day’’ shall mean, for 

orders so designated, that if after entry 

into the System, the order is not fully 

executed, the order (or unexecuted 

portion thereof) shall remain available 

for potential display and/or execution 

only until 4 p.m. Eastern Time on the 

day they are submitted unless cancelled 

before then by the entering party.

(q) The term ‘‘End-of-Day’’ shall 

mean, for orders so designated, that if 

after entry into the System, the order is 

not fully executed, the order (or 

unexecuted portion thereof) shall 

remain available for potential execution 

and/or display until 8 p.m. Eastern 

Time, after which it shall be returned to 

the entering party.

(r) The term ‘‘Pegged’’ shall mean, for 

priced limit orders so designated, that 

after entry into the System, the price of 

the order is automatically adjusted by 

the System in response to changes in the 

Nasdaq inside bid or offer (for Nasdaqlisted securities) or the national best bid 

or offer (for ITS securities), as 

appropriate. The Participant entering a 

Pegged Order can specify that order’s 

price will either equal the inside quote 

or improves the inside quote by an 

amount set by the entering party on the 

same side of the market (a ‘‘Regular 

Pegged Order’’) or offset the inside quote 

on the contra side of the market by an 

amount (the ‘‘Offset Amount’’) set by 

the Participant (e.g., $0.01 less than the 

inside offer or $0.02 more than the 

inside bid) (a ‘‘Reverse Pegged Order’’). 

The Participant entering a Pegged Order 

may (but is not required to) specify a 

limit price, to define a price at which 

pegging of the order will stop and the 

order will be permanently converted 

into an un-pegged limit order at limit 

price. This order type is available for 

Nasdaq-listed and Exchange-listed 

securities.

(s) The term ‘‘Discretionary’’ shall 

mean an order that when entered into 

System has both a displayed bid or offer 

price, as well as a non-displayed 

discretionary price range and size 

(which shall be equal to or less than the 

Order’s Reserve Size) at which the 

Participant is also willing to buy or sell, 

if necessary. This order type is available 

for Nasdaq-listed and Exchange-listed 

securities.

(t) The term ‘‘Post Only’’ shall mean, 

for To Brut limit orders so designated, 

that if an order is marketable against an 

order then-displayed in the System 

upon receipt, it shall be rejected and 

returned to the entering Participant. If 

the order is marketable against a quote 

displayed outside of Brut, the price of 

the order is adjusted to a price $0.01 

inferior to the best bid (or offer, as 

appropriate) then displayed in the 

Nasdaq Market Center, and then 

displayed in the System. This order type 

is available for Nasdaq-listed and 

Exchange-listed securities.

(u) The term ‘‘Agency Away’’ shall 

mean an agency order designated by the 

entering Participant as eligible for 

execution at a price inferior to the thencurrent national best bid/offer. This 

order type is available only for Nasdaqlisted securities.

(v) The term ‘‘Principal Inside Only’’

shall mean a principal order designated 

by the entering Participant as only 

eligible for execution at a price equal or 

better than the then-current national 

best bid/offer. This order type is 

available for Nasdaq-listed and 

Exchange-listed securities.

(w) The term ‘‘normal unit of trading’’

shall mean one hundred (100) shares.

4902. System Participant Registration 

(a) Participation in Brut requires 

current registration with the System and 

is conditioned upon the Participant’s 

initial and continuing compliance with 

the following requirements:

(1) Execution of a System Subscriber 

Agreement;

(2) Satisfaction of the Brut New 

Accounts Policies & Procedures 

requirements;

(3) Membership in, or access 

arrangement with a participant of, a 

clearing agency registered with the 

Commission that maintains facilities 

through which System compared trades 

may be settled;

(4) Acceptance and settlement of each 

System trade that System identifies as 

having been effected by such 

Participant, or if settlement is to be 

made through another clearing member, 

guarantee of the acceptance and 

settlement of such identified System 

trade by the clearing member on the 

regularly scheduled settlement date;

(5) Compliance with all applicable 

rules and operating procedures of the 

Association and the Securities and 

Exchange Commission.

(b) Access to the System by nonSystem participants is available through 

the Nasdaq Market Center as defined in 

NASD Rule 4701(r) and related rules.

4903. Order Entry Parameters 

(a) To Brut Orders—

(1) General. A To Brut Order is an 

order that is displayed in the System 

and is executable only against 

marketable contra-side orders in the 

System. This order type is available for 

Nasdaq-listed and Exchange-listed 

securities. The following requirements 

shall apply to To Brut Orders entered by 

Participants:

(A) A To Brut Order shall be a limit 

order, and shall indicate whether it is a 

buy, short sale, short-sale exempt, or 

long sale. A To Brut Order can be 

designated as End-of-Day, Immediate or 

Cancel, Good-till-Cancelled, Day, Goodtill-Canceled Overnight, Good-till-Time, 

Effective Time, Post Only, Pegged or 

Discretionary.

(B) To Brut Orders shall be executed 

pursuant to the Brut Book Process as 

described in Rule 4905(a).

(C) A To Brut Order to sell short shall 

not be executed if the execution of such 

order would violate NASD Rule 3350 or, 

in the case of ITS Securities, SEC Rule 

10a–1. In said circumstances, the price 

of the To Brut Order shall be adjusted 

to $.01 above the Nasdaq inside bid for 

Nasdaq-listed securities or, in the case 

of exchange-listed securities, $.01 above 

the national best bid or offer, and 

thereafter be processed as if a Reverse 

Pegged Order.

(D) The System shall not accept To 

Brut Orders that are All-or-None, or 

have a minimum size of execution.

(b) Brut Cross Orders—

(1) General. A Brut Cross Order is an 

order that is displayed in the System, 

and is executable against marketable 

contra-side orders in the System. The 

order also is eligible for routing to other 

market centers. If marketable upon 

receipt against both orders in the 

System as well as other market centers, 

the order shall execute first against 

System orders. With the exception of 

Directed Cross Orders, once a Brut Cross 

Order is routed (in whole or in part) to 

another market center, any remaining 

unexecuted or returned portion of the 

order shall be posted in System and 

shall no longer be eligible for routing to 

other market centers.

(A) A Brut Cross Order shall be a limit 

order, and shall indicate whether it is a 

buy, short sale, short-sale exempt, or 

long sale. A Brut Cross Order can be 

designated as Immediate or Cancel, 

End-of-Day, Good-till-Cancelled, Day, 

Good-till-Cancelled Overnight, Goodtill-Time, Effective Time.

(B) A Brut Cross Order may also be 

designated as an Aggressive Cross 

Order. An Aggressive Cross Order is an 

order that is displayed in the System 

during market hours and is executable 

against marketable contra-side orders in 

the System. The order also is eligible for 

routing to other market centers. If 

marketable upon receipt against both 

orders in the System as well as other 

market centers, the order shall execute 

first against System orders. If, after 

being posted in the Brut System, and 

after it has exhausted available liquidity 

4904 Federal Register / Vol. 70, No. 19 / Monday, January 31, 2005 / Notices 

in the Brut System, the Aggressive Cross 

Order has its price crossed by the 

displayed quote of another market 

center, the System will be routed by Brut 

to that market center for potential 

execution. Aggressive Cross Orders may 

comply with paragraph (A) of this rule.

(C) A Brut Cross Order may also be 

designated as a Super Aggressive Cross 

Order. A Super Aggressive Cross Order 

is an order that is displayed in the 

System during market hours and is 

executable against marketable contraside orders in the System. The order 

also is eligible for routing to other 

market centers. If marketable upon 

receipt against both orders in the 

System as well as other market centers, 

the order shall execute first against 

System orders. If, after being posted in 

the Brut System, and after it has 

exhausted available liquidity in the Brut 

System, the Aggressive Cross Order has 

its price locked or crossed by the 

displayed quote of another market 

center the System will be routed by Brut 

to that market center for potential 

execution.

(D) A Brut Cross Order may also be 

designated as a Directed Cross Order. A 

Directed Cross Order is an order that 

entered in the System during market 

hours and is executable against 

marketable contra-side orders in the 

System. The order also is eligible for 

routing to other market centers. If, after 

being processed in the Brut System and 

exhausting available liquidity in the 

Brut System, the order is automatically 

routed by Brut to the specific market 

center selected by the entering party for 

potential execution. Any portion of the 

Directed Cross Order that remains 

unfilled after being routed to the 

selected market center will be returned 

to the entering party.

(E) Brut Cross Orders, including those 

designated as Aggressive Cross Orders, 

Super Aggressive Cross Orders and 

Directed Cross Orders, shall be executed 

pursuant to:

(i) The To Brut Order Process 

described in Rule 4905(a) to the extent 

marketable against an order resident in 

the System; and

(ii) With the exception of Directed 

Cross Orders, the Brut Order Routing 

Process described in Rule 4905(b) to the 

extent not marketable against an order 

resident in the System.

(F) A Brut Cross Order, including 

those designated as an Aggressive Cross 

Order, Super Aggressive Cross Order 

and Directed Cross Order, to sell short 

shall not be executed in the System if 

the execution of such order would 

violate NASD Rule 3350 or, in the case 

of ITS Securities, SEC Rule 10a–1. In 

said circumstances, the price of the Brut 

Cross Order shall be adjusted to $.01 

above the Nasdaq inside bid for Nasdaqlisted securities or, in the case of 

exchange-listed securities, $.01 above 

the national best bid or offer, and 

thereafter be processed as if a Reverse 

Pegged Order.

(c) Thru Brut Orders—

(1) General. A Thru Brut Order is an 

order submitted to the System that is 

designated for routing to another market 

center. This order type is available for 

Nasdaq-listed and Exchange-listed 

securities. The following requirements 

shall apply to Thru Brut Orders:

(A) A Thru Brut Order shall be a 

market order or a limit order, and must 

indicate whether it is a buy, short sale, 

short-sale exempt, or long sale. A Thru 

Brut Order can be designated as 

Immediate or Cancel, End-of-Day, Goodtill-Cancelled, Day, or Good-till-Time, or 

Effective Time.

(B) Thru Brut Orders do not 

participate in Brut Routing Process as 

described in Rule 4905(b). Instead such 

orders are sent directly to the market 

center selected by the entering party. If 

unexecuted, the order (or unexecuted 

portion thereof) shall be returned to the 

entering party.

(d) Hunter Orders—

(1) General. A Hunter Order is a nondisplayed order that will execute against 

trading interest in the System or another 

market center. This order type is 

available only for Nasdaq-listed 

securities. After 6:30 p.m. Eastern Time, 

Hunter Orders will execute only against 

other orders in the System. The 

following requirements shall apply to 

Hunter Orders:

(A) A Hunter Order shall be a limit 

order, and must indicate whether it is a 

buy, short sale, short-sale exempt, or 

long sale. A Hunter Order can be 

designated as Immediate or Cancel, 

End-of-Day, Good-till-Cancelled, Day, or 

Good-till-Time, or Effective Time.

(B) Hunter Orders shall be executed 

as follows:

(i) To the extent marketable upon 

receipt against orders in the System, 

pursuant to the Brut Book Process as 

described in Rule 4905(a); then/or

(ii) If not marketable upon receipt 

against orders in the System but 

marketable against the displayed quotes 

of other market centers, pursuant to the 

Brut Routing Process as described in 

Rule 4905(b).

(iii) If not marketable upon receipt 

against any quote displayed in the 

System or another market center, the 

order shall be retained, but not be 

displayed, in the System and shall 

remain available for execution via the 

Brut Book and/or Brut Routing 

Processes should the order become 

marketable.

(e) Entry of Agency and Principal 

Orders—Participants are permitted to 

submit agency, riskless principal, and 

principal orders for processing in the 

System. Participants shall correctly note 

their capacity at the time of entry of an 

order(s) into the System.

(1) Unless designated as ‘‘Agency 

Away’’, no agency order shall be 

executed at a price inferior to the then 

current National Best Bid (for sell 

orders) or Best Offer (for buy orders), 

taking into account prior efforts to 

execute against the bids/offers of other 

market centers.

(2) Unless designated as ‘‘Principal 

Inside Only’’, principal and riskless 

principal orders may be executed at a 

price inferior to the then current 

National Best Bid (for sell orders) or 

Best Offer (for buy orders).

(f) Order Size—Any order in whole 

shares up to 1,000,099 shares may be 

entered into the System, subject to a 

dollar volume limitation of $25,000,000.

4904. Entry and Display of Orders 

(a) Entry of Orders—Participants can 

enter orders into the System, subject to 

the following requirements and 

conditions:

(1) Participants shall be permitted to 

transmit to the System multiple orders 

at a single as well as multiple price 

levels. Each order shall indicate the 

amount of reserve size (if applicable).

(2) The System shall time-stamp an 

order upon receipt, which time-stamp 

shall determine the ranking of the order 

for purposes of processing To Brut 

Orders and Brut Cross Orders.

(3) Good-till-Cancelled, Day, orders 

can be entered into the System (or 

previously entered orders cancelled) 

between the hours 7:30 a.m. to 4 p.m. 

Eastern Time. Pegged, Discretionary, 

Immediate-or-Cancel and End-of-Day 

To Brut Orders, Good-till-Time, Goodtill-Canceled Overnight and GTX orders 

can be entered into System (or 

previously entered orders cancelled) 

between the hours 7:30 a.m. to 8 p.m. 

Eastern Time. Orders entered prior to 

market open and Good-till-Time orders 

carried over from previous trading days, 

shall not become available for execution 

until 7:30 a.m. Eastern Time. Good-tillTime orders carried over from previous 

trading days with an Effective Time will 

not become available for execution until 

the Effective Time on all subsequent 

trading days the order is held by the 

System.

(b) Display of Orders—The System 

will display orders submitted to the 

System as follows:

Federal Register / Vol. 70, No. 19 / Monday, January 31, 2005 / Notices 4905

(1) System Book Feed—orders 

resident in the System will be displayed 

to Participants via the System Book 

Feed.

(2) Nasdaq Market Center—For each 

Nasdaq Market Center eligible security, 

the best priced order to buy and sell 

resident in the System shall be 

displayed and eligible for execution 

within the Nasdaq Market Center. The 

System may also provide to the Nasdaq 

Market Center additional orders, up to 

and including all orders in System, in 

Nasdaq Market Center eligible 

securities.

(3) Exceptions—The following 

exceptions shall apply to the display 

parameters set forth in paragraphs (1) 

and (2) above:

(A) Odd-lots, Mixed Lots, and 

Rounding—The System Book Feed shall 

be capable of displaying trading interest 

in round lot and mixed-lot amounts, 

and sub-penny increments for 

quotations priced under $1.00.

For Nasdaq Market Center display 

purposes, the System shall aggregate all 

shares, including odd-lot share 

amounts, entered by Participants at a 

single price level and round the total 

share amount down to the nearest 

round-lot amount. Any odd-lot portion 

of an order that is not displayed as a 

result of the rounding process shall 

remain available for execution, in 

accordance with the time-priority of 

their original entry time. Round-lots that 

are subsequently reduced by executions 

to a mixed lot amount shall also be 

rounded for to the nearest round-lot 

amount for purposes of display in the 

Nasdaq Market Center. Any odd-lot 

number of shares that do not get 

displayed as a result of rounding will 

remain available for execution, in 

accordance with the time-priority of 

their original entry time.

(B) Minimum Increments and 

Rounding—The minimum trading 

increment for System quotations priced 

$1.00 and above is $.01. For quotations 

priced below $1.00 the minimum 

increment is $.0001.

(i) For System display purposes, 

quotations in sub-penny increments 

$1.00 and above will be rounded down 

(for bids) or up (for offers) by the System 

to the nearest $.01 increment. Orders so 

rounded shall have no superior 

execution priority compared to orders 

previously submitted at the relevant 

$.01 increment.

(ii) For Nasdaq Market Center display 

purposes, any quotations in sub-penny 

increments shall be rounded down (for 

bids) and up (for offers) to the nearest 

$.01 increment. Sub-penny quotations 

that are rounded for display purposes 

shall be executed at their actual price, 

rather than the rounded price at which 

they are displayed.

(C) Reserve Size—Reserve Size shall 

not be displayed in the System, but shall 

be accessible as described in Rule 4905.

(D) Discretionary & Hunter Orders—

Hunter Orders, and the discretionary 

portion of Discretionary Orders shall be 

available for execution only upon the 

appearance of contra-side marketable 

trading interest, and shall be executed 

pursuant to Rule 4905.

4905. Order Processing 

(a) Brut Book Order Process

Orders subject to the Brut Book Order 

Process shall be executed as follows:

(1) Default Execution Algorithm—

Price/Time—The System shall execute 

interest within the System in price/time 

priority in the following order:

(A) Displayed Orders;

(B) Reserve Size;

(C) Discretionary Orders within the 

Discretionary Order’s discretionary 

price range; and

(D) Hunter Orders.

(2) Decrementation—Upon execution, 

an order shall be reduced by an amount 

equal to the size of that execution. In 

the case of orders that have both a 

displayed and reserve share component, 

share amounts shall be reduced starting 

first with their reserve portions.

(3) Processing of Locking/Crossing 

Orders: If during market hours, a 

Participant enters a To Brut order that 

will lock/cross the market (as defined in 

NASD Rule 4613(e) or in NASD Rule 

5263(a) or (b)), the System shall adjust 

the price of the order to $.01 less than 

the current best bid quotation (for buy 

orders) or $.01 more than the current 

best offer quotation (for sell orders) and 

thereafter be processed as a Reverse 

Pegged Order.

(4) Processing of Directed, Aggressive 

and Super Aggressive Cross Orders—

The System shall process crossed 

Directed and Aggressive Cross Orders, 

and locked or crossed Super Aggressive 

Cross Orders as follows:

(A) Displayed orders which are 

designated as ‘‘Directed Cross Orders’’

by a Participant shall be routed to the 

market center selected by the entering 

party for potential execution by the 

System. This order type is available 

Nasdaq-listed and Exchange-listed 

securities.

(B) Displayed orders which are 

designated as ‘‘Aggressive Cross Orders’’

by a Participant that are subsequently 

crossed by the displayed quotation of 

another market center shall be executed 

pursuant to the Brut Order Routing 

Process upon being so crossed. This 

order type is available for Nasdaq-listed 

and Exchange-listed securities.

(C) Displayed orders which are 

designated as ‘‘Super Aggressive Cross 

Orders’’ by a Participant that are 

subsequently locked or crossed by the 

displayed quotation of another market 

center shall be executed pursuant to the 

Brut Order Routing Process upon being 

so locked or crossed. This order type is 

available for Nasdaq-listed and 

Exchange-listed securities.

(b) Brut Order Routing Process

(1) The Brut Order Routing Process 

shall be available to Participants from 

7:30 a.m. to 6:30 p.m. Eastern Time, and 

shall route orders in accordance with 

parameters described in Rule 4903 for a 

particular order type.

(2) With the exception of Thru Brut 

and Directed Cross Orders that 

specifically direct which market center 

an order is to be routed, orders routed 

out of the Brut System to other market 

centers for potential execution are 

generally delivered to other market 

centers in price/size priority. If the 

routed order is smaller in size than the 

total combined displayed share 

amounts of accessible market centers at 

the best price level, the Brut System 

delivers the routed order to the available 

market centers in price/size priority. If 

the routed order is larger than the total 

combined displayed share amounts of 

accessible market centers at the best 

price level, the Brut System delivers 

over-sized orders to each displayed 

market center’s quote in proportion to 

the individual market’s center share of 

that total displayed share amount.

(3) In the event an order routed to 

another market center is not executed in 

its entirety, the remaining portion of the 

order shall be returned to the System 

and, if upon return the order is 

marketable against a System order then 

priced at the NBBO, it will be subjected 

to Brut Book Process prior to any further 

routing.

(4) An order that has been routed to 

another market shall have no time 

standing in the System execution queue 

relative to other orders in the System. A 

request from a Participant to cancel an 

order while it is outside the System shall 

be processed subject to the applicable 

rules of the market center to which the 

order has been routed.

4906. Clearance and Settlement 

All transactions executed in, or 

reported through, System shall be 

cleared and settled by and between the 

System Participant and Brut, through a 

registered clearing agency using a 

continuous net settlement system.

4906 Federal Register / Vol. 70, No. 19 / Monday, January 31, 2005 / Notices 

4Nasdaq owns Brut via Nasdaq’s 100% 

ownership interest in Toll Associates LLC. Toll 

Associates LLC, in turn, owns 99.78% Brut LLC and 

100% of Brut Inc., which owns the remaining 

0.22% of Brut LLC. Both Toll Associates LLC and 

Brut Inc. conduct no business other than serving as 

holding entities for their respective ownership 

interests in Brut LLC, the entity that operates the 

Brut ECN.

5Nasdaq currently operates Brut pursuant to a 

Temporary Conditional Exemption from Rule 19(b) 

of the Exchange Act issued by the Commission. See 

Exchange Act Release No. 50311 (September 3, 

2004), 69 FR 54818 (September 10, 2004).

4907. Obligation To Honor System 

Trades 

(a) If a Participant, or clearing 

member acting on a Participant’s behalf, 

is reported by the System, or shown by 

the activity reports generated by the 

System, as constituting a side of a 

System trade, such Participant, or 

clearing member acting on its behalf, 

shall honor such trade on the scheduled 

settlement date.

(b) Brut and/or Nasdaq shall have no 

liability if a Participant, or a clearing 

member acting on the Participant’s 

behalf, fails to satisfy the obligations in 

paragraph (a).

4908. Compliance With Rules and 

Registration Requirements 

(a) Failure by a Participant to comply 

with any of the rules or registration 

requirements applicable to the System 

identified herein shall subject such 

Participant to censure, fine, suspension 

or revocation of its registration a 

Participant or any other fitting penalty 

under the Rules of the Association.

(b) If a Participant fails to maintain a 

clearing relationship to honor its 

obligations under Rule 4906, it shall 

have its access to the System restricted 

until such time as a clearing 

arrangement is reestablished.

(c) The authority and procedures 

contained in paragraph (b) do not 

otherwise limit the Association’s 

authority, contained in other provisions 

of the Association’s Rules, to enforce its 

rules or impose any fitting sanction.

4909. Adjustment of Open Orders 

Except when a cash dividend or 

distribution is less than one cent ($0.01), 

on the ex-date of a corporate action, the 

System shall automatically adjust the 

price and/or size of Good-till-Cancelled 

Overnight orders resident in the System 

in response to issuer corporate actions 

related to a cash dividend as follows:

(a) Sell Orders—Sell orders shall not 

be adjusted by the System and must be 

modified, if desired, by the entering 

party,

(b) Buy Orders—Buy orders shall be 

reduced by the dividend amount. To the 

extent that the dividend includes a subpenny increment, the order will be 

displayed and processed as set forth in 

Rule 4904(b)(3)(B). Open buy and sell 

orders that are adjusted by the System 

pursuant to the above rules, and that 

thereafter continuously remain in the 

System, shall retain the time priority of 

their original entry.

4910. Anonymity 

(a) Transactions executed in the 

System shall be cleared and settled with 

Brut. The transaction reports produced 

by the System will indicate the details 

of the transactions, and shall not reveal 

contra party identities other than Brut.

(b) Brut shall reveal a member’s 

identity in the following circumstances:

(1) When the National Securities 

Clearing Corporation (‘‘NSCC’’) ceases 

to act for a member, or the member’s 

clearing firm, and NSCC determines not 

to guarantee the settlement of the 

member’s trades;

(2) For regulatory purposes or to 

comply with an order of an arbitrator or 

court;

4911. Clearly Erroneous Transactions 

All matters related to clearly 

erroneous transactions executed in the 

System shall be initiated and 

adjudicated pursuant to NASD Rule 

11890.

[4912. Minimum Quotation Increment 

The minimum quotation increment in 

the BRUT ECN System for quotations of 

$1.00 or above in Nasdaq-listed 

securities and in securities listed on a 

national securities exchange shall be 

$0.01. The minimum quotation 

increment in the BRUT ECN System for 

quotations below $1.00 in Nasdaq-listed 

securities and in securities listed on a 

national securities exchange shall be 

$0.0001.] 

4912. Normal Business Hours 

The Brut System operates from 6:30 

a.m. to 8 p.m. Eastern Time on each 

business day.

4913. Limitation of Liability 

The Association and its subsidiaries, 

as well as Nasdaq and Brut and their 

subsidiaries, shall not be liable for any 

losses, damages, or other claims arising 

out of the System or its use. Any losses, 

damages, or other claims, related to a 

failure of the System to deliver, display, 

transmit, execute, compare, submit for 

clearance and settlement, adjust, retain 

priority for, or otherwise correctly 

process an order, Quote/Order, message, 

or other data entered into, or created by, 

the System shall be absorbed by the 

member, or the member sponsoring the 

customer, that entered the order, Quote/

Order, message, or other data into the 

System.

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, as amended. 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 

Background 

On September 7, 2004, Nasdaq 

completed its purchase of Brut, LLC 

(‘‘Brut’’), a registered broker-dealer and 

member of the NASD, and operator of 

the Brut ECN (the ‘‘Brut System’’ or 

‘‘System’’).4 According to Nasdaq, as a 

member of the NASD, Brut remains 

subject to all NASD rules applicable to 

its activities as a broker-dealer, 

including those requiring its 

participation in market surveillance and 

audit trail programs conducted by 

Nasdaq and the NASD. Nasdaq states 

that, as an ECN, Brut participates in the 

Nasdaq Market Center system as an 

Order-Delivery ECN pursuant to the 

NASD Rule 4700 Series, and as an ITS 

Market Maker pursuant to the NASD 

Rule 5200 Series. Brut continues to act 

as a counter-party to all trades taking 

place in its system, for anonymity as 

well as clearance and settlement 

purposes. Brut also continues to provide 

outbound order routing services to other 

market centers for its subscribers. 

According to Nasdaq, to meet its limit 

order display obligations, Brut currently 

provides the Nasdaq Market Center its 

best single ‘‘top-of-file’’ priced orders in 

individual securities Brut has within the 

System.

Nasdaq states that, once purchased by 

Nasdaq, the Brut System became a 

‘‘facility’’ of a national securities 

association subject to the standards set 

forth in Sections 15A and 19(b)(1) of the 

Exchange Act.5 As such, Nasdaq is 

obligated to file with the Commission 

rules to govern the operation of the Brut 

System. This filing is intended to meet 

that obligation and includes a 

description of the Brut System, its 

Federal Register / Vol. 70, No. 19 / Monday, January 31, 2005 / Notices 4907

6See Securities Exchange Act Release No. 50956 

(January 3, 2005), 70 FR 1746 (January 10, 2005) 

(NASD–2004–190).

7This filing relocates the standards governing the 

Brut System’s acceptance and processing of subpenny orders from current NASD Rule 4912 to 

proposed NASD Rule 4904(b)(3)(B).

8For all order type examples, the term ‘‘market 

center’’ refers to any trading venue other than Brut, 

including the Nasdaq Market Center.

various features, order processing 

method, and a proposed set of Brut 

System rules.

The Brut System 

1. Order Display/Matching System 

The Brut System allows subscribers to 

enter market and priced limit orders to 

buy and sell Nasdaq and Exchangelisted securities. Such orders may be in 

round-lots, mixed-lots, or odd-lots of 

any size up to 1,000,099 shares up to a 

maximum single order dollar cap 

amount of $25,000,000, and may be 

entered on a principal, riskless 

principal, or agency basis. Nasdaq states 

that Brut acts only as an agent on behalf 

of its subscribers and engages in no 

proprietary trading save that necessary 

to correct system errors. Subscribers 

may enter multiple orders at single or 

multiple price levels. Subscribers have 

the option to have a portion of their 

order held in reserve and not displayed 

to the marketplace. Brut, in turn, makes 

available to System subscribers and 

market data vendors a data feed of all 

displayable orders on both the bid and 

offer side of the market (excluding 

reserve size share amounts) for all price 

levels at which shares are available 

within its System. According to Nasdaq, 

to the extent that Brut displays orders in 

the Nasdaq Market Center, those orders 

are displayed under the same terms and 

conditions generally applicable to 

Nasdaq Quoting Market Participants, 

including the rounding and aggregation 

procedures contained in NASD Rule 

4707. Although Brut currently provides 

only its best top-of-file prices to the 

Nasdaq Market Center, Nasdaq proposes 

that Brut be given the option to provide 

the Nasdaq Market Center additional 

orders at other price levels, up to and 

including Brut’s full depth-of-book, so 

that Nasdaq Market Center users may 

have the full benefit of Brut’s liquidity. 

Brut also currently accepts sub-penny 

amounts for orders priced under $1.00 

a share. Nasdaq states that, for orders 

priced $1.00 a share and above, Brut 

accept orders only in penny 

increments.6 Sub-penny order prices are 

viewable by System subscribers. If a 

sub-penny order is required to be 

displayed via the Nasdaq Market Center, 

the Brut system rounds such orders 

down (for bids) or up (for offers) to the 

nearest $.01 increment. Sub-penny 

orders executed via the Nasdaq Market 

Center, however, will be executed at 

their actual price, rather than the 

rounded price at which they are 

displayed.7

2. Access Standards 

According to Nasdaq, to obtain access 

to the Brut System as a system 

participant, a user must execute a Brut 

subscriber agreement and be a 

participant in, or have an access 

arrangement with a participant in, a 

Commission-registered clearing agency. 

In addition, the Brut subscriber must 

also agree to: 

a. Comply with all applicable rules of 

the NASD and the Commission; and 

b. Accept all Brut System trades 

identified by the System as being 

effected by the subscriber. 

Broker-dealers may also access 

System orders through the Nasdaq 

Market Center, regardless of their status 

as a system participant as described 

above, provided they have met the 

conditions for access to the Nasdaq 

Market Center. 

3. Order Types 

The Brut System makes available to 

subscribers several order types. These 

order types are described below. 

Limit Order—an order to buy or sell 

a stock at a specified price or better. 

This order type is available for Nasdaqlisted and Exchange-listed securities. 

Market Order—an un-priced order to 

buy or sell a stock at the market’s 

current best price. A market order may 

have a limit price beyond which the 

order shall not be executed. This order 

type is available for Nasdaq-listed and 

Exchange-listed securities. 

Agency Away Order—an agency order 

that is designated by the entering party 

as eligible for execution at a price 

inferior to the then-current national best 

bid/offer. This order type is available for 

Nasdaq-listed securities.

Principal Inside Only Order—a 

principal order that is designated by the 

party as only eligible for execution at a 

price equal or better than the thencurrent national best bid/offer. This 

order type is available for Nasdaq-listed 

and Exchange-listed securities. 

Brut Cross Order—an order that is 

displayed in Brut and executable against 

marketable contra-side orders in any 

market center, including the Brut 

System, at the time of receipt. If equallypriced executable orders are available 

both in Brut and another market center, 

the order will first execute against Brut 

System orders. Once a Brut Cross Order 

is routed out in whole or in part to 

another market center, any remaining 

unexecuted or returned portion of the 

order will be posted in the Brut System 

and will no longer be routed out for 

potential execution, unless the order is 

designated as an Aggressive Cross Order 

or Super Aggressive Cross Order. This 

order type is available for Nasdaq-listed 

and Exchange-listed securities. 

Example:

The market is 10.00 bid—10.01 offer. 

Brut receives a Brut Cross sell order, 

priced at 10.00. 

Brut will route this order out to any 

crossing market center for potential 

execution.8 If the routed order is only 

partially executed, the outstanding 

shares remaining will be posted in the 

Brut book on the offer at 10.00. Once 

posted, the order will no longer be 

routed out for execution.

Directed Cross Order—an order that 

if, after entry into the Brut System and 

after it has exhausted available liquidity 

in the Brut System is routed by Brut to 

that specific market center for potential 

execution. This order type is available 

for Nasdaq-listed and Exchange-listed 

securities. 

Example:

The market is 10.00 bid—10.01 offer. 

Brut receives a Directed Cross sell 

order, priced at 10.00 and directed to 

Market Center A. 

After checking the Brut system for 

available liquidity, the system will route 

this order to Market Center A for 

potential execution. If the routed order 

is only partially executed, the 

outstanding shares are returned to the 

entering party. 

Aggressive Cross Order—a Brut Cross 

Order that if, after being posted in the 

Brut System and after it has exhausted 

available liquidity in the Brut System, 

has its price crossed by the displayed 

quote of another market center is routed 

by Brut to that market center for 

potential execution. This order type is 

available for Nasdaq-listed and 

Exchange-listed securities. 

Example:

The market is 10.00 bid—10.01 offer. 

Brut receives an Aggressive Cross sell 

order, priced at 10.01. 

Brut will first post this order on the 

offer at 10.01. Soon thereafter, another 

market center posts a bid price at 10.02. 

Since this 10.02 price is marketable 

against the Aggressive Cross Order’s 

limit price of 10.01, the order will be 

routed out by Brut to the other market 

center for execution. If the liquidity 

priced at 10.02 is depleted, and the 

Aggressive Cross Order still has 

outstanding shares remaining, the order 

4908 Federal Register / Vol. 70, No. 19 / Monday, January 31, 2005 / Notices 

9Currently, the Brut System processes orders 

designated as GTC and Day in the exact same 

manner. In the near future, Nasdaq states that Brut 

will modify the names of its order types to 

eliminate this duplication.

will be re-posted in the Brut book at its 

price of 10.01. If the price of returned 

shares is again crossed, the shares will 

again be routed for potential execution. 

Super Aggressive Cross Order—a Brut 

Cross Order that, if after being posted in 

the Brut System, has its price locked or 

crossed by the displayed quote of 

another market center, is routed by Brut 

for potential execution. This order type 

is available for Nasdaq-listed and 

Exchange-listed securities. 

Example:

The market is 10.00 bid—10.01 offer 

Brut receives a Super Aggressive 

Cross sell order, priced at 10.01. 

Brut will first post this order on the 

offer at 10.01. Soon thereafter, another 

market center posts a bid price at 10.01. 

Since this 10.01 price is equal to the 

Super Aggressive Cross Order’s limit 

price of 10.01, the order will be routed 

out by Brut to the other market center 

for execution. If the liquidity priced at 

10.01 is depleted, and the Super 

Aggressive Cross Order still has shares 

remaining, the order will be re-posted in 

the Brut book at its price of 10.01. This 

same process would be followed if the 

other market center had posted a price 

that crossed the Super Aggressive Cross 

Order. If the price of returned shares is 

again locked or crossed, the shares will 

again be routed for potential execution. 

Thru Brut Order—an order that is 

directed to a market center other than 

Brut for execution. This order type is 

available for Nasdaq-listed and 

Exchange-listed securities.

To Brut Order—an order eligible for 

execution upon receipt solely against 

Brut System orders, and displayed in 

the System to the extent the order 

cannot be executed upon receipt. This 

order type is available for Nasdaq-listed 

and Exchange-listed securities. 

Hunter Order—an order that is not 

displayed in the System, but will 

execute against available trading interest 

residing in the Brut System or another 

market center. This order type is 

available for Nasdaq-listed and 

Exchange-listed securities. 

Example:

The market is 10.00 bid—10.02 offer. 

Brut receives a Hunter Order to buy, 

priced at 10.01. 

Since there is no liquidity at the 10.01 

price, Brut will hold the order 

undisplayed until marketable trading 

interest is available. If thereafter an offer 

is posted at 10.01 either in Brut or in 

another market center Brut will execute 

or route the Hunter Order to access that 

liquidity. Any unexecuted shares will 

remain/return to the book and wait 

undisplayed until another order is 

marketable against the Hunter Order or 

the Hunter Order times out. If the 

returned shares of the Hunter Order 

again become marketable, the shares 

will again be routed for potential 

execution. 

Pegged Order—a To Brut limit order 

that, after entry, has its price 

automatically adjusted by the System in 

response to changes in the Nasdaq 

Market Center (for Nasdaq-listed 

securities) or national best bid or offer 

(for Exchange-listed securities), as 

appropriate. Pegged Orders can specify 

that its price will either equal the inside 

quote on the same side of the market or 

improves the inside quote by an amount 

set by the entering party (a ‘‘Regular 

Pegged Order’’), or a price that is offset 

from the inside quote on the contra side 

of the market by an amount (the ‘‘Offset 

Amount’’) set by the entering party (e.g., 

$0.01 less than the inside offer or $0.02 

more than the inside bid) (a ‘‘Reverse 

Pegged Order’’). The Pegged Order only 

moves towards, or up to, the best price 

as appropriate. The entering party may 

voluntarily specify a limit price at 

which pegging price changes of the 

order will stop and the order will be 

permanently converted into an unpegged limit order at the limit price. 

This order type is available for Nasdaqlisted and Exchange-listed securities. 

Pegged orders may not be combined 

with other order processing 

designations. 

Example:

The market is 10.00 bid—10.01 offer. 

Brut receives a Regular Pegged buy 

order, with a peg limit of 10.05. 

Brut will post the order at 10.00. If the 

inside bid moves to 10.01, Brut will 

move the Pegged Order also to the 10.01 

bid price. This process will continue 

until the order is executed or its price 

reaches the peg limit of 10.05. 

Discretionary Order—an order that 

has both a displayed price, as well as a 

non-displayed discretionary price range 

and size (which shall be equal to or less 

than the order’s reserve size) in which 

the entering party, if necessary, is also 

willing to buy or sell. This order type 

is available for Nasdaq-listed and 

Exchange-listed securities. 

Example:

The market is 10.00 bid—10.50 offer. 

Brut receives a Discretionary buy 

order, with a limit price of 10.00 and a 

display quantity of 200 shares, a 

discretion price of 10.25 and a 

discretion quantity of 1,000 shares. 

Brut posts the order at 10.00. 

Thereafter, another market participant 

posts an offer for 1,000 shares at 10.20. 

Since this is within the Discretionary 

Order’s price range, Brut will route the 

full discretion quantity (i.e., 1,000 

shares) for potential execution while the 

displayed portion remains in the Brut 

book. 

Post Only Order—a To Brut Limit 

Order that, if marketable upon receipt 

against an order then-displayed in the 

System, is rejected and returned to the 

entering party. If the order is marketable 

against a quote displayed outside of 

Brut, the price of the order is adjusted 

to a price $0.01 inferior to the best bid 

(or offer, as appropriate) then displayed 

in the Nasdaq Market Center, and then 

displayed in Brut. This order type is 

available for Nasdaq-listed and 

Exchange-listed securities. 

Example:

The market is at 10.00 bid—10.01 

offer. Brut is at the 10.00 bid. 

Brut receives Post-Only sell order, 

priced at 10.00. 

Normally, this order would execute 

against the Brut 10.00 bid, but since the 

order is post-only, the order is rejected 

back to the entering party. Had the 10.00 

bid not been in Brut but another venue, 

Brut would not reject the order but 

instead adjust the order’s price and post 

it in the Brut System. 

4. Time in Force Designations 

Orders entered into the Brut System 

may be designated by the entering party 

to remain in force and available for 

display and/or potential execution for 

varying periods of time. Unless 

cancelled earlier, once these time 

periods expire, the order (or the 

unexecuted portion thereof) is returned 

to the entering party. These ‘‘time in 

force’’ designations are described below: 

Immediate or Cancel (IOC)—limit 

orders with this designation are 

returned to the sender if not 

immediately executed. If partially 

executed, un-executed remainders of 

these orders are returned immediately to 

the entering party. 

Good-till-Canceled (GTC)—orders 

with this designation (or the unexecuted 

portions of such orders) are held by the 

Brut System and remain available for 

potential display/execution until 4 p.m. 

Eastern Time on the day they are 

submitted unless cancelled before then 

by the entering party.9

Day (DAY)—orders with this 

designation (or the unexecuted portions 

of such orders) are held by the Brut 

System and remain available for 

potential display/execution until 4 p.m. 

Eastern Time on the day they are 

submitted unless cancelled before then 

by the entering party. This is the default 

Federal Register / Vol. 70, No. 19 / Monday, January 31, 2005 / Notices 4909

10Nasdaq states that Brut routes to other market 

centers trading Nasdaq securities as well as to 

National Securities Exchanges, including the 

American and New York stock exchanges and other 

regional stock exchanges using the Intermarket 

Trading System (‘‘ITS’’). Access to the New York 

Stock Exchange’s DOT system is currently provided 

to Brut through an agreement with NYSE-member 

SunGuard Global Execution Services. As part of this 

access arrangement, Brut allows subscribers to send 

orders for immediate pass-through to SunGuard and 

then to DOT, including market on open/close and 

limit on open/close orders and orders with the fillor-kill and all-or-none share amount designations.

11According to Nasdaq, use of the Brut router is 

voluntary. Users can select, by the type of order 

entered, if they want the Brut System to route their 

order to another market center for potential 

execution.

time in force where none is provided by 

the entering party. 

Good-till-Canceled-Overnight 

(GTCO)—orders with this designation 

(or the unexecuted portions of such 

orders) are treated like GTC orders, but 

are held by the Brut System overnight 

and remain available for potential 

display/execution until 4 p.m. of a date 

provided by the entering party, or 

indefinitely, unless and until cancelled 

by the entering party. GTCO orders are 

not eligible for execution between 4 

p.m. and 8 p.m. Eastern Time.

End-of-Day (GTX)—orders with this 

designation (or the unexecuted portions 

of such orders) are held by the Brut 

System and remain available for 

potential display/execution until 8 p.m. 

Eastern Time on the day they are 

submitted unless cancelled before then 

by the entering party. 

Good-till-Time (GTT)—orders with 

this designation (or the unexecuted 

portions of such orders) are held by the 

Brut System and remain available for 

potential display/execution until the 

time designated by the entering party. 

This time may be a relative time (e.g., 

30 minutes after receipt) or an actual 

time (e.g., 2 p.m.). 

Effective Time (EFT)—orders with 

this designation (or the unexecuted 

portions of such orders) are held by the 

Brut System and only become available 

for potential display/execution at an 

actual time during the trading day 

selected by entering party (e.g., 3 p.m.). 

Nasdaq states that the Brut System 

normally operates between the hours of 

6:30 a.m. and 8 p.m. Eastern Time. 

Orders with the above time in force 

designations may be entered into the 

Brut System, or previously entered 

orders cancelled, starting at 6:30 a.m. 

Eastern Time. With the exception of the 

GTC and DAY designations, which may 

only be entered until 4 p.m. Eastern 

Time, all time in force designations may 

be entered into Brut until 8 p.m. Eastern 

Time. Though the entry of various time 

in force designations is permitted 

throughout the System’s hours of 

operation, the Brut System will not 

execute an order in contravention of the 

time in force period selected by the 

entering party, and instead will hold all 

such entries until they can be processed 

in conformity with the time in force 

parameters selected upon entry. 

5. Routing 

The Brut System provides the 

capability to route orders to other 

available market centers between the 

hours of 7:30 a.m. and 6:30 p.m. Eastern 

Time.10 The entering party designates, 

through the order type it selects (e.g., 

Thru Brut, Brut Cross, Aggressive Cross, 

Super Aggressive Cross, Directed Cross, 

or Hunter), whether the System should 

first seek to execute the order against 

contra-side marketable orders in the 

System prior to routing. Nasdaq states 

that in no event, however, does the 

router give an order to a market center 

displaying an inferior-priced order until 

the router has attempted to access 

better-priced displayed orders in that or 

other market centers.11

According to Nasdaq, with the 

exception of Thru Brut and Directed 

Cross Orders that specifically direct 

which market center an order is to be 

routed, orders routed out of the Brut 

System to other market centers for 

potential execution are generally 

delivered to other market centers in 

price/size priority. If the Nasdaq Market 

Center has displayed shares at the best 

price level, the System will first deliver 

to the displayed Nasdaq Market Center 

quote/order before routing to other 

market centers. If the routed order is 

smaller in size than the total combined 

displayed share amounts of accessible 

market centers at the best price level, 

the Brut System delivers the routed 

order to the available market centers in 

price/size priority. If the routed order is 

larger than the total combined displayed 

share amounts of accessible market 

centers at the best price level, the Brut 

System delivers over-sized orders to 

each displayed market center’s quote in 

proportion to the individual market’s 

center share of that total displayed share 

amount. For example, if Market Center 

A is showing 60% of the total amount 

of displayed shares across all markets at 

the best price level, and Brut has a 

routable order greater in size than the 

total displayed share amount across all 

markets, Brut will send an oversized 

order to Market Center A representing 

60% of the total amount of shares Brut 

is attempting to execute via the routed 

order. The other market centers at that 

price will likewise receive oversized 

orders in proportion to their displayed 

amounts. 

Nasdaq states that orders routed by 

Brut to another market do not retain 

time priority with respect to other 

orders in Brut’s System and Brut 

continues to execute other orders while 

the routed order is away at another 

market. Once routed by Brut, an order 

becomes subject to the rules and 

procedures of the destination market 

including, but not limited to, short-sale 

regulation and order cancellation. 

6. Execution Algorithm 

Nasdaq states that the Brut System 

has an execution algorithm of price/time 

priority. For each order, among equallypriced trading interest, the System 

executes against available contra-side 

displayed share amounts in full, in 

price/time priority, before then moving 

to reserve shares which are likewise 

executed in price/time priority. After 

display and reserve size are exhausted 

at a particular price level, the Brut 

System will then access, if available, 

share amounts of Discretionary Orders 

within the Discretionary Order’s 

discretionary price range at that same 

price level, followed by executable 

Hunter Orders before moving on to the 

next price level. 

For example, assume the following 

orders in particular security at the best 

price level in System:

2 p.m.—Order #1 BUY 100 at 20.00 (100 

displayed, 0 reserved). 

2:02 p.m.—Order #2 BUY 2,500 at 20.00 

(1,500 displayed, 1,000 reserved). 

2:03 p.m.—Order #3 BUY 1,000 at 20.00 

(discretion to 20.07) (500 displayed, 

500 reserved). 

2:04 p.m.—Order #4 BUY 400 at 20.00 

(Hunter Order) (0 displayed, 400 

reserved). 

2:05 p.m.—Order #5 BUY 500 at 20.00 

(200 displayed, 300 reserved).

Thereafter, the system receives a 

10,000 share To Brut limit order to sell 

at 19.99. 

Matching 

In the above situation, the System will 

match Order #1 for 100 shares, then 

match the 1,500 share displayed portion 

of Order #2, followed by the 500 share 

displayed portion of Order #3, and 

finally the 200 share displayed portion 

of Order #5 for a total of 2,300 shares. 

Since 7,700 shares are still needed to fill 

the market sell order in full, the system 

will then match the 1,000 share reserve 

amount of Order #2, and then 500 share 

displayed portion of Order #3, followed 

next by the 300 share reserve amount of 

Order #5.

4910 Federal Register / Vol. 70, No. 19 / Monday, January 31, 2005 / Notices 

12This decrementation process differs from that 

of the Nasdaq Market Center, which decrements 

shares directly from the matched portion of quotes/

orders and then refreshes those matched portions 

from any remaining reserve share amounts. See 

NASD Rule 4710.

13See NASD Rule 11890(a)–(b) and proposed 

NASD Rule 4911. Telephone conversation between 

Thomas Moran, Associate General Counsel, Nasdaq, 

and David Liu, Attorney, Division of Market 

Regulation, Commission, on January 25, 2005.

14See NASD Rule 4705(h).

15See proposed NASD Rule 4909.

16See proposed NASD Rule 4907.

17See proposed NASD Rules 4908.

18 15 U.S.C. 78o–3.

19 15 U.S.C. 78o–3(b)(6).

Decrementation 

Having determined which orders are 

eligible for execution via the matching 

process, the Brut System then proceeds 

to decrement (reduce) share amounts 

from those orders. These share amounts 

are decremented from the matched 

orders starting with reserve size of the 

orders, if any.12 (Order #1—no reserve, 

100 shares display portion decremented 

in full; Order #2—1,000 shares reserve 

decremented followed by 500 shares of 

displayed 1,500 shares, leaving 1,000 

shares displayed; Order # 3—500 shares 

(discretionary amount treated as reserve 

= 500 executed, 500 share displayed 

portion remains); Order #5—300 shares 

reserve decremented by 200 shares, 

leaving 300 shares). Finally, the System 

will execute the 400 share Hunter Order 

#4. Having exhausted all trading interest 

at the best price level in the system, the 

order would then move on to seek 

additional shares at the next price level 

in the System.

7. Clearly Erroneous Trade Procedures 

According to Nasdaq, Brut adjudicates 

clearly erroneous trade disputes for 

executions taking place exclusively 

within its System. While generally 

reviewing clearly erroneous trade claims 

in response to subscriber requests, Brut 

reserves the right to take action on its 

own initiative if it determines that a 

trade is clearly erroneous and needs to 

be modified or cancelled. Nasdaq states 

that, in the normal course, Brut limits 

its clearly erroneous review to only 

those Brut System trades that execute at 

prices that are a certain percentage or 

raw dollar price away from the National 

Best Bid/Offer at the time of execution. 

These parameters, which vary based on 

the execution price of the asserted 

clearly erroneous trade, are summarized 

below:

Execution price Range away 

from the NBBO 

$.01–$.99 ........................... 10%. 

$1–$19.99 .......................... 5%. 

$20 and above ................... 1 Point. 

According to Nasdaq, if a Brut-only 

trade satisfies the above, Brut considers 

the trade potentially erroneous and 

conducts a facts and circumstances 

analysis to determine what, if any, 

action should be taken. In addition to 

the individual facts and circumstances 

of the trade, Brut also considers other 

factors in evaluating clearly erroneous 

trade claims including: If the trade 

created a new high or low in the stock; 

if the trade consisted of an excessive 

number of shares; if the trade took place 

in close proximity to news released on 

the security; if the trade took place 

during a locked or crossed market or 

during a period of extreme volatility; if 

the trade took place before or after 

normal market hours; if the trade took 

place in close proximity to halt and 

subsequent resumed trading in the 

security; how soon after the trade the 

subscriber notified Brut of the 

potentially erroneous trade; and if the 

trade or trades at issue involves a 

security whose issuer was recently 

reorganized. 

Nasdaq states that, while Brut follows 

the above procedures today, when Brut 

operates pursuant to rules approved by 

the Commission, Brut will automatically 

cease operating an independent clearly 

erroneous review process and instead 

trades taking place in its System will 

immediately become subject to NASD 

Rule 11890 that already governs trades 

in the Nasdaq Market Center and grants 

authority to designated Nasdaq officers 

‘‘to review any transaction arising out of 

the use or operation of any execution or 

communication System owned or 

operated by Nasdaq and approved by 

the Commission, * * *’’ 13

8. Other System Features and Standards 

As part of the proposed set of rules 

governing its Brut Facility, Nasdaq is 

also proposing to codify current Brut 

system functions and, where 

appropriate, establish similar standards 

regarding operational issues between 

the Nasdaq Market Center and Brut. For 

example, Nasdaq is proposing that the 

Brut System have a limitation of 

liability rule substantially similar to that 

already in place for the Nasdaq Market 

Center.14 Nasdaq is also proposing that 

the Brut system adjust open orders in its 

system in a manner substantially similar 

to the way they are adjusted in the 

Nasdaq Market Center,15 as well 

codifying standards regarding the 

obligation of users to honor system 

trades,16 and the removal of users for 

failing to maintain a required clearing 

relationship.17

9. Brut/Nasdaq Integration Plan 

Though now sharing common 

ownership, Brut and Nasdaq currently 

operate separate order display and 

execution systems. With respect to the 

processing of quotes/orders, Nasdaq 

states that the interaction between the 

entities is limited to Brut participating 

in the Nasdaq Market Center as a 

Nasdaq Order-Delivery ECN pursuant to 

the NASD Rule 4700 Series and as an 

ITS Market Maker pursuant to NASD 

Rule 5200 Series. In these capacities 

Brut provides the Nasdaq Market Center 

its best single ‘‘top-of-file’’ price orders 

in individual securities Brut has within 

the System. 

Nasdaq states that its goal is to 

increase the scope and quality of the 

interaction between its two systems to 

ensure that the users of either the 

Nasdaq Market Center or Brut have 

access to the best-priced orders in both 

systems. According to Nasdaq, as 

currently contemplated and proposed in 

this filing, Nasdaq’s first step in 

integrating Brut’s System and its orders 

more closely into the Nasdaq Market 

Center will be to have Brut provide its 

full depth of its order book to the 

Nasdaq Market Center. In addition, Brut 

will connect to the Nasdaq Market 

Center using a dedicated direct 

voluntary linkage that Nasdaq makes 

available to any Nasdaq Order-Delivery 

ECN that wants it. 

Nasdaq states that its long-term vision 

is to have Brut and Nasdaq unified in 

a single technology platform that will 

further enhance execution quality for 

system users. Nasdaq currently 

contemplates using the Brut brokerdealer in a manner ancillary to the 

market execution system as an 

outbound access broker dealer to other 

market centers. 

2. Statutory Basis 

Nasdaq believes that the proposed 

rule change, as amended, is consistent 

with section 15A of the Act,18 in 

general, and furthers the objectives of 

section 15A(b)(6),19 in particular, in that 

it is designed to prevent fraudulent and 

manipulative acts and practices, to 

promote just and equitable principles of 

trade, 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.

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

Nasdaq does not believe that the 

proposed rule change, as amended, will 

Federal Register / Vol. 70, No. 19 / Monday, January 31, 2005 / Notices 4911

20 17 CFR 200.30–3(a)(12).

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

2 17 CFR 240.19b–4.

3 ‘‘Standard & Poor’s’’, ‘‘S&P’’, ‘‘S&P 500’’, 

‘‘Standard & Poor’s 500’’, and ‘‘500’’ are trademarks 

of The McGraw-Hill Companies, Inc. Neither 

Standard & Poor’s nor its index compilation agent 

makes any recommendation concerning the 

advisability of investing in options on SPDRs.

4Exchange Rule 1002, Exercise Limits, refers to 

exercise limits that correspond to aggregate long 

positions as described in Exchange Rule 1001. The 

position limit established in a given option under 

Exchange Rule 1001 is also the exercise limit for 

such option.

5See Exchange Rule 1001, Commentary .05(a).

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 

No written comments were either 

solicited or 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 Nasdaq consents, the 

Commission will: 

(A) By order approve such proposed 

rule change, as amended; 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. 

Comments may be submitted by any of 

the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NASD–2004–173 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

450 Fifth Street, NW., Washington, DC 

20549–0609. 

All submissions should refer to File 

Number SR–NASD–2004–173. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/

rules/sro.shtml). 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 also will be 

available for inspection and copying at 

the principal office of Nasdaq. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR-NASD–2004–173 and 

should be submitted on or before 

February 22, 2005.

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.20

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. 05–1697 Filed 1–28–05; 8:45 am] 

BILLING CODE 8010–01–P

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–51071; File No. SR-Phlx2005–05] 

Self-Regulatory Organizations; 

Philadelphia Stock Exchange, Inc.; 

Notice of Filing and Order Granting 

Accelerated Approval to a Proposed 

Rule Change to Increase Position 

Limits and Exercise Limits for Options 

on Standard and Poor’s Depositary 

Receipts (SPDRs) 

January 21, 2005. 

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 January 

19, 2005, the Philadelphia Stock 

Exchange, Inc., (‘‘Phlx’’ or ‘‘Exchange’’) 

filed with the Securities and Exchange 

Commission (‘‘Commission’’) the 

proposed rule change as described in 

Items I and II below, which Items have 

been prepared by the Exchange. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. In 

addition, the Commission is granting 

accelerated approval of the proposed 

rule change.

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange proposes to amend 

Exchange Rule 1001, Position Limits, to 

increase position limits and exercise 

limits for options on the Standard and 

Poor’s Depositary Receipts (‘‘SPDRs’’).3

The text of the proposed rule change is 

available on the Phlx’s Web site (http:/

/www.phlx.com), at the Phlx’s Office of 

the Secretary, and at the Commission’s 

Public Reference Room.

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

Exchange included statements 

concerning the purpose of, and basis for, 

the proposed rule change and discussed 

any comments it had received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in item III below. The 

Phlx 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 

The Exchange proposes to amend 

Exchange Rule 1001 to increase the 

position limits and exercise limits 4

applicable to options on SPDRs from 

75,000 to 300,000 contracts on the same 

side of the market. The Exchange began 

trading options on SPDRs on the 

Exchange’s electronic trading platform 

for options, Phlx XL, on January 10, 

2005. Given the expected institutional 

demand for options on SPDRs, the 

Exchange believes that the current 

equity position limit of 75,000 

contracts 5 is too low and could be a 

deterrent to the successful trading of the 

product. Options on SPDRs are 1/10th 

the size of options on the Standard and 

Poor’s 500 Index (‘‘SPX’’). Thus, a 

position limit of 75,000 contracts in 

options on SPDRs is equivalent to a