Federal Register / Vol. 70, No. 214 / Monday, November 7, 2005 / Notices 67513 

12The Commission has considered the proposed 

rule’s impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 

13 15 U.S.C. 78o–3(b)(6). 

14 15 U.S.C. 78o–3(b)(5). 

15See Securities Exchange Act Release No. 51005 

(January 10, 2005), 70 FR 2917 (January 18, 2005) 

(approving, among other things, the waiver of entry 

fees, application fees, and additional shares listing 

fees for securities that are originally listed on a 

national securities exchange but later dually listed 

on Nasdaq). 

16 15 U.S.C. 78s(b)(2). 

17 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

4520(d) to clarify that an issuer of a 

Nasdaq-listed security that is subject to 

a record-keeping fee must submit the 

appropriate form to Nasdaq within ten 

days after a change that requires 

payment of a record-keeping fee. Nasdaq 

has represented that this proposed 

change reflects the current practice of 

Nasdaq issuers. 

III. Discussion and Commission 

Findings 

After careful review of the proposal, 

the Commission finds that the proposed 

rule change, as amended, is consistent 

with the requirements of the Act and the 

rules and regulations applicable to a 

national securities association.12

The Commission believes that the 

proposed notice requirement for a 

substitution listing event is consistent 

with Section 15A(b)(6) of the Act,13

which requires that the rules of a 

national securities association be 

designed to foster cooperation and 

coordination with persons engaged in 

regulating, clearing, settling, processing 

information with respect to, and 

facilitating transactions in securities; to 

remove impediments to and perfect the 

mechanism of a free and open market 

and a national market system; and, in 

general, to protect investors and the 

public interest. Nasdaq is requiring all 

of its issuers to provide notice of 

substitution listing events for the 

purposes of maintaining up-to-date 

corporate information and 

disseminating accurate information 

about its listed securities. This 

requirement should better enable 

Nasdaq to perform its essential 

monitoring functions and enhance the 

flow of accurate market data. 

In addition, the Commission believes 

that the fee for a substitution listing 

event is consistent with Section 

15A(b)(5) of the Act,14 which requires 

that the rules of a national securities 

association provide for the equitable 

allocation of reasonable dues, fees, and 

other charges among members and 

issuers and other persons using any 

facility or system which the association 

operates or controls. The fee is designed 

to offset the costs associated with 

collecting and verifying information 

related to substitution listing events and 

for implementing requisite systems 

changes. The Commission believes that 

it is reasonable for a listing market to 

assess fees on its issuers that will enable 

the listing market to make necessary 

systems changes and to carry out its 

regulatory responsibilities. With respect 

to the fee waiver for issuers of Nasdaq 

non-designated securities, the 

Commission notes that it has previously 

approved a waiver of fees based on a 

security’s dually listed status.15 Nasdaq 

has represented that its costs for 

processing substitution listing events of 

Nasdaq non-designated securities are 

significantly reduced on account of 

Nasdaq’s reliance on electronic 

consolidated reports received from the 

listing market for such securities. On 

this basis, the Commission believes that 

the proposed fee for Nasdaq designated 

securities and the proposed fee waiver 

for substitution listing event fee for 

Nasdaq non-designated securities are a 

reasonable allocation of fees among 

issuers. 

Finally, the Commission believes that 

codifying a requirement for an issuer to 

notify Nasdaq of the payment of a 

corporate record-keeping fee is 

reasonable and consistent with the Act. 

IV. Conclusion 

It is therefore ordered, pursuant to 

Section 19(b)(2) of the Act,16 that the 

proposed rule change (SR–NASD–2004–

162), as amended, is approved. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.17

Jonathan G. Katz, 

Secretary. 

[FR Doc. 05–22181 Filed 11–4–05; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–52723; File No. SR–NASD–

2005–128] 

Self-Regulatory Organizations; 

National Association of Securities 

Dealers, Inc.; Notice of Filing of 

Proposed Rule Change To Establish 

Rules Governing the Operation of the 

INET System 

November 2, 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 

1, 2005, 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. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of the Substance 

of the Proposed Rule Change 

Nasdaq intends to purchase INET 

ATS, Inc. (‘‘INET’’), operator of the 

INET ECN (the ‘‘INET System’’ or 

‘‘System’’). Nasdaq proposes to establish 

rules governing the operation of the 

INET System and fees for System 

services. Below is the text of the 

proposed rule change. Proposed new 

language is italicized. 

* * * * * 

4950. INET SYSTEM 

4951. Definitions 

Unless stated otherwise, the terms 

described below shall have the following 

meaning: 

(a) The terms ‘‘The INET ECN 

System,’’ ‘‘INET System,’’ or ‘‘System,’’

shall mean the automated system 

owned and operated by INET, 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 for dissemination to 

the public and the industry, 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. 

(b) The term ‘‘System Securities’’ shall 

mean Nasdaq Market Center eligible 

securities as that term is defined in 

NASD Rule 4701(s) and ITS Securities 

securities as defined in NASD Rule 

5210(c). 

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

an entity that fulfills the obligations 

contained in NASD Rule 4952 regarding 

participation in the System. 

(d) 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. 

67514 Federal Register / Vol. 70, No. 214 / Monday, November 7, 2005 / Notices 

(e) The term ‘‘System Book Feed’’

shall mean a data feed for System 

eligible securities. 

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

shall mean one hundred (100) shares. 

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

an order that is for more than a normal 

unit of trading but not a multiple 

thereof. 

(h) The term ‘‘odd-lot’’ shall mean an 

order that is for less than a normal unit 

of trading. 

(i) The term ‘‘Immediate or Cancel’’ or 

‘‘IOC’’ 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. 

(j) The term ‘‘Market Day’’ or ‘‘Limit 

Day’’ shall mean, for orders so 

designated, that if after entry into the 

System, the order is not fully executed, 

the order (or the unexecuted portion 

thereof) shall remain available for 

potential display/execution until 4:00 

p.m. Eastern Time on the day it was 

submitted unless cancelled before then 

by the entering party. 

(k) The term ‘‘Extended 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 until 8:00 p.m. Eastern 

Time. 

(l) The term ‘‘Expire Time’’ shall 

mean, for orders so designated, the time 

until which the System will hold the 

order for potential execution. 

(m) The term ‘‘Limit Order’’ shall 

mean an order to buy or sell a stock at 

a specified price or better. 

(n) The term ‘‘Market Order’’ shall 

mean 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. 

(o) The term ‘‘Discretionary Order’’

shall mean an order that has both a 

displayed price and size, as well as a 

non-displayed discretionary price range, 

at which the entering party, if necessary, 

is also willing to buy or sell. The nondisplayed trading interest is not entered 

into the System book but is converted to 

an IOC order equal in size to the 

displayed size and priced at the most 

aggressive price in the discretionary 

price range when displayed shares 

become available or an execution takes 

place at any price within the 

discretionary price range. The 

generation of this IOC order is 

accompanied by the cancellation of the 

displayed portion of the Discretionary 

Order. If more than one Discretionary 

Order is available for conversion to an 

IOC order, the system will convert all 

such orders at the same time and 

priority will be given to the first IOC 

order(s) that reaches the trading interest 

on the other side of the market. If an 

IOC order is not executed in full, the 

unexecuted portion of the order is 

automatically re-posted and displayed 

in the System book with a new time 

stamp, its original displayed price, and 

its non-displayed discretionary price 

range. 

(p) The term ‘‘Reserve Order’’ shall 

mean a limit order that has both a 

round-lot displayed size as well an 

additional non-displayed share amount. 

Both the displayed and non-displayed 

portions of the Reserve Order are 

available for potential execution against 

incoming orders. If the round-lot 

displayed portion of a Reserve Order is 

reduced to less than 100 shares, the 

System will replenish the display 

portion from reserve up to at least a 

single round-lot amount. A new 

timestamp is created for the replenished 

portion of the order each time it is 

replenished from reserve, while the 

reserve portion retains the time-stamp of 

its original entry. 

(q) The term ‘‘Pegged Order’’ shall 

mean, for orders so designated, an order 

that, after entry, has its price 

automatically adjusted by the System in 

response to changes in the national best 

bid or offer (‘‘NBBO’’), as appropriate. A 

Pegged Order can specify that its price 

will equal the inside quote on the same 

side of the NBBO (‘‘Primary Peg’’) or the 

opposite side of the NBBO (‘‘Market 

Peg’’). In addition, Pegged Orders may 

also establish their pricing relative to 

the NBBO by the selection of one or 

more $0.01 offset amounts that will 

adjust the price of the order by the offset 

amount selected. A new timestamp is 

created for the order each time it is 

automatically adjusted. 

(r) The term ‘‘Displayed Order’’ shall 

mean, for limit orders so designated, an 

order that is displayed in the System, in 

whole or in part, and is available for 

potential execution against all incoming 

orders until executed in full or 

cancelled. 

(s) The term ‘‘Non-Displayed Order’’

shall mean, for limit orders so 

designated, an order that is not 

displayed in the System, but 

nevertheless remains available for 

potential execution against all incoming 

orders until executed in full or 

cancelled. 

(t) The term ‘‘Minimum Quantity 

Order’’ shall mean, for orders so 

designated, an order that requires that 

a specified minimum quantity of shares 

be obtained, or the order is cancelled. 

Minimum Quantity Orders may only be 

entered with a time-in-force designation 

of Immediate or Cancel. 

4952. System Participant Registration 

(a) Participation in INET 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 INET new account 

policy and procedure requirements; 

(3) membership in, or an 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 the 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 Commission. 

(6) In addition to the above, on or 

before 60 days after the System becomes 

a facility of Nasdaq, all System 

Participants shall be members of the 

Association. 

4953. Order Entry Parameters 

(a) INET System Orders 

(1) General—An INET System order is 

an order that is entered into the System 

for display and/or execution as 

appropriate. Such orders are executable 

against marketable contra-side orders in 

the System as set forth in NASD Rule 

4955. 

(A) All INET System Orders shall 

indicate whether they are a Market 

Order or Limit Order and shall indicate 

if they are a buy, short sale, short-sale 

exempt, or long sale. INET Systems 

Orders can be designated as Immediate 

or Cancel (‘‘IOC’’), Market Day or Limit 

Day (‘‘DAY’’), Extended Day (‘‘XDAY’’), 

or Expire Time (‘‘ExT’’). 

(B) An INET System order may also be 

designated as a Reserve Order, a Pegged 

Order, a Non-Displayed Order, a 

Minimum Quantity Order, or a 

Discretionary Order. 

(2) Short Sale Compliance—INET 

System orders to sell short shall not be 

executed if the execution of such an 

order would violate Regulation SHO 

under the Exchange Act, NASD Rule 

3350 or, for routed orders, the rules of 

Federal Register / Vol. 70, No. 214 / Monday, November 7, 2005 / Notices 67515 

the applicable self-regulatory 

organization governing short selling or, 

in the case of ITS Securities, Rule 10a–

1 under the Exchange Act. 

(3) Routing—All INET System orders 

entered by participants directing or 

permitting routing to other market 

centers shall be routed for potential 

display and/or execution as set forth in 

NASD Rule 4956. 

4954. 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 which shall determine the time 

ranking of the order for purposes of 

processing the order. 

(3) Orders can be entered into the 

System (or previously entered orders 

cancelled) between the hours 7 a.m. to 

8 p.m. Eastern Time. 

(A) Exception: Orders entered prior to 

9:30 a.m. Eastern Time, or after 4 p.m. 

Eastern Time, seeking to be routed to 

either the New York or American Stock 

Exchanges shall be rejected. 

(B) Exception: Pegged and Market 

Orders may only be entered between 

9:30 a.m. and 4 p.m. Eastern Time. 

(b) Display of Orders— The System 

will display orders submitted to the 

System as follows: 

(1) System Book Feed—orders 

resident in the System will be displayed 

via the System Book Feed. 

(2) Best Priced Order Display—For 

each System Security, the best priced 

order to buy and sell resident in the 

System will be displayed via the 

National Stock Exchange. The System’s 

display of its orders in the National 

Stock Exchange shall not continue 

beyond September 30, 2006. 

(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 odd-lot, round lot and mixed-lot 

amounts and, for orders price under 

$1.00, in sub-penny increments. 

(B) Minimum Increments ‘‘The 

minimum trading increments for the 

System shall be set forth in NASD Rule 

4962. 

(C) Reserve Size—Reserve Size shall 

not be displayed in the System, but shall 

be accessible as described in NASD Rule 

4955. 

(D) Discretionary Orders—The 

discretionary portion of Discretionary 

Orders shall be made available for 

execution only upon the appearance of 

contra-side marketable trading interest, 

and shall be executed pursuant to 

NASD Rule 4955 and NASD Rule 

4951(o). 

(E) Non-Displayed Orders—NonDisplayed Orders are not displayed in 

the System, and have lower priority 

within the System than an equally 

priced Displayed Order, regardless of 

time stamp, and shall be executed 

pursuant to NASD Rule 4955. 

(F) Trade-Through Compliance and 

Locked or Crossed Markets—If, at the 

time of entry, a Displayed Order in an 

exchange-listed security that the 

entering party has elected not to make 

eligible for routing would lock the 

market, it will be converted by the 

System into a Non-Displayed Order. If, 

at the time of entry, a similar Displayed 

Order would cross the market or would 

cause a trade-through violation, the 

order will be converted by the System to 

a Non-Displayed Order and re-priced to 

the current low offer (for bids) or to the 

current best bid (for offers). Such NonDisplayed Orders will be cancelled by 

the System if the market moves through 

the price of the order after the order is 

accepted. 

4955. Order Processing 

(a) INET Book Order Process 

INET System orders shall be executed 

through the INET Book Order Process as 

set forth below: 

(1) Default Execution Algorithm—

Price/Time—The System shall execute 

equally priced or better priced trading 

interest within the System in price/time 

priority in the following order: 

(A) Displayed Orders; 

(B) Non-Displayed Orders, the reserve 

portion of Reserve Orders, in price/time 

priority among such interest; 

(C) The discretionary portion of 

Discretionary Orders as set forth in 

NASD Rule 4951(o). 

(2) Decrementation—Upon execution, 

an order shall be reduced by an amount 

equal to the size of that execution. 

(3) Price Improvement—any potential 

price improvement resulting from an 

execution in the System shall accrue to 

the taker of liquidity. 

Example: 

Buy order resides on INET book at 10. 

Incoming order to sell priced at 9 

comes into INET System 

Order executes at 10 (seller get $1 

price improvement) 

4956. Routing 

(a) INET Order Routing Process 

(1) The INET Order Routing Process 

shall be available to Participants from 7 

a.m. to 8 p.m. Eastern Time, and shall 

route orders as described below: 

(A) Exchange-Listed Routing Options 

The System provides five routing 

options for orders in exchange-listed 

securities. Of these five, only two—DOT 

Immediate and DOT Alternative—are 

available for orders ultimately sought to 

be directed to either the New York Stock 

Exchange (‘‘NYSE’’) or the American 

Stock Exchange (‘‘AMEX’’). The System 

also allows firms to send individual 

orders to the NYSE Direct + System, and 

to elect to have orders not be sent to the 

AMEX. The five System routing options 

for NYSE and/or Amex listed orders are: 

(i) DOT Immediate (‘‘DOTI’’)—under 

this option, after checking the INET 

System for available shares, orders are 

sent directly to the NYSE or the AMEX 

as appropriate. When checking the INET 

book, the System will seek to execute at 

the better price of either the limit price 

specified in the order, or the best price 

displayed at that time at the NYSE. If 

no liquidity is available in the INET 

System, the order will be routed directly 

to the NYSE or AMEX at the limit order 

price. This option may only be used for 

orders with time-in-force parameters of 

either DAY, IOC, or market-on-open/ 

close. Only limit orders may be used 

with this option. 

(ii) DOT Alternative (‘‘DOTA’’)—

under this option, after checking the 

INET System for available shares, orders 

are sent to other available market 

centers for potential execution before 

the destination exchange. Any unexecuted portion will thereafter be sent 

to the NYSE or AMEX, as appropriate, 

at the order’s original limit order price. 

This option may only be used for orders 

with time-in-force parameters of either 

DAY, IOC, or market-on-open/close. 

Only limit orders may be used with this 

strategy. 

(iii) Reactive Electronic Only 

(‘‘STGY’’)—under this option, after 

checking the INET System for available 

shares, orders are sent to other available 

market centers for potential execution. 

When checking the INET book, the 

System will seek to execute at the price 

it would send the order to a non-INET 

destination market center. If shares 

remain un-executed after routing, they 

are posted on the INET book and are not 

sent to the NYSE or AMEX. Once on the 

INET book, should the order 

subsequently be locked or crossed by 

another accessible market center, the 

System shall route the order to the 

67516 Federal Register / Vol. 70, No. 214 / Monday, November 7, 2005 / Notices 

locking or crossing market center for 

potential execution. With the exception 

of the Minimum Quantity order type, all 

time-in-force parameters and order 

types may be used in conjunction with 

this routing option. This process is one 

of the routing strategies allowed by the 

System for all securities. 

(iv) Electronic Only Scan (‘‘SCAN’’)—

under this option, after checking the 

INET System for available shares, orders 

are sent to other available market 

centers for potential execution. When 

checking the INET book, the System will 

seek to execute at the price it would 

send the order to a non-INET 

destination market center. If shares 

remain un-executed after routing, they 

are posted on the INET book and are not 

sent to the NYSE or AMEX. Once on the 

INET book, should the order 

subsequently be locked or crossed by 

another accessible market center, the 

System will not route the order to the 

locking or crossing market center. With 

the exception of the Minimum Quantity 

order type, all time-in-force parameters 

and order types may be used in 

conjunction with this routing option. 

This process is one of the routing 

strategies allowed by the System for all 

securities. 

(v) Aggressive Electronic Only 

(‘‘SPDY’’)—under this option, after 

checking the INET System for available 

shares, orders are sent to other available 

market centers for potential execution. 

When checking the INET book, the 

System will seek to execute at the price 

it would send the order to a non-INET 

destination market center. If shares 

remain un-executed after routing, they 

are posted on the INET book and are not 

sent to the NYSE or AMEX. Once on the 

INET book, should the order 

subsequently be locked or crossed by 

another accessible market center, the 

System shall route the order to the 

locking or crossing market center for 

potential execution. Market orders with 

the SPDY designation will, during a 

locked or crossed market, have their 

price adjusted by the System to match 

the best price displayed on the same 

side of the market as the market order 

(i.e., a buy order to the bid, a sell to the 

offer). If the order is for a security 

eligible for a de minimis exception to 

the trade-through rule set forth in 

Section 8 (d)(i) of the ITS Plan, the 

System will ignore AMEX prices when 

adjusting the SPDY order. With the 

exception of the Minimum Quantity 

order type, all time-in-force parameters 

and order types may be used in 

conjunction with this routing option. 

This process is one of the routing 

strategies allowed by the System for all 

securities. 

(B) Nasdaq-Listed Routing Options 

The STGY, SPDY, and SCAN options 

are the only routing options provided by 

the System for orders in Nasdaq-listed 

securities not sought to be directed to 

either the NYSE or AMEX. 

(C) Priority of Routed Orders 

Regardless of the routing option 

selected, orders sent by the INET System 

to other markets do not retain time 

priority with respect to other orders in 

INET’s System and the System shall 

continue to execute other orders while 

routed orders are away at another 

market center. Once routed by the 

System, an order becomes subject to the 

rules and procedures of the destination 

market including, but not limited to, 

short-sale regulation and order 

cancellation. If a routed order is 

subsequently returned, in whole or in 

part, that order, or its remainder, shall 

receive a new time stamp reflecting the 

time of its return to the System. 

4957. Clearance and Settlement 

All transactions executed in the 

System shall be cleared and settled by 

and between the System Participant and 

INET, through a registered clearing 

agency using a continuous net 

settlement system. 

4958. 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) INET 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). 

4959. Compliance with Rules and 

Registration Requirements 

(a) Failure by a Participant to comply 

with any of the rules or registration 

requirements applicable to it and its use 

of the System shall subject such 

Participant to censure, fine, suspension 

or revocation of its registration as 

Participant or any other fitting penalty 

under the Rules of the Association, or 

such other action, up to and including 

termination of access to the System. 

(b) If a Participant fails to maintain a 

clearing relationship, or to honor its 

obligations under NASD Rule 4958, it 

shall have its access to the System 

restricted until such time as a clearing 

arrangement is reestablished and/or the 

Participant meets its obligation to honor 

System trades. 

(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. 

4960. Anonymity 

(a) Transactions executed in the 

System shall be cleared and settled with 

INET. The transaction reports produced 

by the System will indicate the details 

of the transactions, and shall not reveal 

contra party identities other than INET. 

(b) INET shall reveal a Participant’s 

identity in the following circumstances: 

(1) when the National Securities 

Clearing Corporation (‘‘NSCC’’) ceases 

to act for a participant, or the 

Participant’s clearing firm, and NSCC 

determines not to guarantee the 

settlement of the Participant’s trades; 

(2) for regulatory purposes or to 

comply with an order of an arbitrator or 

court; 

(3) no later than the end of the day 

on the date a trade was executed, when 

the participant’s order has been 

decremented by another order 

submitted by that same Participant; or 

(4) if both Participants to the 

transaction consent. 

4961. Clearly Erroneous Transactions 

Commencing no later than 60 days 

after the System becomes a facility of 

Nasdaq, all matters related to clearly 

erroneous transactions executed in the 

System shall be initiated and 

adjudicated pursuant to NASD Rule 

11890. 

4962. Minimum Quotation Increment 

The minimum quotation increment in 

the INET 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 

INET System for quotations below $1.00 

in Nasdaq-listed securities and in 

securities listed on a national securities 

exchange shall be $0.001. 

4963. Normal Business Hours 

The INET System operates from 7 

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

business day. 

4964. Limitation of Liability 

The Association and its subsidiaries, 

as well as Nasdaq and INET 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, 

Federal Register / Vol. 70, No. 214 / Monday, November 7, 2005 / Notices 67517 

3Nasdaq states that, as a member of the NASD, 

INET is, and remains, subject to all NASD Rules 

Continued 

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. Notwithstanding the foregoing, 

the System may, within it sole discretion 

and for a period of time not to exceed 

60 days after the System becomes a 

facility of Nasdaq, compensate users for 

losses arising out of the System or its 

use. 

* * * * * 

7010. System Services (a)–(v) No 

Change. 

(w) INET System Order Execution 

(1) For a period of time not to exceed 

60 days after INET becomes a facility of 

Nasdaq, the following charges shall 

apply to the use of the order execution 

services of Nasdaq’s INET System by 

Participants for: 

NASDAQ-Listed Securities 

Order Execution 

Non-Directed Order that accesses the 

Quote/Order of a market Participant 

through Nasdaq’s INET System: 

Charge to Participant entering order: 

Average daily shares of liquidity 

provided through Nasdaq’s INET 

System by the Participant during the 

month: 

Greater than 60 million shares 

accessed or routed and 5 million shares 

provided: $0.0027 per share executed 

Greater than 40 million shares but 

less than 60 million shares accessed or 

routed and 5 million shares provided: 

$0.0028 per share executed 

Less than 5 million shares provided or 

less than 40 million shares accessed or 

routed: $0.0030 per share executed 

Credit to Participant providing liquidity: 

Average daily shares of liquidity 

provided through Nasdaq’s INET 

System by the Participant during the 

month: 

Greater than 30 million shares 

provided or greater than 30 million 

shares accessed or routed or greater 

than 50 million shares combined 

provided, accessed or routed: $0.0025 

per share executed 

Less than or equal to 30 million 

shares provided and less than or equal 

to 30 million shares accessed or routed 

and less than or equal to 50 million 

shares combined provided, accessed, or 

routed: $0.002 per share executed 

Any order that matches against 

another order of the same Participant: 

$0.00025 per share per side. 

Routed Orders 

Any other order entered by a 

Participant that is routed outside of 

Nasdaq’s INET System: $0.0025 per 

share executed 

AMEX-listed Stocks 

Order Execution 

Non-Directed Order that accesses the 

Quote/Order of a market Participant 

through Nasdaq’s INET System: 

Credit to Participant entering order: 

$0.001 per share executed 

Charge to Participant providing 

liquidity: $0.0009 

Any order that matches against 

another order of the same Participant: 

No charge 

Routed Orders 

Any order entered by a Participant 

that is routed outside of Nasdaq’s INET 

System through DOT: $0.01 per share 

executed 

Any order entered by a Participant 

that is routed outside of Nasdaq’s INET 

System other than through DOT: 

$0.0035 per share executed 

AMEX-listed ETFs 

Order Execution 

Non-Directed Order that accesses the 

Quote/Order of a market Participant 

through Nasdaq’s INET System: 

Charge to Participant entering order: 

Average daily shares of liquidity 

provided through Nasdaq’s INET 

System by the Participant during the 

month: 

Greater than 60 million shares 

accessed or routed and 5 million shares 

provided: $0.0027 per share executed 

Greater than 40 million shares but 

less than 60 million shares accessed or 

routed and 5 million share executed 

shares provided: $0.0028 per share 

executed 

Less than 5 million shares provided or 

less than 40 million shares accessed or 

routed: $0.0030 per share executed 

Credit to Participant providing 

liquidity: 

Average daily shares of liquidity 

provided through Nasdaq’s INET 

System by the Participant during the 

month: 

Greater than 30 million shares 

provided or greater than 30 million 

shares accessed or routed or greater 

than 50 million shares combined 

provided, accessed or routed: $0.0025 

per share executed 

Less than or equal to 30 million 

shares provided and less than or equal 

to 30 million shares accessed or routed 

and less than or equal to 50 million 

shares combined provided, accessed, or 

routed: $0.002 per share executed 

Any order that matches against 

another order of the same Participant: 

$0.00025 per share per side. 

Routed Orders 

Any order entered by a Participant 

that is routed outside of Nasdaq’s INET 

System through DOT: $0.01 per share 

executed 

Any order entered by a Participant 

that is routed outside of Nasdaq’s INET 

System other than through DOT: 

$0.0035 per share executed 

NYSE-listed stocks 

Order Execution 

Non-Directed Order that accesses the 

Quote/Order of a market Participant 

through Nasdaq’s INET System: 

Credit to Participant entering order: 

$0.001 per share executed 

Charge to Participant providing 

liquidity: $0.0009 

Any order that matches against 

another order of the same Participant: 

No charge 

Routed Orders 

Any order entered by a Participant 

that is routed outside per of Nasdaq’s 

INET System through DOT: $0.0005 

share executed 

Any order entered by a Participant 

that is routed outside of Nasdaq’s INET 

System other than through DOT: 

$0.0015 per share executed 

* * * * * 

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 

Background 

On April 22, 2005, Nasdaq entered 

into definitive agreements to purchase 

INET, a registered broker-dealer and 

member of the NASD 3, and operator of 

67518 Federal Register / Vol. 70, No. 214 / Monday, November 7, 2005 / Notices 

applicable to its activities as a broker-dealer. In 

addition, INET would continue to participate in 

market surveillance and audit trail programs 

conducted by Nasdaq, the NASD, and other selfregulatory organizations. INET would continue to 

act as a counter-party to all trades taking place in 

its system, for anonymity as well as clearance and 

settlement purposes. INET would also continue to 

provide outbound order routing services to other 

market centers for its subscribers. 

4 15 U.S.C. 78o–3. 

5 15 U.S.C. 78s(b)(1). 

6Nasdaq states that it will provide to the 

Commission formal written notice of the closing 

date of the transaction. Such closing date shall be 

the start date for the calculation of any temporary 

time period referred to in this filing. Nasdaq states 

that it will thereafter submit rule filings to include 

such closing date in its rules. 

7Nasdaq states that, as is the case today, INET 

would remain subject to all applicable rules and 

regulations of the NSX. 

the INET System. Nasdaq states that, 

once formally purchased by Nasdaq, the 

INET System would immediately 

become a ‘‘facility’’ of a national 

securities association subject to the 

standards set forth in Sections 15A 4

and 19(b)(1) 5 of the Act and would be 

required to operate pursuant to formal 

system rules approved by the 

Commission. In order to ensure that 

such rules are in place at the time of 

closing, Nasdaq has filed this proposed 

set of INET System rules for 

Commission review and approval that 

includes a description of the INET 

System, its various features, fees, and 

order processing methods. Nasdaq 

proposes that these rules would be 

implemented immediately upon formal 

closing of the Nasdaq/INET transaction, 

and in no event more than two weeks 

after Commission approval.6

The INET System 

1. Order Display/Matching System 

The INET System allows subscribers 

to enter market and priced limit orders 

to buy and sell Nasdaq and exchangelisted securities. According to Nasdaq, 

such orders may be in round-lots, 

mixed-lots, or odd-lots of any size up to 

999,999 shares. Nasdaq states that INET 

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. INET, 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. 

INET currently provides its best topof-file prices, and other prices, to the 

National Stock Exchange (‘‘NSX’’). In 

this filing, Nasdaq proposes rules under 

which INET would be permitted to 

continue to provide its best-priced 

orders to the NSX until the end of the 

third quarter of 2006.7 At any time prior 

to that date, Nasdaq may file with the 

Commission a rule proposal to move the 

INET System’s best-priced orders, and 

other orders including up to full depth 

of book, to the Nasdaq Market Center for 

display, routing, and execution 

purposes. If filed, Nasdaq states that it 

would seek immediate effectiveness of 

the proposal. In addition, INET would 

continue to accept sub-penny prices in 

$0.001 increments for securities priced 

under $1.00 a share. Such sub-penny 

prices are viewable via the System data 

feed. 

2. Access Standards 

Nasdaq states that, to obtain access to 

the INET System as a system 

participant, a user must execute an 

INET subscriber agreement and be a 

participant in, or have an access 

arrangement with a participant in, a 

Commission-registered clearing agency. 

In addition, the INET subscriber must 

also agree to: 

a. Comply with all applicable rules of 

the NASD and the Commission; and 

b. Accept all INET System trades 

identified by the System as being 

effected by the subscriber. 

According to Nasdaq, INET also 

currently provides access to 

approximately 70 non-NASD member 

broker-dealers. Nasdaq states that it 

intends, for a period of time not to 

exceed 60 days after the formal close of 

the Nasdaq/INET transaction, to 

continue to provide such entities with 

sponsored access to the INET System 

under generally the same terms and 

conditions they enjoy today. This would 

be accomplished through contractual 

agreements between INET and such 

subscribers. Nasdaq states that, within 

60 days after the formal closing of the 

Nasdaq/INET transaction, all 

participants in the INET System must be 

NASD members. 

3. Order Types 

The INET 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. 

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. 

Reserve Order—a limit order that has 

both a round-lot displayed size as well 

as an additional non-displayed share 

amount. Both the displayed and nondisplayed portions of the Reserve Order 

are available for potential execution 

against incoming orders. If the round-lot 

displayed portion of a Reserve Order is 

reduced to less than 100 shares, the 

System would replenish the display 

portion from reserve up to at least a 

single round-lot amount. 

Pegged Order—a limit order that, after 

entry, has its price automatically 

adjusted by the System in response to 

changes in the national best bid or offer 

(‘‘NBBO’’), as appropriate. A Pegged 

Order can specify that its price will 

equal the inside quote on the same side 

of the NBBO (‘‘Primary Peg’’) or the 

opposite side of the NBBO (‘‘Market 

Peg’’). In addition, Pegged Orders may 

also establish their pricing relative to 

the NBBO by the selection of $0.01 

offset amounts that would adjust the 

price of the order by the offset amount 

selected. 

Example Primary Pegged Order 

The market is $10.00 bid–$10.01 offer. 

INET receives a non-route Primary 

Pegged buy order. INET would post the 

order at $10.00. If the inside bid moves 

to $10.01, INET would modify the 

Pegged Order to the $10.01 bid price. A 

new time stamp is created at the time of 

this modification. If a sell order is 

subsequently entered at $10.01 or lower, 

the pegged order would execute at 

$10.01. 

Example Market Pegged Order 

The market is $10.00 bid–$10.01 offer. 

INET receives a Market Pegged buy 

order. INET would post the order at 

$10.01. If the inside offer moves to 

$10.02, INET would modify the Pegged 

Order to the $10.02 offer price. A new 

time stamp is created at the time of this 

modification. 

Displayed Order—a limit order that is 

displayed in the System, in whole or in 

part, and is available for potential 

execution against all incoming orders 

until executed in full or cancelled. 

Non-Displayed Order—a limit order 

that is not displayed in the System, but 

nevertheless remains available for 

potential execution against all incoming 

orders until executed in full or 

cancelled. 

Minimum Quantity Order—an order 

that requires that a specified minimum 

quantity of shares be obtained, or the 

order is cancelled. Minimum Quantity 

Orders may only be entered with a timein-force designation of IOC. 

Example Minimum Quantity Order 

The market is $10.00 bid–$10.01 offer. 

INET receives an order to buy 1000 

Federal Register / Vol. 70, No. 214 / Monday, November 7, 2005 / Notices 67519 

8 In addition, Nasdaq states that the System also 

supports On-Open and On-Close order types for 

orders being routed directly to the NYSE, AMEX, 

and Nasdaq Market Center. 

According to Nasdaq, these orders are not 

supported or executed within the INET System 

itself. Instead, these order formats are designed for 

processing at their destination market. 

shares, Minimum Quantity of 500 

shares, at $10.01. This order can only 

have a time in force of IOC. The INET 

book has 2 sell orders each for 300 

shares at $10.01. INET executed 600 

shares at $10.01 (in two lots) and 

cancels the remaining 400 shares back. 

Discretionary Order—an order that 

has both a displayed price and size, as 

well as a non-displayed discretionary 

price range, at which the entering party, 

if necessary, is also willing to buy or 

sell. The non-displayed trading interest 

is not entered into the System book but 

is converted to an IOC order equal in 

size to the displayed size and priced at 

the most aggressive price in the 

discretionary price range when 

displayed shares become available or an 

execution takes place at any price 

within the discretionary price range. 

The generation of this IOC order is 

accompanied by the cancellation of the 

displayed portion of the Discretionary 

Order. If more than one Discretionary 

Order is available for conversion to an 

IOC order, the system would convert all 

such orders at the same time and 

priority would be given to the first IOC 

order(s) that reaches the trading interest 

on the other side of the market. If an 

IOC order is not executed in full, the 

unexecuted portion of the order would 

be automatically re-posted and 

displayed in the System book with a 

new time stamp, its original displayed 

price, and its original non-displayed 

discretionary price range. 

Example 

INET receives a Discretionary buy 

order, with a displayed limit price of 

$10.00 and a display quantity of 1000 

shares and a discretionary price range of 

up to $15.00. INET posts the order as 

1000 shares at $10.00. Thereafter, 

another market participant posts 

another offer to buy at 300 shares at 

$11.00, creating a buy market as follows: 

Display Reserve Price Discretionary price range 

300 .......................................................... 0 $11.00 None. 

1000 ........................................................ 0 $10.00 $11.00–$15.00. 

Thereafter, another market participant 

enters a sell order for 500 shares at 

$11.00. The resulting executions are as 

follows: 

1. 300 shares execute immediately at 

$11.00. 

2. 200 shares to sell at $11.00 is 

posted to the book. 

3. Both the execution at $11.00 and 

the posting of the display price of 

$11.00 are events that trigger the 

processing of the discretionary portion 

of the Discretionary Order. 

4. INET would cancel the 1000 

display portion of the Discretionary 

Order and send an IOC order for 1000 

shares priced at $15.00 to the displayed 

200 shares priced at $11.00. 

5. The 200 shares would execute at 

$11.00, and the 800 share remainder of 

the Discretionary Order would be 

placed back into the INET book at its 

original order price of $10.00. If there 

were multiple Discretionary Orders 

available to interact with the 200 shares, 

all such orders would be activated at the 

same time by the INET system and 

whichever IOC order(s) first reached the 

200 shares would get the execution. 

4. Time in Force Designations 

Orders entered into the INET 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: 8

Immediate or Cancel (IOC)—limit 

orders with this designation execute 

immediately at the limit price if shares 

are available. If no shares are available, 

the orders are immediately cancelled. If 

partially executed, un-executed 

remainders of these orders are 

immediately cancelled. 

Market Day or Limit Day (DAY)—limit 

orders with these designations (or the 

unexecuted portions of such orders) are 

held by the INET 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. If not 

executed by 4 p.m., the order is 

cancelled and sent back to the entering 

party. 

Expire Time (ExT)—limit orders with 

this designation are held by the system 

for potential execution until the 

expiration of the specific time period 

indicated by the entering party, 

including time periods outside of 

normal market hours. 

Extended Day (XDAY)—limit orders 

with this designation (or the unexecuted 

portions of such orders) are held by the 

INET System and remain available for 

potential execution until 8 p.m. eastern 

time. 

The INET System operates between 

the hours of 7 a.m. and 8 p.m. Eastern 

Time. Orders with the above time in 

force designations may be entered into 

the INET System, or previously entered 

orders cancelled, starting at 7 a.m. 

eastern time. Only orders with the 

XDAY designation would be retained by 

the system after 4 p.m. eastern time, 

with all other order types being 

cancelled back to the entering party. 

5. Routing 

The INET System provides the 

capability to route orders to other 

available market centers. Routing 

functionality is available to System 

users between the hours of 7 a.m. and 

8 p.m. eastern time. In general, the 

System provides users with five 

optional routing strategies for exchangelisted securities. These strategies are 

summarized below: 

DOT Immediate (DOTI) 

After checking the INET System for 

available shares, orders are sent directly 

to the New York Stock Exchange 

(‘‘NYSE’’) via the DOT system. When 

checking the INET book, the System 

looks to execute at the better price of 

either the limit price specified in the 

order, or the best price displayed at that 

time at the NYSE. If no liquidity is 

available in the INET System the order 

is routed directly to the NYSE via DOT 

at the limit order price for posting. A 

similar process is followed for orders in 

stocks listed on the American Stock 

Exchange (‘‘AMEX’’). This strategy may 

only be used for orders with time-inforce parameters of either DAY, IOC, or 

market-on-open/close. 

Example of DOTI Routable Order 

The current NBBO is $10.00 bid x 

$10.02 offer. Offer size is as follows: 300 

shares INET displayed, 200 shares INET 

non-displayed, 100 shares PCX, 200 

shares NYSE. Participant A enters a buy 

order for 1000 shares at $10.02. The 

System would first IOC INET for 1000 

67520 Federal Register / Vol. 70, No. 214 / Monday, November 7, 2005 / Notices 

shares at $10.02. Participant A would 

execute against 300 shares at $10.02 

displayed and the 200 shares nondisplayed. The System would route the 

remaining 500 shares to NYSE. 

Participant A would receive 200 shares 

from NYSE. The remaining 300 shares 

would reside on the NYSE book, per 

routing instructions. 

DOT Alternative (DOTA) 

After checking the INET System for 

available shares, the order would be 

sent to various available market centers 

for potential execution. Any remaining 

un-executed portion would thereafter be 

sent to the NYSE or AMEX, as 

appropriate, at the limit order price for 

posting. This strategy may only be used 

for orders with time-in-force parameters 

of either DAY, IOC, or market-on-open/ 

close. 

Example of DOTA Routable Order 

The current NBBO is $10.00 bid x 

$10.02 offer. Offer size is as follows: 300 

shares INET displayed, 200 shares INET 

non-displayed, 100 shares PCX, 200 

shares NYSE. Participant A enters a buy 

order for 1000 shares at $10.02. The 

System would first IOC INET at $10.02. 

Participant A would execute against 300 

shares at $10.02 displayed and the 200 

shares non-displayed. The System 

would route the remaining shares to 

PCX. Participant A would receive 100 

shares from PCX. The System would 

then route 400 shares to the NYSE. 

Participant A would receive 200 shares 

from the NYSE. The remaining 200 

shares would reside on the NYSE book, 

per routing instructions. 

SCAN/STGY/SPDY 

In all of these routing options, after 

checking the INET System for available 

shares, orders would be sent to various 

available market centers for potential 

execution. For all these options, when 

checking the INET book, the System 

would look to execute at the price it 

would send the order to the non-INET 

destination market center and, if any 

shares remain un-executed after routing, 

they are posted on the INET book and 

are not sent to the NYSE or AMEX for 

posting. 

Once returned to the INET book after 

routing, an order with the SCAN 

designation would not be routed out to 

an accessible market center that 

subsequently locks or crosses the SCAN 

order. Orders with STGY and SPDY 

would be routed to an accessible market 

center that subsequently locks or crosses 

the STGY or SPDY order. While both 

STGY and SPDY orders would route to 

locking or crossing markets, the SPDY 

order would be re-priced by the System 

to match on then being displayed on the 

same side of the market by the locking 

or crossing market center (i.e., a buy 

order to the bid and a sell to the offer). 

With the exception of the Minimum 

Quantity Order type, all time-in-force 

parameters and order types may be used 

with the STGY, SCAN, and SPDY 

routing options. Nasdaq states that 

orders routed by INET to another market 

do not retain time priority with respect 

to other orders in INET’s System and 

INET continues to execute other orders 

while the routed order is away at 

another market. Nasdaq states that, once 

routed by INET, an order becomes 

subject to the rules and procedures of 

the destination market including, but 

not limited to, short-sale regulation, and 

order cancellation. According to 

Nasdaq, orders routed to a destination 

market that are subsequently returned in 

whole or in part to the System would 

have their time priority based on the 

time they are returned to the System. 

Example of STGY Routable Order 

The current NBBO is $10.00 bid x 

$10.02 offer, size 200 shares at the 

Nasdaq Market Center. INET has a nondisplay offer of 500 shares at $10.01. 

Participant A enters an order onto INET 

to buy 1000 shares at $10.02. The 

System would first IOC the INET book 

for any potential orders at or better than 

the limit price. Participant A would 

execute 500 shares on INET at $10.01 

(the non-display order on the book). The 

System would then route the order to 

the Nasdaq Market Center at $10.02. 200 

shares execute at the Nasdaq Market 

Center at $10.02. 300 shares of the order 

remain unexecuted, and are entered 

onto the INET book at $10.02. 5 seconds 

later, PCX enters the market with an 

offer of $10.02. The System would 

cancel the order off the book, and route 

300 shares at $10.02 to PCX. PCX 

executes 300 shares at $10.02. 

Participant A receives an execution for 

the remaining 300 shares in the order. 

Example of STGY Routable Order 

(Crossed Market) 

The current NBBO is $10.01 bid x 

$10.00 offer. INET has 500 shares on the 

offer at $10.00. PCX has 300 shares on 

the offer at $10.00. Participant A enters 

a market order to buy 1000 shares. The 

System would price the order at $10.00 

and IOC the INET book. Participant A 

would receive 500 shares at $10.00. The 

System would route the remaining 

shares to PCX. Participant A would 

receive 300 shares at $10.00 from PCX. 

After attempting to exhaust the quotes, 

the remaining 200 shares would be 

posted to the INET book at $10.00. 

Example of SCAN Routable Order: 

The current NBBO is $10.00 bid x 

$10.02 offer, size 200 shares at the 

Nasdaq Market Center. INET has a nondisplay offer of 500 shares at $10.01. 

Participant A enters an order onto INET 

to buy 1000 shares at $10.02. The 

System would first IOC the INET book 

for any potential orders at or better than 

the limit price. Participant A would 

execute 500 shares on INET at $10.01 

(the non-display order on the book). The 

System would route the order off the 

book with the remaining shares of the 

order, 500, to the Nasdaq Market Center 

at $10.02. 200 shares execute at the 

Nasdaq Market Center at $10.02. 300 

shares of the order remain unexecuted, 

and are entered onto the INET book at 

$10.02. 5 seconds later, PCX enters the 

market with an offer of $10.02. The 

System would not route the order to 

PCX, but would keep the order on the 

INET book, per Participant A’s routing 

instructions. 

Example of SPDY Routable Order 

(Crossed Market) 

The current NBBO is $10.01 bid x 

$10.00 offer. INET has 500 shares on the 

offer at $10.01. PCX has 300 shares on 

the offer at $10.00. Participant A enters 

a market order to buy 1000 shares. The 

System would price the order at $10.01 

and IOC the INET book. Participant A 

would receive 500 shares at $10.01. The 

System would route the remaining 500 

shares to PCX. Participant A would 

receive 300 shares at $10.00 from PCX. 

The remaining 200 shares would be 

posted to the INET book at $10.01. 

Other 

Nasdaq states that the System also 

allows firms to send individual orders 

to the NYSE Direct + System, and to 

elect to have orders not be sent to the 

AMEX. 

6. Execution Algorithm 

Nasdaq states that the INET System 

has an execution algorithm based on 

price/time priority. For each order, 

among equally-priced or better-priced 

trading interest, the System executes 

against available contra-side displayed 

share amounts in full, in price/time 

priority, before then moving to any nondisplayed shares which are likewise 

executed in price/time priority. Below 

are examples of this algorithm: 

Displayed Order 

The current NBBO is $10.00 bid x 

$10.02 offer. Participant A enters a 

display order on INET to buy 1000 

shares at $10.01. NBBO is changed to 

$10.01 x $10.02. Participant B sees the 

1000 share order at $10.01 and enters an 

Federal Register / Vol. 70, No. 214 / Monday, November 7, 2005 / Notices 67521 

9See proposed NASD Rules 4958 and 4959. 

10See NASD Rule 4705(j) and proposed NASD 

Rule 4964. 

11See proposed NASD Rule 7010(w). 

12See Section (8)(d) of the Plan for the Purpose 

of Creating and Operating an Intermarket 

Communications Linkage Pursuant to Section 

11A(a)(3)(B) of the Act. 

order to sell 500 shares at $10.01. The 

orders match at $10.01, with 500 shares 

matched. NBBO remains at $10.01 x 

$10.02 with the size on the bid 

decremented to 500 shares, the amount 

of shares matched. 

Limit Order (with Reserve) 

The current NBBO is $10.01 bid x 

$10.02 offer. Participant A enters an 

order to buy 1000 shares, display 200, 

at $10.01. INET bid is $10.01, 200 

displayed, 800 non-displayed. 

Participant B enters a display buy order 

for 1000 shares at $10.01. INET bid is 

$10.01, 1200 displayed, 800 nondisplayed. Participant C enters an order 

to sell 1500 shares at $10.01. Participant 

C receives executions against orders as 

follows: Participant A executes 200 

shares at $10.01; Participant B executes 

1000 shares at $10.01 (display order 

receives priority over non-display even 

though non-display order was there 

first); Participant A executes 300 shares 

from non-display portion. Participant C 

has executed a total of 1500 shares. 

Participant B has executed all 1000 of 

its shares. Participant A has 200 shares 

remaining in its order, and is now 

displayed, per original instructions. 

Routable Order 

The current NBBO is $10.00 bid x 

$10.02 offer, size 200 shares at the 

Nasdaq Market Center. INET has a nondisplay offer of 500 shares at $10.01. 

Participant A enters an order onto INET 

to buy 1000 shares at $10.02. The 

system would first IOC the INET book 

for any potential orders at or better than 

the limit price. Participant A would 

execute 500 shares on INET at $10.01 

(the non-display order on the book). The 

System would then route the order off 

the book with the remaining shares of 

the order, 500, to the Nasdaq Market 

Center at $10.02. 200 shares execute at 

the Nasdaq Market Center at $10.02. 300 

shares of the order remain unexecuted, 

and are entered onto the INET book at 

$10.02. 

7. Clearly Erroneous Trade Procedures 

Nasdaq states that currently, INET 

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, INET currently 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. INET currently also reserves 

the right to refuse to review potentially 

erroneous transactions that are brought 

to its attention more than 20 minutes 

after execution. In the normal course, 

INET limits its clearly erroneous review 

to INET System trades that execute at 

prices that are certain percentages away 

from the National Best Bid/Offer at the 

time of execution. These percentages are 

provided below: 

Execution Price Range Away From 

NBBO 

$3 and under: 10%. 

Over $3 and under $10: 5%. 

$10 to $30: 3%. 

Over $30: $1 or more. 

Nasdaq is proposing to continue the 

above process for a period of 60 days 

after the formal close of the Nasdaq/ 

INET transaction. During that interim 

period, Nasdaq states that it would 

prepare to incorporate INET into the 

current clearly erroneous process of 

Nasdaq and Brut, which is governed by 

NASD Rule 11890. Nasdaq states that 

this interim period would ensure that 

sufficient notice is provided to System 

subscribers about their rights and 

obligations related to clearly erroneous 

trades under NASD Rule 11890, as well 

as allow Nasdaq to train incoming INET 

staff to properly process such requests. 

Prior to 60 days after the formal close 

of the Nasdaq/INET transaction, Nasdaq 

states that it would file with the 

Commission a rule proposal making 

INET’s clearly erroneous process 

specifically subject to NASD Rule 

11890. Nasdaq states that it will seek 

immediate effectiveness of that filing. 

8. Other System Standards 

Nasdaq is also proposing to establish 

standards regarding operational issues 

between the Nasdaq Market Center and 

INET. For example, Nasdaq is proposing 

rules for the INET System codifying 

standards regarding the obligation of 

users to honor system trades and the 

removal of users for failing to maintain 

a required clearing relationship.9 While 

Nasdaq is proposing that INET have in 

place at closing a general limitation of 

liability rule, Nasdaq is also proposing 

that INET continue, for a period of time 

not to exceed 60 days after the formal 

close of the Nasdaq/INET transaction, to 

have the discretion to accommodate 

users of the System for losses arising out 

of the System or its use. Before the end 

of that time period, Nasdaq states that 

it will file a rule proposal with the 

Commission so that the System’s future 

accommodation of users would be 

subject to the same standards already in 

place for the Nasdaq Market Center and 

Nasdaq’s Brut Facility.10 Nasdaq is also 

proposing to establish rules governing 

the anonymity provided by the system, 

as well as rules governing minimum 

quote increments. Nasdaq states that the 

System’s anonymity standards and 

proposed minimum quote increment 

standards are substantially similar to 

those in place in the Nasdaq Market 

Center and Nasdaq’s Brut Facility and 

also provides for allowing sub-penny 

quotes in securities priced under $1.00. 

9. Pricing 

Nasdaq is also proposing the creation 

of a fee and rebate schedule for the INET 

System. Nasdaq states that, with 

exception of eliminating fee rates 

discounts based on the use of the 

services of the Instinet broker-dealer, 

this fee and rebate schedule is the same 

as the one applicable to current INET 

subscribers.11 Nasdaq proposes that this 

fee schedule remain in place for a 

period of time not to exceed 60 days 

after the formal close of the Nasdaq/ 

INET transaction. Before the termination 

of such 60-day period, Nasdaq will file 

with the Commission an integrated fee 

and rebate structure governing the use 

of all Nasdaq’s main trading systems 

(i.e., the Nasdaq Market Center, 

Nasdaq’s Brut Facility, and Nasdaq’s 

INET System). 

10. Trade-Through Compliance and 

Locked and Crossed Markets 

Nasdaq states that, in order to ensure 

compliance with the trade-through rule 

for listed securities,12 the INET system 

checks the prices of orders in listed 

securities that are not made eligible for 

routing by the entering party before and 

after an order is entered in the System. 

The process is described in further 

detail below: 

At Order Entry—At the time of order 

entry, every order would be checked to 

ensure that it does not lock or cross the 

market, or cause an execution at a price 

that would constitute a violation of the 

trade-through rule. If an order locks the 

market, it would be turned into a nondisplay order so as not to quote a locked 

market. If an order crosses the market, 

or would cause a trade-through 

violation, it would be re-priced to the 

current low offer (for bids) or to the 

current best bid (for offers), and turned 

into a non-display order so as to not 

quote a locked market. Any non-display 

order that crosses the market would be 

re-priced to the current low offer (for 

bids) or to the current best bid (for 

offers). 

67522 Federal Register / Vol. 70, No. 214 / Monday, November 7, 2005 / Notices 

13Changes to text made pursuant to phone 

conversation between Thomas P. Moran, Associate 

General Counsel, Nasdaq, and John C. Roeser, 

Assistant Director, Division of Market Regulation, 

Commission, on November 2, 2005. 

14 15 U.S.C. 78o–3. 

15 15 U.S.C. 78o–3(b)(6). 

16See Securities Exchange Act Release Nos. 

37619A (August 29, 1996), 61 FR 48290 (September 

6, 1996) (Order Handling Release); 40760 

(December 8, 1998), 63 FR 70844 (December 22, 

1998) (Regulation ATS Release); 46249 (July 24, 

2002), 67 FR 49822 (July 31, 2002) (ADF Release); 

and 51808 (June 9, 2005), 70 FR 37496 (June 29, 

2005) (Regulation NMS Release). 

Example 

The National Best Bid in a listed 

security is $83.55. INET Subscriber 

enters a non-route order to sell at 

$83.54. The INET system would 

automatically re-price the order to 

$83.55 and change it to non-display. 

After Order Entry—An non-routable 

order entered for display would not be 

affected by the trade-through rule after 

it is accepted. To prevent tradethroughs, however, a non-display nonroutable order however, may be 

cancelled from the INET book with the 

reason code if the market moves through 

the price of the order after the order is 

accepted. 

Example 

The National Best Bid in a listed 

security is $83.55. INET Subscriber 

enters a non-display non-route order to 

sell at $83.55. The National Best Bid in 

the security becomes $83.56. The nondisplay order to sell at $83.55 would be 

cancelled since it cannot be executed 

without causing a trade-through 

violation. 

Nasdaq states that INET’s re-pricing 

and conversions to non-display of 

orders are done with the knowledge of 

System subscribers and only takes place 

in connection with orders that 

subscribers have elected not to make 

eligible for routing. 

11. Integration Plan 

Upon the closing of the INET 

transaction, Nasdaq will be the owner 

and operator of three separate trading 

systems, the Nasdaq Market Center, 

Nasdaq’s Brut Facility, and Nasdaq’s 

INET System. For a period of time after 

the close, Nasdaq states that it will 

continue to separately operate these 

systems, with each system providing 

distinct order-display, execution, and 

routing services. Orders entered and 

displayed in a particular system shall 

have time-priority only with regard to 

other orders in that same system. For a 

period of time ending no later than 

September 30, 2006, the INET System 

would continue to post its top-of-file 

quotes through the facilities of NSX. 

Nasdaq’s long-term vision is to have 

all of its systems integrated into a single 

technology platform that would further 

enhance execution quality for market 

participants. As part of that 

consolidation plan, soon after the formal 

close of the Nasdaq/INET transaction, 

Nasdaq states that it anticipates that it 

will merge the INET broker-dealer into 

Nasdaq’s Brut broker-dealer and that 

Brut as a single broker dealer would 

operate both ECNs as separate systems, 

with separate order processing and 

execution. As such, the NYSE would 

continue to serve as the designated 

examining authority for financial 

responsibility purposes for Nasdaq’s 

broker-dealer. Nasdaq states that there 

would continue to be no priority in one 

system for orders entered into the other. 

According to Nasdaq, the next step in 

its current plan is to combine all of its 

three execution systems into a single 

trading platform. Nasdaq states that it 

expects to accomplish this process 

sometime before the end of the third 

quarter of 2006. As part of this process, 

Nasdaq would also combine all three of 

its system books into a single integrated 

book where all orders interact and have 

time-priority against each other. Nasdaq 

anticipates transitioning quotation and 

execution activity from its systems and 

other market centers to its single system 

in phases. 

Once Nasdaq’s single integrated 

system is operational and fully 

populated, Nasdaq states that it expects 

to continue to operate a broker-dealer to 

act as Nasdaq’s outbound access broker 

dealer to reach orders displayed in other 

market centers.13

2. Statutory Basis 

Nasdaq believes that the proposed 

rule change is consistent with the 

provisions of Section 15A of the Act,14

in general, and Section 15A(b)(6) of the 

Act,15 in particular, in that it is designed 

to prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, remove 

impediments to 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 will result in any 

burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Act. Nasdaq states 

that its proposed operation of the INET 

System must be viewed against the 

backdrop of today’s competitive and 

dynamic market structure. According to 

Nasdaq, the Commission’s action in 

approving the Order Handling Rules, 

Regulation ATS, the creation of NASD’s 

Alternative Display Facility (‘‘ADF’’), 

and the recent approval of Regulation 

NMS 16 provide increased opportunities 

for market participants to compete 

vigorously for the trading of U.S. equity 

securities. 

Nasdaq states that the combination of 

Regulation NMS’s articulation of a 

framework that obligates market 

participants to seek the best price and 

the availability of technology to display 

and reach that price ensures that all 

market centers will be able to compete 

by offering the best price. Nasdaq 

believes that the dynamic market 

structure and the incentives that led to 

the creation of entities such as the INET 

System ensure that all market centers 

will continue to innovate and compete 

to serve their customers, and that new 

competitors will be able to enter if they 

believe it would be profitable for them 

to do so. In this dynamic competitive 

environment, Nasdaq believes that its 

operation of the INET System will not 

place any burden on competition. 

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; 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: 

Federal Register / Vol. 70, No. 214 / Monday, November 7, 2005 / Notices 67523 

17 17 CFR 200.30–3(a)(12). 

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

2 17 CFR 240.19b–4. 

3 Information on Rule 144A transactions in 

TRACE-eligible securities is not disseminated 

because securities sold pursuant to Rule 144A are 

subject to restrictions on transfer and are not freely 

tradable in the public secondary market. 

4See Securities Exchange Act Release No. 50317 

(September 3, 2004), 69 FR 55202 (September 13, 

2004). 

5NASD proposed that dissemination of TRACE 

information be implemented in phases as the 

TRACE Rules were developed. See Securities 

Exchange Act Release No. 43873 (January 23, 2001), 

66 FR 8131 (January 29, 2001) (order approving 

NASD’s proposed rules creating TRACE, the 

corporate bond trade reporting and transaction 

dissemination facility) (‘‘SEC 2001 Approval 

Order’’). In the SEC 2001 Approval Order, the SEC 

discussed and approved the NASD’s proposal to 

increase transparency in phases. See id. at 8133. 

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–2005–128 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–9303. 

All submissions should refer to File 

Number SR–NASD–2005–128. 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–2005–128 and 

should be submitted on or before 

November 28, 2005. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.17

Jonathan G. Katz, 

Secretary. 

[FR Doc. 05–22227 Filed 11–4–05; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–52700; File No. SR–NASD–

2005–120] 

Self-Regulatory Organizations; 

National Association of Securities 

Dealers, Inc.; Notice of Filing of 

Proposed Rule Change Relating to 

Dissemination of Information on 

TRACE-Eligible Securities 

Transactions 

October 28, 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 October 

14, 2005, the National Association of 

Securities Dealers, Inc. (‘‘NASD’’) 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 NASD. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

NASD is proposing to amend Rule 

6250 of the Trade Reporting and 

Compliance Engine (‘‘TRACE’’) rules to 

disseminate immediately upon receipt 

transaction information on TRACEeligible securities (except transactions 

effected pursuant to Rule 144A of the 

Securities Act of 1933 (‘‘Rule 144A 

transactions’’)). The text of the proposed 

rule change is available on NASD’s Web 

site (http://www.nasd.com), at NASD’s 

principal office, 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, 

NASD 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. NASD 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 

NASD is proposing to amend Rule 

6250 to eliminate all delays in the 

dissemination of information on 

transactions in TRACE-eligible 

securities (‘‘TRACE information’’). The 

proposed amendments to NASD Rule 

6250 provide that TRACE information 

on all transactions (except on Rule 144A 

transactions) be disseminated 

immediately upon receipt of the 

transaction report. The proposed rule 

change represents the last stage of a 

series of NASD regulatory actions to 

gradually increase transparency, by 

phases, for all transactions in TRACEeligible securities (except Rule 144A 

transactions) for the benefit of all market 

participants.3 The proposed 

amendments also meet the 

Commission’s expectations as set forth 

in its September 2004 approval order for 

the third phase of TRACE dissemination 

(‘‘Phase III’’) (‘‘Phase III Approval 

Order’’).4 In the Phase III Approval 

Order, the Commission stated that it 

expected NASD to submit a proposal 

eliminating the remaining delays in 

TRACE information dissemination not 

later than November 1, 2005. 

Background 

Prior to the approval of the initial 

TRACE Rule 6200 Series, NASD 

structured TRACE to phase in the 

dissemination of TRACE information 

gradually. As of July 1, 2002, when 

TRACE became operational, it was 

agreed that public dissemination of 

TRACE information on these corporate 

bond transactions would be 

implemented over three phases.5

Bond Transaction Reporting 

Committee. In addition, before TRACE 

became operational on July 1, 2002, 

NASD formed the Bond Transaction 

Reporting Committee (‘‘BTRC’’) to