9704 Federal Register / Vol. 60, No. 34 / Tuesday, February 21, 1995 / Notices

2 17 CFR 200.30–3(a)(12)(1994).

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

2See Securities Exchange Act Release No. 33377

(Dec. 23, 1993), 58 FR 69419 (Dec. 30, 1993)

(‘‘Interim SOES Rules Approval Order’’).

3See Securities Exchange Act Release No. 35275

(Jan. 25, 1995), 60 FR 6327 (Feb. 1, 1995) (‘‘Interim

SOES Rules Extension Order’’).

Interpretation .03 to Rule 24.13 to delete

the requirement that any delays in the

opening rotation must be in five (5)

minute intervals and to give two Floor

Officials greater discretion to delay the

commencement of the opening rotation.

Rather than limiting the circumstances

under which two Floor Officials may

delay the opening, amended

Interpretation .03 would permit Floor

Officials to delay the opening rotation at

their discretion in the interests of a fair

and orderly market. The circumstances

outlined in current Interpretation .03 to

Rule 24.13, under which two Floor

Officials may delay the opening, would

remain as factors that Floor Officials

may consider in deciding whether to

delay the opening rotation. CBOE

believes that these amendments to

Interpretation .03 are consistent with

the amendment proposed for Rule 6.2,

which grants two Floor Officials the

authority to delay the opening rotation

in any class of options in the interests

of a fair and orderly market. Current

Interpretation .01 to Rule 24.13 provides

that the procedures for modification of

a rotation and other aspects of the

rotation set forth in Rule 6.2 are

applicable to index options. CBOE

believes that the authority regarding

delays in opening contained in Rule 6.2

should therefore apply to index options,

so that Floor Officials’ discretion to

delay the opening is not more restricted

in the case of index options.

The present requirement that the

delay in the opening rotation for index

options may only be in five (5) minute

intervals would be deleted because

CBOE believes the interests of a fair and

orderly market are better served if the

Floor Officials may end the delay and

commence the opening when it is

appropriate to do so, without having to

wait until the prescribed five minutes

has lapsed. In addition, CBOE believes

that for lengthy delays, it is impractical

to require two Floor Officials to remain

at the index options post for the sole

purpose of declaring successive five

minute delays.

Conclusion

The proposed rule changes are

intended to give Order Book Officials,

with the approval of two Floor Officials,

the discretion to conduct a trading

rotation during the day and to structure

the order and manner of the rotation as

they consider appropriate under the

circumstances. The rule changes would

further allow any two Floor Officials to

delay the opening rotation if it is in the

interests of a fair and orderly market to

do so. CBOE believes that the proposed

rule changes are consistent with and

further the objectives of section 6(b)(5)

of the Act, in that the rule changes are

designed to perfect the mechanism of

free and open market and to protect

investors and the public interest by

enabling Floor Officials and Order Book

Officials to evaluate and consider

market conditions and circumstances in

determining the appropriate order and

manner of the rotation and whether to

delay the opening rotation.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

CBOE does not believe that the

proposed rule changes will impose any

burden on competition.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Changes Received From

Members, Participants or Others

No written comments were solicited

or received with respect to the proposed

rule changes.

III. Date of Effectiveness of the

Proposed Rule Changes 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 funding or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

(A) By order approve such proposed

rule changes, or

(B) institute proceedings to determine

whether the proposed rule changes

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, NW.,

Washington, DC 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

changes that are filed with the

Commission, and all written

communications relating to the

proposed rule changes 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

Section, 450 Fifth Street NW.,

Washington, DC 20549. Copies of such

filing will also be available for

inspection and copying at the principal

office of CBOE. All submissions should

refer to the file number SR–CBOE–95–

04 and should be submitted by March

14, 1995.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.2

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 95–4161 Filed 2–17–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35364; File No. SR–NASD–

95–8]

Self-Regulatory Organizations; Notice

of Proposed Rule Change by the

National Association of Securities

Dealers, Inc., Relating to a Six Month

Extension of the SOES Minimum

Exposure Limit Rule and the SOES

Automated Quotation Update Feature

February 13, 1995.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’),1 notice is hereby given that on

February 10, 1995, the National

Association of Securities Dealers, Inc.

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

the Securities and Exchange

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

the proposed rule change as described

in Items I, II, and III below, which Items

have been prepared by the NASD. The

Commission in 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

The NASD proposed to extend, until

October 2, 1995, the effectiveness of

certain rules governing the operation of

The Nasdaq Stock Market, Inc.’s

(‘‘Nasdaq’’) Small Order Execution

System (‘‘SOES’’). Specifically, these

SOES rules, which were previously

approved by the Commission on a pilot

basis on December 23, 1993 2 and

recently extended through March 27,

1995,3 provide for: (1) a reduction in the

minimum exposure limit for

unpreferenced SOES orders from five

times the maximum order size to two

times the maximum order size, and for

the elimination of exposure limits for

preferenced orders (‘‘SOES Minimum
Federal Register / Vol. 60, No. 34 / Tuesday, February 21, 1995 / Notices 9705

4As first approved by the Commission on

December 23, 1993, the Interim SOES Rules had

four components: (1) The SOES minimum Exposure

Limit; (2) the Automated Quotation Update; (3) a

reduction in the maximum size order eligible for

execution through SOES from 1,000 shares to 500

shares (‘‘SOES Maximum Order Size’’); and (4) the

prohibition of short sales through SOES. In light of

the SEC’s approval of the NASD’s short sale rule in

June 1994, the NASD did not seek to extend the

prohibition against the entry of short sales into

SOES. Absent SEC approval of an extension of the

effectiveness of the SOES Maximum Order Size

rule, the rule will lapse effective March 28, 1995.

5Securities Exchange Act Release No. 33377 (Dec.

23, 1993), 58 FR 69419 (Dec. 30, 1993) (approving

the Interim SOES Rules on a one-year pilot basis

effective January 7, 1994). See also Securities

Exchange Act Release No. 33424 (Jan. 5, 1994)

(order denying stay and granting interim stay

through January 25, 1994) and Securities Exchange

Act Release No. 33635 (Feb. 17, 1994) (order

denying renewed application for stay).

6See SOES Interim Rules Extension Order, supra

note 3.

7 Interim SOES Rules Approval Order, supra note

2, 58 FR at 69423 (footnote omitted).

8 Id. (footnote omitted).

9 Id. at 69424–25.

10 Id. (footnote omitted).

Exposure Limit Rule’’); and (2)

implementation of an automated

function for updating market maker

quotations when the market maker’s

exposure limit has been exhausted

(‘‘SOES Automated Quotation Update

Feature’’). These rules are part of a set

of SOES rules approved by the SEC on

a pilot basis known as the Interim SOES

Rules.4

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

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. The 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

On December 23, 1993, the SEC

issued an order approving the Interim

SOES Rules on a one-year pilot basis

effective January 7, 1994. In response to

two applications requesting a stay of the

Interim SOES Rules Approval Order,

however, the SEC granted a partial stay

of the effective date of the order through

January 25, 1994. Thus, absent further

Commission action, the Interim SOES

Rules initially were effective from

January 26, 1994 through January 25,

1995.5 On January 25, 1995, the SEC

approval an NASD proposal to extend

the effectiveness of the Interim SOES

Rules through March 27, 1995.6

As described in more detail below,

because the NASD believes

implementation of the SOES Minimum

Exposure Limit rule and the SOES

Automated Quotation Update Feature

have been associated with positive

developments in the markets for Nasdaq

securities and clearly have not had any

negative effect on market quality, the

NASD believes it is appropriate and

consistent with the maintenance of fair

and orderly markets and the protection

of investors to extend the effectiveness

of these rules. In addition, consistent

with the termination of the Interim

SOES Rule that prohibited the entry of

short sales into SOES, the NASD

believes its instant proposal to continue

the effectiveness of some but not all of

the original components of the Interim

SOES Rules is appropriate and

consistent with the Act. While the

NASD believes the Interim SOES Rules

collectively have had a beneficial

impact on the market, the NASD also

believes that each of the Interim SOES

Rules has individually had a benefit on

the market. Thus, each one of the

Interim SOES Rules can be evaluated for

consistency with the Act independent of

the others. The SOES Minimum

Exposure Limit rule and the SOES

Automated Quotation Update Feature

reflect a reasoned approach by the

NASD to address the adverse effects on

market liquidity attributable to active

intra-day trading activity through SOES,

while at the same time not

compromising the ability of small, retail

investors to receive immediate

executions through SOES. Specifically,

these rules are designed to address

concerns that concentrated, aggressive

use of SOES by a growing number of

order entry firms has resulted in

increased volatility in quotations and

transaction prices, wide spreads, and

the loss of liquidity for individual and

institutional investor orders.

The NASD believes that the same

arguments and justifications made by

the NASD in support of approval of the

SOES Minimum Exposure Limit rule

and the SOES Automated Quotation

Update Feature are just as compelling

today as they were when the SEC relied

on them to initially approve the rules.

In sum, the NASD continues to believe

that concentrated bursts of SOES

activity by active order-entry firms

contributed to increased short-term

volatility, wider spreads, and less

market liquidity on Nasdaq and that the

SOES Minimum Exposure Limit rule

and the SOES Automated Quotation

Update Feature are an effective means to

minimize these adverse market impacts.

The NASD also notes that the SEC

made specific findings in the Interim

SOES Rules Approval Order that the

SOES Minimum Exposure Limit rule

and the SOES Automated Quotation

Update Feature were consistent with the

Act. In particular, the SEC stated in its

approval order that:

a. Because the benefits for market quality

of restricting SOES usage outweigh any

potential decrease in pricing efficiency, the

Commission concludes that the net effect of

the proposal is to remove impediments to the

mechanism of a free and open market and a

national market system, and to protect

investors and the public interest, and that the

proposed rule changes are designed to

produce accurate quotations, consistent with

Section 15A(b)(6) and 16A(b)(11) of the Act.

In addition, the Commission concludes that

the benefits of the proposal in terms of

preserving market quality and preserving the

operational efficiencies of SOES for the

processing of small size retail orders

outweigh any potential burden on

competition or costs to customers or brokerdealers affected adversely by the proposal.

Thus, the Commission concludes that the

proposal is consistent with Section 15A(b)(9)

of the Act in that it does not impose a burden

on competition which is not necessary or

appropriate in furtherance of the purposes of

the Act.7

b. The Commission also concludes that the

proposal advances the objectives of Section

11A of the Act. Section 11A provides that it

is in the public interest and appropriate for

the protection of investors and the

maintenance of fair and orderly markets to

assure economically efficient execution of

securities transactions, fair competition

among market participants, and the

practicality of brokers executing orders in the

best market. The Commission concludes that

the proposal furthers these objectives by

preserving the operational efficiencies of

SOES for the processing of small orders from

retail investors.8

c. The Commission believes that it is

appropriate to restrict trading practices

through SOES that impose excessive risks

and costs on market makers and jeopardize

market quality, and which do not provide

significant contributions to liquidity or

pricing efficiency. * * * The Commission

believes that it is more important to ensure

that investors seeking to establish or

liquidate an inventory position have ready

access to a liquid Nasdaq market and SOES

than to protect the ability of customers to use

SOES for intra-day trading strategies.9

d. The Commission believes that there are

increased costs associated with active intraday trading activity through SOES that

undermine Nasdaq market quality * * *

Active intra-day trading activity through

SOES can also contribute to instability in the

market. * * * 10

e. In addition, these waves of executions

can make it difficult to maintain orderly

markets. Given the increased volatility
9706 Federal Register / Vol. 60, No. 34 / Tuesday, February 21, 1995 / Notices

11 Id. at 69424–26 (footnote omitted).

12 Id.

13 Id.

14 Id. at 69429.

15See letter from Gene Finn, Vice President &

Chief Economist, NASD, to Katherine England,

Assistant Director, National Market System & OTC

Regulation, SEC, dated October 24, 1994 (letter

submitted in connection with the NASD’s

N•PROVE filing, SR–NASD–94–13).

16See The Association Between the Interim SOES

Rules and Nasdaq Market Quality, Dean Furbush,

Ph.D., Economists, Inc., Washington D.C., December

30, 1994 (‘‘Furbush Study’’).

17 Interim SOES Rules Approved Order, supra

note 2, 59 FR at 69429.

18Some press reports have attributed the recent

decline in spreads for Nasdaq stocks to the

publication, on May 26 and 27, 1994, of newspaper

articles in The Wall Street Journal, The Los Angeles

Times and other publications reporting the results

of an economic study conducted by two

academicians that illustrated the lack of odd-eighth

quotes for active Nasdaq stocks. Contrary to these

press reports, this study shows that spreads had

indeed narrowed before publication of these articles

(from April 28 to May 12), stabilized at these

narrower levels from mid-May until June 23, and

declined again from June 23 to July 18.

19See 1NASD Department of Economic Research:

Impact of SOES Active Trading Firms on Nasdaq

Market Quality (May 12, 1993) (‘‘May 1993 SOES

Study’’). See also Securities Exchange Act Release

No. 32313 (May 17, 1993), 58 FR 29647 (publication

of the study for comment).

associated with these waves of intra-day

trading activity, market makers are subject to

increased risks that concentrated waves of

orders will cause the market to move away.

As a result, individual market makers may be

unwilling to narrow the current spread and

commit additional capital to the market by

raising the bid or lowering the offer. When

market makers commit less capital and quote

less competitive markets, prices can be

expected to deteriorate more rapidly.

Accordingly, the Commission believes that it

is appropriate for the NASD to take measured

steps to redress the economic incentives for

frequent intra-day trading inherent in SOES

to prevent SOES activity from having a

negative effect on market prices and

volatility.11

f. The Commission does not believe that

intra-day trading strategies through SOES

contribute significantly to market efficiency

in the sense of causing prices to reflect

information more accurately.12

g. The Commission has evaluated each of

the proposed modifications to SOES, and

concludes that each of the modifications

reduces the adverse effects of active trading

through SOES and better enables market

makers to manage risk while maintaining

continuous participation in SOES. In

addition, the Commission does not believe

that any of the modifications will have a

significant negative effect on market quality.

To the extent that any of the modifications

may result in a potential loss of liquidity for

small investor orders, the Commission

believes that these reductions are marginal

and are outweighed by the benefits of

preserving market maker participation in

SOES and increasing the quality of

executions for public and institutional orders

as a result of the modifications.13

h. The Commission * * * has determined

that the instant modifications to SOES

further objectives of investor protection and

fair and orderly markets, and that these goals,

on balance, outweigh any marginal effects on

liquidity for small retail orders, and any anticompetitive effects on order entry firms and

their customers. The Commission concludes

that the ability of active traders to place

trades through a system designed for retail

investors can impair market efficiency and

jeopardize the level of market making capital

devoted to Nasdaq issues. The Commission

believes that the rule change is an

appropriate response to active trading

through SOES, and that the modifications

will reduce the effects of concentrated intraday SOES activity on the market.14

The NASD believes these significant

statutory findings by the SEC regarding

the SOES Minimum Exposure Limit rule

and the SOES Automated Quotation

Update Feature and the SEC’s

assessment of the likely benefits to the

marketplace that would result from the

rules have been confirmed and

substantiated by econometric studies on

the effectiveness of the Interim SOES

Rules conducted by the NASD’s

Economic Research Department 5 and an

independent economist commissioned

by the NASD.16 When the SEC approved

the Interim SOES Rules, it stated that

‘‘[a]ny further action the NASD seeks

with respect to SOES—extension of

these modifications upon expiration, or

introduction of other changes—will

require independent consideration

under Section 19 of the Act.’’ 17 In

addition, the SEC stated that, should the

NASD desire to extend these SOES

changes or modify SOES, the

Commission would expect, ‘‘the NASD

to monitor the quality of its markets and

assess the effects of the approved SOES

changes on market quality for Nasdaq

securities.’’ Also, if feasible, the SEC

instructed the NASD to provide a

quantitative and statistical assessment

of the effects of the SOES changes on

market quality; or, if an assessment is

not feasible, the SEC stated that the

NASD should provide a reasoned

explanation supporting that

determination.

In sum, the NASD’s study found that:

• Since the SOES changes went into

effect in January 1994, the statistical

evidence indicated that when average

daily volume, stock price, and stock

price volatility are held constant

through regression techniques, quoted

percentage spreads in Nasdaq securities

experienced a decline in the immediate

period following implementation of the

changes and have continued to decline

since then. The statistical evidence also

showed that the narrowing of quoted

percentage spreads became more

pronounced and robust the longer the

Interim SOES Rules were in effect. In

particular, quoted spreads in cents per

share for the 500 largest Nasdaq

National Market securities experienced

a sharp decline from April 28 to May 12

and from June 23 to July 18. 18

• With the exception of a brief,

market-wide period of volatility

experienced by stocks traded on

Nasdaq, the New York Stock Exchange,

and the American Stock Exchange

during the Spring, the volatility of

Nasdaq securities appears to be

unchanged in the period following

implementation of the changes; and

• A smaller percentage of Nasdaq

stocks experienced extreme relative

price volatility after implementation of

the rules and that these modifications,

in turn, suggest a reduction in relative

volatilities since the rules were put into

effect.

The Furbush Study also corroborated

the findings of the NASD’s study. This

study found that there was a statistically

significant improvement in effective

spreads for the top 100 Nasdaq stocks

(based on dollar volume) during the

three month period following

implementation of the rules. Moreover,

the study also found that the most

significant improvement in effective

spreads for the top 100 stocks occurred

for trade sizes between 501 and 1,000

shares, precisely the level that was

made ineligible for SOES trading by the

Interim SOES Rules. In addition, the

study found that the average number of

market makers for the top ten Nasdaqlisted stocks increased from 44.3 to 46.0,

or 3.8 percent, and from 30.2 to 30.9 for

the top 100 stocks, or 2.3 percent.

Although correlation does not

necessarily imply causation, as noted by

the SEC when it approved the Interim

SOES Rules, the NASD believes that

positive market developments clearly

have been associated with

implementation of the Interim SOES

Rules.

The NASD also believes that these

studies of the effectiveness of the

Interim SOES Rules lend credence to

another NASD study that was submitted

to the SEC in support of approval of the

Interim SOES Rules.19 In the May 1993

SOES Study, the NASD found that

concentrated waves of orders entered

into SOES by active order-entry firms

resulted in discernible degradation to

the quality of the Nasdaq market.

Specifically, the study found, among

other things, that: (1) bursts of orders

entered into SOES by active order entry

firms frequently result in a decline in

the bid price and a widening of the bidask spread; (2) there is a significant
Federal Register / Vol. 60, No. 34 / Tuesday, February 21, 1995 / Notices 9707

20Rule 80A provides that when the Dow Jones

Industrial Average declines or advances by 50

points or more, all index arbitrage orders to sell or

buy must be executed in a market stabilizing

manner.

21See Securities Exchange Act Release No. 28282

(July 30, 1990), 55 FR 31468, 31472 (Order

approving File Nos. SR–NYSE–90–5 and 90–11).

22See Securities Exchange Act Release No. 29854

(Oct. 24, 1991), 56 FR 55963 (Oct. 30, 1991) (order

approving file SR–NYSE–91–21) (‘‘Rule 80A

Approval Order’’).

23 Id. 56 FR at 55967.

24 Id.

25 Id. 56 FR at 55967–68

positive relationship between increases

in spreads and volume attributable to

active order-entry firms as it related to

total SOES volume per security; and (3)

activity by active order-entry firms

resulted in higher price volatility and

less liquidity—higher price changes are

associated with high active trading firm

volume, even after controlling for

normal price fluctuations.

Therefore, in light of all the abovecited statutory findings made by the

SEC when it approved the SOES

Minimum Exposure Limit rule and the

SOES Automated Quotation Update

Feature, coupled with the NASD’s

findings that these rules, as well as the

rest of the Interim SOES Rules, have

been associated with positive market

developments in terms of lower spreads

on Nasdaq and less stocks with extreme

relative price volatility, the NASD

believes it would be consistent with the

Act for the Commission to extend the

effectiveness of the SOES Minimum

Exposure Limit rule and the SOES

Automated Quotation Update Feature

for a six-month period. In sum, the

NASD believes its study and the

Furbush Study affirm the validity and

correctness of the SEC’s prior statutory

findings made in connection with the

approval of these rules. Moreover, even

if the Commission is unwilling to find

positive significance in the NASD’s

statistical analyses, at the very least,

these studies indicate that the market

has not been harmed by implementation

of these rules.

In addition, even if the Commission

concludes that the Interim SOES Rules

have had no impact on market quality,

the NASD believes the Commission’s

approval of New York Stock Exchange

(‘‘NYSE’’) Rule 80A on a permanent

basis illustrates that the Commission

would still have a sufficient basis to

approve an extension on the SOES

Minimum Exposure Limit rule and the

SOES Automated Quotation Update

Feature for a six month period.20 When

NYSE Rule 80A was proposed, the

Commission received considerable

adverse comment to the effect that there

was no causal relationship between

index arbitrage and market volatility

and that activation of the rule during

turbulent market conditions could have

disastrous effects on related options and

futures markets and actually exacerbate

market volatility. Despite these

comments, the commission approved

the proposal on a one-year pilot basis

noting that ‘‘the NYSE proposal

represents a modest step, proposed on a

pilot basis, to attempt to address the

issue of market volatility.’’ 21 After the

one year pilot, the NYSE prepared a

report that, in the SEC’s words, found

that the standard measures of NYSE

market quality appear largely unaffected

by Rule 80A. Specifically, the NYSE

Report indicated that: (1) quotes on the

NYSE did not widen after the 50 Dow

Jones Industrial Average point trigger

was reached; and (2) the imposition of

Rule 80A did not have any negative

effect on price continuity and depth in

the market.22 In addition, in approving

Rule 80A on a permanent basis, the SEC

noted that the rule ‘‘represents a modest

but useful step by the NYSE to attempt

to address the issue of market

volatility.’’ 23 that the rule ‘‘has not been

disruptive to the marketplace,’’ 24 and

that there was a ‘‘lack of evidence of any

harmful effects of Rule 80A.’’ 25 In sum,

the SEC discussion of the statutory basis

for approval of NYSE Rule 80A focused

in large part on the fact that Rule 80A

did not have any adverse impacts on

market quality on the NYSE and that, as

a result, the NYSE should be given the

latitude to take reasonable steps to

address excessive volatility in its

marketplace. Accordingly, the NASD

believes the SEC should afford the

NASD the same regulatory flexibility

that it afforded the NYSE to implement

rules reasonably designed to enhance

the quality of Nasdaq and minimize the

effects of potentially disruptive trading

practices.

The NASD believes that the proposed

rule change is consistent with Sections

15A(b)(6), 15A(b)(9), 15A(b)(11) and

11A(a)(1)(C) of the Act. Among other

things, Section 15A(b)(6) requires that

the rules of a national securities

association be designed to prevent

fraudulent and manipulative acts and

practices, to promote just and equitable

principles of trade, to foster cooperation

and coordination with persons engaged

in regulating, clearing, settling,

processing information with respect to,

and facilitating transactions in

securities, to remove impediments to

and perfect the mechanism of a free and

open market and a national market

system and in general to protect

investors and the public interest.

Specifically, the NYSE is proposing to

extend the effectiveness of the SOES

Minimum Exposure Limit rule and the

SOES Automated Quotation Update

Feature for six months because of

concerns that concentrated, aggressive

use of SOES by a growing number of

order entry firms has resulted in

increased volatility in quotations and

transactions prices, wider spreads, and

the loss of liquidity for individual and

institutional investor orders, all to the

detriment of public investors and the

public interest. The NYSE believes the

SOES Minimum Exposure Limit rule

and the SOES Automated Quotation

Update Feature have operated to rectify

this situation while continuing to

provide an effective opportunity for the

prompt, reliable execution of small

orders received from the investing

public. Accordingly, in order to protect

investors and the public interest, the

NASD believes the Interim SOES Rules

should be extended through October 2,

1995, so that small investors’ orders will

continue to receive the fair and efficient

executions that SOES was designed to

provide.

Section 15A(b)(9) provides that the

rules of the Association may not impose

any burden on competition not

necessary or appropriate in furtherance

of the purposes of the Act. The SOES

Minimum Exposure Limit rule and the

SOES Automated Quotation Update

Feature apply across the board and do

not target any particular user or

participant, as all dealers may set their

exposure limits at two times the tier size

and all dealers may elect to utilize the

automated quote feature. Accordingly,

the NASD believes that these rules

changes are not anti-competitive, as

they are uniform in application and they

seek to preserve the ability of SOES to

provide fair and efficient automated

executions for small investor orders,

while preserving market maker

participation in SOES and market

liquidity.

Section 15A(b)(11) empowers the

NASD to adopt rules governing the form

and content of quotations relating to

securities in the Nasdaq market. Such

rules must be designed to produce fair

and informative quotations, prevent

fictitious and misleading quotations,

and promote orderly procedures for

collecting and distributing quotations.

The NASD is seeking to continue the

effectiveness of the SOES Minimum

Exposure Limit rule and the SOES

Automated Quotation Update Feature so

that SOES activity may not result in

misleading quotations in the Nasdaq

market. Market makers place quotes in

the Nasdaq system and these quotes

comprise the inside market and define

the execution parameters of SOES.
9708 Federal Register / Vol. 60, No. 34 / Tuesday, February 21, 1995 / Notices

26 17 CFR 200.30–3(a)(12) (1994)

1NASD Manual, Code of Arbitration Procedure,

Part III, Sec. 32(c) (CCH) ¶ 3732.

When volatility in the SOES

environment causes market makers to

widen spreads or to change quotes in

anticipation of waves of SOES orders,

quotes in the Nasdaq market become

more volatile and may be misleading to

the investing public. Accordingly,

absent continuation of the SOES

Minimum Exposure Limit rule and the

SOES Automated Quotation Update

Feature, the quotations published by

Nasdaq may not reflect the true market

in a security and, as a result, there may

be short-term volatility and loss of

liquidity in Nasdaq securities, to the

detriment of the investing public.

Further, the continuation of the

automated refresh feature will ensure

that a market maker’s quotation is

updated after an exposure limit is

exhausted. Uninterrupted use of this

function will maintain continuous

quotations in Nasdaq as market makers

exhausting their exposure limits in

SOES will not be subject to a ‘’closed

quote’’ condition or an unexcused

withdrawal from the market.

Finally, the NASD believes that the

proposed rule change is consistent with

significant national market system

objectives contained in Section

11A(a)(1)(C) of the Act. This provision

states it is in the public interest and

appropriate for the protection of

investors and the maintenance of fair

and orderly markets to assure, among

other things, (i) economically efficient

execution of securities transactions; (ii)

fair competition among brokers and

dealers; and (iii) the practically of

brokers executing investor orders in the

best market. Specifically, the SOES

Minimum Exposure Limit rule and the

SOES Automated Quotation Update

Feature advance each of these objectives

by preserving the operational

efficiencies of SOES for the processing

of small investors’ orders, by

maintaining current levels of market

maker participation through reduced

financial exposure from unpreferenced

orders, and by reducing price volatility

and the widening of market makers’

spreads in response to the practices of

order entry firms active in SOES.

In addition, for the same reasons

provided by the SEC when it approved

the Interim SOES Rules that are cited

above in the text accompanying

footnotes 7 through 14, the NASD

believes that the proposed rule change

is consistent with Sections 15A(b)(6),

15A(b)(9), 15A(b)(11) and 11A(a)(1)(C)

of the Act.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The NASD believes that the proposed

rule change will not result in any

burden on competition that is not

necessary or appropriate in furtherance

of the purposes of the Act.

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received from

Members, Participants, or Others

Comments were neither solicited nor

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 the NASD 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.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection for copying in

the Commission’s Public Reference

Room. Copies of such filing will also be

available for inspection and copying at

the principal office of the NASD. All

submissions should refer to File

Number SR–NASD–95–8 and should be

submitted by March 14, 1995.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.

Margaret H. MacFarland,

Deputy Secretary.

[FR Doc. 95–4085 Filed 2–17–95; 8:45 am]

BILLING CODE 8010–01–M

[Release No. 34–35370; File No. SR–NASD–

94–05]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

National Association of Securities

Dealers, Inc. Relating to Time Period

for the Exchange of Documents Before

an Arbitration Hearing

February 14, 1995.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Act’’), 15 U.S.C. 78s(b)(1), notice is

hereby given that on February 1, 1995,

the National Association of Securities

Dealers, Inc. (‘‘NASD’’) or

‘‘Association’’) 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 the 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

The NASD is proposing to amend

Section 32(c) of the NASD Code of

Arbitration Procedure (‘‘Code’’).1 Below

is the text of the proposed rule change.

Proposed new language is in italics;

proposed deletions are in brackets.

Code of Arbitration Procedure

* * * * *

General Provisions Governing Per-Hearing

Proceedings

Sec. 32.

* * * * *

(c) Pre-Hearing Exchange. At least [ten

(10)] Twenty (20) calendar days prior to

the first scheduled hearing date, all

parties shall serve on each other copies

of documents in their possession they

intend to present at the hearing and

shall identify witnesses they intend to

present at the hearing. The arbitrators

may exclude from the arbitration any

documents not exchanged or witnesses

not identified. This paragraph does not

require service of copies of documents

or identification of witnesses which

parties may use for cross-examination or

rebuttal.

* * * * *

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

NASD included statements concerning