[Federal Register Volume 60, Number 44 (Tuesday, March 7, 1995)]
[Notices]
[Pages 12583-12585]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-5462]



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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-35428; File No. SR-NASD-94-9, Amendment No. 2]


Self-Regulatory Organizations; Notice of Amendment No. 2 To 
Proposed Rule Change by National Association of Securities Dealers, 
Inc. Relating to Non-member Viewing Access to SelectNet

February 28, 1994.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on January 30, 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 is publishing this notice to solicit comments on the 
proposed rule change from interested persons.

    \1\15 U.S.C. 78s(b)(1) (1988).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The NASD proposes to amend its proposal to enhance the transparency 
of, and nonmember viewing access to, ``broadcast'' orders transmitted 
through The Nasdaq Stock Market, Inc.'s (``Nasdaq'') SelectNet service. 
Specifically, the NASD proposes to disseminate a separate feed of 
``broadcast'' orders entered into SelectNet that will be available to 
vendors.\2\

    \2\The subscriber fees imposed for receipt of this information 
will be set forth in a separate rule filing submitted pursuant to 
Section 19(b) of the Act. The NASD does not believe that Commission 
consideration of the instant proposal should be contingent upon 
approval of the fees for this service, as Nasdaq will make the 
service available at no charge until an appropriate fee structure 
for the service is approved by the Commission.
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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

    In March 1994, the NASD proposed modifications to the operation of 
Nasdaq's SelectNet service that would permit viewing access by non-
members who are subscribers to the Nasdaq Workstation Level 2 service 
to view ``broadcast'' orders immediately as they are entered into the 
service.\3\ In addition, because of the additional non-member 
constituencies that will be able to view all broadcast orders entered 
into SelectNet, the NASD also proposed to modify its order-entry 
procedure for SelectNet to ensure that broadcast orders are entered 
into and displayed through SelectNet anonymously. This feature was 
proposed for two reasons: (a) To preserve incentives for dealers to 
continue to make markets that add liquidity to the market; and (b) to 
avoid conditioning the market in one direction or another by orders 
identified with particular market makers or order entry firms.\4\ With 
this filing, the NASD [[Page 12584]] proposes to modify its proposal by 
providing for the dissemination of a separate feed of ``broadcast'' 
orders entered into SelectNet that will be available to vendors. In 
particular, the feed to vendors will contain information on all orders 
broadcast in SelectNet, partial executions of these orders, full 
executions of these orders, and, if applicable, when these orders 
timed-out or were canceled.

    \3\Securities Exchange Act Release No. 33938 (Apr. 20, 1994), 59 
FR 22033 (Apr. 28, 1994).
    \4\The original notice of the NASD's proposal set forth in 
greater detail the basis for this feature. Specifically, the 
original notice states that:
    Because of the additional non-member constituencies that will be 
able to view all broadcast orders, the NASD is also proposing to 
modify its order-entry procedure for SelectNet to ensure that 
broadcast orders are entered into and displayed through SelectNet 
anonymously. This feature is proposed for two reasons: To preserve 
incentives for dealers to continue to make markets that add 
liquidity to the market and to avoid conditioning the market in one 
direction or another by orders identified with particular market 
makers or order entry firms. First, the NASD believes that it is 
very important to retain incentives for market makers to participate 
in the market. Market makers put quotes in the Nasdaq system as a 
form of advertisement that they stand ready and willing to transact 
business at their quoted prices and sizes. There are obligations 
that accrue to those market makers, however, the NASD and the SEC 
require market makers to be firm for their quotes and to participate 
in order execution systems. Enabling order entry firms to advertise 
buy and sell interest freely, with no concomitant market maker 
obligations, by attaching their names to SelectNet orders so that 
anyone with a Workstation would be able to contact the entity 
directly by telephone, would eviscerate the positive attributes of 
being a market maker with a quote in the Nasdaq system.
    Second, allowing market makers (or order entry firms) to put 
their names on broadcast orders might condition or influence the 
market in a security by advertising the buying or selling power of 
the member firm. For example, if a broker/dealer that is considered 
a lead market maker or a major institutional block positioner in a 
security was interested in buying shares in the stock, it might 
broadcast a sell order in SelectNet, identify its name on the order, 
and cause the market to react to the sell interest and the power of 
the firm's name. Accordingly, other market makers in the stock might 
react to the sell interest by dropping their bids and the lead 
market maker would be able to buy stock at a lower price than would 
otherwise have been the case, simply because it was advertising its 
name, or conditioning the market. Indeed, similar conditioning 
effects might be caused by any firm, order entry firm or market 
maker, by entering orders that are quickly canceled without actual 
trading interest by the entry firm. Accordingly, the NASD proposes 
that member firms enter all broadcast orders anonymously.
    Although orders must be entered on an anonymous basis, once two 
firms are in negotiation over the terms of the broadcast order, the 
order entry firm may of course identify itself to the contra side. 
Presently, SelectNet provides members the option of identifying 
themselves on broadcast orders through their market maker 
identification symbol, although this alternative is seldom used. The 
information on SelectNet broadcast orders will be made available to 
members and nonmember subscribers to the Nasdaq Workstation Level 2 
service. This proposal is intended to avoid conditioning the market 
with orders that might be canceled at any time without actual 
trading interest by the order entry firm.
    Securities Exchange Act Release No. 33938 (Apr. 20, 1994), 59 FR 
22033 (Apr. 28, 1994 ).
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    SelectNet is the service operated by The Nasdaq Stock Market that 
permits NASD member firms to enter buy or sell orders in Nasdaq 
securities into the system, direct those orders to a single market 
maker (directed orders) or broadcast the order to all market makers in 
the security. Originally implemented in its predecessor form in 1988 as 
the Order Confirmation Transaction service,\5\ the primary function of 
that service was to offer an automated alternative to the telephone as 
a method of contacting market makers in times of market stress. To this 
end, order entry firms could direct an order to buy or sell a Nasdaq 
security to a single market maker in the issue. When the service was 
enhanced and renamed SelectNet in 1990,\6\ the broadcast feature was 
added to permit a wider dissemination of orders (i.e., ``broadcast 
orders'') to all market makers in an issue. In addition, the redesigned 
system allowed market makers in a subject security to send a broadcast 
order to all member firms that had designated that security in their 
SelectNet ``watch file,''\7\ whether the firm was a market maker or 
not. In 1992, the service was expanded to add pre-opening and after-
hours sessions,\8\ so that today SelectNet is available for members to 
negotiate and execute orders from 9:00 a.m. until 5:15 p.m. Eastern 
Time. The Nasdaq Stock Market operates SelectNet to provide investors 
and members with an automated system to facilitate communication of 
trading interest between members, negotiation of orders with the 
possibility of price improvement with automated, locked-in executions, 
and dissemination of last sale reports to the tape. In addition, 
SelectNet retains the original functionality of the service as a 
replacement for one-on-one communication between members, especially in 
times of market stress.

    \5\See Securities Exchange Act Release No. 25263 (Jan. 11, 
1988), 53 FR 1430 (Jan. 19, 1988).
    \6\See Securities Exchange Act Release No. 28636 (Nov. 21, 
1990), 55 FR 49732 (Nov. 30, 1990).
    \7\The SelectNet watch file is established by each member firm 
and may contain as many as 300 securities. The member will then 
receive any directed or broadcast order selected for inclusion in 
the watch file.
    \8\See Securities Exchange Act Release No. 30581 (Apr. 14, 
1992), 57 FR 14596 (Apr. 21, 1992).
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    Since its enhancement in December 1990, the service has grown in 
popularity with members and traffic has increased significantly--from 
an average of 3,000 transactions and 6 million shares daily in the 
first half of 1991 to over 10,000 transactions and more than 12 million 
shares daily in December 1994. As the system's usage has increased, 
institutions and other non-members have expressed a desire to view the 
orders broadcast within the service. Indeed, the Commission's Division 
of Market Regulation (``Division'') recommended that ``the NASD 
[should] examine how to improve access to information regarding orders 
entered into SelectNet'' in its Market 2000 Report.\9\ Accordingly, as 
noted above, in March 1994, the NASD filed the instant rule proposal 
with the Commission.

    \9\Market 2000: An Examination of Current Equity Market 
Developments, Division of Market Regulation, Securities and Exchange 
Commission (Jan. 1994).
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    With this amendment to the filing, the NASD now proposes to enhance 
further the market transparency benefits of the proposal by providing 
market participants with a more cost-effective and efficient means to 
receive information on orders broadcast in SelectNet. In particular, by 
making SelectNet information available to investors without the need 
for them to procure Nasdaq Workstation Level 2 Service, the NASD 
believes investors will have ready viewing access to an expanded 
spectrum of information regarding larger-size orders in Nasdaq 
securities at an affordable and reasonable cost. With this information, 
the NASD believes investors will be better able to assess the overall 
supply and demand for a particular Nasdaq stock, which, in turn, will 
permit them to effect transactions in a more cost-effective manner. 
Thus, the NASD believes this proposal, as amended, will promote the 
protection of investors and the maintenance of fair and orderly 
markets. The NASD also believes that the proposal directly responds to 
one of the Division's key recommendations designed to improve the 
transparency of orders broadcast through the SelectNet service.
    This proposed amendment also is responsive to comments raised 
regarding the NASD's proposal. In particular, the Investment Company 
Institute (``ICI'') and the New York Stock Exchange (``NYSE'') 
commented that the SelectNet order information should be made available 
to all subscribers of Nasdaq Level 2 price information, not just to 
non-members that possess Nasdaq Level 2 Workstations.\10\ Without 
making the SelectNet order information more broadly available at a 
lower cost, these commentators maintain that the improvements to market 
transparency and the benefits to investors resulting from the proposal 
will be minimal. The [[Page 12585]] NASD believes these comments are 
fully addressed by this proposed amendment.

    \10\See letters from Craig S. Tyle, Vice President & Senior 
Counsel, Securities and Financial Regulation, ICI, to Jonathan G. 
Katz, Secretary, SEC, dated May 19, 1994, a 2-3, and from James E. 
Buck, Senior Vice President & Secretary, NYSE, to Jonathan G. Katz, 
Secretary, SEC, dated June 2, 1994, at 4-7.
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    The NASD believes the proposed rule change is consistent with 
Sections 15A(b)(6) and 11A(a)(1)(C) of the Act and is a particularly 
timely and germane response to the recommendations contained in the 
Market 2000 study. 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. Section 11A(a)(1)(C) finds 
that it is in the public interest to, among other things, assure the 
availability to brokers, dealers, and investors of information with 
respect to quotations for and transactions in securities and 
economically efficient execution of securities transactions.
    The SelectNet service has served as an alternative to the telephone 
in times of market stress and as a system to broadcast orders to market 
makers for economically efficient negotiations and executions. By 
permitting non-members to view those broadcast orders, the NASD is 
removing impediments to transparency of market information and is 
facilitating transactions for those non-members who will now be able to 
see all broadcast orders in the service and timely arrange for the 
execution of such orders by a member. Although the orders in SelectNet 
do not represent quotations or last sale reports, the NASD believes 
that the information is valuable to investors and market participants 
and should be transparent and disseminated to non-members.

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 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, NW., Washington, DC 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 and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File Number SR-NASD-94-9 and 
should be submitted by March 28, 1995.

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

    \11\17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-5462 Filed 3-6-95; 8:45 am]
BILLING CODE 8010-01-M