[Federal Register Volume 66, Number 26 (Wednesday, February 7, 2001)]
[Notices]
[Pages 9394-9398]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-3112]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43913; File No. SR-NASD-00-76]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the National Association of 
Securities Dealers, Inc. Relating to Locked and Crossed Markets That 
Occur at or Prior to the Market's Open and the Market's Close

January 31, 2001.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on January 5, 2001, the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''), through its wholly owned 
subsidiary, the Nasdaq Stock Market, Inc. (``Nasdaq''), filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') the 
proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by Nasdaq. On January 22, 2001, the NASD, 
through Nasdaq, filed Amendment No. 1 to the proposed rule change.\3\ 
The Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Letter from Jeffrey S. Davis, Assistant General Counsel, 
Nasdaq, to Sapna C. Patel, Attorney, Division of Market Regulation 
(``Division''), Commission, dated January 19, 2001 (``Amendment No. 
1''). In Amendment No. 1, the Nasdaq made a minor technical 
correction to the rule text.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq proposes to amend the provisions of NASD Rule 4613(e) 
regarding locked and crossed market conditions that occur prior to the 
market's opening and to add provisions relating to locked and crossed 
markets that occur prior to the market's close. Below is the text of 
the proposed rule change. Proposed new language is italicized; proposed 
deletions are in brackets.
* * * * *

4613. Character of Quotations

    (a)-(d) No Change.
(e) Locked and Crossed Markets
    (1) A market maker shall not, except under extraordinary 
circumstances, enter or maintain quotations in Nasdaq during normal 
business hours if:
    (A) No Change.
    (B) No Change.
    (C) Obligations Regarding Locked/Crossed Market Conditions Prior to 
Market Opening And Prior to Market Closing
    (i) Locked/Crossed Market Prior to 9:20 a.m.--For locks/crosses 
that occur prior to 9:20 a.m. Eastern Time, a market maker that is a 
party to a lock/cross because the market maker either has entered a bid 
(ask) quotation that locks/crosses another market maker's quotation(s) 
or has had its quotation(s) locked/crossed by another market maker 
(``party to a lock/cross'') may, beginning at 9:20 a.m. Eastern Time, 
send through Nasdaq's SelectNet system (or its successor system) a 
message of any size that is at the receiving market maker's quoted 
price (``Trade-or-Move Message''). [Any market maker that receives a 
Trade-or-Move Message at or after 9:20 a.m. Eastern Time, and that is a 
party to a lock/cross, must within 30 seconds of receiving such message 
either: fill the incoming Trade-or-Move Message for the full size of 
the message; or move its bid down (offer up) by a quotation increment 
that unlocks/uncrosses the market.]
    (ii) Locked/Crossed Market Between 9:20 and 9:29:59 a.m.--[If] 
Before a

[[Page 9395]]

market maker enters a quote that would lock[s] or cross[es] the market 
between 9:20 and 9:29:59 a.m. Eastern Time, the market maker must 
[immediately] first send through SelectNet to the market maker whose 
quote[s] it [is] would lock[ing] or cross[ing] a Trade-or-Move Message 
[a message] that is at the receiving market maker's quoted price and 
that is for at least [5,000] 10,000 shares ([in instances where there 
are] if multiple market makers [to a] would be locked/crossed, each one 
must receive a Trade-or-Move Message [the locking/crossing market maker 
must send a message to each party to the lock/cross] and the aggregate 
size of all such messages must be at least [5,000] 10,000 shares); 
provided, however, that if a market participant is representing an 
agency order (as defined in subparagraph (vi) of this rule), the market 
participant shall be required to send a Trade-or-Move Message9s) in an 
amount equal to the agency order, even if that order is less than 
[5,000] 10,000 shares. A market maker that sends a Trade-or-Move 
Message during these periods must then wait at least 15 seconds before 
entering a quote that would lock or cross the market. [A market maker 
that receives a Trade-or-Move Message during this period and that is a 
party to a lock/cross, must within 30 seconds of receiving such message 
either: fill the incoming Trade-or-Move Message for the full size of 
the message; or move its bid down (offer up) by a quotation increment 
that unlocks/uncrosses the market.]
    (iii) Locked/Crossed Market Between 3:50 and 3:59:59 p.m.--Before a 
market maker enters a quote that would lock or cross the market between 
3:50 and 3:59:59 p.m. Eastern Time, the market maker must first send 
through SelectNet to the market maker whose quote it would lock or 
cross, a Trade-or-Move Message that is at the receiving market maker's 
quoted price and that is for at least 10,000 shares (if multiple market 
makers would be locked/crossed, each one must receive a Trade-or-Move 
Message and the aggregate size of all such messages must be at least 
10,000 shares); provided, however, that if a market participant is 
representing an agency order (as defined in subparagraph (vi) of this 
rule), the market participant shall be required to send a Trade-or-Move 
Message(s) in an amount equal to the agency order, even if that order 
is less than 10,000 shares. A market maker that sends a Trade-or-Move 
Message during this period must then wait at least 15 seconds before 
entering a quote that would lock or cross the market.
    (iv) A market maker that receives a Trade-or-Move Message must, 
within 15 seconds of receiving such message, either fill the incoming 
Trade-or-Move Message for the full size of the message, or, consistent 
with its Firm Quote obligations, move its bid down (offer up) by a 
quotation increment that restores or maintains an unlocked/uncrossed 
market.
    [(iii)] (v) A market maker that sends a Trade-or-Move Message 
pursuant to subparagraphs (e)(1)(C)(i), (ii), or (iii) [or 
(e)(1)(C)(ii)] of this rule must append to the message a Nasdaq-
provided symbol indicating that it is a Trade-or-Move Message.
    [(iv)] (vi) For the purposes of this rule ``agency order'' shall 
mean an order(s) that is for the benefit of the account of a natural 
person executing securities transactions with or through or receiving 
investment banking services from a broker/dealer, or for the benefit of 
an ``institutional account'' as defined in NASD Rule 3110. An agency 
order shall not include an order(s) that is for the benefit of a market 
maker in the security at issue, but shall include an order(s) that is 
for the benefit of a broker/dealer that is not a market maker in the 
security at issue.
    (2)-(3) No Change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Nasdaq is proposing amendments to NASD Rule 4613(e) that would 
alter the obligations of market makers regarding locked and crossed 
markets that occur prior to the market's open and also prior to the 
market's close. Specifically, the proposal would: (1) Extend the 
application of NASD Rule 4613(1)(C)(ii) regarding locked/crossed 
markets before the market's open to the period just prior to the 
market's close as well; (2) require market makers that send a Trade-or-
Move Message do so at least 15 seconds before entering a locking/
crossing quote rather than after entering a locking/crossing quote, as 
the rule currently requires; (3) increase from 5,000 to 10,000 the 
minimum number of shares that accompany a non-agency Trade-or-Move 
Message; and (4) reduce from 30 seconds to 15 seconds the amount of 
time within which the recipient of a Trade-or-Move Message must 
properly respond.
    a. Background. On February 7, 2000, the Commission approved changes 
to NASD Rule 4613(e) \4\ that altered the obligations of market 
participants who enter locking/crossing quotations during the pre-
market opening period.\5\ Under the NASD Rule 4613(e), a market 
participant that locks/crosses the market between 9:20 a.m. and 9:29:59 
a.m. is then required to send a message(s), which has a ``Trade-or-
Move'' designator (``Trade-or-Move Message''), to the parties it is 
locking/crossing. The Trade-or-Move modifier allows market participants 
to distinguish a Trade-or-Move Message (to which a receiving market 
maker is obligated to respond) from other pre-opening messages it may 
receive.
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    \4\ See Securities Exchange Act Release No. 42400 (February 7, 
2000), 65 FR 7407 (February 14, 2000) (order approving File No. SR-
NASD-99-23). On June 2, 2000, the Commission approved changes to 
NASD Rule 4613(e) relating to the allegations of market participants 
representing agency orders who enter locking/crossing quotations. 
See Securities Exchange Act Release No. 42896 (June 2, 2000), 65 FR 
36747 (June 9, 2000) (order approving File No. SR-NASD-00-18).
    \5\ A locked market occurs when the quoted bid price is the same 
as the quoted ask price. A crossed market occurs when the quoted bid 
price is greater than the quoted ask price.
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    Currently, under NASD Rule 4613(e), the aggregate size of the 
Trade-or-Move Message must be at least 5,000 shares (i.e., the market 
participant must send a total of 5,000 shares to all parties it is 
locking/crossing) in the case of a proprietary quote, or the actual 
size of an agency order if that is the basis for the locking/crossing 
quote. NASD Rule 4613(e) further provides that a party that receives a 
Trade-or-Move Message must, within 30 seconds, either: (1) Trade in 
full with the incoming Trade-or-Move Message,\6\ (2) decline to trade 
with the incoming Trade-or-Move Message and move its quotation to a 
price level that unlocks or uncrosses the market; or (3) trade with a 
portion of the incoming Trade-or-Move Message and move its quotation to 
a level that unlocks or uncrosses the market. In essence, NASD Rule 
4613(e) prohibits market participants from locking/crossing the

[[Page 9396]]

market during the 10 minutes before the opening, unless the party is 
willing to commit a significant number of shares.
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    \6\ The recipient of a Trade-or-Move Message that trades in full 
with the Trade-or-Move Message may move its quotation, but is not 
obligated to do so.
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    Currently, unlike a market participant that actively locks or 
crosses the market after 9:20 a.m., a market participant that locks or 
crosses the market prior to 9:20 a.m. is not obligated to send a Trade-
or-Move Message for a specific number of shares to all parties to the 
lock or cross.\7\ This distinction is necessary because market 
participants often do not actively monitor their quotations prior to 
9:20 a.m., and, as a result, it is often difficult to determine which 
party actively locked or crossed the market prior to 9:20 a.m. For this 
reason, the obligations and rights of the parties to the lock or cross 
do not begin until 9:20 a.m.
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    \7\ However, beginning at 9:20 a.m., any party to a lock/cross 
may send a Trade-or-Move Message to any other party to the lock/
cross. See NASD Rule 4613(e)(1)(C)(i).
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    b. Rule Changes. The implementation of the Trade-or-Move Message 
has substantially reduced the occurrence of locked/crossed markets 
prior to the open. It has, in addition, reduced the duration of locks/
crosses that do occur. Although these improvements are encouraging, 
Nasdaq members have indicated that further improvement can be achieved 
by further modifying NASD Rule 4613(e). First and foremost, Nasdaq 
believes that the occurrence of locked/crossed markets prior to the 
open would be further reduced if market makers were required to send a 
Trade-or-Move Message before rather than after the lock or cross is 
entered. By preventing individual locks/crosses from occurring, Nasdaq 
hopes to further reduce the aggregate time that any market remains 
locked/crossed.
    Accordingly, under the current proposal, market participants would 
be obligated to send the Trade-or-Move Message before entering a 
locking or crossing quotation during the applicable periods.\8\ 
Implicit in the sending of a Trade-or-Move Message is the 
representation by the sender of its determination of the 
appropriateness of the price sought to be reflected and the intention 
to enter such quote immediately following the response to the Trade-or-
Move Message. Nasdaq will monitor the use of the Trade-or-Move Message 
by firms with respect to the entry of quotes following the response to 
the message, to detect any patterns of failure to enter quotations that 
may be indicative of manipulative conduct.
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    \8\ Market participants will continue to utilize SelectNet to 
send Trade-or-Move Messages to market participants that would be 
locked or crossed by the entry of the intended quote. The Trade-or-
Move Message will continue to carry the special identifier ``trd or 
mov'' for ease of recognition and will also continue to constitute a 
valid offer to buy or sell the number of shares contained in the 
message that may be accepted by the recipient in whole or in part, 
subject to the recipient's firm quote obligations.
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    Specifically, under the proposal, market participants will be 
required to send a Trade-or-Move Message and then wait 15 seconds 
before entering a quotation that would lock or cross another quote. The 
market participant receiving the Trade-or-Move Message would be 
required to respond to the message within 15 seconds, rather than 
within 30 seconds as currently allowed. The recipient of a Trade-or-
Move Message can respond by trading in full and leaving its quote at 
the same price, trading in part and moving its quote to a price that 
would not lock or cross the Trade-or-Move price, or decline to trade 
and move its quote to a price that would not lock or cross the Trade-
or-Move price.\9\ As is the case today, if a market maker receives a 
Trade-or-Move Message just prior to the open (i.e., at or after 9:29:45 
a.m.), the market maker must trade or move within 15 seconds, even if 
the end of that 15 seconds occurs after the market's open.\10\
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    \9\ During market hours, the recipient's ability to decline to 
trade with the Trade-or-Move Message would be subject to the 
recipient's firm quote obligations.
    \10\ If, however, a market maker wishes to enter a locking/
crossing quote at or after 9:30:00, the market maker would be 
required to use reasonable means to avoid locking/crossing the 
market by, for example, sending a SelectNet message to the party (or 
parties) it will lock/cross. See NASD Notice to Members 97-49.
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    Nasdaq also believes that increasing the economic significance of 
the Trade-or-Move Message would offset, and even further reduce, any 
potential for misuse that might arise by permitting market participants 
to send such messages without having first locked/crossed the market. 
Accordingly, Nasdaq proposes to increase the minimum size of the Trade-
or-Move Message to 10,000 shares from the current 5,000 shares (subject 
to the agency order exception provided by the current rule). 
Consequently, when multiple market participants would be locked/
crossed, each one must receive a Trade-or-Move Message and the 
aggregate size of all such messages must equal 10,000 shares (also 
subject to the agency order exception).
    Finally, given the positive effect that Trade-or-Move has had on 
resolving potential locked and crossed markets at and immediately 
before the market's opening, Nasdaq proposes to expand its application 
to include the ten-minute period preceding the market's close (3:50 
p.m. to 3:59:59 p.m.). Due to its volatility, this period is well-
suited to the application of the Trade-or-Move Message and its related 
regulatory requirements to minimize the potential for locked or crossed 
markets. Nasdaq believes that the Trade-or-Move Message will facilitate 
the entry of quotes that more accurately reflect the current state of 
the market.
    The Trade-or-Move Message used prior to the close would operate in 
the same manner as is currently proposed for prior to the open, with 
one exception. Prior to the market's open, the market participant 
receiving a Trade-or-Move Message has no liability under the NASD's 
firm quote rule (NASD Rule 4613(b)), or under the SEC's firm quote rule 
(Rule 11Ac-1 under the Act). Thus, a market maker is permitted to move 
its quote without trading upon the receipt of what, during market 
hours, would be a SelectNet ``liability'' order. Prior to the market's 
close, however, a Trade-or-Move Message will be considered a liability 
order. Therefore, unlike during the earlier period, a market 
participant that receives a Trade-or-Move Message prior to the close 
may move its quote or trade with just a portion of the Trade-or-Move 
Message only if doing so is consistent with its firm quote obligations 
under the NASD and SEC rules.\11\
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    \11\ The proposed changes to NASD Rule 4613(e) are designed to 
address conditions that exist today in Nasdaq. Nasdaq hopes that the 
implementation of the Nasdaq National Market Execution System 
(``NNMS''), currently scheduled for after the full implementation of 
the decimalization for trading of Nasdaq securities, will further 
diminish the occurrence and duration of locked and crossed markets 
in Nasdaq and perhaps obviate the need for this rule. Nasdaq will 
carefully monitor the operation of NASD Rule 4613(e) in the NNMS and 
propose any changes necessitated by NNMS.
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    c. Examples of Rule Operation. The following are examples of how 
the proposed rule would work. At 9:21 a.m., MMA plans to lock four 
market participants--MMB, MMC, MMD and MME--each quoting 1,000 shares 
at 20. Because the lock occurred after 9:20 a.m., MMA is required to 
send Trade-or-Move Messages in an aggregate amount of 10,000 shares to 
these four market makers at least 15 seconds before entering the 
locking quote. Accordingly, MMA sends a Trade-or-Move Message for 2,500 
shares to MMB, who declines and moves (MMB must move at least one 
increment away from the locking price). MMC receives a 2,500 share 
order, fills it partially (1,000), and, as required, moves its quote at 
least one trading increment away from the locking price. MMD receives a 
message for 2,500 shares, fills the message in full, and then moves 
down one trading increment below the locking price, although MMD is not 
obligated to move its quote. MME receives a 2,500-share

[[Page 9397]]

message, and fills it completely. MME is permitted to remain at her 
quote, but is not required to do so; like MMD, MME may move down one 
trading increment below the locking price. If MME remains at her quote, 
MMA could send another Trade-or-Move Message to MME, who could fill the 
message in full and remain at her quote, trade with a portion of the 
message and move her quote, or decline to trade with the message and 
move her quote.
    As a second example, assume that at 9:18 a.m., MMW and MMX are 
bidding 20, and MMY and MMZ enter offer prices of 19, thus crossing the 
market. Because it is before 9:20 a.m., no Trade-or-Move Messages may 
be sent yet. At 9:20 a.m., each of the four market participants would 
have the right to send Trade-or-Move Messages of any size to either of 
the two market participants crossing them. Any party not filling such 
an order in full within 15 seconds would have to move its quote at 
least one trading increment beyond the crossing price, 19, to restore 
an unlocked/uncrossed market.
    Finally, assume that at 3:51 p.m., MMA plans to lock two market 
participants--MMB and MMC--each quoting 2,000 shares at 10.\12\ Because 
the lock would occur between 3:50 p.m. and 3:59:59 p.m., MMA is 
required to send a Trade-or-Move Message via SelectNet for a total of 
10,000 shares to MMB and MMC at least 15 seconds before entering the 
locking quote. MMA sends a Trade-or-Move Message for 5,000 shares to 
MMB. MMB may either trade in full and stay at 10, trade in part and 
move, or decline move (MMB must move at least one increment away from 
the locking price).\13\ If MMB chooses to trade in full and remain at 
10, MMA could send another Trade-or-Move Message to MMB. MMC receives a 
5,000-share order, fills the order partially (1,000 shares), and, as 
required, moves its quote at least one trading increment away from the 
locking price.
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    \12\ Nasdaq revised the following examples to eliminate 
references to the customer limit orders. Telephone conversation 
between Jeffrey S. Davis, Assistant General Counsel, Nasdaq, and 
Yvonne Fraticelli, Special Counsel, Division, Commission, on January 
26, 2001.
    \13\ MMB's ability to decline to trade with the message is 
subject to MMB's firm quote obligations.
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    d. Conclusion. In sum, the Nasdaq believes that the proposal 
provides a strong impetus to avoiding locked or crossed markets near 
the open and the close, while providing a mechanism for the prompt 
adjustment of quotations to more accurately reflect the state of the 
market at that point in time. Moreover, the Nasdaq believes that the 
change in response time to the Trade-or-Move Message and the increased 
size the message will enhance the effectiveness of the rule both before 
the open and the close of the market, while providing the 
predictability needed to facilitate the programming of market 
participants systems to comply with the rule.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of section 15A(b)(6) \14\ and section 11A(a)(1)(C) \15\ 
of the Act. Section 15A(b)(6) requires that the rules of a registered 
national securities association are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principals 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; and are not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers. Section 11A(a)(1)(C) provides, in relevant part, that is in 
the public interest and appropriate for the protection of investors and 
the maintenance of fair and orderly markets to assure: (1) Economically 
efficient execution of securities transactions; (2) fair competition 
among brokers and dealers; (3) the availability to brokers, dealers and 
investors or information with respect to quotations for and 
transactions in securities; (4) the practicability of brokers executing 
investors orders in the best market; and (5) an opportunity for 
investors orders to be executed without the participation of a dealer.
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    \14\ 15 U.S.C. 78o-3(b)(6).
    \15\ 15 U.S.C. 78k-1(a)(1)(C).
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    Nasdaq believes that the amendments to NASD Rule 4613(e) are 
consistent with section 15A(b)(6) and section 11A(a)(1)(C). By 
attempting to resolve locks and crosses at the market opening and 
closing, Nasadq believes that the proposal will ensure the fair and 
orderly operation of Nasdaq and the protection of investors, as its 
purpose is to limit the disruptions to the Nasdaq market and the 
potential for harm to investors.

B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

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

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if its finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    A. By order approve such proposed rule change, or
    B. Institute proceedings to determine whether the proposed rule 
change should be disapproved.

VI. 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. Persons making written submission 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NASD. All submissions should refer to File No. SR-NASD-00-76 and should 
be submitted by February 28, 2001.

[[Page 9398]]

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-3112 Filed 2-6-01; 8:45 am]
BILLING CODE 8010-01-M