[Federal Register Volume 66, Number 35 (Wednesday, February 21, 2001)]
[Notices]
[Pages 11076-11078]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-4259]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43958; File No. SR-NASD-01-03]


Self-Regulatory Organizations: Notice of Proposed Rule Change and 
Amendment No. 1 Thereto by the National Association of Securities 
Dealers, Inc. Relating to the Elimination of the Interval Delay Between 
Executions for Initial Public Offerings and Secondary Offerings in the 
Nasdaq National Market Execution System

February 13, 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 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 31, 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 
and Amendment No. 1 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 Thomas P. Moran, Assistant General Counsel, 
Nasdaq, to Jack Drogin, Assistant Director, Division of Market 
Regulation, Commission, dated January 30, 2001 (Amendment No. 1). In 
Amendment No. 1, the Nasdaq added a footnote to proposed NASD Rule 
4710(b)(1)(D)(3) requiring the lead underwriter of a secondary 
offering to submit a written request to the Nasdaq Market Operations 
Department for immediate processing of executions in secondary 
offerings. See infra note 4.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    Nasdaq is filing a proposed rule change, on a six-month pilot 
basis, to eliminate the interval delay between executions against the 
same market maker at the same price level during the first day of 
trading of the securities of initial public offerings (``IPOs'') and 
secondary offerings in the Nasdaq National Market Execution System 
(``NNMS'' or ``SuperSOES''). Below is the text of the proposed rule 
change, as amended. Proposed new language is italicized.
* * * * *

4710. Participant Obligations in NNMS

    (a) No Change.
    (b) Market Makers
    (1) An NNMS Market Maker in an NNMS Security shall be subject to 
the following requirements:
    (A) No change.
    (B) No change.
    (C) No change.
    (D) (1) Except as provided in subparagraphs (2) and (3) below, 
after the NNMS system has executed an order against a market maker's 
displayed quote and reserve size (if applicable), that market maker 
shall not be required to execute another order at its bid or offer in 
the same security until 5 seconds has elapsed from the time the order 
was executed, as measured by the time of execution in the Nasdaq 
system.
    (2) For securities included in the Nasdaq 100 Index, after the NNMS 
system has executed an order against a market maker's displayed quote 
and reserve size (if applicable), that market maker shall not be 
required to execute another order at its bid or offer in the same 
security until 2 seconds has

[[Page 11077]]

elapsed from the time the order was executed, as measured by the time 
of execution in the Nasdaq system.
    (3) For both the fist day of trading of the securities of initial 
public offerings and the first day of trading of the securities of 
secondary offerings,\4\ after the NNMS system has executed an order 
against a market maker's displayed quote and reserve size (if 
applicable), that market maker shall be required to execute another 
order at its posted bid or offer in that same security as soon as the 
NNMS system delivers another order to that market maker's quote. After 
the first day of trading, subsequent multiple executions against the 
same market maker's quote at the same price level in such securities 
shall be processed pursuant to subparagraph (D)(2) of this rule if the 
security is included in the Nasdaq 100 Index, or if not included in 
that index, multiple executions against the same market maker's quote 
at the same price level in such securities shall be processed pursuant 
to subparagraph (D)(1) of this rule.
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    \4\ In order to obtain immediate processing of executions in 
secondary offerings, the lead underwriter of the secondary offering 
shall communicate its request in writing to the Nasdaq Market 
Operations Department no later than the business day immediately 
prior to the start of the trading in the secondary offering. Failure 
to do so may result in the secondary offering being processed 
pursuant to the interval delay time frames applicable to the 
currently trading shares of the issuer. See Amendment No. 1, supra 
note 3.
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    (c) through (e). 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
    Currently, the rules governing the Nasdaq Small Order Execution 
System establish a delay of 17 seconds (15 seconds for quote management 
and two seconds for system processing) between executions against the 
same market maker in the same security at the same price level. With 
the launch of SuperSOES, this delay will be reduced to five seconds 
(plus two seconds system processing time) for the vast majority of 
Nasdaq NMS securities. Due to market participants' concerns that 
significant order flow could potentially produce queuing within the 
system, Nasdaq recently filed a rule change with the Commission to 
further reduce the interval delay between executions in Nasdaq 
securities to two seconds.\5\
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    \5\ See Securities Exchange Act Release No. 43720 (December 13, 
2000), 65 FR 79909 (December 20, 2000) (notice of filing and 
immediate effectiveness of File No. SR-NASD-00-67).
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    Recently, Nasdaq market participants have also raised similar 
queuing concerns in the context of the rapid flow of orders 
accompanying IPOs as well as secondary offerings. Accordingly, Nasdaq 
is making the instant proposal to reduce from five seconds to zero 
seconds (plus system processing time) the delay between round-lot 
executions against the same market participant in the same security for 
the first day of trading of all SuperSOES-eligible IPOs and secondary 
offerings. This means that a market maker will be available for round-
lot executions as quickly as the system can transmit instructions 
between the execution and quote-update engines, an operation that 
generally requires from one to one and one half seconds.
    Under the proposal, Nasdaq will eliminate, during the first day of 
trading of IPOs and secondary offerings, the NNMS interval delay 
between executions taking place against the same market maker at the 
same price level. This proposed rule change will permit orders in these 
offerings to be processed on the first day of trading as fast as the 
SuperSOES system will allow. After the first day of trading, the NNMS 
interval delay between executions against the same market maker at the 
same price level for these securities would revert, and be determined, 
like all other NNMS-eligible securities, by whether or not the 
securities are part of the Nasdaq 100 Index (``Nasdaq 100''). If a 
security is a part of the Nasdaq 100, the NNMS interval delay between 
executions against the same market maker at the same price level on 
subsequent trading days would be two seconds. If a security is not a 
Nasdaq 100 security, the NNMS interval delay between executions against 
the same market maker at the same price level on subsequent trading 
days would be five seconds. Nasdaq proposes to eliminate the NNMS 
interval delay for the first day of trading of IPOs and secondary 
offerings on a six-month pilot basis to commence when the SuperSOES 
system becomes operational. During that time, Nasdaq will monitor the 
performance of the system under the proposed parameters to determine 
whether the proposed measures adequately address the concerns expressed 
by market participants.
    In addition, Nasdaq proposes to continue, for the time being, its 
current practice of using the same interval delay between multiple 
round-lot executions against the same market participant for odd-lot 
executions of that same security. For example, if the interval delay in 
a particular security were five seconds, the interval delay after an 
odd-lot execution would also be five seconds. Nasdaq will closely 
monitor odd-lot order entry activity in NNMS to ensure that such 
activity does not adversely impact market quality.
    Nasdaq believes that reducing the interval delay between executions 
of the first day of trading of NNMS-eligible IPOs and secondary 
offerings will ensure that customer orders for those securities are 
processed in the most expeditious manner possible. In turn, such 
processing will improve market function and aid in the crucial price 
discovery process.
2. Statutory Basis
    Based on the above, Nasdaq believes that the proposed rule change, 
as amended, is consistent with section 15A(b)(6) \6\ of the Act, in 
that the proposed rule change is designed to promote just and equitable 
principles of trade, foster cooperation and coordination with persons 
engaged in processing information with respect to and facilitating 
transactions in securities, as well as to remove impediments to and 
perfect the mechanism of a free and open market, and, in general, to 
protect investors and the public interest.
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    \6\ 15 U.S.C. 78o-3(b)(6).
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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.

[[Page 11078]]

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 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.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, is consistent with the Act. Persons making written 
submissions 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-01-03 and should be submitted by March 14, 2001.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\7\
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    \7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-4259 Filed 2-20-01; 8:45 am]
BILLING CODE 8010-01-M