Document ID: SEC-2005-0063-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2005-10-03T04:00Z

[Federal Register: October 3, 2005 (Volume 70, Number 190)]
[Notices]               
[Page 57636-57638]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03oc05-153]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52511; File No. SR-NASD-2005-113]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers; Notice of Filing and Immediate Effectiveness of Proposed Rule 
Change Related to Proactive Limit Orders

September 27, 2005.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on September 22, 2005, the National Association of Securities Dealers, 
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I and 
II below, which Items have been prepared by Nasdaq. Pursuant to Section 
19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ Nasdaq 
has designated the proposed rule change as non-controversial, and 
therefore the proposed rule change is effective upon filing. 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\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to create a voluntary proactive limit order type 
that, if locked or crossed by another accessible market center, will 
automatically be routed to that market center for potential execution. 
Nasdaq intends to implement the proposed rule change promptly and

[[Page 57637]]

will inform market participants of the exact implementation date via a 
Head Trader Alert on http://www.nasdaqtrader.com.

    The text of the proposed rule change is below. Proposed new 
language is in italics; proposed deletions are in brackets.
* * * * *

4701. Definitions

    Unless stated otherwise, the terms described below shall have the 
following meaning:
    (a) through (uu) No Change.
    (vv) The term ``Proactive'' shall mean, for priced limit orders so 
designated, that if marketable upon entry into the Nasdaq Market 
Center, the order will first attempt to execute in the Nasdaq Market 
Center and thereafter be sent to available external execution venues 
until it is fully executed or no longer marketable. The order will 
thereafter be added to the Nasdaq Market Center Book. Once on the book, 
if another accessible execution venue displays an order that locks or 
crosses the Proactive Limit Order, the order will be removed from the 
Nasdaq Market Center book and routed to that locking or crossing 
execution venue for potential execution.
* * * * *

4706. Order Entry Parameters

    (a) Non-Directed Orders--
    (1) General. The following requirements shall apply to Non-Directed 
Orders Entered by Nasdaq Market Center Participants:
    (A) A Nasdaq Market Center Participant may enter into the Nasdaq 
Market Center a Non-Directed Order in order to access the best bid/best 
offer as displayed in Nasdaq and other markets as set out in Rule 4714.
    (B) A Non-Directed Order must be a market or limit order, must 
indicate whether it should be not routed to another market in 
accordance with Rule 4714, whether it is a buy, short sale, short-sale 
exempt, or long sale, and may be designated as ``Immediate or Cancel'', 
``Day'', ``Good-till-Cancelled'', ``Auto-Ex'', ``Fill or Return'', 
``Pegged'', ``Discretionary'', ``Sweep'', ``Total Day'', ``Total Good 
till Cancelled'', [or] ``Total Immediate or Cancel[,]'', [or] 
``Summary[.]'', or ``Proactive''.
    (i) through (xiii) No change.
    (xiv) A limit order may be designated as ``Proactive,'' in which 
case the order shall be designated as Day, GTC, X, or GTX. A Proactive 
Order that is marketable upon entry into the Nasdaq Market Center will 
first attempt to execute in the Nasdaq Market Center and thereafter be 
sent to available external execution venues until it is fully executed 
or no longer marketable. The order will thereafter be added to the 
Nasdaq Market Center book. Once on the book, if another accessible 
execution venue displays an order that locks or crosses the Proactive 
Limit Order, the order will be removed from the Nasdaq Market Center 
book and routed to that locking or crossing execution venue for 
potential execution.
    (C) through (F) No Change.
    (2) No Change.
    (b)-(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
    Nasdaq is proposing to implement the Proactive Order, an order 
option that will allow Nasdaq users to enter limit order(s) that 
execute against interest posted on the Nasdaq Market Center book, are 
posted on the book, and then are routed to another available market 
center if the limit order's price is locked or crossed by that market 
center.
    Currently, limit orders in the Nasdaq Market Center that are locked 
or crossed by other market centers remain inside the Nasdaq system and 
are not routed based on their price being locked or crossed. Under this 
proposal, users would have the option of directing that if their limit 
orders posted on the book subsequently become locked or crossed by 
prices displayed in another market center, the orders will be routed to 
the locking/crossing market center for potential execution. 
Specifically, the process would operate as follows:
    If marketable upon entry, the order will be executed either 
internally in the Nasdaq Market Center or routed to available external 
execution venues until it is fully executed or no longer marketable. 
The order will thereafter be added to the Nasdaq Market Center Book. 
Once on the book, if another accessible execution venue displays an 
order that locks or crosses the Proactive Limit Order, the order will 
be removed from the Nasdaq Market Center book and routed to that 
locking or crossing execution venue for potential execution. This 
proactive routing capability shall be available as an option on all 
Nasdaq Market Center order types that are eligible for routing to other 
execution venues.
    Nasdaq notes that a similar order functionality is already offered 
by Nasdaq's Brut Facility as a Super Aggressive Cross Order.\5\ Nasdaq 
also believes that this functionality will reduce the incidence and 
duration of locked or crossed markets and improve the quality of 
executions for Nasdaq Market Center users. Because of the similarities 
between the proposed functionality and orders already in use in the 
marketplace as well as the important market quality benefits the 
functionality provides, Nasdaq requests that the Commission waive the 
30-day pre-operative waiting period contained in Rule 19b-4(f)(6)(iii) 
under the Act.\6\
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    \5\ See NASD Rule 4903(b)(1)(C).
    \6\ 17 CFR 240.19b-4(f)(6)(iii).
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2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 15A of the Act,\7\ in general, and with 
Section 15A(b)(6) of the Act,\8\ in particular, in that it is designed 
to prevent fraudulent and manipulative acts and practices, to promote 
just and equitable principles of trade, remove impediments to a free 
and open market and a national market system, and, in general, to 
protect investors and the public interest. In particular, the proposal 
will limit the length of locked or crossed markets and improve the 
quality of executions for all Nasdaq Market Center participants.
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    \7\ 15 U.S.C. 78o-3.
    \8\ 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

    Written comments were neither solicited nor received.

[[Page 57638]]

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

    Because the foregoing proposed rule change does not: (i) 
Significantly affect the protection of investors or the public 
interest; (ii) impose any significant burden on competition; and (iii) 
become operative for 30 days from the date on which it was filed, or 
such shorter time as the Commission may designate if consistent with 
the protection of investors and the public interest, it has become 
effective pursuant to Section 19(b)(3)(A) of the Act \9\ and Rule 19b-
4(f)(6) thereunder.\10\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
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    Nasdaq has requested that the Commission waive the 30-day operative 
delay. The Commission believes that waiving the 30-day operative delay 
is consistent with the protection of investors and the public interest 
because the proposed change rule would permit Nasdaq to implement an 
order type similar to one already in use in the marketplace that may 
offer market quality benefits. Therefore, the Commission designates the 
proposal to be effective and operative upon filing with the 
Commission.\11\
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    \11\ For purposes of waiving the 30-day operative delay, the 
Commission has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate such rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File Number SR-NASD-2005-113 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-NASD-2005-113. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, 

all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Room. Copies of the 
filing also will be available for inspection and copying at the 
principal office of the NASD. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly.
    All submissions should refer to File Number SR-NASD-2005-113 and 
should be submitted on or before October 24, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-5346 Filed 9-30-05; 8:45 am]

BILLING CODE 8010-01-P