Document ID: SEC-2006-1640-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-12-15T05:00Z

[Federal Register: December 15, 2006 (Volume 71, Number 241)]
[Notices]               
[Page 75597-75599]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr15de06-119]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54901; File No. SR-NASD-2006-126]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change To Integrate Brut and INET Facilities

December 8, 2006.
    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 November 13, 2006, 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 substantially prepared by Nasdaq. On 
November 22, 2006, Nasdaq submitted Amendment No. 1 to the proposed 
rule change. Nasdaq has filed the proposal pursuant to Section 
19(b)(3)(A) of the Act \3\ and Rule 19b-4(f)(6) thereunder,\4\ which 
renders the proposal effective upon filing with the Commission. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change, as amended, 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 Substance 
of the Proposed Rule Change

    Nasdaq proposes to fully integrate its Brut and INET execution 
systems. Nasdaq states that this would result in the termination of 
operations of the Brut system and the elimination of applicable system 
rules from NASD's rule manual. Nasdaq has designated this proposal as 
non-controversial and has requested that the Commission waive the 30-
day operative delay period contained in Rule 19b-4(f)(6)(iii) under the 
Act.\5\ If such waiver is granted, Nasdaq would implement the migration 
in two phases: (1) A group of up to 20 test stocks beginning on or 
after November 13, 2006,\6\ and (2) the remaining stocks on November 
20, 2006. The text of the proposed rule change, as amended, is 
available on NASD's Web site (http://www.nasd.com), at NASD's principal 

office, and at the Commission's Public Reference Room.
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    \5\ 17 CFR 240.19b-4(f)(6)(iii).
    \6\ Telephone conversation between Jeffrey Davis, Vice 
President--Deputy General Counsel, Nasdaq, and Theodore Venuti, 
Attorney, Division of Market Regulation, Commission, on December 7, 
2006.
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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, Nasdaq included statements 
concerning the purpose of and basis for the proposed rule change, as 
amended, and discussed any comments it received on the proposed rule 
change, as amended. 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
    On January 13, 2006, the Commission issued an order conditionally 
approving Nasdaq's registration as a national securities exchange.\7\ 
In July of 2006, Nasdaq satisfied the conditions set forth in the 
Exchange Approval Order with respect to the trading of stocks listed on 
Nasdaq. On August 1, 2006, The NASDAQ Stock Market LLC (``Nasdaq LLC'') 
began operating as an exchange for the trading of Nasdaq-listed stocks. 
Nasdaq has not yet satisfied the conditions set forth in the Exchange 
Approval Order with respect to the trading of stocks listed on the New 
York Stock Exchange LLC (``NYSE'') and the American Stock Exchange LLC 
(``Amex''). Therefore, Nasdaq continues to operate as a facility of the 
NASD with respect to the trading of NYSE and Amex stocks. Nasdaq states 
that this

[[Page 75598]]

rule filing is submitted with respect to the trading of NYSE and Amex 
stocks.
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    \7\ See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (``Exchange Approval Order'').
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    Nasdaq proposes to fully integrate its Brut and INET execution 
systems resulting in the termination of operations of the Brut system 
and the elimination of applicable system rules from NASD's rule manual.
    The Commission has already approved the integration of Nasdaq LLC's 
three execution systems--the Nasdaq Market Center, the Brut ECN, and 
the INET ECN--into a single execution system commonly known as the 
Nasdaq Single Book.\8\ On October 16, 2006, Nasdaq LLC successfully 
launched the first phase of the Single Book by offering trading of 
twenty Nasdaq-listed securities. Nasdaq LLC completed the roll-out of 
trading in Nasdaq stocks in two phases, 200 additional Nasdaq stocks on 
October 23 and the remaining Nasdaq stocks on October 30. With respect 
to Nasdaq securities, the operation of the Brut system has been 
completely terminated as a result of the completed roll-out of the 
Single Book.
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    \8\ See Securities Exchange Act Release No. 54155 (July 14, 
2006), 71 FR 41291 (July 20, 2006).
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    The Commission approval of Nasdaq LLC's systems integration applies 
equally to the trading of NYSE- and Amex-listed stocks, but Nasdaq LLC 
has not begun to implement the Single Book with respect to those 
stocks. Nasdaq LLC has experienced an unanticipated delay in its 
implementation of Single Book for NYSE/Amex trading. This delay 
provides Nasdaq with an opportunity to add an additional step in the 
orderly implementation process, namely to merge the Brut and INET 
systems together in advance of the Single Book launch.
    Integrating Brut and INET would benefit Nasdaq participants by 
simplifying Nasdaq's market structure and operations, while imposing no 
technical or financial impact on participating firms. Nasdaq is 
proposing a ``virtual'' integration of Brut and INET. Specifically, 
current Brut users would continue to use the same front-end technology 
they use today, but all orders would be re-directed to the INET 
processors. As firms have the ability to enter orders into INET via 
various connectivity options today, existing Brut connectivity, via the 
FIX protocol, would become yet another connectivity option to the INET 
processors where such orders would be posted, executed or routed, per 
the entry firm's instructions.
    More specifically, the three basic Brut orders--To Brut, Cross, and 
Thru Brut--and their sub-types would be ``mapped'' to a currently 
approved and operational order type, as set forth below:

------------------------------------------------------------------------
                                           Mapping to INET order types
 Brut order types defined in NASD Rule    defined in NASD Rules 4953 and
                  4903                                 4956
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To Brut................................  INET order.
To Brut (with post only attribute).....  order would be rejected.
To Brut (with discretion attribute)....  STGY.
Cross..................................  SCAN.
Aggressive Cross.......................  STGY.
Super Aggressive Cross.................  STGY.
Directed Cross (destination is the New   DOTN or DOTA (based on
 York Stock Exchange or the American      instructions from entering
 Stock Exchange).                         party).
Directed Cross (destination is not the   STGY.
 New York Stock Exchange or the
 American Stock Exchange).
Thru (destination is the New York Stock  TDOT.
 Exchange or the American Stock
 Exchange).
Thru (destination is not the New York    STGY.
 Stock Exchange or the American Stock
 Exchange).
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    The migration of Brut order flow would be seamless to Brut users. 
First, the Commission's approval of Nasdaq LLC's system integration 
included the elimination of the Brut operating system; integrating Brut 
operations into INET is no different than integrating Brut into Single 
Book. Second, the integration Nasdaq proposes is virtual and, as 
described above, would not affect how Brut subscribers participate in 
the Nasdaq market. Third, in addition to the absence of system impact, 
the vast majority of Brut subscribers are also INET subscribers that 
are already familiar with the INET system. Nasdaq would work with the 
remaining Brut subscribers to address any questions or concerns they 
have regarding the proposed integration.
    With respect to the applicable rules, in the order approving Single 
Book the Commission approved the removal of the Brut rules from Nasdaq 
LLC's exchange rule manual, which currently applies to the trading of 
Nasdaq stocks. Nasdaq now proposes to remove the Brut rules from the 
NASD manual, which currently governs the NASD/Nasdaq trading of NYSE/
Amex stocks and would continue to govern that trading until Nasdaq LLC 
operates as an exchange for these stocks. Nasdaq expects that it would 
begin operating as an exchange with respect to NYSE/Amex stocks on the 
day (1) Nasdaq LLC launches Single Book and (2) the NASD launches its 
new quotation system for NYSE/Amex stocks.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of section 15A of the Act,\9\ in 
general, and with section 15A(b)(6) of the Act,\10\ in particular, in 
that it is designed 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.
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    \9\ 15 U.S.C. 78o-3.
    \10\ 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, as amended, 
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 75599]]

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

    The foregoing proposed rule change, as amended, is subject to 
section 19(b)(3)(A)(iii) of the Act \11\ and rule 19b-4(f)(6) 
thereunder \12\ because the proposal: (i) Does not significantly affect 
the protection of investors or the public interest; (ii) does not 
impose any significant burden on competition; and (iii) does not become 
operative prior to 30 days after the date of filing or such shorter 
time as the Commission may designate if consistent with the protection 
of investors and the public interest; provided that Nasdaq has given 
the Commission notice of its intent to file the proposed rule change, 
along with a brief description and text of the proposed rule change, at 
least five business days prior to the date of filing of the proposed 
rule change, or such shorter time as designated by the Commission.
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    \11\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \12\ 17 CFR 240.19b-4(f)(6).
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    Nasdaq has fulfilled the five-day pre-filing requirement. 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 such waiver would immediately allow Nasdaq to integrate its 
Brut and INET execution systems. For these reasons, the Commission 
designates the proposed rule change, as amended, to be effective and 
operative upon filing with the Commission.\13\
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    \13\ For the purposes only of waiving the 30-day operative 
delay, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of such 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.\14\
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    \14\ 15 U.S.C. 78s(b)(3)(C). For purposes of calculating the 60-
day period within which the Commission may summarily abrogate the 
proposal, the Commission considers the period to commence on 
November 22, 2006, the date on which the Exchange submitted 
Amendment No. 1.
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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. 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-2006-126 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-NASD-2006-126. 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-2006-126 and should be submitted on or before January 5, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6-21340 Filed 12-14-06; 8:45 am]

BILLING CODE 8011-01-P