Document ID: SEC-2007-0815-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NASDAQ Stock Market LLC
Posted Date: 2007-06-13T04:00Z

[Federal Register: June 13, 2007 (Volume 72, Number 113)]
[Notices]               
[Page 32692-32693]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13jn07-121]                         

[[Page 32692]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-55870; File No. SR-NASDAQ-2007-037]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; 
Notice of Filing of Proposed Rule Change To Modify Order Audit Trail 
System Rules To Provide an Exemption From Transmission Requirements for 
Proprietary Orders and Amendment No. 1 Thereto

June 6, 2007.
    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 April 3, 2007, The NASDAQ Stock Market LLC (``Nasdaq'') filed with 
the Securities and Exchange Commission (``Commission'') the proposed 
rule change as described in Items I, II, and III below, which Items 
have been substantially prepared by Nasdaq. On June 4, 2007, Nasdaq 
filed Amendment No. 1, which replaced the text of the original filing 
in its entirety. 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.
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I. Self-Regulatory Organization's Statement of the Terms of the 
Substance of the Proposed Rule Change

    Nasdaq proposes to modify its Order Audit Trail System (``OATS'') 
rules to provide an exemption from OATS transmission requirements for 
certain proprietary orders. The text of the proposed rule change is 
available at http://www.nasdaq.com, at Nasdaq, and at the Commission's 

Public Reference Room.

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 proposes to modify its OATS rules to adopt a limited 
exemption from OATS order data transmission requirements for 
proprietary trading firms. OATS is an integrated audit trail of order, 
quote, and trade information for Nasdaq securities used to recreate 
events in the life cycle of orders and more completely monitor the 
trading practices of member firms.
    A ``Proprietary Trading Firm'' is proposed to be defined as meaning 
a Nasdaq member that trades its own capital with all the trading being 
done in the firm's accounts by traders that are owners of, employees 
of, or contractors to the firm. Additionally, a Proprietary Trading 
Firm does not have ``customers,'' as that term is defined in Nasdaq 
Rule 0120(g) and is not a member of the National Association of 
Securities Dealers, Inc. (``NASD''). At present, there are no 
Proprietary Trading Firms that are also market makers.
    Nasdaq also proposes to revise Nasdaq Rule 6955 to add that a 
Proprietary Trading Firm, and persons associated with a Proprietary 
Trading Firm, only upon request would be required to transmit order 
data information for specific time periods stated in a request to 
Nasdaq Regulation.\3\ Although a Proprietary Trading Firm would not be 
required to transmit the order data information to Nasdaq Regulation 
unless requested, it still would be held responsible for maintaining 
and retaining the information in a format that could be easily 
integrated into the NASD's OATS system in the event Nasdaq Regulation 
makes a request for such information.
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    \3\ Rule 0130 provides that the term Nasdaq Regulation should be 
understood as also referring to NASD staff, NASD Regulation staff, 
and NASD departments acting on behalf of Nasdaq pursuant to the 
Regulatory Contract. NASD Regulation has agreed to perform certain 
functions on behalf of Nasdaq pursuant to a regulatory services 
agreement.
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    The current requirement for Proprietary Trading Firms to transmit 
all data order information is onerous and not offset by an equivalent 
regulatory benefit. It is very expensive for firms to develop and 
maintain the compliance systems and compliance staff required to 
continuously monitor the daily transmission of OATS data. Additionally, 
the transmission of OATS data often results in either rejections or 
mismatches.\4\
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    \4\ OATS rejections may occur for a multitude of reasons 
including: Incorrect symbol; duplicate order event; cancelled time 
stamp prior to order timestamp; canceled timestamp greater than 
current date and time; issue is not reportable to OATS; issue symbol 
invalid for order event date; missing or invalid shares quantity or 
Buy/Sell code; missing or invalid member type code or issue symbol 
ID; missing or invalid cancel quantity; missing time in force code; 
missing or invalid firm order ID; and missing or invalid expiration 
time.
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    Errors can result from a programming error even if it just a 
misplaced semicolon. To cure these issues, members may need to spend an 
inordinate amount of time correcting a minor glitch with NASD. 
Mismatches occur when NASD reconstitutes the order and any 
discrepancies exist between the order origination and order execution, 
which may be different entities.\5\ Often times the discrepancy is of 
very minor consequence, but triage efforts are overly burdensome.
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    \5\ Common causes of mismatches include: missing branch/sequence 
numbers; improperly formatted branch/sequence numbers on one of the 
reports; differing execution timestamps; missing reporting exception 
codes and late reporting of OATS execution reports.
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    The basis for OATS is customer protection through the transparency 
of the executions of customer orders. The proposed rule change does not 
impact this, since by definition, Proprietary Trading Firms do not 
handle customer orders. OATS was designed to provide an accurate, time-
sequenced record of orders and transactions, beginning with the receipt 
of an order at the first point of contact between the broker-dealer and 
the customer or counterparty and further documenting the life of the 
order through the process of execution. This requirement only came into 
effect during the later stages of the OATS implementation. Also, as 
mentioned below, no other exchange has a daily transmission requirement 
for this category of customer.
    This approach parallels, in a much more limited manner, the 
approach undertaken by the New York Stock Exchange (``NYSE'') in NYSE 
Rule 132C, which requires NYSE members, upon request, to transmit order 
tracking data to the NYSE.\6\ The NYSE has stated that it has been its 
experience that ``submission of data by request has proven to be 
effective and efficient'' \7\ from both the NYSE's and its members' 
perspective.
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    \6\ See Securities Exchange Act Release No. 47689 (April 17, 
2003), 68 FR 20200 (April 24, 2003) (SR-NYSE-99-51).
    \7\ Id. at 20202.
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    Additionally, much of the information retained by a Proprietary 
Trading Firm is otherwise available to the Nasdaq

[[Page 32693]]

Regulation through Nasdaq's systems, and Nasdaq can use such 
information and supply it to the NASD, upon request, as well. This 
information includes trade reporting data, including order time and 
sales data captured by the Nasdaq system.
2. Statutory Basis
    Nasdaq believes that the proposed rule change is consistent with 
the provisions of Section 6 of the Act,\8\ in general, and with Section 
6(b)(5) of the Act,\9\ in particular, in that the proposal is 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.
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    \8\ 15 U.S.C. 78f.
    \9\ 15 U.S.C. 78f(b)(5).
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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, as amended.

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.

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. 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-NASDAQ-2007-037 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.

All submissions should refer to File Number SR-NASDAQ-2007-037. 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 such 
filing also will be available for inspection and copying at the 
principal office of the Nasdaq. 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-NASDAQ-2007-037 and should be submitted on or before 
July 5, 2007.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
Florence E. Harmon,
Deputy Secretary.
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    \10\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E7-11369 Filed 6-12-07; 8:45 am]

BILLING CODE 8010-01-P