Document ID: SEC-2006-0909-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: NASDAQ Stock Market LLC
Posted Date: 2006-07-20T04:00Z

[Federal Register: July 20, 2006 (Volume 71, Number 139)]
[Notices]               
[Page 41291-41305]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20jy06-96]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54155; File No. SR-NASDAQ-2006-001]

 
Self-Regulatory Organizations; The NASDAQ Stock Market LLC; Order 
Approving a Proposed Rule Change and Amendment No. 1 Thereto and Notice 
of Filing and Order Granting Accelerated Approval to Amendment Nos. 2 
and 3 Thereto Relating to the Nasdaq Market Center

July 14, 2006.

I. Introduction

    On February 7, 2006, The NASDAQ Stock Market LLC (``Nasdaq'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission''), pursuant to Section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act''),\1\ and Rule 19b-4 thereunder,\2\ a 
proposed rule change to integrate the operations of the existing Nasdaq 
Market Center, along with Nasdaq's Brut and INET facilities. On March 
29, 2006, Nasdaq submitted Amendment No. 1 to the proposed rule change 
(``Amendment No. 1''). The proposed rule change, as amended by 
Amendment No. 1, was published for comment in the Federal Register on 
April 14, 2006.\3\ The Commission received twelve comments regarding 
the proposal.\4\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 53583 (March 31, 
2006), 71 FR 19573 (``Single Book Proposal'').
    \4\ See letter from Kim Bang, Chief Executive Officer, Bloomberg 
Tradebook LLC (``Bloomberg'') (``Kim Bang'') to Brian G. Cartwright, 
General Counsel, Commission, dated March 6, 2006 (``Bloomberg 
Comment Letter I''); letter from Kim Bang, David Cummings, Chief 
Executive Officer, BATS Trading, Inc. (``BATS'') (``David 
Cummings''), Ronald Pasternak, President, Direct Edge ECN LLC, and 
Martin Kaye, Chief Executive Officer, Track ECN (``Track'') 
(``Martin Kaye'') to Robert L.D. Colby, Acting Director, Division of 
Market Regulation (``Davision''), Commission, dated March 21, 2006 
(``ECN Comment Letter''); letter from Kim Bang to Jonathan G. Katz, 
Secretary, Commission (``Jonathan Katz''), dated May 5, 2006 
(``Bloomberg Comment Letter II''); letter from David Cummings to 
Christopher Cox, Chairman, Commission (``Chairman Cox''), dated May 
5, 2006 (``BATS Comment Letter''); letter from Martin Kaye to 
Chairman Cox, dated May 5, 2006 (``Track Comment Letter I''); letter 
from Leonard J. Amoruso, Senior Managing Director and Chief 
Compliance Officer, Knight Capital Group, Inc. (``Knight'') to Nancy 
M. Morris, Secretary, Commission (``Nancy Morris''); dated May 5, 
2006 (``Knight Comment Letter''); letter from C. Thomas Richardson, 
Managing Director, Citigroup Global Markets Inc. (``Citigroup'') to 
Nancy Morris, dated May 17, 2006 (``Citigroup Comment Letter''); 
letter from Kim Bang to Nancy Morris, dated May 30, 2006 
(``Bloomberg Comment Letter II''); letter from David C. Chavern, 
Vice President, Capital Markets Program, U.S. Chamber of Commerce 
(``USCC'') to Nancy Morris, dated June 8, 2006 (``USCC Comment 
Letter''); letter from David Colker, National Stock Exchange 
(``NSX'') to Chairman Cox, dated June 20, 2006 (``NSX Comment 
Letter''); letter from Kim Bang to Nancy Morris, dated June 23, 2006 
(``Bloomberg Comment Letter IV''); and letter from Martin Kaye to 
Chairman Cox, dated July 3, 2006 (``Track Comment Letter II'').

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[[Page 41292]]

    On July 7, 2006, Nasdaq filed Amendment No. 2 to the proposed rule 
change (``Amendment No. 2''). On July 14, 2006, Nasdaq filed Amendment 
No. 3 to the proposed rule change (``Amendment No. 3''). This order 
approves the proposed rule change, as amended by Amendment No. 1. 
Simultaneously, the Commission is providing notice of filing of 
Amendment Nos. 2 and 3 and granting accelerated approval of Amendment 
Nos. 2 and 3.

II. Description

    Nasdaq proposes to combine the operations of the existing Nasdaq 
Market Center with its Brut and INET facilities to create a single 
integrated system, with a single pool of liquidity (the ``Integrated 
System'' or ``System''). The Integrated System would only accept 
automatic executions and would eliminate Nasdaq's current order 
delivery functionality. The Integrated System is designed to enable 
Nasdaq to operate its execution system as that of a national securities 
exchange rather than as a national securities association, pursuant to 
the Commission order, dated January 13, 2006, approving Nasdaq's 
application to register as a national securities exchange.\5\ In 
addition, Nasdaq has designed the Integrated System to comply with the 
requirements of Rules 610 and 611 of Regulation NMS under the Act 
(``Regulation NMS'').\6\Nasdaq has designated August 28, 2006 as the 
initial implementation date for this System.\7\
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    \5\ See Securities Exchange Act Release No. 53128 (January 13, 
2006), 71 FR 3550 (January 23, 2006) (``Exchange Application 
Order'').
    \6\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
    \7\ See Amendment No. 3.
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    Nasdaq currently operates three execution systems: (1) The Nasdaq 
Market Center, formerly known as SuperMontage (``NMC Facility''); (2) 
the Brut ECN, a registered broker-dealer that is a Nasdaq subsidiary 
(``Brut Facility''); and (3) the INET ECN, which is operated by Brut, 
LLC, a subsidiary of Nasdaq (``INET Facility'') (collectively, the 
``Nasdaq Facilities'').\8\ Currently, the Nasdaq Facilities are all 
linked, but separate, each operating pursuant to independent 
Commission-approved rules, with the NMC Facility operating under the 
4700 Series, the Brut Facility operating under the 4900 Series, and the 
INET Facility operating under the 4950 Series.
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    \8\ In its Single Book Proposal, Nasdaq noted that, until 
January 31, 2006, INET ATS, Inc. was a registered broker-dealer and 
a member of the NASD. On February 1, 2006, the INET broker-dealer 
and a member of the NASD. On February 1, 2006, the INET broker-
dealer was merged into the Brut broker-dealer which is a member of 
the New York Stock Exchange (``NYSE''). Nasdaq states that it will 
continue to operate the Brut Facility and INET Facility under the 
rubric of a single broker-dealer until the Integrated System is 
fully operational. See Single Book Proposal at 19589.
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    Under the proposal, as amended, Nasdaq seeks to integrate the 
matching systems of the three Nasdaq Facilities into a single matching 
system, governed by a single set of rules. To ease the transition for 
Nasdaq participants, the Integrated System would be accessible through 
the same connectivity by which users currently access each of the 
Nasdaq Facilities, and use functionality that is already approved and 
operating within one or more of the Nasdaq Facilities. For example, the 
Integrated System would use slightly modified functionality from the 
INET Facility for order entry, display, processing, and routing, and 
draw on functionality in the NMC Facility for the opening and closing 
processes. Participants would remain subject to general obligations 
applicable to all Nasdaq Facilities, including honoring System trades, 
complying with all Commission and Nasdaq rules, and properly clearing 
and settling trades. The proposed rule change, as amended, is designed 
to ensure Nasdaq's readiness to comply with Regulation NMS and 
facilitate Nasdaq's operation as a national securities exchange.
    As the proposed rule change merges the three Nasdaq Facilities into 
a single platform, it also simplifies Nasdaq's rules by merging five 
sets of rules (the 4600, 4700, 4900, 4950, and 5200 Series) into two 
(the 4600 and 4750 Series). The proposed 4600 Series would govern 
Nasdaq participants, while the proposed 4750 Series would govern the 
operation of the Integrated System. The proposed rule change would 
delete in the following series of rules in their entirety: Series 4700 
(Nasdaq Market Center--Execution Services), Series 4900 (Brut Systems), 
Series 4950 (INET System), and Series 5200 (Intermarket Trading System/
Computer Assisted Execution System). The proposed rule change would add 
new Series 4750 (Nasdaq Market Center--Execution Services) and modify 
current Series 4600 (Requirements for Nasdaq Market Makers and Other 
Nasdaq Market Center Participants), including renumbering rules 
governing participants' obligations to honor trades and to comply with 
applicable rules and registration requirements.
    In addition to reorganizing the rules, and making changes to the 
Exchange's rules for exchange and Regulation NMS readiness, the 
proposed rule change, as amended, addresses, among other things, 
openings and closings, the order display/matching system, order types, 
time in force designations, anonymity, routing, book processing, 
adjustment of open orders,\9\ and Nasdaq's plan for a phased-in 
implementation of the proposed rule change.
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    \9\ See supra note 3.
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    In Amendment No. 2, because of the extension of certain compliance 
dates relating to Regulation NMS, Nasdaq proposed to modify certain 
rules such that their effectiveness would coincide with the Regulation 
NMS compliance dates announced by the Commission. Amendment No. 2 also 
contained a number of non-substantive changes and technical corrections 
to clarify the proposal.
    In Amendment No. 3, Nasdaq proposed to schedule the implementation 
of the System beginning August 28, 2006.\10\ Nasdaq described its 
planned phase-in schedule for the Integrated System and intention to 
test the System during the month of July and early in August prior to 
the transition. Then, beginning August 28, 2006, Nasdaq would 
transition Nasdaq-listed securities in three groups over a three-week 
period with 15 to 30 Nasdaq-listed stocks the first week, an additional 
100-200 Nasdaq-listed stocks the second week, followed by the remaining 
Nasdaq-listed stocks the third week. Following the transition of Nasdaq 
stocks, Nasdaq would transition all non-Nasdaq-listed securities (i.e., 
NYSE, American Stock Exchange (``Amex''), and regional-listed stocks). 
Nasdaq noted that it plans to monitor the implementation and adjust the 
schedule as needed to maintain an orderly transition.
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    \10\ The Commission notes that Amendment No. 3 replaces the 
August 14, 2006 implementation date that Nasdaq had proposed in 
Amendment No. 2.
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III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment Nos. 2 
and 3 are 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

[[Page 41293]]

     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NASDAQ-2006-001 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-NASDAQ-2006-001. 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 Exchange. 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-2006-001 and should be submitted on or before 
August 10, 2006.

IV. Summary of Comments Received

    The Commission received twelve comment letters, representing seven 
different entities, on the proposed rule change.\11\ Five of the seven 
commenters either directly or indirectly operate electronic 
communications networks (``ECNs''). Each of the ECN commenters opposed 
the proposed rule change. The remaining two commenters did not directly 
support or oppose the proposal.
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    \11\ See supra note 4. Other than the Bloomberg Comment Letter 
I, all the comment letters discussed not only SR-NASDAQ-2006-001, 
but SR-NASD-2006-048 as well. In NASD-2006-048, Nasdaq propoess to 
charge an order delivery fee of 10 cents per 100 shares to order 
delivery participants on its system. See Securities Exchange Act 
Release No. 53644 (April 13, 2006), 71 FR 20149 (April 19, 2006) 
(``Order Delivery Fee Proposal''). The summary here focuses on the 
comment letter discussions relating to SR-NASD-2006-001, rather than 
those relating to the Order Delivery Fee Proposal.
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    Bloomberg submitted four comment letters. The Bloomberg Comment 
Letter I was submitted prior to Nasdaq's submission of Amendment No. 1. 
In that letter, Bloomberg commented on one provision of the proposal 
that would have prohibited members from charging access fees triggered 
by the execution of a quotation within the System.\12\ Bloomberg 
suggested that such a provision would violate Section 6(e)(1) of the 
Act,\13\ which states that ``no national securities exchange may impose 
any schedule or fix rates of commissions, allowances, discounts, or 
other fees to be charged by its members.'' In addition, the Bloomberg 
Comment Letter I asserted that the Form 19b-4 did not adequately 
discuss or justify the burdens on competition with respect to the 
proposed prohibition on fees.\14\ Bloomberg recommended that Nasdaq 
withdraw the provision of the proposal regarding the prohibition of 
fees. In Amendment No. 1, Nasdaq eliminated its proposal to prohibit 
members from charging access fees.\15\
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    \12\ Bloomberg Comment Letter I at 1-2.
    \13\ 15 U.S.C. 78f(e)(1).
    \14\ Boomberg Comment Letter I at 2-4.
    \15\ See infra Section V.
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    In its second comment letter, Bloomberg objected to proposed Nasdaq 
Rule 4623(b)(5), which would eliminate the order delivery functionality 
from Nasdaq's rules, because it would expose ECNs to the risk of dual 
liability.\16\ Bloomberg said that dual liability was ``a risk that in 
the past the Commission found to justify requiring Nasdaq to provide 
order delivery as opposed to execution delivery.'' \17\ Bloomberg 
opined that eliminating the order delivery functionality, and thereby 
requiring all Nasdaq participants to accept automatic execution, would 
force ECNs to ``abandon their current business models and begin to act, 
involuntarily, as dealers;'' currently, unlike market makers, ECNs act 
as agency brokers and do not carry inventory or act as principal.\18\ 
Bloomberg also asserted that because ECNs do not earn a market maker's 
bid-ask spread, being forced to ``eat'' an execution could ``never be 
profitable'' for ECNs.\19\ Bloomberg concluded that this aspect of the 
proposal would force ECNs out of the Nasdaq market. Bloomberg 
questioned how investors and the national market system would be well 
served by eliminating the competitive liquidity and investor choices 
provided by ECNs from the Nasdaq platform.\20\
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    \16\ Bloomberg Comment Letter II at 1.
    \17\ Bloomberg Comment Letter II at 8-9, note 7 (citing 
Securities Exchange Act Release No. 43863 (January 19, 2001), 66 FR 
8020 (January 26, 2001) (``SuperMontage Order'')), See also ECN 
Comment Letter at 3.
    \18\ Bloomberg Comment Letter II at 4; see also Citigroup 
Comment Letter at 1.
    \19\ Bloomberg Comment Letter II at 4.
    \20\ Bloomberg Comment Letter II at 2, 10. Bloomberg noted that 
the ``independent ECNs'' at risk represent some 15% of the total 
Nasdaq volume.
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    The Bloomberg Comment Letter II took issue with Nasdaq's claim that 
the order delivery functionality of ECNs made Nasdaq less competitive 
by slowing its execution services. Bloomberg stated that Nasdaq's claim 
did not include any data or factual support, and was ``incredible on 
its face.'' \21\ Bloomberg noted that Nasdaq market participants 
entering orders could effectively choose to have their orders sent to 
automatic execution participants; thus, if order delivery ECNs were 
consistently slower or less efficient, they would suffer dire business 
consequences.\22\ The comment letter also noted that Nasdaq itself 
routes orders to other market centers, such as Archipelago, and that 
there was no indication that this routing slowed down its system. 
Bloomberg stated that its typical response time to incoming Nasdaq 
orders was 5-20 milliseconds. Bloomberg posited that slow quotation 
updates, rather than order delivery delays, were the true cause of 
Nasdaq's system slowdowns. Bloomberg noted that the Nasdaq Quotation 
Dissemination Service feed had latencies of 500 milliseconds or more 
during periods of high market activity.\23\
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    \21\ Bloomberg Comment Letter II at 5.
    \22\ Bloomberg Comment Letter II at 5-6.
    \23\ Bloomberg Comment Letter II at 6-8.
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    Bloomberg also disagreed with Nasdaq's characterization of the 
Division's response to Question 5 of its Responses to Frequently Asked 
Questions Concerning Rule 611 and Rule 610 of Regulation NMS.\24\ In 
the Single Book Proposal, Nasdaq stated that it did not believe that it 
could offer order delivery functionality and also satisfy Question 5's 
standard of continuously providing ``a response to incoming orders that 
does not significantly vary between orders handled entirely within the 
SRO trading facility and orders delivered to the ECN.'' \25\ In 
Bloomberg's view, Question

[[Page 41294]]

5 does not ``authorize Nasdaq to drop order delivery without 
considering the factors the Division cited.'' Bloomberg believed that 
the Division suggested that Nasdaq could ``continue to deliver orders 
to an ECN as long as Nasdaq's order-handling performance does not 
significantly vary between orders handled entirely within the SRO 
trading facility and orders delivered to the ECN.'' \26\ Rather than 
considering whether it could meet the conditions outlined by the 
Division in its NMS FAQs relating to order delivery functionality, 
Bloomberg believed that Nasdaq chose not to confront the issue. 
Bloomberg believed that the ``facts demonstrate that there is no valid 
basis for Nasdaq's proposed deletion of order delivery to ECNs that can 
respond within milliseconds.'' \27\
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    \24\ Division of Market Regulation (``Division''), Responses to 
Frequently Asked Questions Concerning Rule 611 and Rule 610 of 
Regulation NMS, dated January 27, 2006 (``NMS FAQs'') (available at 
http://www.sec.gov/divisions/marketreg/rule611faq.pdf).

    \25\ Single Book Proposal at 19591, citing NMS FAQs at Question 
5.
    \26\ Bloomberg Comment Letter II at 7.
    \27\ Bloomberg Comment Letter II at 7-8.
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    Bloomberg also argued that the proposed rule change was 
inconsistent with the Act, in that Nasdaq's analysis of the proposal's 
impact on competition failed to consider ``the liquidity that ECN 
participants provide to investors, the advantage this brings to 
investors and the internal discipline and drive to innovation within 
Nasdaq itself that is provided by the ECNs.''\28\
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    \28\ Bloomberg Comment Letter II at 8.
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    Bloomberg posited that the proposed rule change was inconsistent 
with Section 6(b)(5) of the Act \29\ because it discriminated unfairly 
against ECNs in that the only order delivery participants on Nasdaq are 
ECNs. Bloomberg also opined that the proposed rule change was 
inconsistent with Nasdaq's obligations under the Act to promote a free 
and open market and a national market system. In addition, Bloomberg 
believed that the proposal would violate Section 6(b)(8) of the Act 
\30\ by imposing burdens on competition that are not necessary or 
appropriate in furtherance of the purposes of the Act. Finally, 
Bloomberg noted that Section 3(f) of the Act \31\ requires the 
Commission to consider whether the proposed rule change would promote 
competition.\32\
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    \29\ 15 U.S.C. 78f(b)(5).
    \30\ 15 U.S.C. 78f(b)(8).
    \31\ 15 U.S.C. 78c(f).
    \32\ Bloomberg Comment Letter II at 9-11.
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    In its comment letter, Citigroup stated its belief that the 
National Association of Securities Dealers, Inc.'s (``NASD'') 
Alternative Display Facility (``ADF'') currently does not provide a 
viable alternative to the Nasdaq platform. Citigroup cited the ADF's 
connectivity costs, inability to quote NYSE- and Amex-listed 
securities, and inability to display sub-penny quotations to four 
decimal places for sub-$1.00 securities. In addition, Citigroup 
asserted that the ADF was a more expensive facility for ECNs, because 
it charged for quotation updates and did not have a general revenue 
sharing plan. Citigroup also believed that the ADF provided inadequate 
order protection because it would not provide an aggregate top-of-the-
book quotation with protection under Rule 611 of Regulation NMS.\33\
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    \33\ Citigroup Comment Letter at 2-3.
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    In support of its claim that the ADF is not a viable alternative to 
Nasdaq, Citigroup noted that daily volume on the ADF averaged 
approximately fifteen million shares compared to the total daily volume 
of approximately 1.7 billion shares for Nasdaq securities.\34\ Finally, 
Citigroup said that the Commission, in response to various ADF-related 
comments in the Nasdaq exchange application context,\35\ indicated that 
the ADF was not a viable alternative to the Nasdaq Market Center.\36\
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    \34\ Citigroup Comment Letter at 3.
    \35\ See supra note 5.
    \36\ Citigroup Comment Letter at 3, quoting Exchange Application 
Order at 57-58 (referring to comments from the Securities Industry 
Association and Instinet).
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    In its third comment letter, responding to Nasdaq's initial comment 
response letter,\37\ Bloomberg endorsed the ``main thrust'' of 
Citigroup's comment letter, in particular supporting Citigroup's 
assertion that the ADF was not a viable alternative to Nasdaq, pointing 
to the ADF's connectivity issues and its lack of capability to provide 
an aggregate top-of-book quotation under Rule 611 of Regulation 
NMS.\38\ Bloomberg also reiterated its disagreement with Nasdaq's 
assertion that retaining order delivery would slow down the Nasdaq 
market.\39\ In addition, Bloomberg emphasized that several other ECNs 
shared their concerns about the proposal.\40\
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    \37\ See infra note 75.
    \38\ Bloomberg Comment Letter III at 1.
    \39\ Bloomberg Comment Letter III at 2.
    \40\ Bloomberg Comment Letter III at 2.
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    Bloomberg stated that, contrary to Nasdaq's assertions in its 
initial comment response letter, the existing platform of the NSX is 
not a viable venue for multiple participants, particularly in light of 
its limited capacity. While acknowledging that BATS had moved from 
Nasdaq to NSX, Bloomberg pointed out that, notwithstanding that BATS is 
a very new ECN and has a relatively light share volume, BATS 
experienced a significant decrease in trading volume following its move 
to NSX. In addition, Bloomberg argued that, because the current NSX 
platform is unable to attribute quotes for multiple participants, 
market participants might be required to build temporary connectivity 
to each ECN participating in NSX, which would divert the industry's 
attention and resources at a time when implementation of Regulation NMS 
and industry consolidation issues were already pushing programming 
capacity to its limits.\41\
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    \41\ Bloomberg Comment Letter III at 2-3.
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    Bloomberg also believed that Nasdaq, in its initial comment 
response letter, misstated the Commission's duties under the Act. 
Bloomberg opined that the Act put a special burden on self-regulatory 
organizations (``SROs'') if an SRO such as Nasdaq wished to change an 
existing rule or system. Bloomberg believed that Nasdaq must 
demonstrate that such change is lawful, does not unfairly discriminate 
among members, and that any resulting burden on members is necessary or 
appropriate in furtherance of the purposes of the Act, which Bloomberg 
contrasted with an SRO's own commercial purposes. In addition, 
Bloomberg believed that whether other national securities exchanges had 
similar systems should not be relevant to the Commission's 
analysis.\42\
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    \42\ Bloomberg Comment Letter III at 4-6.
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    Bloomberg also posited that the data Nasdaq provided in its initial 
comment response letter pertaining to order delivery transactions was 
contextually insufficient. Bloomberg pointed to the speed of Nasdaq's 
quotation updates as a factor in order failures, and noted that Nasdaq 
had not provided data regarding the speed of quotation updates during 
high volume openings and closings. Bloomberg also suggested that, 
rather than removing order delivery functionality from its system, 
Nasdaq should establish rules to mandate faster quotation updates. In 
addition, Bloomberg proposed that Nasdaq could prevent some ECN 
outliers from exceeding its 5-second response time rule by mandating a 
500-millisecond or even 50-millisecond rule.\43\
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    \43\ Bloomberg Comment Letter III at 6-8.
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    Bloomberg also noted that, based on public statements of Nasdaq and 
the Commission, an order delivery ECN would have reasonably believed 
that either order delivery functionality would remain on the Nasdaq 
system indefinitely or an order delivery ban would not occur until the 
fall of 2006 at the earliest.\44\ Bloomberg contended that it was not 
seeking to slow down Nasdaq's Single Book Proposal, but rather Nasdaq 
had accelerated the

[[Page 41295]]

timing of the new system's roll-out. In addition, Bloomberg noted that 
the roll-out of the Single Book Proposal is not necessary to the 
commencement of Nasdaq's operation as an exchange and ``would visit 
needless disruption and dislocation not only on the independent ECNs 
but on the market as a whole'' and would ``unfairly disadvantage 
independent ECNs and regional exchange competitors, such as NSX.'' \45\
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    \44\ Bloomberg Comment Letter III at 8-9.
    \45\ Bloomberg Comment Letter III at 9-10.
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    Bloomberg also believed that the elimination of order delivery 
functionality would burden competition for order flow in Nasdaq-listed 
securities. Bloomberg claimed that Nasdaq acquired INET and Brut ``with 
a view to curtailing competition for order flow in Nasdaq securities'' 
and was now ``attempting to perfect its monopoly by crushing the 
remaining independent ECNs.'' \46\ Finally, Bloomberg believed that 
Nasdaq, in its initial comment response letter, misstated the 
Commission's authority when it said that the Commission lacked the 
statutory authority to provide a delay. Bloomberg believed that the 
Commission has clear authority to require Nasdaq to provide an adequate 
transition period in its proposal, and could request that Nasdaq amend 
its proposal to build in such a delay.\47\
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    \46\ Bloomberg Comment Letter III at 10.
    \47\ Bloomberg Comment Letter III at 10-11.
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    The remaining ECN commenters each endorsed the positions set forth 
in the Bloomberg Comment Letter II.\48\ Some commenters also expressed 
their concern not only about short-term market dislocation and 
disruption,\49\ but also regarding the long-term loss of investor 
choice.\50\ In particular, Bloomberg stated that, since Nasdaq's 
acquisition of the Brut and INET ECNs in the past two years, trading in 
the Nasdaq market had become more concentrated and less competitive. 
Bloomberg opined that Nasdaq was driving other ECNs off its system to 
allow it ``to charge monopoly rents for access to its market and for 
market data.'' \51\ In addition, some of the commenters felt that 
Nasdaq's proposal represented a for-profit exchange using the 
regulatory process to eliminate competition.\52\
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    \48\ See BATS Comment Letter, Track Comment Letter I, Knight 
Comment Letter.
    \49\ See BATS Comment Letter, Track Comment Letter I at 1, 
Bloomberg Comment Letter II at 2.
    \50\ See BATS Comment Letter, Bloomberg Comment Letter II at 2.
    \51\ See Bloomberg Comment Letter II at 2.
    \52\ See BATS Comment Letter, Track Comment Letter I at 1, 
Bloomberg Comment Letter II at 1, 3.
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    Bloomberg also noted that it did not believe that requiring Nasdaq 
to maintain its order delivery functionality would imply an affirmative 
obligation for other national securities exchanges to provide the 
same.\53\ Finally, Bloomberg and Track requested that if the Commission 
decided to approve the proposed rule change, more time should be given 
to the ECNs to find another venue to operate their business.\54\ 
Similarly, the USCC encouraged the Commission to, as a matter of good 
process, ``consider the need for appropriate transition periods'' 
should the proposed rule change be adopted.\55\
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    \53\ See Bloomberg Comment Letter II at 11.
    \54\ See Bloomberg Comment Letter II at 11 (delay in the 
effective date); Track Comment Letter I at 2 (phased-in approach).
    \55\ See USCC Comment Letter at 1-2.
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    In response to Nasdaq's fourth comment letter regarding technical 
difficulties relating to INET's participation in the NSX,\56\ NSX 
submitted a comment letter to describe its relationship with Nasdaq and 
INET, in particular noting that NSX's dissemination of quotations for 
Nasdaq may be slow because of Nasdaq's own internal system delays.\57\ 
NSX also noted that it intended to build a robust, state-of-the-art 
trading system that should help minimize future problems related to the 
capacity of, or linkage to, its market.\58\
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    \56\ See infra note 99.
    \57\ See NSX Comment Letter at 1-2.
    \58\ See NSX Comment Letter at 1-2.
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    On June 23, 2006, Bloomberg submitted its fourth comment letter, 
welcoming the USCC Comment Letter's call for an appropriate transition 
period, and describing Nasdaq's third and fourth response letters \59\ 
as containing misleading statements and false assertions.\60\ Bloomberg 
believed that Nasdaq's characterization in its third comment letter 
that the two ECNs operating on NSX (BATS and INET) were cohabitating 
with little disruption contrasted with Nasdaq's fourth response letter 
which stated that the NSX platform was experiencing severe capacity 
overages and delays.\61\ In addition, Bloomberg said that Nasdaq's 
claim in its fourth comment letter that the Commission had ordered INET 
to cease quoting in NSX by September 1, 2006 was untrue, noting that 
the Commission merely recognized a Nasdaq representation that it would 
cease quoting in NSX and the correct date was September 30, 2006.\62\ 
Bloomberg emphasized that the difference between the two dates was 
crucial, and stated that the ``Commission understood that additional 
time beyond September 30, 2006 might be prudent and necessary.'' \63\
---------------------------------------------------------------------------

    \59\ See infra Nasdaq Response Letter III and Nasdaq Response 
Letter IV, notes 92 and 99.
    \60\ See Bloomberg Comment Letter IV at 1-2 and 4-5.
    \61\ See Bloomberg Comment Letter IV at 2.
    \62\ See Bloomberg Comment Letter IV at 3 (citing Nasdaq Rule 
4720).
    \63\ See Bloomberg Comment Letter IV at 3.
---------------------------------------------------------------------------

    Bloomberg also reiterated its prior arguments regarding the need 
for business certainty and that Nasdaq had given the expectation that 
its Single Book Proposal would be rolled out in December 2006. 
Bloomberg said that, because of the resulting uncertainty and confusion 
of Nasdaq's earlier proposed roll-out date, ECNs have had to explore 
and develop, at substantial cost, a number of competing alternative 
scenarios; for example, Bloomberg has explored an interim migration to 
another platform, temporarily participating in Nasdaq while trying to 
prevent double execution, and ultimately migrating to an exchange 
platform that offers order delivery and quotation display. Bloomberg 
stated that the lack of certainty has ``impeded sound business planning 
and threatens to constrict investor choice and the development of sound 
market alternatives.'' \64\
---------------------------------------------------------------------------

    \64\ See Bloomberg Comment Letter IV at 4.
---------------------------------------------------------------------------

    Bloomberg also disputed Nasdaq's statement regarding its 
participation in Nasdaq's Opening and Closing Crosses, stating that it 
has had to develop special facilities to integrate during such times 
with Nasdaq and that, during those limited periods, Bloomberg simply 
operates as an order-routing system.\65\ In addition, Bloomberg also 
disputed various characterizations by Nasdaq, including its NSX 
participation, percentage of total Nasdaq trading volume attributable 
to order delivery executions, and the data Nasdaq presented with regard 
to Bloomberg's response times in early May 2006.\66\ Bloomberg also 
again suggested that Nasdaq could enforce its 5-second response time 
rule or even impose a more stringent 50-millisecond rule.\67\ Finally, 
Bloomberg believed that, contrary to Nasdaq's assertions in its 
response letters, it was proper for the Commission to consider comment 
letters received after the comment period deadline had expired.\68\
---------------------------------------------------------------------------

    \65\ See Bloomberg Comment Letter IV at 5.
    \66\ See Bloomberg Comment Letter IV at 5-7.
    \67\ See Bloomberg Comment Letter IV at 7-8.
    \68\ See Bloomberg Comment Letter IV at 8.
---------------------------------------------------------------------------

    On July 3, 2006, Track submitted a second comment letter to clarify 
to the Commission that it was still a participant in the Nasdaq Market 
Center, reiterate its comments submitted previously as part of the ECN 
Comment

[[Page 41296]]

Letter, and support the comment letters of Citigroup, USCC, and 
Bloomberg.\69\ Track emphasized that Bloomberg was not the sole party 
objecting to aspects of the Single Book Proposal, but that it and other 
ECNs were interested parties as well. Track stated that it continued to 
execute significant business through Nasdaq's platform. In addition, it 
noted that only one percent of its volume was on the ADF, which it did 
not believe was a viable place to conduct its business. Track believed 
that NSX's trading platform currently under development, which it 
expected to include order delivery functionality, would be a viable 
alternative. However, Track noted that the new NSX platform was not 
scheduled to be ready until September 2006. Adding in two months to 
ramp up its volume on the new system, Track requested that it be able 
to continue to operate on Nasdaq's platform until the NSX platform is 
operational and capable of handling the volumes of business required by 
the ECNs. Track also noted that it planned to begin testing on the new 
platform in July 2006.\70\ Track stated that its only issue with the 
Single Book Proposal was Nasdaq's decision to accelerate its roll-out 
timetable for its integrated system because it provided too brief a 
period for migration to workable venues, and that ``[a]ll other matters 
with regard to Nasdaq's Exchange status are not at issue with Track 
ECN.'' \71\
---------------------------------------------------------------------------

    \69\ See Track Comment Letter II at 1.
    \70\ See Track Comment Letter II at 2.
    \71\ See Track Comment Letter II at 2.
---------------------------------------------------------------------------

V. Nasdaq's Response to Comments

    In Amendment No. 1, Nasdaq addressed the Bloomberg Comment Letter I 
and the ECN Comment Letter. Nasdaq revised its statement on burden on 
competition to state that it operates in an intensely competitive 
global marketplace where its ability to compete is ``based in large 
part on the quality of its trading systems, the overall quality of its 
market and its attractiveness to the largest number of investors, as 
measured by speed, likelihood and cost of executions, as well as 
spreads, fairness, and transparency.'' \72\ Nasdaq asserted that its 
Single Book Proposal would have a pro-competitive effect by reducing 
overall trading costs, increasing price competition, and spurring 
further initiative and innovation among market centers and market 
participants. In addition, Nasdaq believed that its discontinuation of 
the order delivery functionality was pro-competitive, because such 
functionality harmed its competitiveness vis-[agrave]-vis other 
exchanges and reduced the overall quality of its marketplace.
---------------------------------------------------------------------------

    \72\ See Single Book Proposal at 19596.
---------------------------------------------------------------------------

    Nasdaq also defended its proposal to require all of its 
participants to accept automatic execution by eliminating its order 
delivery functionality. Nasdaq stated that its order delivery 
functionality is unique among exchanges and that no other exchange 
offers order delivery to its participants. Nasdaq asserted that such 
functionality is ``expensive, complex, and detrimental to system 
performance, thereby increasing the cost and complexity of Nasdaq's 
trading systems and decreasing its performance.'' Nasdaq also believed 
that order delivery discourages order flow providers from sending 
orders to Nasdaq for processing because market participants cannot 
predict whether their orders will be delivered or automatically 
executed, thereby hurting Nasdaq's ability to compete with other 
markets.\73\
---------------------------------------------------------------------------

    \73\ Id.
---------------------------------------------------------------------------

    In addition, Nasdaq noted that, within its own system, the presence 
of order delivery negatively impacts the competition between market 
makers, ECNs/alternative trading systems (``ATSs''), and agency broker-
dealers, because market makers and agency broker-dealers (who are 
required to participate in Nasdaq via automatic execution) view 
themselves as disadvantaged relative to ECNs and ATSs that can choose 
to participate either via automatic execution or order delivery. Nasdaq 
believed that removing the order delivery functionality would level the 
playing field between its market participants. Finally, Nasdaq noted 
that its ability to provide the fastest, fairest, and most efficient 
system possible was particularly important given the Commission's 
adoption of Regulation NMS.\74\
---------------------------------------------------------------------------

    \74\ See Single Book Proposal, supra note 3.
---------------------------------------------------------------------------

    On May 8, 2006, Nasdaq again responded to the comments regarding 
the proposed rule change.\75\ Nasdaq stated that the Single Book 
Proposal would ``benefit investors by offering a faster, fairer, more 
efficient and more transparent system that executes trades in strict 
price/time priority; promote competition by allowing Nasdaq to increase 
efficiency, decrease overall trading costs, and provide better service 
to market participants; promote the development of the national market 
system by integrating separate trading systems into a single pool of 
exchange liquidity for market participants to access; and improve 
regulation by complying with the Regulation NMS Access and Order 
Protection Rules to prevent locked and crossed markets and trade 
throughs.'' \76\ Nasdaq contended that Bloomberg's sole dispute with 
the Single Book Proposal was Nasdaq's proposal to eliminate the order 
delivery functionality that is available only to ECNs and available 
only on Nasdaq.\77 \
---------------------------------------------------------------------------

    \75\ See Letter from Edward S. Knight, Executive Vice President 
and General Counsel, Nasdaq to Morris, dated May 8, 2006 (``Nasdaq 
Response Letter I'').
    \76\ Nasdaq Response Letter I at 1.
    \77\ Nasdaq Response Letter I at 2.
---------------------------------------------------------------------------

    Nasdaq stated that Bloomberg was unable to identify any requirement 
in the Act that a national securities exchange offer order delivery 
functionality, and noted that no other exchange has been required to, 
or chosen to, offer such functionality. Nasdaq stated that any 
requirement to offer such functionality should apply equally to all SRO 
markets.\78\ In addition, Nasdaq rejected Bloomberg's claim that it was 
unfairly discriminating against ``independent'' ECNs to the advantage 
of its own ECN facilities (i.e., Brut and INET), because this proposal 
would integrate the Brut and INET execution facilities with the Nasdaq 
Market Center into a single trading platform.\79\
---------------------------------------------------------------------------

    \78\ Nasdaq Response Letter I at 2.
    \79\ Nasdaq Response Letter I at 2.
---------------------------------------------------------------------------

    Nasdaq emphasized that its proposal would not exclude ECNs but 
rather it would welcome them to participate in Nasdaq provided that 
they accept automatic execution. Nasdaq opined that the ECN commenters' 
systems were fully automated, and that they had declined to participate 
in Nasdaq via automatic execution to ``isolate orders within [their] 
own system[s] and to preserve internal executions as much as 
possible.'' \80\ Nasdaq also noted that several agency brokers 
participate in Nasdaq, accept automatic executions, and manage their 
risk of double executions by cancelling their quote or order on Nasdaq 
before matching an order internally.\81\
---------------------------------------------------------------------------

    \80\ Nasdaq Response Letter I at 3.
    \81\ Nasdaq Response Letter I at 3, note 6.
---------------------------------------------------------------------------

    Nasdaq stated that Bloomberg could conduct its business elsewhere 
and that the Act does not require Bloomberg to post its orders in 
Nasdaq. As an example, Nasdaq noted that other ECNs have elected to 
move their business to regional exchanges or the ADF. Nasdaq said that 
Bloomberg's contention was based on the false premise of a Nasdaq 
monopoly, and that Bloomberg was a privileged Nasdaq participant, as 
opposed to a ``prisoner'' of Nasdaq's system.\82\
---------------------------------------------------------------------------

    \82\ Nasdaq Response Letter I at 4.
---------------------------------------------------------------------------

    Nasdaq reiterated its concerns about the delay in executions caused 
by order

[[Page 41297]]

delivery. Nasdaq stated that order delivery interactions were more time 
consuming than automatic execution interactions, and that unlike 
automatic execution, orders delivered to an ECN could be rejected if 
the shares had been accessed by an ECN's direct subscribers. Nasdaq 
also presented data relating to order delivery during the week of March 
13, 2006, which included a so-called ``expiration Friday'' on March 
17th. During that week, Nasdaq stated that: 100 percent of automatic 
execution orders that Nasdaq attempted to execute actually executed; 14 
percent of total orders that Nasdaq delivered to order delivery 
participants failed to execute and for one order delivery participant 
the overall failure rate exceeded 25 percent; 55.6 percent of orders 
delivered to order delivery participants prior to 9:30:15 failed to 
execute; 27.9 percent of orders delivered to order delivery 
participants between 9:30:15 and 9:30:30 failed to execute; 12.7 
percent of orders delivered to order delivery participants between 
9:30:30 to 3:59:30 failed to execute; and prior to 9:30:15, three order 
delivery participants had mean response times of over four, nine, and 
twenty seconds per order during that week.\83\
---------------------------------------------------------------------------

    \83\ Nasdaq Response Letter I at 5-6.
---------------------------------------------------------------------------

    In addition to the time and response issues, Nasdaq stated that it 
was costly to maintain the order delivery functionality because it 
demanded ``disproportionate system capacity and unique specifications, 
requirements, and programming not available to or needed by the vast 
majority of Nasdaq participants * * *.'' Nasdaq emphasized that these 
are costs no other SRO incurs. Nasdaq also believed that ECN response 
times and rejection rates created strong disincentives for market 
participants to use Nasdaq's systems because of the uncertainty and 
reduced speed of an order execution.\84\ In addition, Nasdaq believed 
that time and response issues would be exacerbated under Regulation 
NMS, and expressed concern again about order delivery making Nasdaq a 
``slow'' market or exposing it to ``self-help'' declarations by other 
trading centers.\85\
---------------------------------------------------------------------------

    \84\ Nasdaq Response Letter I at 6.
    \85\ Nasdaq Response Letter I at 6.
---------------------------------------------------------------------------

    Finally, Nasdaq objected to Bloomberg's request for a delay in the 
effective date of an approval. Nasdaq believed that this would simply 
``delay the time when investors receive the benefits offered by a 
faster, fairer, more efficient and more transparent system.'' \86\ In 
addition, Nasdaq noted that BATS was able to shift its order flow to 
the NSX in a matter of weeks, and that Nasdaq's filing provides 
Bloomberg with over three months to make the system changes needed for 
similar migration. Nasdaq also stated that there was no requirement 
under the Act to ``accommodate the business schedule of any individual 
market participant'' as it negotiated ``a beneficial arrangement to 
post quotes in another venue'' and that the Commission was directed by 
Section 19(b) of the Act to ``determine promptly whether a rule 
proposal is consistent with the Act and to approve or reject it 
accordingly.''\87\
---------------------------------------------------------------------------

    \86\ Nasdaq Response Letter I at 6.
    \87\ Nasdaq Response Letter I at 7.
---------------------------------------------------------------------------

    On May 26, 2006, Nasdaq submitted to the Commission a second 
letter, responding to the Citigroup Comment Letter.\88\ Nasdaq 
requested that the Commission disregard Citigroup's comment letter 
because Nasdaq asserted that it was untimely filed and was an attempt 
to use the statutory notice and comment period to delay consideration 
of the Single Book Proposal.\89\ Nonetheless, Nasdaq responded to the 
substantive elements of the letter and disputed the assertions by 
Citigroup regarding the ADF's viability. In particular, Nasdaq noted 
that the predecessor of Citigroup's current OnTrade ECN, NexTrade, had 
been quoting on the ADF for over three years. Nasdaq also disputed 
Citigroup's assertion that the ADF's cost of connectivity was an 
``economic disincentive,'' instead characterizing it as ``a cost of 
doing business'' and stating that Nasdaq's order routing technology 
supports connectivity to any ADF participant whose quotation is 
displayed through the ADF in the consolidated quotation.\90\ Nasdaq 
also reiterated that, like Bloomberg, Citigroup failed to mention that 
scores of agency brokers participate on Nasdaq systems and accept 
automatic executions, managing their dual liability risks by cancelling 
their quotations or orders on Nasdaq prior to matching their orders 
internally. Finally, Nasdaq asserted that Citigroup misstated that 
there would be no alternative facility for NYSE- and Amex-listed 
securities and distorted the Commission's statements in the Exchange 
Application Order, noting that it believed that the passage cited by 
Citigroup related to the Commission's requirement that there be an 
alternative facility for non-Nasdaq stocks prior to Nasdaq's operation 
as an exchange.\91\
---------------------------------------------------------------------------

    \88\ See Letter from Edward S. Knight, Executive Vice President 
and General Counsel, Nasdaq to Morris, dated May 26, 2006 (``Nasdaq 
Response Letter II'').
    \89\ Nasdaq Response Letter II at 1-2.
    \90\ Nasdaq Response Letter II at 2.
    \91\ Nasdaq Response Letter II at 2.
---------------------------------------------------------------------------

    On June 8, 2006, Nasdaq submitted to the Commission a third letter, 
responding to the Bloomberg Comment Letter III.\92\ In this letter, 
Nasdaq reiterated its belief that Bloomberg could participate in Nasdaq 
via automatic execution, that Bloomberg was technologically capable of 
quoting in the NASD ADF ``in a matter of days,'' and that Bloomberg did 
in fact have a number of alternatives to being an order delivery 
participant in Nasdaq.\93\ Nasdaq also disagreed with Bloomberg's 
description of NSX's current operation and pointed out that two ECNs, 
INET and BATS, operate in that market with little disruption.\94\ In 
addition, Nasdaq reiterated the critical nature of its Single Book 
Proposal, given the competition it faces both in the United States and 
abroad. Nasdaq stated that Single Book would be ``lightning fast'' and 
produce faster, more certain executions. In addition, Nasdaq stated 
that the proposal would transform its market into a strict price-time 
priority venue, promote competition, decrease overall trading costs, 
provide better service to market participants, and allow Nasdaq to 
comply with the access and order protection provisions of Regulation 
NMS.\95\
---------------------------------------------------------------------------

    \92\ See Letter from Jeffrey S. Davis, Senior Associate General 
Counsel, Nasdaq to Morris, dated June 8, 2006 (``Nasdaq Response 
Letter III'').
    \93\ Nasdaq Response Letter III at 2-3, 4-5.
    \94\ Nasdaq Response Letter III at 3.
    \95\ Nasdaq Response Letter III at 3-4.
---------------------------------------------------------------------------

    Nasdaq also stated that Bloomberg has a negative impact on Nasdaq's 
competitiveness, pointing to the period immediately following the 
market's opening as an example.\96\ Nasdaq noted that, during the first 
week of May 2006, during the trading period prior to 9:30:15 am, 
Bloomberg's mean response time to delivered orders was over 5 seconds 
per order.\97\ Finally, Nasdaq disagreed with Bloomberg's contention 
that eliminating order delivery was discriminatory, stating that it did 
not see ``how requiring all market participants to use identical 
automatic functionality [could] be considered discriminatory.'' \98\
---------------------------------------------------------------------------

    \96\ Nasdaq Response Letter III at 4.
    \97\ Nasdaq Response Letter III at 4.
    \98\ Nasdaq Response Letter III at 4-5.
---------------------------------------------------------------------------

    On June 9, 2006, Nasdaq submitted to the Commission a fourth 
letter, describing INET's technological problems in NSX.\99\ Nasdaq 
stated that, on June 8, 2006, senior officers of the

[[Page 41298]]

NSX notified Nasdaq that the NSX was ``experiencing severe capacity 
overages and quotation delays in its core systems * * * [and] * * * 
requested that Nasdaq cause INET to cease sending quotations to the NSX 
and stated that NSX was considering terminating INET's ability to send 
quotations to NSX.'' \100\ Nasdaq stated that the possibility of future 
technology failures was increasing as message traffic has increased 
significantly across the industry. Nasdaq stated that it was taking all 
available, prudent steps to avoid future disruptions, and that approval 
of the Single Book Proposal would enable it to remove all quotations 
from NSX and avoid such technology failures.\101\
---------------------------------------------------------------------------

    \99\ See Letter from Edward S. Knight, Executive Vice President 
and General Counsel, Nasdaq to Cox, dated June 9, 2006 (``Nasdaq 
Response Letter IV'').
    \100\ Nasdaq Response Letter IV at 1.
    \101\ Nasdaq Response Letter IV at 1-2.
---------------------------------------------------------------------------

VI. Commission's Findings and Order Granting Accelerated Approval of 
Amendment Nos. 2 and 3

    As discussed fully throughout this approval order, the Commission 
has carefully reviewed the proposed rule change, as amended, the 
comment letters, and Nasdaq responses, and finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange and, in particular, the requirements of Section 
6(b) of the Act.\102\ Specifically, the Commission finds that the 
proposed rule change, as amended, is consistent with Section 6(b)(5) of 
the Act \103\ 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; and is not designed to 
permit unfair discrimination between customers, issuers, brokers, or 
dealers, or to regulate by virtue of any authority conferred by the Act 
matters not related to the purposes of the Act or the administration of 
the exchange. The Commission also finds that the proposed rule change, 
as amended, is consistent with Section 6(b)(8) of the Act \104\ in that 
it does not impose any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act.
---------------------------------------------------------------------------

    \102\ 15 U.S.C. 78f(b).
    \103\ 15 U.S.C. 78f(b)(5).
    \104\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

A. Elimination of Order Delivery Function

    Nasdaq's proposal would require that all Nasdaq participants accept 
automatic executions and would eliminate order delivery processing in 
the newly integrated system. Nasdaq's primary rationale for this aspect 
of the proposal is as follows:
     Order delivery functionality is expensive, complex, and 
detrimental to its system and decreases system performance and no other 
national securities exchange is required to provide this service;
     Order delivery functionality hampers Nasdaq's ability to 
compete by discouraging order flow providers from sending orders to 
Nasdaq because market participants cannot predict whether their orders 
will be delivered or automatically executed;
     Order delivery functionality negatively impacts 
competition between market makers, ECNs/ATSs, and agency broker-
dealers, because market makers and agency broker-dealers (who are 
required to participate in Nasdaq via automatic execution) are 
disadvantaged relative to ECNs and ATSs that can choose to participate 
either via automatic execution or order delivery;
     Nasdaq's system is completely voluntary and ECNs are not 
required to quote or participate in Nasdaq; and
     In light of the competition fostered by Regulation NMS, 
Nasdaq needs to provide the fastest, fairest, and most efficient 
system.
    Nearly all of the commenters opposed the proposed elimination of 
Nasdaq's order delivery functionality.\105\ The commenters suggested 
that the proposal was inconsistent with Sections 6(b)(5) \106\ and 
6(b)(8) of the Act \107\ in that it unfairly discriminated between 
brokers or dealers and imposed a burden on competition that is not 
necessary or appropriate in furtherance of the purposes of the Act. The 
main assertions by the commenters are as follows:
---------------------------------------------------------------------------

    \105\ See, e.g., Bloomberg Comment Letter II at 9; Knight 
Comment Letter at 2; Track Comment Letter I at 1.
    \106\ 15 U.S.C. 78f(b)(5).
    \107\ 15 U.S.C. 78f(b)(8).
---------------------------------------------------------------------------

     The automatic execution requirement would expose ECNs to 
dual liability risks;
     The automatic execution requirement would force ECNs out 
of the Nasdaq market and have a negative impact on their customers;
     The costs to move to another facility would be burdensome 
for ECNs;
     There are no viable alternatives, including the NASD ADF 
and regional exchanges, to participation in Nasdaq;
     Nasdaq is using its regulatory status to perfect a 
monopoly over Nasdaq-listed securities; and
     Order delivery does not have a negative impact on the 
performance of Nasdaq's system, nor would it place Nasdaq at any undue 
risk in light of Regulation NMS.
    The Commission finds that this proposal does not unfairly 
discriminate among market participants, nor does it impose any burden 
on competition that is not necessary or appropriate in furtherance of 
the Act.
1. Competition Issues
    The Commission believes that the Single Book Proposal is an 
appropriate initiative by Nasdaq to enhance the quality of its exchange 
through integrating its three trading platforms into a single unified 
system, to add efficiency in executions and to increase overall market 
transparency. The Commission has long held the view that ``competition 
and innovation are essential to the health of the securities markets. 
Indeed, competition is one of the hallmarks of the national market 
system.'' \108\ The Commission notes that the notion of competition is 
inextricably tied with the notion of economic efficiency, and the Act 
seeks to encourage market behavior that promotes such efficiency, lower 
costs, and better service in the interest of investors and the general 
public.\109\ Therefore, the Commission believes that the appropriate 
analysis to determine a proposal's competitive impact is to weigh the 
proposal's overall benefits and costs to competition based on the 
particular facts involved, such as examining whether the proposal would 
promote economically efficient execution of securities and fair 
competition between and among exchange markets and other market 
centers, as well as fair competition between the participants of a 
particular market.
---------------------------------------------------------------------------

    \108\ See SuperMontage Order at 8049.
    \109\ 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    The Commission notes that Nasdaq operates in a competitive global 
exchange marketplace for listings, financial products, and market 
services and competes in such an environment with other market centers, 
including national securities exchanges, ECNs, and other alternative 
trading systems, for the privilege of providing market and listing 
services to broker-dealers and issuers. Within Nasdaq's systems, ECNs 
and ATSs compete with market

[[Page 41299]]

makers and agency broker-dealers for retail and institutional order 
flow. Thus, the Commission views Nasdaq as an individual market as well 
as a piece of the larger, overall market structure.
    The ECN's opposition to the instant proposal is that it will cause 
a disruption to their manner of doing business, and such operational 
changes are potentially burdensome and costly. Under the proposal, ECNs 
that choose to continue operating in Nasdaq will have to accept 
automatic executions and internally manage their quotes to prevent dual 
executions of the same order, while ECNs that opt to use another SRO 
facility to display their order flow may face reduced connectivity and 
higher costs. That a proposed rule change to an SRO's trading system 
requires a market participant to reevaluate its business model, develop 
new technology, or reprogram its current systems is not something that 
is unique to Nasdaq and moreover is not something that is unique to 
ECNs. Invariably, any proposed rule change to a fundamental function of 
an SRO market (e.g., display, execution, trade-reporting, etc.) will 
require certain changes by the affected market participants; and more 
than likely such changes must be effectuated by a technological 
solution in an increasingly automated national market system.
    As stated above, ECNs currently using Nasdaq's order delivery 
functionality may continue to participate in Nasdaq via automatic 
execution. Rather than excluding ECNs, Nasdaq is simply requiring ECNs 
to participate in Nasdaq on an automatic execution basis, as other 
participants are currently required to do. According to Bloomberg, 
order delivery is necessary because unlike market makers, ECNs act as 
agency brokers and do not carry inventory or act as principal. Without 
the order delivery functionality, Bloomberg contends that ECNs would be 
exposed to dual liability.\110\ Bloomberg says that ECNs would be 
involuntarily forced to act as dealers and abandon their current 
business models.\111\ Nasdaq responds that ECNs could participate as 
Nasdaq automatic execution participants as agency brokers by managing 
dual liability risks by cancelling their quote/order on Nasdaq before 
matching the order internally.\112\ This risk management objective 
could be technologically achieved by ECNs giving priority to execution 
of the publicly displayed order in Nasdaq rather than the order flow 
that is only internally available on the ECN books to its 
subscribers.\113\ In fact, Nasdaq asserts that agency-brokers on its 
system currently operate and manage their dual liability risks in that 
manner. The various ECN comment letters opposing the elimination of 
Nasdaq's order delivery functionality have not disputed the validity of 
this claim.
---------------------------------------------------------------------------

    \110\ Bloomberg Comment Letter II at 4.
    \111\ See, e.g., Bloomberg Comment Letter II at 4.
    \112\ See Nasdaq Response Letter I at 3, note 6.
    \113\ Nasdaq Response Letter I at 3, note 6.
---------------------------------------------------------------------------

    Nasdaq has also stated that its current order delivery 
functionality is costly to operate and requires disproportionate system 
capacity, unique specifications, and additional programming. In 
addition, Nasdaq has emphasized that, though ECNs may provide an 
automated evaluation and response to orders, the time required to send 
message traffic back and forth between Nasdaq and ECNs involves delays 
that do not exist in the case of automatic executions. This potential 
for delay, as well the possibility that an order could be rejected by 
an order delivery ECN, gives a measure of uncertainty to orders entered 
on Nasdaq, which may impede Nasdaq's ability to compete with other 
markets and provide faster executions with increased certainty.\114\
---------------------------------------------------------------------------

    \114\ Nasdaq Response Letter I at 4-6. See also Nasdaq Response 
Letter III at 3-5.
---------------------------------------------------------------------------

    Nasdaq has stated legitimate regulatory and operational reasons for 
eliminating the order delivery service. For instance, Nasdaq is 
concerned that order delivery may cause the System to be deemed 
``slow'' under Rule 611 of Regulation NMS. Although it appears that 
under most operating conditions, order delivery may not pose a 
significant risk that the System would be a ``slow'' market or expose 
it to the election of the ``self-help'' exception under Rule 611(b)(1) 
of Regulation NMS, Nasdaq raises legitimate concerns that, during 
periods of increased market activity or system stress, the order 
delivery functionality could place its market at risk.
    The Commission recognizes ECNs could pose differing levels of risk 
to the Integrated System and that normally ECNs may, as Bloomberg 
commented, generally be able to respond within 5-20 milliseconds; \115\ 
however, Nasdaq has valid concerns over the response times of its 
market participants and the potential for such response times to 
negatively impact its entire market. Thus, the prospect of a single 
participant's slow response time affecting the protected quotation 
status of the entire market under Regulation NMS is a valid 
consideration in Nasdaq's determination of whether it is best to retain 
the order delivery functionality.
---------------------------------------------------------------------------

    \115\ See, e.g., Bloomberg Comment Letter II at 7-8.
---------------------------------------------------------------------------

    ECNs also assert that the proposal is unfairly discriminatory and 
it imposes a burden on competition that is not necessary or appropriate 
in furtherance of the Act because it would force ECNs to leave the 
Nasdaq market to operate either in another SRO facility or the NASD 
ADF. The commenters argue there are no viable alternatives for the ECN 
business model in the marketplace, and thus the Nasdaq order delivery 
service, which accommodates the ECN business model, must be preserved. 
The Commission does not share this view.
    As an initial matter, the Commission notes that the Act does not 
require Nasdaq to retain a market structure that supports the business 
operations of ECNs. Further, ECNs may post their orders in an SRO other 
than Nasdaq. The Commission believes that ECNs have a variety of 
options if they determine that, as a result of this proposal, they 
should forego Nasdaq participation. For example, ECNs may decide to 
post their liquidity to another SRO. In the past ECNs such as BATS, 
Brut, Instinet, Island, INET, Archipelago, and Attain have moved some 
or all of their activities from Nasdaq to other trading venues. 
Specifically, INET quotes on NSX; more recently, BATS has also moved 
from Nasdaq to NSX. Archipelago, through ArcaEx, became the equities 
trading facility of the Pacific Exchange, Inc. Other ECNs, including 
OnTrade (and its predecessor, NexTrade), quote in the NASD's ADF. 
Before Brut's purchase by Nasdaq, Brut quoted on the Boston Stock 
Exchange.
    Accordingly, ECNs that do not want to operate under the Nasdaq's 
Exchange Rules have other options at this time, and other alternatives 
for ECNs to participate as order delivery systems are emerging. Thus, 
while ECNs may not view the presently available alternatives to Nasdaq 
to be as appealing as participating on Nasdaq via order delivery, the 
Commission nevertheless believes viable alternatives to Nasdaq 
participation exist for ECNs.
    a. Alternatives to Nasdaq. In their comment letters, ECNs have been 
particularly critical of the capabilities of the NASD ADF and suggested 
that it does not constitute a true viable alternative to the Nasdaq 
market because it lacks: (1) An execution facility; (2) adequate order 
protection and quote attribution; (3) favorable revenue sharing plans; 
(4) sub-penny quoting up to four decimal places for securities priced 
less than $1.00; and (5) connectivity to ECN participants.

[[Page 41300]]

However, the Commission, on various occasions, has determined that the 
NASD ADF provides an alternative quotation facility for Nasdaq 
securities.\116\ The NASD ADF does not have all the advantages and 
liquidity of an active exchange like Nasdaq, and thus may not currently 
be the optimal facility for an ECN and its particular business model; 
nonetheless, the NASD ADF facility has the basic requirements of a 
quotation facility for Nasdaq securities, thus providing market 
participants a venue other than Nasdaq in which to display their 
quotes.
---------------------------------------------------------------------------

    \116\ See, e.g., Securities Exchange Act Release No. 45156 
(December 14, 2001), 67 FR 388 (January 3, 2002).
---------------------------------------------------------------------------

    The history of ECN participation in Nasdaq is instructive. Nasdaq 
began as a quotation, and then trading reporting, facility of the NASD, 
where quotes and trades of securities not listed on an exchange could 
be displayed. Later, Nasdaq displayed quotes and trades of exchange-
listed stocks. Nasdaq satisfied the NASD's obligation to operate a 
system to collect quotes and trades arising under now Rules 601 and 602 
of Regulation NMS.\117\
---------------------------------------------------------------------------

    \117\ 17 CFR 242.601-02.
---------------------------------------------------------------------------

    In 1996, the Commission adopted the Order Handling Rules,\118\ 
enabling ECNs to comply with a requirement to publicly display market 
maker quotes entered into the ECN by communicating these quotes to an 
SRO that was willing to display them in the consolidated quote system. 
The Commission said that if no SRO was willing to accept these quotes, 
it would take steps to ensure that these ECN quotes were included in 
the consolidated quote by an SRO.\119\
---------------------------------------------------------------------------

    \118\ Securities Exchange Act Release Nos. 37619A (September 6, 
1996), 61 FR 48290 (``Order Handling Rules'').
    \119\ Id.
---------------------------------------------------------------------------

    Nasdaq, as the competing market maker quotation system for non-
exchange listed stocks operated on behalf of the NASD, chose at that 
time to accept ECN quotes in its system. Nasdaq accommodated the ECN 
order delivery preferences at their own displayed size even though 
market makers in Nasdaq were required (against their wishes) to accept 
automatic execution at an NASD-imposed 1,000-share automatic execution 
size.\120\
---------------------------------------------------------------------------

    \120\ See Securities Exchange Act Release Nos. 42344 (January 
14, 2000), 65 FR 3987 (January 25, 2000) (NASD-99-11).
---------------------------------------------------------------------------

    Nasdaq subsequently eliminated the required 1,000-share automatic 
execution size, but retained automatic execution for market 
makers.\121\ In SR-NASD-99-53,\122\ Nasdaq recast its execution system 
as the SuperMontage system, accepting orders directly from agency 
brokers, subject to automatic execution. In response to criticisms 
raised by ECNs, SuperMontage retained an order delivery functionality 
for ECNs.
---------------------------------------------------------------------------

    \121\  See Securities Exchange Act Release Nos. 45998 (May 29, 
2002), 67 FR 39759 (June 10, 2002) (NASD-2001-66).
    \122\ See SuperMontage Order, supra note 17.
---------------------------------------------------------------------------

    Because of concerns raised about the monopoly position of Nasdaq as 
the residual quote and trade facility of the NASD, in approving the 
SuperMontage, the Commission conditioned its operation on the NASD's 
creation of an alternate display facility that would permit NASD 
members to operate outside of Nasdaq and still comply with their 
regulatory obligations under the Order Handling Rules and Regulation 
ATS.\123\ The Commission also required that the NASD ADF be designed to 
identify through the central processor the identity of the NASD member 
that is the source of each quote and provide a market neutral linkage 
to the Nasdaq and other marketplaces, but not an execution 
service.\124\ Later, in approving a pilot program for the operation of 
the NASD ADF, the Commission re-stated the purpose first raised in the 
SuperMontage Order that the ``ADF * * * permits registered market 
makers and registered ECNs to display their best-priced quotes or 
customer limit orders * * * through the NASD. ADF market participants 
are required to provide other ADF market participants with direct 
electronic access to their quote * * *. The ADF also serves as a trade 
reporting and trade comparison facility. The ADF will therefore allow 
market participants to satisfy their order display and execution access 
obligations under the Order Handling Rules and Regulation ATS.''\125\ 
The D.C. Circuit Court of Appeals later stated that the NASD ADF is an 
alternative display facility that was created to ``provide an 
alternative outlet in which market participants that did not wish to 
use SuperMontage could fulfill their order display and trading 
reporting obligations under SEC regulations.'' \126\
---------------------------------------------------------------------------

    \123\ See Order Handling Rules, supra note 118 and Securities 
Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844 
(December 22, 1998) (``Regulation ATS'').
    \124\ SuperMontage Order at 8024.
    \125\ See Securities Exchange Act Release No. 46429 (August 29, 
2002), 67 FR 56862.
    \126\ Domestic Securities, Inc. v. Securities and Exchange 
Commission, 333 F.3d 239, 248-249 (D.C. Cir. 2003).
---------------------------------------------------------------------------

    Subsequently, the NASD and Nasdaq chose to sunder their 
relationship, and Nasdaq registered as a separate national securities 
exchange.\127\ The NASD satisfies its obligations for Nasdaq securities 
under Rules 601 and 602 of Regulation NMS through the ADF.
---------------------------------------------------------------------------

    \127\ See supra note 5.
---------------------------------------------------------------------------

    One commenter, Citigroup, suggested that the Commission ``recently 
indicated that ADF is not a viable alternative to the Nasdaq Market 
Center; referring to comments received in response to the Nasdaq 
application for registration as an exchange.'' In this regard, the 
Commission believes that its response to Nasdaq exchange application 
comments has been misconstrued. The Commission did not intend to imply 
that the ADF is not a viable alternative to the Nasdaq Market Center. 
Instead, in response to the aforementioned comments the Commission 
reiterated its general belief, a theme initially voiced in the 
SuperMontage Order and again in the order approving the operation of 
the NASD ADF, that it would not be ``consistent with the Exchange Act 
to allow the NASD to separate from the [Nasdaq] facilities by which it 
satisfies its regulatory obligations without having alternative means 
to do what the Exchange Act and the rules thereunder require. 
Accordingly, the Nasdaq Exchange may not begin operating as a national 
securities exchange and cease to operate as a facility of the NASD 
until NASD has the means to fulfill its regulatory obligations.'' \128\ 
In the Exchange Application Order, the Commission clearly articulates 
the statutory and regulatory obligations the NASD must be able to 
satisfy prior to Nasdaq commences operation as a national securities 
exchange.\129\ In pertinent part, the NASD must represent to the 
Commission that control of Nasdaq through the Preferred D Share is no 
longer necessary because the NASD can fulfill through means other than 
Nasdaq systems or facilities its obligations with respect to CTA Plan 
securities under Section 15A(b)(11) of the Act, Rules 602 and 603 of 
Regulation NMS, and the national market system plans, i.e., the CTA 
Plan, CQ Plan, Nasdaq UTP Plan, the ITS Plan, and the Order Execution 
Quality Disclosure Plan, in which the NASD will participate.\130\
---------------------------------------------------------------------------

    \128\  See Exchange Application Order at 3564.
    \129\  See Exchange Application Order at 3562-64, 3566. The 
Commission recently modified the requirements for Nasdaq's operation 
as an exchange. See Securities Exchange Act Release No. 54085 (June 
30, 2006), 71 FR 38910 (July 10, 2006).
    \130\ See Securities Exchange Act Release No. 54085 (June 30, 
2006), 71 FR 38910 (July 10, 2006).
---------------------------------------------------------------------------

    Thus, while Citigroup cites to the comparative various operational 
differences of the NASD ADF versus the Nasdaq Market Center from a 
business perspective, the only regulatory requirement referenced in its 
letter is

[[Page 41301]]

the ability of the NASD to accept quotes in non-Nasdaq listed 
securities, which is a pre-condition to the separation of Nasdaq from 
NASD and Nasdaq's Exchange operation that must be achieved by virtue of 
the NASD's plan participation.
    The Commission recognizes that participation in the NASD ADF may 
require additional connectivity and related development costs for 
certain market participants. Again, the notion that innovation or 
change to a market's structure or manner of operation will require the 
use of technological or developmental resources is neither novel nor 
unforeseen. In fact, in approving Rule 610 of Regulation NMS (i.e., the 
Access Rule) the Commission extensively discussed the connectivity 
requirements for participants in the NASD ADF. The Regulation NMS Order 
reads, in pertinent part,\131\

    \131\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496, 37542 (June 29, 2005).
---------------------------------------------------------------------------

    The NASD is not * * * statutorily required to provide an order 
execution functionality in the ADF. As a national securities 
association, the NASD is subject to different regulatory 
requirements than a national securities exchange * * *.The Exchange 
Act does not expressly require an association to establish a 
facility for executing orders against the quotations of its members, 
although it could choose to do so. The Commission believes that 
market makers and ECNs should continue to have the option of 
operating in the OTC market, rather than on an exchange or The 
NASDAQ Market Center. As noted in the Commission's order approving 
Nasdaq's SuperMontage trading facility, this ability to operate in 
the ADF is an important competitive alternative to Nasdaq or 
exchange affiliation * * *.

    The Commission further stated that:

    [R]ule 610(b)(1) requires all trading centers that choose to 
display quotations in an SRO display-only quotation facility to 
provide a level and cost of access to such quotations that is 
substantially equivalent to the level and cost of access to 
quotations displayed by SRO trading facilities. Rule 610(b) 
therefore may cause trading centers [e.g., ECNs] that display 
quotations in the ADF to incur additional costs to enhance the level 
of access to their quotations and to lower the cost of connectivity 
for market participants seeking to access their quotations.

Thus, the Commission has contemplated the costs related to linking to 
and operating in the NASD ADF and who may appropriately bear such 
costs.
    The Commission notes that, in addition to the ADF, other SROs such 
as NSX may eventually offer ECNs an order delivery quote 
functionality.\132\ NSX, in response to Nasdaq Response Letter IV,\133\ 
stated that it intended to undertake a major trading system initiative 
to prepare itself for the market structure changes and growth in volume 
anticipated with the implementation of Regulation NMS.\134\ This NSX 
statement is in accord with the Commission's belief that efforts to 
improve the national market system via technological innovations is, 
and will continue to be, a market-wide phenomenon that will ultimately 
ensure that ECNs have a variety of viable options not only from a 
regulatory perspective, but from an operational and business 
perspective as well.
---------------------------------------------------------------------------

    \132\ Bloomberg also questioned the viability of NSX as a 
potential venue alternative to Nasdaq due primarily to a lack of 
system capacity. See Bloomberg Comment Letter III at 2-3.
    \133\ See supra note 82.
    \134\ Specifically, NSX stated that it intends to implement a 
new state-of-the-art trading system, ``NSX Blade,'' that would 
increase its systems capacity ten-fold and ``establish a new 
standard for speed in the securities industry.'' NSX stated that 
broker-dealers would be able to connect to its system ``through 
industry-standard FIX protocol or connect through any of the major 
extranets.'' Thus, NSX has represented that it intends to address 
the capacity and linkage concerns which Bloomberg believes make NSX 
an inadequate venue alternative to the Nasdaq Market Center. See NSX 
Comment Letter at 2.
---------------------------------------------------------------------------

    Accordingly, the Commission continues to encourage the innovation 
of the NASD ADF, SRO facilities, ECNs, and market participants in 
general that would enhance participation and interaction between 
markets and order flow within the national market system. Nonetheless, 
the Commission also believes that Nasdaq must have the flexibility to 
rework its structure to permit appropriate responses to the rapidly 
changing marketplace. Congress noted that the Commission should seek to 
``enhance competition and to allow economic forces, interacting with a 
fair regulatory field, to arrive at appropriate variation in practices 
and services.'' \135\ In the Commission's view, as an exchange in 
competition with other markets, Nasdaq has the right to seek a more 
efficient model of doing business. While ECNs may desire certain 
functionality accommodating their current mode of participating in the 
Nasdaq market, Nasdaq, like other exchanges and market participants, 
must be permitted to innovate and adjust to the dynamic nature of 
today's securities industry, within the requirements of the Act.
---------------------------------------------------------------------------

    \135\ See S. Rep. No. 94-75, 94th Cong., 1st Sess. 7 (1975) at 
8.
---------------------------------------------------------------------------

    The Commission recognizes that ECNs as a group have been among the 
most innovative market participants in recent years, introducing a 
number of novel trading tools and strategies. In addition, ECNs have 
benefited investors by providing cheaper and faster access to valuable 
liquidity. However, the Commission does not believe that the 
elimination of Nasdaq's order delivery functionality must or should 
necessarily have a deleterious impact on ECNs or the national market 
system as a whole.
    b. Nasdaq's Position as SRO. Some of the commenters contended that 
this proposal is an attempt by Nasdaq to use its position as an SRO and 
as a for-profit entity to ``crush'' its ECN competition.\136\ 
Specifically, some commenters aver that Nasdaq's acquisitions of the 
Brut and INET ECNs set this strategy in motion and this proposal would 
enable Nasdaq to ``perfect its monopoly.'' Bloomberg, in its second 
comment letter, asserted that Nasdaq seeks to eliminate the order 
delivery functionality for independent ECNs ``while preserving it for 
Nasdaq's own ECN facilities,'' namely Brut and INET, thereby giving its 
own ECNs a competitive advantage.\137\ However, the Commission notes 
that under this proposal Nasdaq would integrate the Brut and INET 
execution systems with the Nasdaq Market Center, utilizing the INET 
platform; only Brut's broker-dealer routing functionality would 
continue upon the unification of the three trading platforms. Thus, 
this proposal could not advantage Nasdaq-affiliated ECNs over other 
ECNs because Nasdaq-affiliated ECNs would not exist. In addition, the 
Commission notes that Nasdaq's acquisitions of Brut and INET were 
reviewed and approved by the Commission as positive developments in the 
ever-changing, dynamic market environment.\138\
---------------------------------------------------------------------------

    \136\ See, e.g., Track Comment Letter I at 1; and Bloomberg 
Comment Letter II at 1, 5, 8.
    \137\ Bloomberg Comment Letter II at 1.
    \138\ See Securities Exchange Act Release Nos. 51326 (March 7, 
2005), 70 FR 12521 (March 14, 2005) and 52902 (December 7, 2005), 70 
FR 73810 (December 13, 2005).
---------------------------------------------------------------------------

    The Commission agrees with Nasdaq's statement that there is no 
explicit requirement in the Act for a national securities exchange to 
offer order delivery participation in their execution systems.\139\ The 
Commission does not believe that Nasdaq must continue to offer order 
delivery functionality to meet its obligations in the Act and the rules 
and regulations thereunder. Although the order delivery functionality 
has been a part of Nasdaq's trading platform, the Commission does not 
believe Nasdaq is required to retain the functionality going forward, 
particularly given the legitimate regulatory reasons for its 
discontinuation provided by Nasdaq

[[Page 41302]]

including that the functionality could pose significant risks and 
costs.
---------------------------------------------------------------------------

    \139\ Nasdaq Response Letter at 2.
---------------------------------------------------------------------------

    In addition, Nasdaq endured significant cost in 2005 to acquire 
INET \140\ and, through the Single Book Proposal, Nasdaq seeks to use 
the INET platform as the basis for its Integrated System going forward 
in order to provide a faster and more efficient system with greater 
capacity. As competition increases both in the United States and 
globally, and with the Commission's approval of Regulation NMS, nearly 
all national securities exchanges are in the process of transforming 
their systems to better compete. Through implementation of its Single 
Book Proposal, Nasdaq seeks to maximize the advantages of the INET 
trading platform--faster executions and increased certainty.
---------------------------------------------------------------------------

    \140\ In its third comment response letter, Nasdaq stated that 
it spent close to $1 billion in 2005 to acquire INET from Reuters. 
Nasdaq Response Letter III at 3.
---------------------------------------------------------------------------

    As Nasdaq prepares to commence operations as a national securities 
exchange, the Commission believes that providing order delivery 
functionality is not required of Nasdaq, as with any other exchange. If 
another exchange deems such functionality to be advantageous for its 
operation as an exchange, it may choose to add it. Notwithstanding the 
valuable contributions that ECNs bring to the national market system in 
terms of liquidity and innovation, the Commission does not believe that 
the Act requires the Nasdaq exchange to continue to separately provide 
functionality to accommodate the particularized business choices of the 
ECN participants.
2. Claims of Unfair Discrimination
    Some of the commenters assert that the elimination of the order 
delivery functionality in the proposed rule change, as amended, is 
inconsistent with Section 6(b)(5) of the Act because it would 
discriminate unfairly against independent ECNs vis-[agrave]-vis all 
other Nasdaq members and it would not promote a free and open market 
and a national market system.\141\ The Commission disagrees. ECNs have 
been the only Nasdaq participants with the option to use the Nasdaq 
order delivery service; all other Nasdaq market participants, i.e., 
market makers, order entry firms, and UTP Exchanges, are currently 
required to accept automatic executions. Nasdaq has also maintained 
other features of its market exclusively for the benefit of ECNs (e.g., 
the ability to charge quote access fees.) While the Commission approved 
these ``ECN-friendly'' measures and found them to be consistent with 
the Act, these same provisions were never imposed upon Nasdaq by the 
Commission or deemed to be requirements under the Act.
---------------------------------------------------------------------------

    \141\ Bloomberg Comment Letter II at 10.
---------------------------------------------------------------------------

    During its development as a quote facility of the NASD, Nasdaq had 
taken a series of actions to accommodate ECN participation and their 
particularized business model. In certain respects, ECNs have enjoyed a 
privileged status in the Nasdaq market compared to agency brokers and 
market maker participants by virtue of their ability to, amongst other 
things, accept order delivery instead of automatic execution. The 
Commission does not believe that, in removing the order delivery 
functionality, the instant proposal would result in unfair 
discrimination between customers, issuers, brokers, or dealers. Because 
Nasdaq has previously accommodated ECNs, changing features such as the 
order delivery function will necessarily impact ECNs 
disproportionately. However, the Commission disagrees with the 
suggestion that it logically follows that such disproportionate impact 
is per se equivalent to unfair discrimination under the Act. In this 
case, the Commission believes the proposed rule change is consistent 
with the Act and it does not unfairly discriminate between ECNs and 
other Nasdaq market participants. Nasdaq is eliminating a disparate 
treatment between ECNs and the other Nasdaq market participants by 
requiring that all participants accept automatic execution to increase 
the efficiency and competitiveness of the Nasdaq exchange.
3. Automatic Execution Function
    The Commission notes that in numerous instances it has approved 
automatic execution within the national market system in general, and 
Nasdaq in particular. For instance, in the SuperMontage Order, the 
Commission affirmed that automatic execution is a reasonable way for 
Nasdaq to improve market efficiency and provide many benefits to a 
marketplace, particularly speed and certainty of executions.\142\ The 
SuperMontage Order said that automatic execution also would promote 
investor confidence by increasing the likelihood that orders of 
moderate size from large and small investors alike will be filled 
almost instantaneously, improve the accuracy of Nasdaq's pricing 
systems, promote the timeliness of trade reporting, and help alleviate 
locked and crossed markets.\143\ Most recently, in approving Rule 611 
of Regulation NMS, the Commission clearly enunciated a view that 
automated markets and automated quotes (i.e., automatic execution 
functionality), combined with access to such markets and quotes was an 
important attribute in a national market system.\144\
---------------------------------------------------------------------------

    \142\ SuperMontage Order at 8049.
    \143\ SuperMontage Order at 8049-50.
    \144\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
---------------------------------------------------------------------------

    To this end, Rule 611 of Regulation NMS only protects from trade-
throughs automated quotations of automated markets. An automated 
quotation is a quotation that, among other things, is displayed and is 
immediately accessible through automatic execution, and that 
immediately and automatically cancels any unexecuted portion of an 
order marked as immediate-or-cancel without routing the order 
elsewhere.\145\ In Question 5 of the Division's NMS FAQs, the Division 
said that an SRO trading facility that displays the quotations of order 
delivery ECNs can meet the requirements of the definition of an 
automated quotation only if such quotations are closely integrated 
within the SRO trading facility.\146\ In its comment letter, Bloomberg 
asserted that Nasdaq's interpretation of the response to Question 5 of 
the Division's NMS FAQs was wrong, in that the Division did ``not 
authorize Nasdaq to drop order delivery without considering the factors 
the Division cited.'' \147\ The Commission believes that Bloomberg has 
misinterpreted the Division's response to Question 5. The response does 
not address an exchange dropping its order delivery functionality. 
Instead, the response relates to whether a market supporting order 
delivery could be considered ``automated,'' and if its quote could be 
``protected'' under Regulation NMS. The Division's answer is intended 
to clarify how a market would comply with Regulation NMS and does not 
control whether Nasdaq keeps or discards its order delivery 
functionality.
---------------------------------------------------------------------------

    \145\ Rule 600(b)(3) of Regulation NMS defines an automated 
quotation to mean a ``quotation displayed by a trading center that: 
(i) Permits an incoming order to be marked as immediate-or-cancel; 
(ii) immediately and automatically executes an order marked as 
immediate-or-cancel against the displayed quotation up to its full 
size; (iii) immediately and automatically cancels any unexecuted 
portion of an order marked as immediate-or-cancel without routing 
the order elsewhere; (iv) immediately and automatically transmits a 
response to the sender of an order marked as immediate-or-cancel 
indicating the action taken with respect to such order; and (v) 
immediately and automatically displays information that updates the 
displayed quotation to reflect any change to its material terms. 17 
CFR 242.600(b)(3).
    \146\ NMS FAQs at Question 5.
    \147\ Bloomberg Comment Letter II at 7.

---------------------------------------------------------------------------

[[Page 41303]]

4. Implementation Date
    In Bloomberg Comment Letter III, Bloomberg stated that it and other 
order delivery ECNs had been led by Nasdaq to believe that the Nasdaq 
Market Center's order delivery functionality would be available until 
at least fall of 2006 at the earliest, if not on an ongoing basis.\148\ 
Bloomberg requested that, should the Commission decide to approve the 
Single Book Proposal, the Commission delay the effective date of the 
rules to provide ECNs an opportunity to migrate to another venue.\149\ 
The USCC also encouraged the Commission to, as a matter of good 
process, ``consider the need for appropriate transition periods'' 
should the proposed rule change be adopted.\150\ Similarly, Track 
requested a phased-in approach to the rules should they be 
adopted.\151\ In response to commenter concerns and in order to provide 
ECNs with adequate time to program their systems for participation in 
Nasdaq or migration to another venue,\152\ Nasdaq has agreed to delay 
its implementation and roll-out of the Single Book Proposal until 
August 28, 2006.\153\
---------------------------------------------------------------------------

    \148\ Bloomberg Comment Letter III at 8-11.
    \149\ Bloomberg Comment Letter II at 11; see also Bloomberg 
Comment Letter III at 11.
    \150\ See USCC Comment Letter at 1-2.
    \151\ Track Comment Letter I at 2.
    \152\ See Bloomberg Comment Letter II at 11; Bloomberg Comment 
Letter III at 11; USCC Comment Letter at 1-2; and Track Comment 
Letter I at 2.
    \153\ See Amendment No. 3.
---------------------------------------------------------------------------

    In the Commission's approval of Nasdaq's exchange application in 
January 2006, the Commission emphasized that Nasdaq's approval was 
based on a set of rules with price/time priority.\154\ In addition, the 
Commission noted in the Exchange Application Order that the two ECNs 
that Nasdaq had recently acquired--Brut and INET--both applied rules 
that required their orders to be executed in price/time priority.\155\ 
As discussed above, the Single Book concept of integrating the three 
Nasdaq Facilities was discussed by the Commission in the Exchange 
Application Order and the Commission believed that such an integration 
would be beneficial, though the Commission permitted the three Nasdaq 
Facilities to operate separately for a temporary period, until 
September 30, 2006, because the Brut and INET facilities had only been 
recently acquired by Nasdaq.
---------------------------------------------------------------------------

    \154\ Exchange Application Order at 3558-59.
    \155\ Exchange Application Order at 3558, note 137. See also 
Securities Exchange Act Release Nos. 52902 (December 7, 2005), 70 FR 
73810 (December 13, 2005) (``INET Order'') and 51326 (March 7, 
2005), 70 FR 12521 (March 14, 2005) (``Brut Order'').
---------------------------------------------------------------------------

    The Commission notes that Nasdaq, independent of its exchange 
application and as a NASD subsidiary at the time, had already proposed 
to integrate its three facilities by September 30, 2006 in its filing 
to establish the rules governing the operation of its INET System.\156\ 
In the INET Order the Commission approved Nasdaq's proposed commitment 
to integrate as of September 30, 2006; \157\ however, that date was not 
mandated by the Commission. In addition, the plain language of the INET 
Order, NASD Rule 49545(b)(2), and the Exchange Application Order makes 
clear that September 30, 2006 was the latest date that Nasdaq, pursuant 
to its commitment, could integrate its trading facilities. Neither the 
INET Order nor the Exchange Application Order required that integration 
be delayed until September 30, 2006, or prohibited Nasdaq integrating 
its systems at an earlier date.
---------------------------------------------------------------------------

    \156\ See Securities Exchange Act Release No. 52723 (November 2, 
2005), 70 FR 67513 (November 7, 2005)(''INET Notice'').
    \157\ See INET Order at 73811.
---------------------------------------------------------------------------

    The Commission believes that astute market participants, such as 
Bloomberg, could have reasonably anticipated the strong possibility of 
Nasdaq operating on an automatic-execution only basis prior to 
September 30, 2006, based on: (1) Nasdaq's anticipated operation as an 
exchange with executions based on price-time priority for all of 
Nasdaq's order flow, (2) Nasdaq's acquisition of Brut and INET, both of 
which are automatic-execution facilities, and (3) Regulation NMS where 
the Commission clearly enunciated a view that automated markets and 
automated quotes (i.e., automatic execution functionality), combined 
with access to such markets and quotes was an important attribute in a 
national market system.
    In addition, formal notice of Nasdaq's intention to create an 
Integrated System based on automatic executions prior to September 30, 
2006 was clearly given on February 7, 2006, the day Nasdaq filed the 
Single Book Proposal with the Commission. At that time, Nasdaq proposed 
to commence operation of the Integrated System by as early as May 2006. 
Bloomberg submitted an initial comment letter opposing the proposed 
rule change dated March 6, 2006, which suggested that it would take 
three to six months to complete the systems work required to adapt to a 
new venue.\158\ The Commission understands that BATS has already made 
and implemented its plans to migrate its liquidity to NSX.\159\ In 
addition, in response to comments for a transitional phase-in 
period,\160\ Nasdaq has proposed to commence its phased-in 
implementation of the Integrated System based on automatic executions 
on August 28, 2006; \161\ which is almost seven months after the 
proposal was filed, and nearly six months since Bloomberg's initial 
comment letter. The Commission believes that order delivery ECNs have 
had sufficient time to make alternate plans for quoting in the ADF or 
another SRO.
---------------------------------------------------------------------------

    \158\ Bloomberg Comment Letter I at 11.
    \159\ See Nasdaq Response Letter II.
    \160\ See Track Comment Letter I at 2; USCC Comment Letter at 1-
2; and Bloomberg Comment Letter IV at 1.
    \161\ See Amendment No. 3.
---------------------------------------------------------------------------

    Section 19(b)(1) of the Act \162\ requires a SRO to the file with 
the Commission ``any proposed rule change in, addition to, or deletion 
from the rules of such self-regulatory organization * * * accompanied 
by a concise general statement of the basis and purpose of such 
proposed rule change. Such proposed rule change must be filed in 
accordance with the requirements of Rule 19b-4 under the Act.\163\ The 
Commission believes that Nasdaq has filed the Single Book Proposal in 
accordance with the requirements of the Act and its rules and 
regulations thereunder.
---------------------------------------------------------------------------

    \162\ 15 U.S.C. 78s(b)(1).
    \163\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

    The Commission believes that Nasdaq has met all of the procedural 
requirements for the instant proposed rule change and provided the 
public in general and interested parties in particular with adequate 
notice and opportunity to comment under the Act. The Commission 
believes that the Integrated System will promote competition and bring 
investors and the national market system benefits through the 
efficiencies and transparencies brought about through a single 
liquidity pool with price/time priority. The Commission believes that, 
given the notice provided by Nasdaq's filings, it is consistent with 
the Act for Nasdaq to implement the Integrated System as proposed.

B. Operation as a National Securities Exchange

    The Commission notes that, under the Single Book Proposal, Nasdaq's 
trading platform would have an integrated quote/order book operated in 
accordance with a unified price/time priority execution algorithm. In 
the Exchange Application Order, the Commission acknowledged that, 
because of the recent nature of Nasdaq's Brut and INET acquisitions and 
because

[[Page 41304]]

of the reliance by participants on the continued availability of those 
ATSs, it was in the public interest for Brut and INET to be available 
for a limited period while Nasdaq worked to integrate them with its NMC 
Facility.\164\ The Commission stated that ``it is beneficial for orders 
in the same securities directed to an exchange to interact with each 
other'' and that ``[s]uch interaction promotes efficient exchange 
trading and protects investors by assuring that orders are executed 
pursuant to a single set of priority rules that are consistently and 
fairly applied.'' \165\ The Commission permitted the Exchange to 
operate three separate trading platforms--namely the NMC Facility, Brut 
Facility, and INET Facility--for a temporary period prior to September 
30, 2006. This proposed rule change, as amended, would enable Nasdaq to 
satisfy its Commission-approved commitment to integrate its three 
trading facilities prior to September 30, 2006.
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    \164\ Id at 3559.
    \165\ Id.
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    In addition, Nasdaq's Single Book Proposal will allow the Exchange 
to program its system to operate in compliance with the Exchange 
Application Order in additional ways. For example, the Integrated 
System would not accept reports of transactions occurring outside the 
Integrated System, would interact with the network processors for the 
various national market system plans in compliance with Commission 
rules governing exchanges, and would fulfill Nasdaq's new role as an 
exchange in the national market system plans, including the national 
market system plan governing the Intermarket Trading System (``ITS 
Plan''). In addition, under the Single Book Proposal, Nasdaq itself 
(rather than its individual members) would be bound by the obligations 
of the ITS Plan, maintain a single two-sided quotation, and be 
responsible for trade-through compliance. The Commission notes that the 
proposed rules change, as amended, cannot be operational until Nasdaq 
has satisfied all the conditions set forth by the Commission in the 
Exchange Application Order.\166\
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    \166\ Exchange Application Order at 3566.
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C. Regulation NMS

    The Commission believes that the proposed rule change should allow 
Nasdaq to comply with the requirements of Regulation NMS.\167\ In 
proposed Nasdaq Rule 4613(e), Nasdaq proposes to adopt a rule with 
regard to locked and crossed markets. The Exchange has also designed 
its proposed Book Processing \168\ and Order Routing \169\ rules to 
comply with the requirements of Regulation NMS. These proposed rules 
include permitting users to designate orders meeting the requirements 
of Rule 600(b)(30) of Regulation NMS \170\ as intermarket sweep orders, 
which would allow orders so designated to be automatically matched and 
executed without reference to protected quotations at other trading 
centers.
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    \167\ See supra note 6.
    \168\ See proposed Nasdaq Rule 4757.
    \169\ See proposed Nasdaq Rule 4758.
    \170\ 17 CFR 242.600(b)(30).
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    In addition, Nasdaq has proposed to implement routing options that 
its believes are consistent with Rules 610 and 611 of Regulation NMS. 
Nasdaq also proposed rules intended to ensure its compliance with Rule 
612 of Regulation NMS (i.e., accepting sub-penny prices in $0.0001 
increments for securities priced less than $1.00 a share and rejecting 
orders in sub-penny increments for securities priced $1.00 or more per 
share).\171\ The Commission also notes that proposed Nasdaq Rule 
4756(c)(4) addresses situations where Nasdaq has reason to believe it 
is not capable of displaying automated quotations, including adopting 
policies and procedures for communicating to both its members and other 
trading centers about such a situation, as well as receiving and 
responding to notices of other trading centers electing the ``self-
help'' exception under Rule 611(b)(1) of Regulation NMS.
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    \171\ Single Book Proposal at 19592. See also proposed Nasdaq 
Rule 4613(a)(1)(B).
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D. Other Rules

    The proposed rule change, as amended, would merge five current sets 
of rules (the 4600, 4700, 4900, 4950, and 5200 Series) into two (the 
4600 and 4750 Series), with the proposed 4600 Series governing System 
participants and the proposed 4750 Series governing the operation of 
the Integrated System. In addition to reorganizing the rule set, and 
making changes to the Exchange's rules for exchange and Regulation NMS 
readiness, the proposed rule change, as amended, addresses, among other 
things, openings and closings, the order display/matching system, order 
types, time in force designations, anonymity, routing, book processing, 
adjustment of open orders, and Nasdaq's proposed phase-in plan for the 
proposed rules.

E. Impact on Efficiency, Competition, and Capital Formation

    Section 3(f) of the Act requires that the Commission consider 
whether Nasdaq's proposal will promote efficiency, competition, and 
capital formation.\172\ As discussed in more detail above, the 
Commission has carefully considered whether the proposal will promote 
efficiency, competition and capital formation and has concluded that 
the Single Book Proposal should encourage competition and should not 
impede the development of other trading systems or market innovation. 
The Commission believes that the Single Book Proposal is an appropriate 
undertaking by Nasdaq to enhance the quality of its market by providing 
more information to investors, promoting greater efficiency in 
executions, and increasing overall market transparency. While the 
Single Book Proposal should provide a central means for accessing 
liquidity in Nasdaq and non-Nasdaq stocks, it does not represent an 
exclusive means, nor does it prevent broker-dealers from seeking 
alternative order routing and execution services. In addition, the 
Commission believes that the proposal should promote competition and 
capital formation by providing its market participants with several 
quote and order management options (e.g., Discretionary Orders, Reserve 
Orders, Pegged Orders, and Minimum Quantity Order), including order 
types which will enable market participants to operate in the post-
Regulation NMS trading environment, such as Intermarket Sweep Orders, 
Price to Comply Orders, and Price to Comply Post Orders.
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    \172\ 15 U.S.C. 78c(f).
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F. Accelerated Approval of Amendment Nos. 2 and 3

    As set forth below, the Commission finds good cause to approve 
Amendment Nos. 2 and 3 to the proposed rule change, as amended, prior 
to the thirtieth day after the amendments are published for comment in 
the Federal Register pursuant to Section 19(b)(2) of the Act.
    In Amendment No. 2, Nasdaq modifies the proposed rule language to 
reflect the Commission's extension of certain compliance dates relating 
to Regulation NMS. Specifically, Nasdaq is modifying proposed rules to 
reflect that such rules would not become effective until the applicable 
Regulation NMS implementation date of May 21, 2007. Such rules include 
Rule 4613(e) (pertaining to locked and crossed markets), Rule 4751(f) 
(pertaining to order types), and Rule 4755 (pertaining to intermarket 
sweep orders). The Commission finds good cause to accelerate approval 
of these changes prior to the thirtieth day after

[[Page 41305]]

publication in the Federal Register. The Commission believes this is a 
reasonable approach in light of the extension of Regulation NMS 
compliance dates and should help to ensure that the appropriate Nasdaq 
rules are in place at the time that Regulation NMS compliance is 
required.
    In Amendment No. 2, Nasdaq also is making several technical 
corrections to the proposed rule change, for example, eliminating 
typographical and underlining errors. These changes are non-substantive 
and technical in nature and are necessary to clarify the proposal. The 
Commission finds good cause to accelerate approval of these changes 
prior to the thirtieth day after publication in the Federal Register 
because they better clarify Nasdaq's rules, which should assist 
members' ability to comply with their requirements, and assist 
investors in understanding their application and scope.
    In Amendment No. 3, in response to the comments filed by the U.S. 
Chamber of Commerce, Bloomberg, and others, Nasdaq proposes to commence 
a phased-in implementation of the Integrated System on August 28, 
2006.\173\ In addition, Amendment No. 3 describes Nasdaq's plan to test 
securities on the System during July and early August 2006 and phase-in 
the operation of the Integrated System with an initial three-week 
transition period for Nasdaq-listed stocks, followed by non-Nasdaq-
listed stocks.
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    \173\ The Commission notes that Amendment No. 3 replaces the 
August 14, 2006 implementation date that Nasdaq had proposed in 
Amendment No. 2.
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    The Commission finds good cause to accelerate approval of this 
change prior to the thirtieth day after publication in the Federal 
Register. The Commission finds that the change in the proposed 
implementation of the Integrated System to a later date than that 
originally proposed and published for comment and later than that 
proposed by Amendment No. 2, as well as the allowance of a testing 
period and phased-in period, would provide a longer transition period 
for Nasdaq market participants and other participants in the national 
market system. The delay until August 28, 2006 and the phase-in period 
should help to ensure that there is an orderly transition to the 
Integrated System and provide Nasdaq's market participants, including 
many of the commenters, opportunity to decide whether to continue 
participating in Nasdaq, or to elect to move their business elsewhere. 
The Commission notes that August 28, 2006 represents a period of nearly 
seven months from the original filing date of this proposed rule 
change. The Commission also notes that, notwithstanding Nasdaq's 
proposed August 28, 2006 implementation date, the proposed rules 
change, as amended, cannot be operational until Nasdaq has satisfied 
all the conditions set forth by the Commission in the Exchange 
Application Order.\174\ The Commission believes that August 28, 2006 
should provide market participants with adequate time to prepare for 
the Implemented System, and would also permit Nasdaq to meet its 
commitment to fully integrate its three trading facilities on or before 
September 30, 2006.
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    \174\ Exchange Application Order at 3566. The Commission 
recently modified the requirements for Nasdaq's operation as an 
exchange. See Securities Exchange Act Release No. 54085 (June 30, 
2006), 71 FR 38910 (July 10, 2006).
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VII. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\175\ that the proposed rule change (File No. SR-NASDAQ-2006-001), 
as amended by Amendment Nos. 1, 2, and 3, be, and hereby is, approved.
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    \175\ 15 U.S.C. 78s(b)(2).

    By the Commission.
Nancy M. Morris,
Secretary.
[FR Doc. 06-6366 Filed 7-19-06; 8:45 am]

BILLING CODE 8010-01-P