Document ID: SEC-2006-0634-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-05-17T04:00Z

[Federal Register: May 17, 2006 (Volume 71, Number 95)]
[Notices]               
[Page 28730-28732]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17my06-96]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53787; File No. SR-NASD-2006-053]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change and Amendment No. 1 Thereto To Establish 
Additional Routing Options in the INET System for Securities Listed on 
the New York Stock Exchange or the American Stock Exchange

May 11, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 21, 2006, the National Association of Securities Dealers, 
Inc., through its subsidiary, The Nasdaq Stock Market, Inc. 
(``Nasdaq''), filed with the Securities and Exchange Commission 
(``SEC'' or the ``Commission'') the proposed rule change as described 
in Items I and II below, which items have been prepared by Nasdaq. On 
May 5, 2006, Nasdaq submitted Amendment No. 1 to the proposed rule 
change.\3\ Nasdaq has designated the proposed rule change as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A) of the Act 
\4\ thereunder,\5\ which renders the proposal effective upon filing 
with the Commission. The Commission is publishing this notice to 
solicit comments on the proposed rule change, as amended, from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ In Amendment No. 1, Nasdaq revised the proposed rule text to 
specify that the Nasdaq-specified time period under the proposed DOT 
Alternative 2 routing option would not exceed 30 seconds and added a 
representation to the purpose section regarding communicating 
changes to the Nasdaq-specified time period to INET users promptly.
    \4\ 15 U.S.C. 78s(b)(3)(A).
    \5\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Nasdaq proposes to establish two additional routing options in its 
INET System for orders in securities listed on the New York Stock 
Exchange LLC (``NYSE'') or the American Stock Exchange LLC (``AMEX'').
    The text of the proposed rule change is below. Proposed new 
language is underlined; proposed deletions are in [brackets].\6\
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    \6\ Changes are marked to the rule text that appears in the 
electronic NASD Manual that can be found at http://www.nasd.com.

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    4956. Routing
    (a) INET Order Routing Process.
    (1) The INET Order Routing Process shall be available to 
Participants from 7 a.m. to 8 p.m. Eastern Time, and shall route orders 
as described below:
    (A) Exchange-Listed Routing Options.
    The System provides [six] eight routing options for orders in 
exchange-listed securities. Of these [six] eight, [only three] five--
DOT Immediate, DOT Alternative, DOT Alternative 2, Reactive Only DOT 
and DOT Nasdaq--are available for orders ultimately sought to be 
directed to either the New York Stock Exchange (``NYSE'') or the 
American Stock Exchange (``AMEX''). The System also allows firms to 
send individual orders to the NYSE Direct + System, and to elect to 
have orders not be sent to the AMEX. The [six] eight System routing 
options for NYSE and/or Amex listed orders are:
    (i) DOT Immediate (``DOTI'')--under this option, after checking the 
INET System for available shares, orders are sent directly to the NYSE 
or the AMEX as appropriate. When checking the INET book, the System 
will seek to execute at the better price of either the limit price 
specified in the order, or the best price displayed at that time at the 
NYSE. If no liquidity is available in the INET System, the order will 
be routed directly to the NYSE or AMEX at the limit order price. This 
option may only be used for orders with time-in-force parameters of 
either DAY, IOC, or market-on-open/close. Only limit orders may be used 
with this option.
    (ii) DOT Alternative (``DOTA'')--under this option, after checking 
the INET System for available shares, orders are sent to other 
available market centers for potential execution before the destination 
exchange. Any un-executed portion will thereafter be sent to the NYSE 
or AMEX, as appropriate, at the order's original limit order price. 
This option may only be used for orders with time-in-force parameters 
of either DAY, IOC, or market-on-open/close. Only limit orders may be 
used with this strategy.
    (iii) DOT Alternative 2 (``DOTA2'')--under this option, orders 
first check the INET book and then other market centers for potential 
execution. Any portion of the order that remains unexecuted is posted 
on the INET book until the expiration of the Nasdaq-specified time 
period at either the order's limit price or, if the limit price would 
lock or cross the market, at the highest bid or lowest offer that would 
not lock the market. At the expiration of the period specified by 
Nasdaq (which will not exceed 30 seconds), any remaining unexecuted 
portion of the order is sent to the NYSE or AMEX, as appropriate (the 
destination exchange). DOTA2 orders entered prior to the destination 
exchange's opening time will be displayed on the INET book until 
immediately prior to the opening time and then sent to the destination 
exchange. This option may only be used for orders with a time-in-force 
parameter of DAY. Only limit orders may be used with this strategy.
    (iv) Reactive Only DOT (``DOTR'')--under this option, orders first 
check the INET book and then other market centers and the destination 
exchanges (the NYSE or the AMEX, as appropriate) for potential 
execution. Any portion of the order that remains unexecuted is posted 
on the INET book (unless they were sent to the destination exchange). 
Subsequently, if an order that was posted on the INET book became 
locked or crossed by another accessible market center or destination 
exchange, the System will route the order to the locking or crossing 
market center or destination exchange. Whenever an order is sent to the 
destination exchange, it is sent at its original price for potential 
display and/or execution. This option may only be used for orders with 
a time-in-force parameter of DAY. Only limit orders may be used with 
this strategy.
    [(iii)] (v) Reactive Electronic Only (``STGY'')--under this option, 
after checking the INET System for available shares, orders are sent to 
other available market centers for potential execution. When checking 
the INET book, the System will seek to execute at the price it would 
send the order to a non-INET destination market center. If shares 
remain un-executed after routing, they are posted on the INET book and 
are not sent to the NYSE or AMEX. Once on the INET book, should the 
order subsequently be locked or crossed by another accessible market 
center, the System shall route the order to the locking or crossing 
market center for potential execution. With the exception

[[Page 28731]]

of the Minimum Quantity order type, all time-in-force parameters and 
order types may be used in conjunction with this routing option. This 
process is one of the routing strategies allowed by the System for all 
securities.
    [(iv)] (vi) Electronic Only Scan (``SCAN'')--under this option, 
after checking the INET System for available shares, orders are sent to 
other available market centers for potential execution. When checking 
the INET book, the System will seek to execute at the price it would 
send the order to a non-INET destination market center. If shares 
remain un-executed after routing, they are posted on the INET book and 
are not sent to the NYSE or AMEX. Once on the INET book, should the 
order subsequently be locked or crossed by another accessible market 
center, the System will not route the order to the locking or crossing 
market center. With the exception of the Minimum Quantity order type, 
all time-in-force parameters and order types may be used in conjunction 
with this routing option. This process is one of the routing strategies 
allowed by the System for all securities.
    [(v)] (vii) Aggressive Electronic Only (``SPDY'')--under this 
option, after checking the INET System for available shares, orders are 
sent to other available market centers for potential execution. When 
checking the INET book, the System will seek to execute at the price it 
would send the order to a non-INET destination market center. If shares 
remain un-executed after routing, they are posted on the INET book and 
are not sent to the NYSE or AMEX. Once on the INET book, should the 
order subsequently be locked or crossed by another accessible market 
center, the System shall route the order to the locking or crossing 
market center for potential execution. Market orders with the SPDY 
designation will, during a locked or crossed market, have their price 
adjusted by the System to match the best price displayed on the same 
side of the market as the market order (i.e., a buy order to the bid, a 
sell to the offer). If the order is for a security eligible for a de 
minimis exception to the trade-through rule set forth in Section 8 
(d)(i) of the ITS Plan, the System will ignore AMEX prices when 
adjusting the SPDY order. With the exception of the Minimum Quantity 
order type, all time-in-force parameters and order types may be used in 
conjunction with this routing option. This process is one of the 
routing strategies allowed by the System for all securities.
    [(vi)] (viii) DOT Nasdaq (``DOTN'')--under this option, after 
checking the INET System for available shares, orders are sent to other 
available market centers that are owned by Nasdaq, including the Nasdaq 
Market Center and/or Nasdaq's Brut Facility for potential execution 
before the destination exchange. When checking the INET book, the 
System will seek to execute at the price it would send the order to a 
non-INET destination market center as designated by the entering party. 
Any un-executed portion will thereafter be sent to the NYSE or AMEX, as 
appropriate, at the order's original limit order price. This option may 
only be used for orders with time-in-force parameters of either DAY, 
IOC, or market-on-open/close.
    (B) and (C) No change.
* * * * *

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, Nasdaq included statements 
concerning the purpose of, and basis for, the proposed rule change, as 
amended, and discussed any comments it received on the proposal. The 
text of these statements may be examined at the places specified in 
Item IV below. Nasdaq has prepared summaries, set forth in Sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    Users of Nasdaq's INET System are currently able to select (subject 
to their best execution obligations to their own customers, if 
applicable) from among six different routing options for orders in 
securities listed on the NYSE or the AMEX. Some of the existing user 
choices instruct INET to route such orders to the NYSE or the AMEX, 
while others instruct INET to route to a subset of market centers.
    Nasdaq is proposing to give INET System users two additional 
options for how and when INET should route their orders to the NYSE or 
the AMEX (the ``destination exchanges''). Under the proposed DOT 
Alternative 2 option, the INET System first checks the INET book and 
then other market centers (but not the destination exchanges) for 
potential executions. Any portion of the order that remains unexecuted 
is then posted on the INET book at the order's limit price. (If the 
limit price would lock or cross the market, the order is posted at the 
highest price for buy orders or lowest price for sell orders that would 
not lock or cross the market.) At the posted order's expiration time, 
any portion that still remains unexecuted is sent to the NYSE or the 
AMEX for display or execution at the original limit price. The length 
of time from the posting of an order to its expiration will be set by 
Nasdaq for all orders that select the DOT Alternative 2 option. The 
expiration time is currently set at three seconds from the time of 
order posting, but in response to INET System users' preferences, 
Nasdaq may adjust it from time to time in the future. Nasdaq represents 
that it will promptly communicate to INET System users any adjustments 
it makes to the length of this time period.
    The proposed Reactive Only DOT order is similar to the Reactive 
Electronic Only order, but it also includes the manual NYSE and AMEX 
markets in its initial routing. Under the Reactive Only DOT option, the 
INET System first checks the INET book and then other market centers 
and the destination exchanges (the NYSE and the AMEX) for potential 
executions. Any portion of the order that remains unexecuted is posted 
on the INET book. (Of course, any portion of the order that during the 
checking process had appeared marketable at the destination exchange 
and was sent there, but then failed to execute, would be displayed at 
that exchange and not in the INET book.) If any accessible market 
center or destination exchange subsequently locks or crosses the order, 
INET will route it to the locking/crossing market center or exchange. 
If an order is sent to the destination exchange but fails to execute 
completely, the unexecuted portion will be displayed by that exchange 
and will not return to INET for display purposes. Nasdaq notes that the 
new choices will give users of the INET System added flexibility when 
handling orders for NYSE- and AMEX-listed securities. Nasdaq believes 
that such flexibility will undoubtedly help users as they seek to 
achieve best execution of orders. The proposal does not remove or 
change any of the INET System's existing functions, and its users will 
remain free not to take advantage of the new choices that are being 
made available to them.
2. Statutory Basis
    Nasdaq believes that the proposed rule change, as amended, is 
consistent with the provisions of Section 15A of the Act,\7\ in 
general, and with Section

[[Page 28732]]

15A(b)(6) of the Act,\8\ in particular, in that it is designed to 
promote just and equitable principles of trade and to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system. Specifically, Nasdaq notes that the proposal 
offers users of the INET System additional flexibility in selecting the 
most appropriate routing strategy for their orders.
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    \7\ 15 U.S.C. 78o-3.
    \8\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    Nasdaq does not believe that the proposed rule change will result 
in any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

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

    Nasdaq has designated the foregoing rule change, as amended, as a 
``non-controversial'' rule change pursuant to Section 19(b)(3)(A) of 
the Act \9\ and Rule 19b-4(f)(6) thereunder \10\ because the rule 
change does not: (i) Significantly affect the protection of investors 
or the public interest; (ii) impose any significant burden on 
competition; or (iii) become operative for 30 days from the day on 
which it was filed, or such shorter time as the Commission may 
designate if consistent with the protection of investors and the public 
interest. Nasdaq has requested that the Commission waive the 
requirement that the rule change not become operative for 30 days after 
the date of the filing. The Commission hereby grants the request. The 
Commission believes that waiving the 30-day operative delay for the 
proposed rule change, as amended, is consistent with the protection of 
investors and the public interest because the proposal would give INET 
System users two, additional options for routing their orders and, 
therefore, should be implemented without delay. For this reason, the 
Commission designates the proposal to be effective and operative upon 
filing with the Commission.\11\
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    \9\ 15 U.S.C. 78s(b)(3)(A).
    \10\ 17 CFR 240.19b-4(f)(6).
    \11\ For purposes only of waiving the 30-day operative delay, 
the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate the rule change if it 
appears to the Commission that such action is necessary or appropriate 
in the public interest, for the protection of investors, or otherwise 
in furtherance of the purposes of the Act.\12\
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    \12\ The effective date of the original proposed rule change is 
April 21, 2006 and the effective date of Amendment No. 1 is May 5, 
2006. For purposes of calculating the 60-day period within which the 
Commission may summarily abrogate the proposed rule change, as 
amended, under Section 19(b)(3)(C) of the Act, the Commission 
considers the period to commence on May 5, 2006, the date on which 
the Exchange submitted Amendment No. 1. See 15 U.S.C. 78s(b)(3)(C).
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IV. Solicitation of Comments

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

Electronic Comments

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

File Number SR-NASD-2006-053 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASD-2006-053. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of Nasdaq. All comments received will be posted 
without change; the Commission does not edit personal identifying 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File Number SR-NASD-2006-053 and should be submitted on or before June 
7, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
 [FR Doc. E6-7462 Filed 5-16-06; 8:45 am]

BILLING CODE 8010-01-P