Document ID: SEC-2006-0854-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Stock Exchange
Posted Date: 2006-07-06T04:00Z

[Federal Register: July 6, 2006 (Volume 71, Number 129)]
[Notices]               
[Page 38451-38480]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr06jy06-134]                         

[[Page 38451]]

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Part II

Securities and Exchange Commission

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Self-Regulatory Organizations; National Stock Exchange; Notice

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-54044; File No. SR-NSX-2006-08]

 
Self-Regulatory Organizations; National Stock Exchange; Notice of 
Filing of Proposed Rule Change and Amendment No. 1 Thereto To Amend Its 
Trading Rules To Provide for a Strict Price-Time Priority Market and 
Other Related Changes

June 26, 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 June 6, 2006, the National Stock Exchange SM(``NSX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the NSX. On June 22, 
2006, the Exchange submitted Amendment No. 1 to the proposed rule 
change.\3\ 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\ Amendment No. 1 inserted a new NSX Rule 2.11 relating to NSX 
Securities, LLC in the Exchange's rules. Amendment No. 1 also 
revised NSX Rules 11.3(b) and 11.12 relating to crosses, Midpoint 
Crosses, and Clean Crosses, to reflect the delayed compliance date 
for Rule 611 of Regulation NMS under the Act and to add a 
requirement that Clean Crosses have an aggregate value of at least 
$100,000. In addition, Amendment No. 1 made corresponding changes to 
Item 3 of the proposed rule change to reflect these additional rule 
changes and also made additional minor clarifying edits.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing to amend Chapter 11 of the Exchange Rules 
(relating to Trading Rules) in order to incorporate a strict price-time 
priority automatic execution trading model to replace the Exchange's 
current market structure. In connection with the changes to its Trading 
Rules, the Exchange is also proposing to include certain new 
definitions and general provisions in the Exchange Rules, to move rules 
relating to exchange products to another new chapter of the Exchange 
Rules, and to make certain other technical changes in connection with 
the new trading system. The text of the proposed rule change is set 
forth below. Proposed new language is in italics; proposed deletions 
are in [brackets].
* * * * *
RULES OF NATIONAL STOCK EXCHANGE, INC.
* * * * *

CHAPTER I. Adoption, Interpretation and Application of Rules, and 
Definitions

* * * * *
Rule 1.4. [Reserved.] Effective Time
    (a) All Exchange Rules shall be effective when approved by the 
Commission in accordance with the Act and the rules and regulations 
thereunder, except for those Rules that are effective upon filing with 
the Commission in accordance with the Act and the rules thereunder and 
except as otherwise specifically provided in this Rule 1.4 or elsewhere 
in these Rules.
    (b) Rule 11.11(c)(7)(iv) (relating to Sweep Orders) shall not 
become effective until the compliance date for Rule 611 of Regulation 
NMS under the Act (``Regulation NMS'').
    (c) Prior to the compliance date for the appropriate sections of 
Regulation NMS, the following Rules shall only apply to quotations for 
securities subject to the Intermarket Trading System Plan:
    (i) The second sentence of the lead-in to Rule 11.15 (Order 
Execution); and
    (ii) Rule 11.22 (Locking or Crossing Quotations in NMS Stocks).
Rule 1.5. Definitions
    A.
    (1) No change.

Authorized Trader

    (2) The term ``Authorized Trader'' or ``AT'' shall mean a person 
who may submit orders (or who supervises a routing engine that may 
automatically submit orders) to the Exchange's trading facilities on 
behalf of his or her ETP Holder or Sponsored Participant.
    B.-K. No change.
    L. [Reserved.]

Listing Exchange

    (1) The term ``Listing Exchange'' shall mean the national 
securities exchange or association on which a security is listed.
    M. [Reserved.]

Market Maker

    (1) The term ``Market Maker'' shall mean an ETP Holder that acts as 
a Market Maker pursuant to Chapter XI.

Market Maker Authorized Trader

    (2) The term ``Market Maker Authorized Trader'' or ``MMAT'' shall 
mean an authorized trader who performs market making activities 
pursuant to Chapter XI on behalf of a Market Maker.
    N. [Reserved.]

NSX Book

    (1) The term ``NSX Book'' shall mean the System's electronic file 
of orders.
    O. No change.
    P.
    (1) No change.

Protected NBBO

    (2) The term ``Protected NBBO'' shall mean the national best bid or 
offer that is a protected quotation.

Protected Quotation

    (3) The term ``protected quotation'' means a bid or offer in a 
stock that (i) is displayed by an automated trading center; (ii) is 
disseminated pursuant to a national market system plan approved by the 
Commission; and (iii) is an automated quotation that is the best bid or 
best offer of a national securities exchange or association.
    Q. [Reserved.]

Qualified Clearing Agency

    (1) The term ``Qualified Clearing Agency'' means a clearing agency 
registered with the Commission pursuant to Section 17A of the Act that 
is deemed qualified by the Exchange.
    R. [Reserved.]

Regular Trading Hours

    (1) The term ``Regular Trading Hours'' means the time between 8:30 
a.m. and 3:00 p.m. Central Time.
    S.

Sponsored Participant

    (1) The term ``Sponsored Participant'' shall mean a person which 
has entered into a sponsorship arrangement with a Sponsoring ETP Holder 
pursuant to Rule 11.9.

Sponsoring ETP Holder

    (2) The term ``Sponsoring ETP Holder'' shall mean a broker-dealer 
that has been issued an ETP by the Exchange who has been designated by 
a Sponsored Participant to execute, clear and settle transactions 
resulting from the System. The Sponsoring ETP Holder shall be either 
(i) a clearing firm with membership in a clearing agency registered 
with the Commission that maintains facilities through which 
transactions may be cleared or (ii) a correspondent firm with a 
clearing arrangement with any such clearing firm.

Statutory Disqualification

    (3) The term ``statutory disqualification'' shall mean any 
statutory disqualification as defined in the Act.

[[Page 38453]]

System

    (4) The term ``System'' shall mean the electronic securities 
communications and trading facility designated by the Board through 
which orders of Users are consolidated for ranking and execution.
    T. [Reserved.]

Top of Book

    (1) The term ``Top of Book'' shall mean the best-ranked order to 
buy (or sell) in the NSX Book as ranked pursuant to Rule 11.14.
    U. [Reserved.]

User

    (1) The term ``User'' shall mean any ETP Holder or Sponsored 
Participant who is authorized to obtain access to the System pursuant 
to Rule 11.9.

UTP Security

    (2) The term ``UTP Security'' shall mean any security that is not 
listed on the Exchange but is traded on the Exchange pursuant to 
unlisted trading privileges.
    V.-Z. No change.
* * * * *

CHAPTER II. ETP Holders of the Exchange

* * * * *
Rule 2.4. Restrictions
    (a)-(e) No change.
Interpretations and Policies
    .01-.02 No change.
    [.03 An Exchange member may only give-up its own or another 
Exchange member's clearing number when executing a transaction on the 
Exchange; provided, however, that a member may give-up a non-member's 
clearing number when executing a transaction on the Exchange if (i) the 
non-member (a) is a registered broker-dealer and is a self-clearing 
member of the National Securities Clearing Corporation (``NSCC'') and 
(b) consents to the disciplinary jurisdiction of the Exchange and 
agrees to adhere to all applicable Exchange By-Laws and Rules; and (ii) 
the executing member's guaranteeing clearing firm, who must be an 
Exchange member, agrees to accept financial responsibility for all 
transactions given-up to the non-member, including but not limited to, 
responsibility to clear and settle the non-member's trades in the event 
that the non-member or the NSCC does not accept any such trades].
* * * * *

Rule 2.11 NSX Securities, LLC

    For so long as NSX Securities, LLC (``NSX Securities'') is 
affiliated with the Exchange and is providing outbound routing of 
orders from the Exchange to other securities exchanges, facilities of 
securities exchanges, automated trading systems, electronic 
communications networks or other brokers or dealers (collectively, 
``Trading Centers'') (such function of NSX Securities is referred to as 
the ``Outbound Router''), each of the Exchange and NSX Securities shall 
undertake as follows:
    1. The Exchange will regulate the Outbound Router function of NSX 
Securities as a facility (as defined in Section 3(a)(2) of the Act), 
subject to Section 6 of the Act. In particular, and without limitation, 
under the Act, the Exchange will be responsible for filing with the 
Commission rule changes and fees relating to the NSX Securities 
Outbound Router function and NSX Securities will be subject to exchange 
non-discrimination requirements.
    2. The National Association of Securities Dealers (``NASD''), a 
self-regulatory organization unaffiliated with the Exchange or any of 
its affiliates, will carry out oversight and enforcement 
responsibilities as the designated examining authority designated by 
the Commission pursuant to Rule 17d-1 of the Act with the 
responsibility for examining NSX Securities for compliance with the 
applicable financial responsibility rules.
    3. An ETP Holder's use of NSX Securities to route orders to another 
Trading Center will be optional. Any ETP Holder that does not want to 
use NSX Securities may use other routers to route orders to other 
Trading Centers.
    4. NSX Securities will not engage in any business other than (a) 
its Outbound Router function and (b) any other activities it may engage 
in as approved by the Commission.
* * * * *

CHAPTER III. Rules of Fair Practice

* * * * *
Rule 3.6. Fair Dealing with Customers
    (a)-(f) No change.
Interpretations and Policies
    .01 [Designated Dealers] ETP Holders who handle customer orders on 
the Exchange shall establish and enforce fixed standards for queuing 
and executing customer orders.
* * * * *

CHAPTER V. Supervision

* * * * *
Rule 5.5. Chinese Wall Procedures
    (a) An [Exchange Designated Dealer] ETP Holder that trades for its 
own account in a security, acts as a Market Maker on the Exchange, or 
has a specialist operation on another market (an ETP Holder engaged in 
any of the foregoing is referred to in this Rule 5.5 as a 
``specialist'') must establish a functional separation (``Chinese 
Wall'') between the specialist operation and any associated or 
affiliated persons as appropriate to its operation. [and further] 
Further, all ETP Holders must establish, maintain and enforce written 
procedures reasonably designed to prevent the misuse of material, non-
public information, which includes review of employee and proprietary 
trading, memorialization and documentation of procedures, substantive 
supervision of interdepartmental communications by the [Exchange 
specialist] firm's Compliance Department and procedures concerning 
proprietary trading when the firm is in possession of material, non-
public information. The [Exchange specialist] firm must obtain the 
prior written approval of the Exchange that it has complied with the 
requirements above in establishing functional separation as appropriate 
to the operation and that it has established proper compliance and 
audit procedures to ensure the maintenance of the functional 
separation. A copy of these Chinese Wall procedures, and any amendments 
thereto, must be filed with the Exchange's Surveillance Department.
    (b)-(e) No change.
* * * * *

CHAPTER XI. Trading Rules

Rule 11.1. Hours of Trading
    (a) [Except as provided below, the hours of trading on the Exchange 
shall be from 8:30 a.m. to 3:05 p.m. local Chicago time during normal 
business days.
    (b) Unless otherwise provided by the Board, the hours of trading 
for any security traded on the Exchange which is also traded on another 
national securities exchange or on the Nasdaq Stock Market (hereinafter 
``Nasdaq'') (``dually traded'') or exchanges and Nasdaq (``multiply 
traded'') shall be, in addition to the hours of trading set forth in 
paragraph (a) of this Rule, the hours during which the security is 
traded on the principal exchange or Nasdaq.
    (c) For purposes of this Chapter, the term ``principal exchange,'' 
when used with respect to a dually or multiply-traded security, shall 
mean the exchange or Nasdaq with the greatest trading volume in that 
security for the preceding calendar month.] The Exchange shall open for 
the transaction of business during such hours as is

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determined by the Board, with notice to ETP Holders.
    (b) The Exchange will be open for the transaction of business on 
business days. The Exchange will not be open for business on the 
following holidays: New Year's Day, Dr. Martin Luther King Jr. Day, 
Presidents Day, Good Friday, Memorial Day, Independence Day, Labor Day, 
Thanksgiving Day or Christmas. When any holiday observed by the 
Exchange falls on a Saturday, the Exchange will not be open for 
business on the preceding Friday. When any holiday observed by the 
Exchange falls on a Sunday, the Exchange will not be open for business 
on the following Monday, unless otherwise indicated by the Exchange.
Rule 11.2. [Unit] Units of Trading
    [The unit of trading of stocks on the Exchange shall be 100 shares, 
and the unit of trading of bonds on the Exchange shall be $1,000 
original principal amount, except in the case of a dually or multiply-
traded security where the principal exchange or Nasdaq shall have a 
different unit of trading or when the Board of the Exchange shall 
provide otherwise.]
    One hundred (100) shares shall constitute a ``round lot,'' any 
amount less than 100 shares shall constitute an ``odd lot,'' and any 
amount greater than 100 shares that is not a multiple of a round lot 
shall constitute a ``mixed lot.''
Rule 11.3. Price Variations
    (a) No change.
    (b) Except as provided in Rule 11.12(c) or (d), Crosses executed in 
accordance with Rule 11.12 must improve each side of the Top of Book by 
at least $0.01 per share. No Crosses may be executed in increments 
smaller than those permitted by Rule 11.3(a), except for Midpoint 
Crosses (as defined in Rule 11.2(c)), which may be executed in 
increments as little as one-half the minimum increment permitted by 
Rule 11.3(a).
Rule 11.4. [Trading Ex-Dividend, Etc.] Securities Eligible for Trading
    [Transactions in stocks (except those made for ``cash'') shall be 
ex-dividend or ex-rights on the second business day preceding the 
record date fixed by the corporation or the date of the closing of the 
transfer books, except in the case of a dually or multiply-traded 
security where the principal exchange or Nasdaq on which a security is 
traded shall have a different rule or when the Board of the Exchange 
shall provide otherwise. Should such record date or such closing of 
transfer books occur upon a day other than a business day, this Rule 
shall apply for the third preceding business day. Transactions in 
stocks made for ``cash'' shall be ex-dividend or ex-rights on the 
business day following said record date or date of closing of transfer 
books. In respect to stock dividends and/or splits which are 25% or 
greater, the ex-dividend date shall be the first business date 
following the payable date, except in the case of a dually or multiply-
traded security where the principal exchange or Nasdaq on which such a 
security is traded shall have a different rule or when the Board of the 
Exchange shall provide otherwise.]
    The Exchange shall designate securities for trading. Any class of 
securities listed or admitted to unlisted trading privileges on the 
Exchange pursuant to Chapter XV of these Rules shall be eligible to 
become designated for trading on the Exchange. All securities 
designated for trading are eligible for odd-lot, round-lot and mixed-
lot executions, unless otherwise indicated by the Exchange or limited 
pursuant to these Rules.
Rule 11.5. [Orders to be Reduced and Increased on Ex-Date] Registration 
of Market Makers
    [(a) Except in the case of a dually or multiply-traded security 
where the principal exchange or Nasdaq on which a security is traded 
shall have a different rule or the Board of the Exchange shall provide 
otherwise, when a security is quoted ``ex-dividend,'' ``ex-
distribution,'' ``ex-rights'' or ``ex-interest,'' the following kinds 
of orders shall be reduced in price and increased in shares, in the 
case of stock dividends and stock distributions which result in round 
lots, on the day the security sells ex: (i) Open buy orders; (ii) Open 
stock orders to sell (with open stop limit orders to sell, the limit, 
as well as the stop price, shall be reduced). The following orders 
shall not be reduced: (i) Open stop orders to buy; (ii) Open sell 
orders.
    (b) The procedure to be followed in reducing the above kinds of 
orders shall be as follows: (i) In the case of a cash dividend 
disbursement, the price shall be reduced by the amount of such 
disbursement in an amount equal to, or a multiple of, the variation in 
which bids and offers are made. Should the disbursement be in an amount 
other than the variation in which bids and offers are made, or a 
multiple thereof, orders shall be reduced by the next higher variation; 
(ii) In the case of stock dividends or other stock distribution, open 
buy orders and open stop orders to sell shall be reduced in price by 
the proportional value of a stock dividend or stock distribution on the 
day a security sells ex-dividend or ex-distribution. The new price of 
the order is determined by dividing the price of the original order by 
100% plus the percentage value of the stock dividend or stock 
distribution. If, as a result of this calculation, the price is not 
equivalent to or is not a multiple of the variation of a dollar in 
which bids and offers are made in the particular security, the price 
should be rounded to the next lower variation; (iii) In the case of 
reverse splits, all orders (including open sell orders and open stop 
orders to buy) should be cancelled.
    (c) In the case of a stock dividend or stock distribution, the 
procedure to be followed in increasing open buy orders and open stop 
orders to sell shall be as follows: (i) When there is a stock dividend 
or stock distribution which results in one of more full shares for each 
share held, the number of shares in open buy orders and open stop 
orders to sell shall be increased accordingly; (ii) When there is a 
stock dividend or stock distribution on less than a one-for-one basis 
which thus results in fractional shares, open buy orders and open stop 
orders to sell shall be increased to the lowest full round lot; (iii) 
When there is a stock dividend or stock distribution which results in 
fractional shares combined with full shares, the number of shares in 
open buy orders and open stop orders to sell shall be increased to the 
lowest full round lot.
    (d) Open orders held by a member prior to the day a stock sells ex-
dividend, ex-distribution or ex-rights shall be reduced in price and, 
if the above is applicable, increased in shares by the value of the 
dividend or distribution of rights, unless the member is otherwise 
instructed by the customer from whom the orders were received. In this 
regard, a customer may enter a Do Not Reduce or ``DNR'' order if he 
does not want the price of an order reduced for cash dividends, or a Do 
Not Increase or ``DNI'' order if he does not want an order increased in 
shares for stock dividends or stock distributions.]
    (a) No ETP Holder shall act as a Market Maker in any security 
unless such ETP Holder is registered as a Market Maker in such security 
by the Exchange pursuant to this Rule and the Exchange has not 
suspended or cancelled such registration. Registered Market Makers are 
designated as dealers on the Exchange for all purposes under the Act 
and the rules and regulations thereunder. 
    (b) An applicant for registration as a Market Maker shall file an 
application in writing on such form as the Exchange may prescribe. 
Applications shall be

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reviewed by the Exchange, which shall consider such factors including, 
but not limited to capital operations, personnel, technical resources, 
and disciplinary history. Each Market Maker must have and maintain 
minimum net capital of at least the amount required under Rule 15c3-1 
of the Act.
    (c) An applicant's registration as a Market Maker shall become 
effective upon receipt by the ETP Holder of notice of an approval of 
registration by the Exchange.
    (d) The registration of a Market Maker may be suspended or 
terminated by the Exchange if the Exchange determines that: 
    (1) The Market Maker has substantially or continually failed to 
engage in dealings in accordance with Rule 11.8 or elsewhere in these 
Rules;
    (2) The Market Maker has failed to meet the minimum net capital 
conditions set forth under paragraph (b) above; or
    (3) The Market Maker has failed to maintain fair and orderly 
markets.
    (e) Any registered Market Maker may withdraw its registration by 
giving written notice to the Exchange. The Exchange may require a 
certain minimum prior notice period for withdrawal, and may place such 
other conditions on withdrawal and re-registration following 
withdrawal, as it deems appropriate in the interests of maintaining 
fair and orderly markets.
    (f) Any person aggrieved by any determination under this Rule or 
Rules 11.6 or 11.7 below may seek review under Chapter X of Exchange 
Rules governing adverse action.
Rule 11.6. [Types of Trading] Obligations of Market Maker Authorized 
Traders
    [Issues listed on the Exchange and those admitted to unlisted 
trading privileges will be eligible for one of the following three 
types of trading:
    (a) Cabinet trading;
    (b) Qualified dealer trading;
    (c) Multiple dealer trading.]
    (a) General. MMATs are permitted to enter orders only for the 
account of the Market Maker for which they are registered.
    (b) Registration of Market Maker Authorized Traders. The Exchange 
may, upon receiving an application in writing from a Market Maker on a 
form prescribed by the Exchange, register a person as a MMAT.
    (1) MMATs may be officers, partners, employees or other associated 
persons of ETP Holders that are registered with the Exchange as Market 
Makers.
    (2) To be eligible for registration as a MMAT, a person must 
successfully complete the General Securities Representative Examination 
(Series 7) and any other training and/or certification programs as may 
be required by the Exchange; provided, however, the requirement to 
complete the Series 7 Examination may be waived by the Exchange if the 
applicant MMAT has served as a dealer-specialist or market maker on a 
registered national securities exchange or association for at least two 
consecutive years within three years of the date of application.
    (3) The Exchange may require a Market Maker to provide any and all 
additional information the Exchange deems necessary to establish 
whether registration should be granted.
    (4) The Exchange may grant a person conditional registration as a 
MMAT subject to any conditions it considers appropriate in the 
interests of maintaining a fair and orderly market.
    (5) A Market Maker must ensure that a MMAT is properly qualified to 
perform market making activities, including but not limited to ensuring 
the MMAT has met the requirements set forth in paragraph (b)(2) of this 
Rule.
    (c) Suspension or Withdrawal of Registration.
    (1) The Exchange may suspend or withdraw the registration 
previously given to a person to be a MMAT if the Exchange determines 
that:
    (A) The person has caused the Market Maker to fail to comply with 
the securities laws, rules and regulations or the By-Laws, Rules and 
procedures of the Exchange;
    (B) The person is not properly performing the responsibilities of a 
MMAT;
    (C) The person has failed to meet the conditions set forth under 
paragraph (b) above; or
    (D) The Exchange believes it is in the interest of maintaining fair 
and orderly markets.
    (2) If the Exchange suspends the registration of a person as a 
MMAT, the Market Maker must not allow the person to submit orders into 
the System.
    (3) The registration of a MMAT will be withdrawn upon the written 
request of the ETP Holder for which the MMAT is registered. Such 
written request shall be submitted on the form prescribed by the 
Exchange.
Rule 11.7. [Cabinet Trading] Registration of Market Makers in a 
Security
    [Trading in securities for which there is no dealer participation 
may be provided through Exchange facilities. Bids and offers of members 
shall be registered in a book maintained for such purposes by the 
Exchange at a facility located in Chicago, Illinois, or elsewhere as 
designated by the Exchange's Board.]
    (a) A Market Maker may become registered in a newly authorized 
security or in a security already admitted to dealings on the Exchange 
by filing a security registration form with the Exchange. Registration 
in the security shall become effective on the first business day 
following the Exchange's approval of the registration, unless otherwise 
provided by the Exchange. In considering the approval of the 
registration of the Market Maker in a security, the Exchange may 
consider:
    (1) The financial resources available to the Market Maker;
    (2) The Market Maker's experience, expertise and past performance 
in making markets, including the Market Maker's performance in other 
securities;
    (3) The Market Maker's operational capability;
    (4) The maintenance and enhancement of competition among Market 
Makers in each security in which they are registered;
    (5) The existence of satisfactory arrangements for clearing the 
Market Maker's transactions;
    (6) The character of the market for the security, e.g., price, 
volatility, and relative liquidity.
    (b) Voluntary Termination of Security Registration. A Market Maker 
may voluntarily terminate its registration in a security by providing 
the Exchange with a written notice of such termination. The Exchange 
may require a certain minimum prior notice period for such termination, 
and may place such other conditions on withdrawal and re-registration 
following withdrawal, as it deems appropriate in the interests of 
maintaining fair and orderly markets. A Market Maker that fails to give 
advanced written notice of termination to the Exchange may be subject 
to formal disciplinary action pursuant to Chapter VIII of these Rules.
    (c) The Exchange may suspend or terminate any registration of a 
Market Maker in a security or securities under this Rule whenever the 
Exchange determines that:
    (1) The Market Maker has not met any of its obligations as set 
forth in these Rules; or
    (2) The Market Maker has failed to maintain fair and orderly 
markets.
    A Market Maker whose registration is suspended or terminated 
pursuant to this Rule 11.7(c) may seek review under Chapter X of 
Exchange Rules governing adverse action.
    (d) Nothing in this Rule will limit any other power of the Exchange 
under the By-Laws, Rules, or procedures of the

[[Page 38456]]

Exchange with respect to the registration of a Market Maker or in 
respect of any violation by a Market Maker of the provisions of this 
Rule.
Rule 11.8. [Qualified Dealer Trading] Obligations of Market Makers
    [(a) The Securities Committee may approve one or more Proprietary 
Members of the Exchange to be a ``qualified dealer'' for each 
designated issue (as defined in Rule 11.9 of this Chapter). Such 
qualified dealers shall perform the following functions:
    (1) guarantee settlement for transactions occurring through the 
Exchange in issues for which the Proprietary Member is the qualified 
dealer and executes the transaction;
    (2) act as a clearing contra-party for transactions occurring 
through the Exchange in issues for which the Proprietary member is a 
qualified dealer and executes the transaction;
    (3) provide to all members during Exchange trading hours a 
continuous two-sided market in odd-lots of issues for which the 
Proprietary Member is designated a qualified dealer; and
    (4) give precedence in trading to all public agency orders shown to 
the qualified dealer at prices equal to or better than the qualified 
dealer's own bid or offer.
    (b) For purposes of Rule 11.8., a public agency order shall mean 
any order for the account of a person other than a member, which order 
is represented, as agent, by a member.
    (c) Qualified dealer designation shall be used in those designated 
issues where there exists (i) an insufficient number of dealers to 
permit use of multiple dealer trading; (ii) insufficient computer 
capacity to permit use of multiple dealer trading; (iii) insufficient 
order flow to warrant use of multiple dealer trading; or (iv) other 
factors which would, in the judgment of the Securities Committee, make 
multiple dealer trading impracticable.
    (d) Any person aggrieved by any determination under this Rule may 
seek review under the provisions of Exchange Rules for adverse action.]
    (a) General. ETP Holders who are registered as Market Makers in one 
or more securities traded on the Exchange must engage in a course of 
dealings for their own account to assist in the maintenance, insofar as 
reasonably practicable, of fair and orderly markets on the Exchange in 
accordance with these Rules. The responsibilities and duties of a 
Market Maker specifically include, but are not limited to, the 
following:
    (1) Maintain continuous limit orders to buy and to sell for round 
lots in those securities in which the Market Maker is registered to 
trade;
    (2) Remain in good standing with the Exchange and in compliance 
with all Exchange Rules applicable to it;
    (3) Inform the Exchange of any material change in financial or 
operational condition or in personnel;
    (4) Maintain a current list of MMATs who are permitted to enter 
orders on behalf of the Market Maker and provide an updated version of 
this list to the Exchange upon any change in MMATs; and
    (5) Clear and settle transactions through the facilities of a 
registered clearing agency. This requirement may be satisfied by direct 
participation, use of direct clearing services, or by entry into a 
correspondent clearing arrangement with another ETP Holder that clears 
trades through such agency.
    (b) A Market Maker must satisfy the responsibilities and duties as 
set forth in paragraph (a) of this Rule during trading hours on all 
days in which the Exchange is open for business.
    (c) A Market Maker shall be responsible for the acts and omissions 
of its MMATs.
    (d) If the Exchange finds any substantial or continued failure by a 
Market Maker to engage in a course of dealings as specified in 
paragraph (a) of this Rule, such Market Maker will be subject to 
disciplinary action or suspension or revocation of the registration by 
the Exchange in one or more of the securities in which the Market Maker 
is registered. Nothing in this Rule will limit any other power of the 
Exchange under the By-Laws, Rules, or procedures of the Exchange with 
respect to the registration of a Market Maker or in respect of any 
violation by a Market Maker of the provisions of this Rule. Any ETP 
Holder aggrieved by any determination under this Rule may seek review 
under Chapter X of the Exchange Rules governing adverse action. 
    (e) Temporary Withdrawal. A Market Maker may apply to the Exchange 
to withdraw temporarily from its Market Maker status in the securities 
in which it is registered. The Market Maker must base its request on 
demonstrated legal or regulatory requirements that necessitate its 
temporary withdrawal, or provide the Exchange an opinion of counsel 
certifying that such legal or regulatory basis exists. The Exchange 
will act promptly on such request and, if the request is granted, the 
Exchange may temporarily reassign the securities to another Market 
Maker.
Rule 11.9. [National Securities Trading System] Access
    [(a) When used in Rule 11.9, unless the context otherwise 
requires--
    (1) The term ``System'' means the National Securities Trading 
System, an electronic securities communication and execution facility 
designated by the Exchange's Board through which bids and offers of 
competing dealers, as well as public orders, are consolidated for 
review and execution by Users. The System combines the display of both 
the limit order file and current quotation/last sale information to 
Users with the matching and execution of like-priced orders, bids and 
offers according to programmed price/time and agency/principal 
priorities in order to give Users the ability to perform the brokerage 
and market-making functions performed on other exchanges. In addition, 
the System provides for the automatic execution of orders under 
predetermined conditions.
    (2) The term ``Nasdaq/NNM Security'' shall mean any authorized 
security in the Nasdaq National Market which (1) satisfies all 
applicable requirements of the Rule 4300 Series of the NASD Rules and 
substantially meets the criteria set forth in the Rule 4300 Series of 
the NASD Rules; (2) is subject therefore to a transaction reporting 
plan approved by the Commission; (3) has been designated therefore as a 
national market system security pursuant to SEC Rule 11Aa2-1 and (4) as 
to which unlisted trading privileges have been granted pursuant to 
Section 12(f) of the Act.
    (3) The term ``Nasdaq System'' means the NASD's automated Quotation 
System.
    (4) The term ``Approved Dealer'' means a Designated Dealer, a 
Contributing Dealer, or a specialist or market maker registered as such 
with another exchange or Nasdaq with respect to any Designated Issue.
    (5) The term ``Designated Dealer'' means a Proprietary Member who 
maintains a minimum net capital of at least the greater of $500,000 or 
the amount required under Rule 15c3-1 of the Securities Exchange Act of 
1934, as amended, and who has been approved by the Securities Committee 
to perform market functions by entering bids and offers for Designated 
Issues into the System.
    (6) The term ``Contributing Dealer'' means a Proprietary Member who 
(i) maintains a minimum net capital of at least the greater of $50,000 
or the amount required under Rule 15c3-1 of the Securities Exchange 
Act, as amended; (ii) is registered with the

[[Page 38457]]

Exchange with respect to one or more Designated Issues; and (iii) 
provides to all Users through the System, during Exchange trading 
hours, regular bids and offers for round lots of Designated Issues for 
which he is registered.
    (7) The term ``User'' means a Member of the Exchange or an Approved 
Dealer. Access Participant Members are considered to be Users in their 
limited capacity of executing transactions through the facilities of a 
Proprietary Member.
    (8) The term ``Designated Issue'' means a security designated by 
the Securities Committee to be traded in the System.
    (9) The term ``public agency order'' means any order for the 
account of a person other than a member, an Approved Dealer or a person 
who could become an Approved Dealer by complying with this Rule with 
respect to his use of the System, which order is represented, as agent, 
by a User.
    (10) The term ``professional agency order'' means an order entered 
by a User as agent for the account of a broker-dealer, a futures 
commission merchant, or a member of a contract market.
    (11) The term ``Floor'' means the electronically integrated System 
marketplace consisting of the premises on which System terminals are 
located and the System supervisory center.
    (12) The term ``limit order guarantee'' means a guarantee to 
execute an order as principal upon the occurrence of a transaction in 
another market at the price of such order.
    (13) The term ``ITS BBO'' means the best bid/ask quote among the 
Intermarket Trading System (``ITS'') participants in those issues that 
are traded on ITS.
    (14) The term ``Nasdaq System BBO'' means the best bid/ask quote 
generated by the Nasdaq System participants in those issues that are 
traded on the Nasdaq System.
    (b) Any class of securities listed or admitted to unlisted trading 
privileges on the Exchange shall be eligible to become a Designated 
Issue. All Designated Issues are eligible for odd-lot, round-lot and 
partial round-lot executions.
    (c) The Securities Committee shall approve one or more applicant 
Proprietary Members of the Exchange as a Designated Dealer for one or 
more Designated Issues. A Designated Dealer shall perform the following 
functions:
    (i) Upon request of any User guarantee settlement, at such 
Designated Dealer's customary charge, for transactions, executed 
through the System in Designated Issues for which he is a Designated 
Dealer.
    (ii) Upon request of any User, at such Designated Dealer's 
customary charge, act as clearing contra-party for transactions 
executed through the System in Designated Issues for which he is 
Designated Dealer.
    (iii) Provide to all Users through the System, during the Exchange 
trading hours, continuous bids and offers for round lots of Designated 
Issues for which he is a Designated Dealer.
    (iv) Guarantee the execution of public agency market orders in 
Designated Issues for which he is Designated Dealer in accordance with 
subparagraph (n) of this Rule 11.9. If there exist two or more 
Designated Dealers in a Designated Issue, then unless the Securities 
Committee has approved one member as the primary Designated Dealer in 
that issue, the guarantee obligation shall rotate among such Designated 
Dealers on a daily basis. For the purposes of this subsection, market 
order shall include marketable limit order, which is a limit order that 
is immediately executable because the ITS BBO or Nasdaq System BBO at 
the time the order is entered is equal to or better than the limit 
price on the order.
    (v) Guarantee the execution in Designated Issues that are other 
than Nasdaq/NNM securities up to 1099 shares at the opening price of 
opening public agency market orders and limit orders which are priced 
better than such opening price (``marketable limit orders''). Guarantee 
the execution of market orders and marketable limit orders in 
Designated Issues that are Nasdaq/NNM securities up to 1099 shares at 
an opening price that is on or between the first unlocked/uncrossed 
Nasdaq System BBO. If there exist two or more Designated Dealers in a 
Designated Issue, then, unless the Securities Committee has approved 
one member as the primary Designated Dealer in that issue, the 
guarantee obligation shall rotate among such Designated Dealers on a 
daily basis.
    (d) A Proprietary Member registered with the Exchange as a 
Contributing Dealer shall forfeit his right to continue as a 
Contributing Dealer if he fails to provide to all Users through the 
System, during Exchange trading hours, regular bids and offers for 
round lots of Designated Issues for which he is registered as a 
Contributing Dealer.
    (e) Any specialist or market maker registered as such with another 
exchange or Nasdaq with respect to any Designated Issue may provide 
bids and offers with respect to that Designated Issue through the 
System to all Users so long as such specialist or market maker complies 
with the provisions of this Rule with respect to his use of the System.
    (f) Proprietary Members of the Exchange may provide bids and offers 
for their own accounts in any Designated Issue to all Users through the 
System so long as, in effecting transactions on the Exchange through 
the System, they comply with Section 11(a) of the Act and the rules and 
regulations thereunder.
    (g) It shall be the responsibility of all Users when trading on the 
Exchange for the account of another person to effect such transactions 
through the System. Users may enter agency orders to buy and sell in 
Designated Issues through System terminals, which may have computer 
interfaces that have communications capability with the System and are 
directly linked to the System.
    (h) The System shall display all current principal interest and 
agency orders of Users in Designated Issues, as well as the best bid/
ask quotations of each ITS participant and Nasdaq System BBO quotations 
generated by the Nasdaq System participants in, and the last sale price 
for, Designated Issues, to each User for purposes of trading.
    (1) Designated Dealers shall permit each Nasdaq System market 
maker, acting in its capacity as market maker, direct telephone access 
(or other such access as may be established between the Exchange and 
Nasdaq System) to the Designated Dealer in each Nasdaq/NNM Security in 
which such market maker is registered as a market maker. Such access 
shall include appropriate procedures to assure the timely response to 
communications received through telephone access. Nasdaq System market 
makers may use such telephone access (or other such access as may be 
established between the Exchange and Nasdaq System) to transmit orders 
for execution on the Exchange. Executions of Nasdaq System market maker 
orders shall be deemed to be transactions effected through the System 
and must be reported to the Exchange as promptly as possible and in any 
event within one minute of execution; and
    (2) Designated Dealers may send orders from the Exchange via 
telephone (or other access as may be established between the Exchange 
and Nasdaq System) to any Nasdaq System market maker in each Nasdaq/NNM 
Security in which it displays quotations.
    (i) The System offers two modes of order interaction selected by 
members:
    (1) If automatic execution is selected, the System shall match and 
execute like-priced orders, bids and offers on an order by order basis 
only at the specific

[[Page 38458]]

instruction of Users, including Designated Dealers.
    (2) If order delivery and automated response is selected, the 
System will deliver contra-side orders against displayed orders and 
quotations on an order by order basis only at the specific instruction 
of Users, including Designated Dealers. To be eligible for order 
delivery service, Users must demonstrate to Exchange examiners that the 
User's system can automatically process the inbound order and respond 
appropriately within 1 second.
    (j) Limit orders to buy (sell) at a price inferior to the ITS or 
Nasdaq System BBO will be executed other than at the opening only after 
a regular way transaction in the Designated Issue is executed in 
another ITS participant market or Nasdaq System at a price which is 
equal to or less than (greater than) the limit price of the order.
    (k) Public agency orders entered in the System which have not been 
executed may be removed from the System only by the User who entered 
the order for the purpose of canceling the order, transferring the 
order to another national market or, in the case of withdrawal by an 
Approved Dealer or Proprietary Member, executing such order immediately 
as principal pursuant to a limit order guarantee. Executions of public 
agency orders as principal pursuant to a limit order guarantee shall be 
deemed to be transactions effected on the Exchange in the same manner 
as if such transactions were executed through the System and must be 
reported to the Exchange as promptly as possible and in any event 
within one minute of execution.
    (l) Public agency orders to buy or sell at a particular price 
shall, in all cases except execution of such an order pursuant to a 
limit order guarantee, have priority over all other bids and offers on 
the System at the same price. Subject to the following condition,
    (1) All bids entered in the System shall be queued for execution so 
that the highest price bid shall be the first to be executed and so 
that, in the case of bids at the same price, except in the case of 
Approved Dealer bids entered pursuant to subparagraph (u), the bid 
entered earliest in time shall be the first to be executed; and
    (2) All offers entered in the System shall be queued for execution 
so that the lowest price offered shall be the first to be executed and 
so that, in the case of offers at the same price, except in the case of 
Approved Dealer offers entered pursuant to subparagraph (u), the offer 
entered earliest in time shall be the first to be executed.
    (m) It shall be the responsibility of each Approved Dealer or other 
Proprietary Member when trading on the Exchange for his own account or 
as agent for professional agency orders in round lots of Designated 
Issues to effect such transactions through the System and, in so doing, 
to yield priority to
    (1) All public agency orders in the System at prices equal to, or 
better than, his order, bid or offer; and
    (2) All orders, bids and offers of Approved Dealers and other 
Proprietary Members for their own accounts and as agents for 
professional agency orders in the System at prices better than his 
order, bid or offer or at the same price in the event any such orders, 
bids or offers were entered in the System (i) at an earlier time than 
his order, bid or offer, or (ii) in the case of Approved Dealers, for 
the purpose of trading for their own account against public agency 
orders which such Approved Dealers are representing as agent pursuant 
to subparagraph (u).
    (n) Public Agency Guarantee.
    (1) Public agency opening market orders and limit orders better 
than the opening price in securities that are other than Nasdaq/NNM 
securities which are entered prior to the opening up to 1099 shares 
shall be executed at the opening price. Market orders and marketable 
limit orders in Nasdaq/NNM securities up to 1099 shares shall be 
executed at an opening price on or between the first unlocked/uncrossed 
Nasdaq System BBO.
    (2) Public agency market and marketable limit orders in all 
Designated Issues which are entered after the opening are guaranteed 
execution pursuant to the following requirements and limitations.
    (3) The Designated Dealer of the day must accept and guarantee 
execution on all public agency market and marketable limit orders in 
accordance with this subparagraph (n).
    (4) Subject to the requirements of the short sale rule, orders must 
be filed on the basis of the ITS or Nasdaq System BBO bid on a sell 
order or the ITS or Nasdaq System BBO offer on a buy order. Sell orders 
will be satisfied up to the size of the lesser of the ITS or Nasdaq 
System BBO bid or 1099 shares; buy orders up to the lesser of the ITS 
or Nasdaq System BBO offer or 1099 shares. No portion of an order 
larger than 1099 shares is subject to the public agency guarantee.
    (5) The number of shares which the Designated Dealer of the day is 
obligated to execute is reduced by the number of shares executed in the 
System against any agency or principal interest, including interest of 
the Designated Dealer of the Day, priced at the ITS or Nasdaq System 
BBO when the order enters the System.
    (6) In unusual trading situations, a Designated Dealer may seek 
relief from the requirements of 2 through 5 above from an Exchange 
Floor Official or a member of the Exchange staff who would have 
authority to set execution prices. All execution guarantees and the 
requirements of Exchange Rule 12.6, Customer Priority, apply only 
during the hours of trading on the Exchange (8:30 a.m. to 3:05 p.m. 
local Chicago time).
    (o) Prior to formatting any order, bid or offer into an ITS 
commitment to trade and issuing such a commitment to another ITS 
participant market, the System shall process such order, bid or offer 
as follows:
    (1) If a principal bid or offer, the System shall first exhaust all 
interest at or better than such bid or offer which is resident in the 
System;
    (2) If a public agency market or marketable limit order, the System 
shall first process the order pursuant to Exchange Rule 11.9(i) and (n) 
and then expose for fifteen seconds any remaining balance to all 
Approved Dealers, whether or not registered in the Designated Issue 
involved;
    (3) If a professional agency order, the System shall exhaust all 
interest at or better than such order which is resident in the System 
and then, if the Board has authorized the System generation of ITS 
commitments to trade, and such a procedure is in effect, shall expose 
the order for fifteen seconds to all Approved Dealers, whether or not 
registered in the Designated Issue involved.
    (p) Nothing in paragraphs (j) through (l) shall preclude an 
Approved Dealer or Proprietary Member from effecting an execution of a 
public agency order in a Designated Issue on the Exchange pursuant to a 
limit order guarantee.
    (q) Confirmations. The System shall provide hard-copy confirmations 
of each transaction effected through the System promptly to each User 
(or his agent) who is a party to that transaction, supplying the 
following information: size, price, security, whether the User was a 
buyer or a seller and the transaction identification number.
    (r) Access. Any User may obtain from the Exchange (or its designee) 
electronic means of direct access to the System upon the payment of 
such reasonable fees as the Board may specify from time to time in an 
effective rule filed with the Securities and Exchange Commission 
pursuant to Section 19(b)(2) or 19(b)(3) of the Act.
    (s) The Board shall be responsible for the supervision of the 
National

[[Page 38459]]

Securities Trading System including the following:
    (1) Affording to any person adversely affected by any prohibition 
or limitation with respect to access to services offered by the 
Exchange or any member in connection with the System the procedural 
rights available under Exchange Rules for adverse action.
    (2) Requiring all persons participating in the System to maintain 
such additional records and to provide such access to those records as 
the Exchange shall determine are in the public interest or appropriate 
for the protection of investors and the maintenance of fair and orderly 
markets.
    (3) Requiring all Users participating in the System to comply with 
all Exchange Rules. Approved Dealers and Proprietary Members shall 
apprise customers promptly when they have acted as principal in 
effecting transactions with customers, unless earlier notification and 
consent is required by law.
    (t) Neither the Exchange nor its agents, employees or contractors 
shall be liable to its members, member organizations, successors, 
representatives or customers thereof, or any persons associated 
therewith, for any claims arising out of the use or enjoyment by such 
member, member organization, successor, representative, customer, or 
associated person, of the facilities afforded by the Exchange, 
including, without limitation, the National Securities Trading System 
and the Automated Extension Processing System.
    (u) Public agency market and marketable limit orders which an 
Approved Dealer represents as agent may be preferenced to such Approved 
Dealer in accordance with the price-time and agency/principal 
priorities set forth in Rule 11.9(l) and (m). Notwithstanding 
subparagraphs (c) and (n), an Approved Dealer shall be Dealer of the 
day with respect to orders preferenced under this subparagraph (u).
    Additionally, Designated Dealers shall be allowed to preference 
their customer order flow that is related to index arbitrage only on 
plus or zero plus ticks when the Dow Jones Industrial Average 
(``DJIA'') declines by 50 points or more from the previous day's 
closing value.
Interpretations and Policies
.01 Limit Order Protection
    Public agency limit orders in securities other than Nasdaq/NNM 
Securities shall be filled if one of the following conditions occur:
    (a) The bid or offering at the limit price has been exhausted in 
the primary market (NOTE: Orders will be executed in whole or in part, 
based on the rules of priority and precedence, on a share for share 
basis with trades executed at the limit price in the primary market);
    (b) There has been a price penetration of the limit in the primary 
market; or
    (c) The issue is trading at the limit price on the primary market, 
unless it can be demonstrated that such order would not have been 
executed if it had been transmitted to the primary market or the 
customer and the Designated Dealer agree to a specific volume related 
or other criteria for requiring a fill.
    (d) With respect to paragraph (c) above, if the issue has traded in 
a primary market's after-hours closing price trading session, the 
Designated Dealer shall fill limit orders designated as eligible for 
limit order protection based on volume that prints in a primary 
market's after-hours closing price trading session (a ``GTX'' order) at 
such limit price. In unusual trading situations, a Designated Dealer 
may seek relief from the above requirements from two Trading Practices 
Committee members or a designated member of the Exchange staff who 
would have the authority to set execution prices.
    (v)(1) Applicability. This rule is applicable only to Portfolio 
Depositary Receipts. Except to the extent inconsistent with this rule, 
or unless the context otherwise requires, the provisions of the 
Constitution and all other rules and policies of the Board shall be 
applicable to the trading on the Exchange of such securities. Portfolio 
Depositary Receipts are included within the definition of ``security'' 
or ``securities'' as such terms are used in the Constitution and Rules 
of the Exchange.
    (2) Definitions. The following terms as used in the Rules shall, 
unless the context otherwise requires, have the meanings herein 
specified:
    (a) Portfolio Depositary Receipt. The term ``Portfolio Depositary 
Receipt'' means a security (i) that is based on a unit investment trust 
(``Trust'') which holds the securities which comprise an index or 
portfolio underlying a series of Portfolio Depositary Receipts; (ii) 
that is issued by the Trust in a specified aggregate minimum number in 
return for a ``Portfolio Deposit'' consisting of specified numbers of 
shares of stock plus a cash amount; (iii) that, when aggregated in the 
same specified minimum number, may be redeemed from the Trust which 
will pay to the redeeming holder the stock and cash then comprising the 
``Portfolio Deposit''; and (iv) that pays holders a periodic cash 
payment corresponding to the regular cash dividends or distributions 
declared with respect to the component securities of the stock index or 
portfolio of securities underlying the Portfolio Depository Receipts, 
less certain expenses and other charges as set forth in the Trust 
prospectus.
    (b) Reporting Authority. The term ``Reporting Authority'' in 
respect of a particular series of Portfolio Depositary Receipts means 
the Exchange, an institution (including the Trustee for a series of 
Portfolio Depositary Receipts), or a reporting service designated by 
the Exchange, or by the exchange that lists a particular series of 
Portfolio Depository Receipts (if the Exchange is trading such series 
pursuant to unlisted trading privileges) as the official source for 
calculating and reporting information relating to such series, 
including, but not limited to, any current index or portfolio value; 
the current value of the portfolio of securities required to be 
deposited to the Trust in connection with issuance of Portfolio 
Depositary Receipts; the amount of any dividend equivalent payment or 
cash distribution to holders of Portfolio Depositary Receipts, net 
asset value, or other information relating to the creation, redemption 
or trading of Portfolio Depositary receipts.
    (3) Members and member organizations shall provide to all 
purchasers of a series of Portfolio Depositary Receipts a written 
description of the terms and characteristics of such securities, in a 
form approved by the Exchange, not later than the time a confirmation 
of the first transaction in such a series is delivered to such 
purchaser. In addition, members and member organizations shall include 
such a written description with any sales material relating to a series 
of Portfolio Depositary Receipts that is provided to customers or the 
public. Any other written materials provided by a member or member 
organization to customers or to the public making specific reference to 
a series of Portfolio Depositary Receipts as an investment vehicle must 
include a statement in substantially the following form: ``A circular 
describing the terms and characteristics of [the series of Portfolio 
Depositary Receipts] is available from your broker. It is recommended 
that you obtain and review such circular before purchasing [the series 
of Portfolio Depositary Receipts]. In addition, upon request you may 
obtain from your broker a prospectus for [the series of Portfolio 
Depositary Receipts].''
    A member or member organization carrying omnibus account for a non-
member broker-dealer is required to inform such non-member that 
execution

[[Page 38460]]

of an order to purchase a series of Portfolio Depositary Receipts for 
such omnibus account will be deemed to constitute agreement by the non-
member to make such written description available to its customers on 
the same terms as are directly applicable to members and member 
organizations under this rule.
    Upon request of a customer, a member or member organization shall 
also provide a prospectus for the particular series of Portfolio 
Depositary Receipts.
    (4) Designation of an Index or Portfolio. The trading of Portfolio 
Depositary Receipts based on one or more stock indices or securities 
portfolios, whether by listing or pursuant to unlisted trading 
privileges, shall be considered on a case by case basis. The Portfolio 
Depositary Receipts based on each particular stock index or portfolio 
shall be designated as a separate series and shall be identified by a 
unique symbol. The stocks that are included in an index or portfolio on 
which Portfolio Depositary Receipts are based shall be selected by the 
Exchange or by such other person as shall have a proprietary interest 
in and authorized use of such index or portfolio, and may be revised 
from time to time as may be deemed necessary or appropriate to maintain 
the quality and character of the index or portfolio.
    (5) Initial and Continued Listing and/or Trading. A Trust upon 
which a series of Portfolio Depositary Receipts is based will be traded 
on the Exchange, whether by listing or pursuant to unlisted trading 
privileges, subject to application of the following criteria:
    (a) Commencement of Trading--For each Trust, the Exchange will 
establish a minimum number of Portfolio Depositary Receipts required to 
be outstanding at the time of commencement of trading on the Exchange.
    (b) Continued Trading--Following the initial twelve month period 
following formation of a Trust and commencement of trading on the 
Exchange, the Exchange will consider the suspension of trading in, 
removal from listing of, or termination of unlisted trading privileges 
for a Trust upon which a series of Portfolio Depositary Receipts is 
based under any of the following circumstances: (i) If the Trust has 
more than 60 days remaining until termination and there are fewer than 
50 record and/or beneficial holders of Portfolio Depositary Receipts 
for 30 or more consecutive trading days; or (ii) if the value of the 
index or portfolio of securities on which the Trust is based is no 
longer calculated or available; or (iii) if such other event shall 
occur or condition exists which in the opinion of the Exchange, makes 
future dealings on the Exchange inadvisable.
    Upon termination of a Trust, the Exchange requires that Portfolio 
Depositary Receipts issued in connection with such Trust be removed 
from Exchange listing or have their unlisted trading privileges 
terminated. A Trust may terminate in accordance with the provisions of 
the Trust prospectus, which may provide for termination if the value of 
securities in the Trust falls below a specified amount.
    (c) Term--The stated term of the Trust shall be stated in the Trust 
Prospectus. However, a Trust may be terminated under such earlier 
circumstances as may be specified in the Trust prospectus.
    (d) Trustee--The trustee must be a trust company or banking 
institution having substantial capital and surplus and the experience 
and facilities for handling corporate trust business. In cases where, 
for any reason, an individual has been appointed as trustee, a 
qualified trust company or banking institution must be appointed as co-
trustee.
    (e) Voting--Voting rights shall be as set forth in the Trust 
prospectus. The Trustee of a Trust may have the right to vote all of 
the voting securities of such Trust.
    (6) Limitation of Exchange Liability. Neither the Exchange, the 
Reporting Authority nor any agent of the Exchange shall have any 
liability for damages, claims, losses or expenses caused by any errors, 
omissions, or delays in calculating or disseminating any current index 
or portfolio value, the current value of the portfolio of securities 
required to be deposited to the Trust; the amount of any dividend 
equivalent payment or cash distribution to holders of Portfolio 
Depositary Receipts; net asset value; or other information relating to 
the creation redemption or trading of Portfolio Depositary Receipts, 
resulting from any negligent act or omission by the Exchange, or the 
Reporting Authority, or any agent of the Exchange or any act, condition 
or cause beyond the reasonable control of the Exchange or its agent, or 
the Reporting Authority, including, but not limited to, an act of God; 
fire; flood; extraordinary weather conditions; war; insurrection; riot; 
strike; accident; action of government; communications or power 
failure; equipment or software malfunction; or any error, omission or 
delay in the reports of transactions in one or more of the underlying 
securities. The Exchange makes no warranty, express or implied, as to 
the results to be obtained by any person or entity from the use of 
Portfolio Depositary Receipts or any underlying index or data included 
therein and the Exchange makes no express or implied warranties, and 
disclaims all warranties or merchantability or fitness for a particular 
purpose with respect to Portfolio Depositary Receipts or any underlying 
index or data included therein. This limitation of liability shall be 
in addition to any other limitation contained in the Exchange's 
Articles of Incorporation, By-Laws or Rules.
Interpretations and Policies
    .01 The Exchange will trade pursuant to unlisted trading 
privileges, Portfolio Depositary Receipts based on the Standard and 
Poor's Corporation's S&P 500 Index, known as SPDRs.
    .02 The Exchange will trade, pursuant to unlisted trading 
privileges, Portfolio Depositary Receipts based on the Standard and 
Poor's Corporation's S&P MidCap 400 Index, known as MidCap SPDRs.
    ``Standard & Poor's'', ``S&P'', ``S&P 500'', ``Standard & Poor's 
500'', and ``500'' are trademarks of the McGraw-Hill Companies, Inc. 
and have been licensed for use by the Exchange.
    (w)(1) Applicability. This rule is applicable only to Trust Issued 
Receipts. Except to the extent inconsistent with this rule, or unless 
the context otherwise requires, the provisions of the Constitution and 
all the rules and policies of the Board shall be applicable to the 
trading on the Exchange of such securities. Trust Issued Receipts are 
included within the definition of ``security'' or ``securities'' as 
such terms are used in the Constitution and Rules of the Exchange. The 
Exchange will consider for trading, whether by listing or pursuant to 
unlisted trading privileges, Trust Issued Receipts that meet the 
criteria of this Rule.
    (2) Definitions. The following terms as used in the Rules shall, 
unless the context otherwise requires, have the following meanings 
herein specified:
    (a) Trust Issued Receipt. A Trust Issued Receipt is a security (a) 
that is issued by a trust (``Trust'') which holds specific securities 
deposited with the Trust; (b) that when aggregated in some specified 
minimum number, may be surrendered to the Trust by the beneficial owner 
to receive the securities; and (c) that pays beneficial owners 
dividends and other distributions on the deposited securities, if any 
are declared and paid to the trustee by an issuer of the deposited 
securities.
    (3) Designation. The Exchange may trade, whether by listing or 
pursuant to unlisted trading privileges, Trust Issued

[[Page 38461]]

Receipts based on one or more securities. The Trust Issued Receipts 
based on particular securities shall be designated as a separate series 
and shall be identified by a unique symbol. The securities that are 
included in a series of Trust Issued Receipts shall be selected by the 
Exchange or by such other person as shall have a proprietary interest 
in such Trust Issued Receipts.
    (4) Initial and Continued Listing. Trust Issued Receipts will be 
traded on the Exchange subject to application of the following 
criteria:
    (a) Initial Listing--For each Trust, the Exchange will establish a 
minimum number of Trust Issued Receipts required to be outstanding at 
the time of commencement of trading on the Exchange.
    (b) Continued Listing--Following the initial twelve month period 
following formation of a Trust and commencement of trading on the 
Exchange, the Exchange will consider the suspension of trading in or 
removal from listing of a Trust upon which a series of Trust Issued 
Receipts is based under any of the following circumstances: (i) If the 
Trust has more than 60 days remaining until termination and there are 
fewer than 50 record and/or beneficial holders of Trust Issued Receipts 
for 30 or more consecutive trading days; (ii) if the Trust has more 
than 50,000 receipts issued and outstanding; (iii) if the market value 
of all receipts issued and outstanding is less than $1,000,000; or (iv) 
if any other event shall occur or condition exists which, in the 
opinion of the Exchange, makes further dealings on the Exchange 
inadvisable.
    Upon termination of a Trust, the Exchange requires that the Trust 
Issued Receipts issued in connection with such Trust be removed from 
Exchange listing. A Trust may terminate in accordance with the 
provisions of the Trust prospectus, which may provide for termination 
if the value of securities in the Trust falls below a specified amount.
    (c) Term--The stated term of the Trust shall be as stated in the 
Trust prospectus; however, a Trust may be terminated under such earlier 
circumstances as may be specified in the Trust prospectus.
    (d) Trustee--The Trustee must be a trust company or banking 
institution having substantial capital and surplus and the experience 
and facilities for handling corporate trust business. In cases where, 
for any reason, an individual has been appointed as trustee, a 
qualified trust company or banking institution must be appointed co-
trustee.
    (e) Voting--Voting rights shall be set forth in the Trust 
prospectus.
    (5) Member Obligations. Members and member organizations shall 
provide to all purchasers of newly issued Trust Issued Receipts a 
prospectus for the series of Trust Issued Receipts.
    (6) Trading Issues. Trust Issued Receipts may be acquired, held, or 
transferred only in round-lot amounts (or round-lot multiples) of 100 
receipts. Orders for less than a round-lot multiple, will be executed 
to the extent of the largest round-lot multiple.
Interpretations and Policies
    .01 The Exchange may approve a series of Trust Issued Receipts for 
trading, whether by listing or pursuant to unlisted trading privileges, 
pursuant to Rule 19b-4(e) under the Securities Act of 1934, provided 
that the following criteria are satisfied:
    (a) Each security underlying the Trust Issued Receipt must be 
registered under Section 12 of the Exchange Act;
    (b) Each company whose securities are underlying securities for the 
Trust Issued Receipt must have a minimum public float of at least $150 
million;
    (c) Each security underlying the Trust Issued Receipt must be 
listed on a national securities exchange or traded through the 
facilities of NASDAQ as a reported national market system security;
    (d) Each company whose securities are underlying securities for the 
Trust Issued Receipt must have an average daily trading volume of at 
least 100,000 shares during the preceding sixty-day trading period;
    (e) Each company whose securities are underlying securities for the 
Trust Issued Receipt must have an average daily dollar value of shares 
traded during the preceding sixty-day trading period of at least $1 
million; and
    (f) The most heavily weighted security in the Trust Issued Receipt 
cannot initially represent more than 20% of the overall value of the 
Trust Issued Receipt.
    (x) Index Fund Shares
    (1) Applicability. This Chapter is applicable only to Index Fund 
Shares. Except to the extent inconsistent with this Chapter, or unless 
the context otherwise requires, the provisions of the Constitution and 
all other rules and policies of the Exchange shall be applicable to the 
trading on the Exchange of Index Fund Shares. Index Fund Shares are 
included within the definition of ``security'' or ``securities'' as 
such terms are used in the Constitution and Rules of the Exchange.
    (2) Definitions. The following terms as used in the Rules shall, 
unless the context otherwise requires, have the meanings herein 
specified:
    (a) Index Fund Shares means a security (a) that is issued by an 
open-end management investment company based on a portfolio of stocks 
that seeks to provide investment results that correspond generally to 
the price and yield performance of a specified foreign or domestic 
stock index; (b) that is issued by such an open-end management 
investment company in a specified aggregate minimum number in return 
for a deposit of specified numbers of shares of stock and/or a cash 
amount with a value equal to the next determined net asset value; and 
(c) that, when aggregated in the same specified minimum number, may be 
redeemed at a holders request by such open-end investment company which 
will pay to the redeeming holder the stock and/or cash with a value 
equal to the next determined net asset value.
    (b) Reporting Authority. The term ``Reporting Authority'' in 
respect of a particular series of Index Fund Shares means the Exchange, 
a subsidiary of the Exchange, or an institution or reporting service 
designated by the Exchange or its subsidiary as the official source for 
calculating and reporting information to such series, including, but 
not limited to, any current index or portfolio value; the current value 
of the portfolio of any securities required to be deposited in 
connection with issuance of Index Fund Shares; the amount of any 
dividend equivalent payment or cash distribution to holders of Index 
Fund Shares, net asset value, or other information relating to the 
issuance, redemption or trading of Index Fund Shares.
    Nothing in this section shall imply that an institution or 
reporting service that is the source for calculating and reporting 
information relating to Index Fund Shares must be designated by the 
Exchange, the term ``Reporting Authority'' shall not refer to an 
institution or reporting service not so designated.
    (3) Disclosure. Upon request of a customer, members and member 
organizations shall provide to all purchasers of Index Fund Shares a 
prospectus for the series of Index Fund Shares.
    (4) Designation. The trading of Index Fund Shares based on one or 
more securities, whether by listing or pursuant to unlisted trading 
privileges, shall be considered on a case-by-case basis. Each issue of 
Index Fund Shares shall be based on each particular stock index or 
portfolio and shall be a designated as a separate series and shall be 
identified by a unique symbol. The securities that are included in a 
series

[[Page 38462]]

of Index Fund Shares shall be selected by the Exchange or its agent, a 
wholly-owned subsidiary of the Exchange, or by such other person 
thereof, as shall have authorized use of such index. Such index or 
portfolio may be revised from time to time as may be deemed necessary 
or appropriate to maintain the quality and character of the index or 
portfolio.
    (5) Initial and Continued Listing and/or Trading. Each series of 
Index Fund Shares will be traded on the Exchange, whether by listing or 
pursuant to unlisted trading privileges, subject to application of the 
following criteria:
    (a) Commencement of Trading--For each Series, the Exchange will 
establish a minimum number of Index Fund Shares required to be 
outstanding at the time of commencement of trading on the Exchange.
    (b) Continued Trading--Following the initial twelve month period 
following commencement of trading on the Exchange of a series of Index 
Fund Shares, the Exchange will consider the suspension of trading, the 
removal from listing, or termination of unlisted trading privileges for 
such series under any of the following circumstances: (i) If there are 
fewer than 50 beneficial holders of the series of Index Fund Shares for 
30 or more consecutive trading days; (ii) if the value of the index or 
portfolio of securities on which the series of Index Fund Shares is 
based is no longer calculated or available; or (iii) if such other 
event shall occur or condition exist which, in the opinion of the 
Exchange, makes further dealings on the Exchange inadvisable. Upon 
termination of an open-ended management investment company, the 
Exchange requires that Index Fund Shares issued in connection with such 
entity be removed from Exchange listing.
    (c) Voting. Voting rights shall be as set forth in the applicable 
open-end management investment company prospectus.
Interpretations and Policies
    .01 The Exchange may approve a series of Index Fund Shares for 
listing pursuant to Rule 19b-4(e) under the Securities Exchange Act of 
1934 provided each of the following criteria is satisfied:
    (a) Eligibility Criteria for Index Components. Upon the initial 
listing of a series of Index Fund Shares each component of an index or 
portfolio underlying a series of Index Fund Shares shall meet the 
following criteria as of the date of the initial deposit of securities 
to the fund in connection with the initial issuance of shares of such 
fund: (i) Component stocks that in the aggregate account for at least 
90% of the weight of the index or portfolio shall have a minimum market 
value of at least $75 million; (ii) The component stocks shall have a 
minimum monthly trading volume during each of the last six months of at 
least 250,000 shares for stocks representing at least 90% of the weight 
of the index or portfolio; (iii) The most heavily weighted component 
stock cannot exceed 25% of the weight of the index or portfolio, and 
the five most heavily weighted component stocks cannot exceed 65% of 
the weight of the index or portfolio; (iv) The underlying index or 
portfolio must include a minimum of 13 stocks; and (v) All securities 
in an underlying index or portfolio must be listed on a national 
securities exchange or The Nasdaq Stock Market (including the Nasdaq 
SmallCap Market).
    (b) Index Methodology and Calculation. (i) The index underlying a 
series of Index Fund Shares will be calculated based on either the 
market capitalization, modified market capitalization, price, equal-
dollar or modified equal-dollar weighting methodology; (ii) If the 
index is maintained by a broker-dealer, the broker-dealer shall erect a 
``fire-wall'' around the personnel who have access to information 
concerning changes and adjustments to the index and the index shall be 
calculated by a third party who is not a broker-dealer; and (iii) The 
current index value will be disseminated every 15 seconds over the 
Consolidated Tape Association's Network B.
    (c) Disseminated Information. The Reporting Authority will 
disseminate for each series of Index Fund Shares an estimate, updated 
every 15 seconds, of the value of a share of each series. This may be 
based, for example, upon current information regarding the required 
deposit of securities and cash amount to permit creation of new shares 
of the series or upon the index value.
    (d) Initial Shares Outstanding. A minimum of 100,000 shares of a 
series of Index Fund Shares is required to be outstanding at 
commencement of trading.
    (e) Minimal Fractional Trading Variation. The minimum fractional 
trading variation may vary among different series of Index Fund Shares 
but will be set at \1/16\th, \1/32\nd, or \1/64\th of $1.00.
    (f) Hours of Trading. Trading will occur between 9:30 a.m. and 
either 4 p.m. or 4:15 p.m. for each series of Index Fund Shares, as 
specified by the Exchange.
    (g) Surveillance Procedures. The Exchange will utilize existing 
surveillance procedures for Index Fund Shares.
    (h) Applicability of Other Rules. The provisions of the Exchange 
Rules and By-Laws will apply to all series of Index Fund Shares.
    .02 The following paragraphs only apply to series of Index Fund 
Shares that are the subject of an order by the Securities and Exchange 
Commission exempting such series from certain prospectus delivery 
requirements under Section 24(d) of the Investment Company Act of 1940. 
The Exchange will inform members and member organizations regarding 
application of these provisions to a particular series of Index Fund 
Shares by means of an Information Circular prior to commencement of 
trading in such series. The Exchange requires that members and member 
organizations provide to all purchasers of a series of Index Fund 
Shares a written description of the terms and characteristics of such 
securities, in a form prepared by the open-end management investment 
company issuing such securities, not later than the time a confirmation 
of the first transaction in such series is delivered to such purchaser. 
In addition, members and member organizations shall include such a 
written description with any sales material relating to a series of 
Index Fund Shares that is provided to customers or the public. Any 
other written materials provided by a member or member organization to 
customers or the public making specific reference to a series of Index 
Fund Shares as an investment vehicle must include a statement in 
substantially the following form: ``A circular describing the terms and 
characteristics of [the series of Index Fund Shares] has been prepared 
by the [open-end management investment company name] and is available 
from your broker or the Exchange. It is recommended that you obtain and 
review such circular before purchasing [the series of Index Fund 
Shares].''
    A member or member organization carrying an omnibus account for a 
non-member broker-dealer is required to inform such non-member that 
execution of an order to purchase a series of Index Fund Shares for 
such omnibus account will be deemed to constitute agreement by the non-
member to make such written description available to its customers on 
the same terms as are directly applicable to members and member 
organizations under this rule.
    Upon request of a customer, member or member organization shall 
also

[[Page 38463]]

provide a prospectus for the particular series of Index Fund Shares.]
    (a) General. The System shall be available for entry and execution 
of orders by Users with authorized access. To obtain authorized access 
to the System, each User must enter into a User Agreement with the 
Exchange in such form as the Exchange may provide (``User Agreement'').
    (b) Sponsored Participants. A Sponsored Participant may obtain 
authorized access to the System only if such Sponsored Participant is a 
registered broker or dealer and a self-clearing member of a Qualified 
Clearing Agency, and only if such access is authorized in advance by 
one or more Sponsoring ETP Holders as follows:
    (1) Sponsored Participants must enter into and maintain customer 
agreements with one or more Sponsoring ETP Holders establishing proper 
relationship(s) and account(s) through which the Sponsored Participant 
may trade on the System. Such customer agreement(s) must incorporate 
the Sponsorship Provisions set forth in paragraph (2) below.
    (2) For a Sponsored Participant to obtain and maintain authorized 
access to the System, a Sponsored Participant and its Sponsoring ETP 
Holder must agree in writing to the following Sponsorship Provisions:
    (A) Sponsored Participant and its Sponsoring ETP Holder must have 
entered into and maintained a User Agreement with the Exchange. The 
Sponsoring ETP Holder must designate the Sponsored Participant by name 
in its User Agreement as such.
    (B) Sponsoring ETP Holder acknowledges and agrees that
    (i) All orders entered by the Sponsored Participants and any person 
acting on behalf of or in the name of such Sponsored Participant and 
any executions occurring as a result of such orders are binding in all 
respects on the Sponsoring ETP Holder,
    (ii) Sponsoring ETP Holder is responsible for any and all actions 
taken by such Sponsored Participant and any person acting on behalf of 
or in the name of such Sponsored Participant, and
    (iii) Sponsoring ETP Holder shall pay when due all amounts, if any, 
payable to the Exchange or any other third parties that arise from the 
Sponsored Participants access to and use of the System. Such amounts 
include, but are not limited to applicable exchange and regulatory 
fees.
    (C) Sponsoring ETP Holder shall comply with the Exchange's Articles 
of Incorporation, By-Laws, Rules and procedures, and Sponsored 
Participant shall comply with the Exchange's Articles of Incorporation, 
By-Laws, Rules and procedures, as if Sponsored Participant were an ETP 
Holder.
    (D) Sponsored Participant shall maintain, keep current and provide 
upon request to the Sponsoring ETP Holder and the Exchange a list of 
Authorized Traders who may obtain access to the System on behalf of the 
Sponsored Participant. Sponsored Participant shall be subject to the 
obligations of Rule 11.10 with respect to such Authorized Traders.
    (E) Sponsored Participant shall familiarize its Authorized Traders 
with all of the Sponsored Participant's obligations under this Rule and 
will assure that they receive appropriate training prior to any use or 
access to the System.
    (F) Sponsored Participant may not permit anyone other than 
Authorized Traders to use or obtain access to the System.
    (G) Sponsored Participant shall take reasonable security 
precautions to prevent unauthorized use or access to the System, 
including unauthorized entry of information into the System, or the 
information and data made available therein. Sponsored Participant 
understands and agrees that Sponsored Participant is responsible for 
any and all orders, trades and other messages and instructions entered, 
transmitted or received under identifiers, passwords and security codes 
of Authorized Traders, and for the trading and other consequences 
thereof.
    (H) Sponsored Participant acknowledges its responsibility to 
establish adequate procedures and controls that permit it to 
effectively monitor its employees, agents and customers' use and access 
to the System for compliance with the terms of this agreement.
    (3) The Sponsoring ETP Holder must provide the Exchange with a 
written statement in form and substance acceptable to the Exchange 
acknowledging its responsibility for the orders, executions and actions 
of its Sponsored Participant at issue, including without limitation 
responsibility to clear and settle the Sponsored Participant's trades 
in the event that the Sponsored Participant or its Qualified Clearing 
Agency does not accept any such trades.

Rule 11.10. [National Securities Trading System Fees] Authorized 
Traders

[A. Trading Fees
    (a) Agency Transactions. As in the case for Preferenced 
transactions, members acting as an agent will be charged the per share 
incremental rates as noted below for public agency transactions:

------------------------------------------------------------------------
                                                              Charge per
                  Avg. daily share * volume                      share
------------------------------------------------------------------------
1 to 250,000................................................     $0.0015
250,001 to 500,000..........................................      0.0013
500,001 to 750,000..........................................      0.0009
750,001 to 1,250,000........................................      0.0007
1,250,001 and higher........................................      0.0005
------------------------------------------------------------------------
* Odd-Lot Shares Excluded.

    (b) Odd-Lot Transactions. Members will be charged $0.50 per odd-lot 
transaction when acting as agent or principal, except that members will 
earn a credit of $0.50 for every four round-lot transactions executed 
(agency, professional agency or principal) on the Exchange and printed 
on the Consolidated Tape by the Exchange. Notwithstanding the forgoing 
credit, there will be a minimum charge of $0.10 per odd-lot 
transaction.
    (c) Agency Order Mix Fee. Agency limit orders shall be charged 
based on the percentage of public agency market order shares executed 
on the Exchange during the trading month, according to the following 
schedule:

------------------------------------------------------------------------
    Percent of market order shares
               executed                    Agency limit order mix fee
------------------------------------------------------------------------
25 and higher.........................  No Charge.
20 to 24.99...........................  $0.005 per share.
15 to 19.99...........................  $0.010 per share.
10 to 14.99...........................  $0.015 per share.
Less than 10..........................  $0.020 per share.
------------------------------------------------------------------------

    (d) Professional Agency Transactions. Members will be charged 
$0.0025 per share ($0.25/100 shares) for professional agency (Rule 
11.9(a)(8)) transactions.
    (e) Crosses and Meets
    (1) Users executing crosses and meets in Tape A securities shall be 
charged $0.0005 per share per side for average daily volume up to 5 
million shares per day and $0.000025 per share per side for average 
daily volume up above 5 million shares, with a maximum charge of $37.50 
per firm per side of transaction.
    (2) Users, who are not registered as Qualified or Designated 
Dealers in the securities in which they are executing crosses and meets 
in Tape C securities (Nasdaq NM and SmallCap securities), shall pay no 
transaction fees.
    (3) Dealers executing crosses in Tape C securities (Tape ``C'' 
Transactions are defined as transactions conducted in Nasdaq securities 
pursuant to unlisted trading privileges) in which they are registered 
shall be charged a per share fee as noted below:

[[Page 38464]]

------------------------------------------------------------------------
                                                                Fee per
               Average daily number of shares                    share
------------------------------------------------------------------------
Up to 5 million shares......................................      $0.001
5 million shares and above..................................    0.000025
------------------------------------------------------------------------

    (4) Users executing crosses and meets in Tape A, B or C securities 
through the Exchange's System Supervisory Center shall be charged $15 
per contra-party, up to a maximum of $75 per side of transaction. This 
transaction fee shall be in lieu of any transaction fee otherwise 
applicable under Paragraphs (A)(e)(1) through (A)(e)(3) above.
    (f) ITS Transactions. All ITS transactions, whether inbound or 
outbound, will be charged $0.001 per share.
    (g) Proprietary (Principal) Transactions.
    (1)(A) All Designated Dealers in securities other than Nasdaq 
securities, except those acting as Preferencing Dealers or Contributing 
Dealers, will be charged $0.001 per share ($0.10/100 shares) for 
principal transactions.
    (B) For a pilot period commencing October 1, 2002 and lasting 
through June 30, 2006, members that execute orders in Nasdaq securities 
against previously displayed quotes/orders of other members shall pay 
$0.004 per share for such execution. The Exchange shall pass on to the 
member displaying the quote/order executed against $0.003 per share and 
the Exchange shall retain $0.001 per share.
    (2) Designated Dealers acting as ``Dealer of the Day'' will be 
charged $0.0025 per share ($0.25/100 shares) for principal 
transactions.
    (3) Contributing Dealers will be charged $0.02 per share ($2.00/100 
shares) for principal transactions.
    (4) Members executing principal transactions in securities for 
which they are not registered as a Designated or Contributing Dealer 
will be charged $0.02 per share ($2.00/100 shares).
    (h)(1) Preferenced Transactions. Designated Dealers that are 
preferencing transactions in Tape A securities are charged for one side 
of their preferenced transactions and are subject to the incremental 
rates as noted below:

------------------------------------------------------------------------
                                                              Charge per
             Avg. daily principal share*  volume                 share
------------------------------------------------------------------------
1 to 250,000................................................     $0.0015
250,001 to 500,000..........................................      0.0013
500,001 to 750,000..........................................      0.0009
750,001 to 1,250,000........................................      0.0007
1,250,001 and higher........................................     0.0005
------------------------------------------------------------------------
* Odd-lot shares excluded.

    (2) Dealers executing preferencing transactions in Tape C 
securities are charged for one side of their preferenced transactions 
and are subject to the following incremental rates:

------------------------------------------------------------------------
                                                              Charge per
            Avg. daily principal share**  volume                 share
------------------------------------------------------------------------
Up to 5 million shares......................................      $0.001
5 million shares and above..................................   0.000025
------------------------------------------------------------------------
** Odd-lot shares excluded.

    (i) Transaction Fee Cap. The monthly transaction fees charged to 
each member shall be equal to the lesser of (1) the amounts assessed 
pursuant to Paragraphs (A)(a) through (A)(h) of this Rule 11.10 or (2) 
$50,000.
    (j) Revenue Sharing Program. After the Exchange earns total 
operating revenue sufficient to offset actual expenses and working 
capital needs, a percentage of all Specialist Operating Revenue 
(``SOR'') shall be eligible for sharing with Designated Dealers. SOR is 
defined as operating revenue that is generated by specialist firms. SOR 
consists of transaction fees, book fees, technology fees, and market 
data revenue that is attributable to specialist firm activity. SOR 
shall not include any investment income or regulatory monies. The 
sharing of SOR shall be based on each Designated Dealer's pro rata 
contribution to SOR in excess of $75,000 per quarter. In no event shall 
the amount of revenue shared with Designated Dealers exceed SOR. To the 
extent market data revenue is subject to any adjustment, SOR revenue 
may be adjusted accordingly.
    (k) Tape ``B'' Transactions. Except as provided in Paragraph 
(A)(e)(4) above, the Exchange will not impose a transaction fee on 
Consolidated Tape ``B'' securities. In addition, Members will receive a 
50 percent pro rata transaction credit of gross Tape ``B'' revenue; 
provided that, however, calculation of the transaction credit will be 
based on net Tape ``B'' revenues in those fiscal quarters where the 
overall revenue retained by the Exchange does not offset actual 
expenses and working capital needs. To the extent market data revenue 
from Tape ``B'' transactions is subject to any adjustment, credits 
provided under this program may be adjusted accordingly.
    (l) Reserved.
    (m) DD Issue/Book Fees. Designated Dealers will be charged a 
monthly book fee based on the following incremental schedule:

------------------------------------------------------------------------
                                                                Fee per
                      Number of issues                           issue
------------------------------------------------------------------------
0 to 150....................................................      $30.00
151 to 300..................................................       20.00
301 to 500..................................................       15.00
501 and higher..............................................        2.00
------------------------------------------------------------------------

    (n) NSTS Internal Customer Port Charge. For purposes of this 
charge, a ``Port'' shall be defined as a TCP/IP address. For each port 
utilized on the Exchange mainframe a $350.00 per month charge will be 
assessed to the member.
    (o) Technology Fee. Every Member of the Exchange shall be assessed 
a fee of $1,250.00 per month to help offset technology expenses 
incurred by the Exchange.
    (p) Clearing Related Fee Passed Through to Member. The Exchange 
will pass onto members the entire amount of the clearing related fees 
allocated to the Exchange by the clearing agent for transactions which 
the Exchange submits to clearing on behalf of members.
    (q) Regulatory Transaction Fee. Under Section 31 of the Act, the 
Exchange must pay certain fees to the Commission. To help fund the 
Exchange's obligations to the Commission under Section 31, this 
Regulatory Transaction Fee is assessed to members. To the extent there 
may be any excess monies collected under this Rule, the Exchange may 
retain those monies to help fund its general operating expense. Each 
member engaged in executing transactions on the Exchange shall pay, in 
such manner and at such times as the Exchange shall direct, a 
Regulatory Transaction Fee equal to (i) the rate determined by the 
Commission to be applicable to covered sales occurring on the Exchange 
in accordance with Section 31 of the Act multiplied by (ii) the 
member's aggregate dollar amount of covered sales occurring on the 
Exchange during any computational period.
    (r) Workstation Fee. Every member using the Exchange Workstation 
shall be charged $1,000.00 per device per month.
    B. Membership Fees.

------------------------------------------------------------------------
                            Item                                  Fee
------------------------------------------------------------------------
Yearly Membership Dues (Quarterly Charge $625)..............      $2,500
New Member Application Fee..................................       1,000
Transfers...................................................         350
Responsible Party Change
Firm Registration/Name Change
------------------------------------------------------------------------

    C. Transaction Credit De Minimis. For all rebates applicable to 
Tape A and Tape B Transactions, no member shall be eligible for a 
rebate for any quarter unless the total rebate calculation for that 
quarter exceeds $500.00.]
    (a) An ETP Holder shall maintain a list of ATs who may obtain 
access to the System on behalf of the ETP Holder or the ETP Holder's 
Sponsored Participants. The ETP Holder shall

[[Page 38465]]

update the list of ATs as necessary. ETP Holders must provide the list 
of ATs to the Exchange upon request.
    (b) An ETP Holder must have reasonable procedures to ensure that 
all ATs comply with all Exchange Rules and all other procedures related 
to the System.
    (c) An ETP Holder must suspend or withdraw a person's status as an 
AT if the Exchange has determined that the person has caused the ETP 
Holder to fail to comply with the Rules of the Exchange and the 
Exchange has directed the ETP Holder to suspend or withdraw the 
person's status as an AT.
    (d) An ETP Holder must have reasonable procedures to ensure that 
the ATs maintain the physical security of the equipment for accessing 
the facilities of the Exchange to prevent the improper use or access to 
the systems, including unauthorized entry of information into the 
systems.

Rule 11.11. Orders and Modifiers

    Users may enter into the System the types of orders listed in this 
Rule 11.11, subject to the limitations set forth in this Rule or 
elsewhere in these Rules.
    (a) General Order Types.
    (1) Market Order. An order to buy or sell a stated amount of a 
security that is to be executed at the best price obtainable when the 
order reaches the Exchange. A market order that is designated as ``NSX 
Only'' will be cancelled if when reaching the Exchange, it cannot be 
executed in accordance with Rule 11.15(a)(i) on the System. Market 
orders that are not designated as ``NSX Only'' and that cannot be 
executed in accordance with Rule 11.15(a)(i) on the System when 
reaching the Exchange will be eligible for routing away pursuant to 
Rule 11.15.
    (2) Limit Order. An order to buy or sell a stated amount of a 
security at a specified price or better. A ``marketable'' limit order 
is a limit order to buy (sell) at or above (below) the Protected NBBO 
offer (bid) for the security.
    (b) Time-in-Force. Limit orders must have one of the following 
time-in-force terms.
    (1) Immediate-or-Cancel (``IOC'') Order. A limit order that is to 
be executed in whole or in part as soon as such order is received, and 
the portion not so executed is to be treated as cancelled. An order 
designated as IOC is not eligible for routing away pursuant to Rule 
11.15.
    (2) Day Order. A limit order to buy or sell which, if not executed, 
expires at the closing of the regular trading session for such security 
on its Listing Exchange. Any Day Order entered into the System before 
the opening of business on the Exchange as determined pursuant to Rule 
11.1, or after the closing of the regular trading session for such 
security on its Listing Exchange, will be rejected.
    (3) Day + Order. A limit order to buy or sell which, if not 
executed, expires at the closing of business on the Exchange (as 
determined pursuant to Rule 11.1) on the day on which it was entered. 
Any Day + Order entered into the System before the opening of business 
or after the closing of business on the Exchange as determined pursuant 
to Rule 11.1 will be rejected.
    (4) Any limit orders entered with a ``Good 'til Cancel'' (GTC) or 
similar time-in-force term will be automatically converted into Day 
Orders.
    (5) Any limit orders entered with a ``Good 'til Extended Hours'' 
(GTX) or similar time-in-force term will be automatically converted 
into Day + Orders.
    (c) Other Types of Orders and Order Modifiers.
    (1) ITS Order. An order entered into the System via the Intermarket 
Trading System (``ITS'') as described in Chapter XIV of these Rules. 
ITS Orders are executable in round lots only. All ITS Orders shall be 
treated as Immediate-or-Cancel (IOC).
    (2) Reserve Order. A limit order with a portion of the quantity 
displayed (``display quantity'') and with a reserve portion of the 
quantity (``reserve quantity'') that is not displayed.
    (3) Odd Lot Order. An order to buy or sell an odd lot. Odd Lot 
Orders are only eligible to be protected quotations if aggregated to 
form a round lot.
    (4) Mixed Lot Order. An order to buy or sell a mixed lot. Odd lot 
portions of Mixed Lot Orders are only eligible to be protected 
quotations if aggregated to form a round lot.
    (5) Post Only Order. A limit order that is to be posted on the 
Exchange and not routed away to another trading center. A Post Only 
Order will be rejected without execution if it is immediately 
marketable when entered.
    (6) NSX Only Order. An order that is to be executed on the Exchange 
pursuant to Rule 11.15(a) or cancelled, without routing away to another 
trading center.
    (7) Sweep Order. A limit order that instructs the System to 
``sweep'' the market.
    (i) Sweep Orders may be designated as ``Protected Sweep,'' ``Full 
Sweep,'' or ``Destination Sweep.'' Sweep Orders not carrying any such 
designation shall be treated as Protected Sweep Orders.
    (A) A Protected Sweep Order will be converted into one or more 
limit orders with sizes equal to the sizes of protected quotations in 
the NSX Book and at away trading centers to be executed in accordance 
with Rule 11.15(b).
    (B) A Full Sweep Order will be converted into one or more limit 
orders with sizes equal to the sizes of the best available quotations 
(including manual quotations) in the NSX Book and at away trading 
centers in accordance with Rule 11.15(b).
    (C) A Destination Sweep Order will be routed to an away trading 
center specified by the User, after the order is exposed to the NSX 
Book.
    (ii) When entering a Protected Sweep Order or Full Sweep Order, 
Users shall designate the Sweep Order as ``Sweep and Post,'' ``Sweep 
and Cancel,'' or a combination thereof.
    (A) Any unfilled portion of a Sweep Order designated ``Sweep and 
Post'' following the market sweep described in subsection (i) above 
will be converted into a Post Only Order.
    (B) Any unfilled portion of a Sweep Order designated ``Sweep and 
Cancel'' after the completion of the market sweep described in 
subsection (i) above will be cancelled.
    (iii) A Sweep Order entered as part of a ``Cross/Sweep'' message 
pursuant to Rule 11.12 shall be treated identically to a Sweep Order 
designated ``Sweep and Cancel'' except as otherwise provided in Rule 
11.12.
    (iv) Any order converted from a Protected Sweep Order or Full Sweep 
Order for routing to other trading centers or for execution against the 
NSX Book shall be marked as an intermarket sweep order or ``ISO''.
    (8) Incoming Intermarket Sweep Order. The System will accept 
incoming intermarket sweep orders (as such term is defined in 
Regulation NMS) from other trading centers. Such orders must be marked 
``ISO'' in order to be eligible for treatment as an intermarket sweep 
order. Such orders, if appropriately marked, will be considered 
immediate-or-cancel (IOC) and will be executed without regard to 
protected quotations at away markets consistent with Regulation NMS.
    (9) Destination Specific Order. A market or limit order that 
instructs the System to route the order to a specified away trading 
center, after exposing the order to the NSX Book. Users can access 
markets offering bids and offers other than protected quotations (i.e., 
manual quotations) by entering a Destination Specific Order. A 
Destination Specific Order must have an order type and a time-in-force 
term permitted by this Rule 11.11.
    (d) Cancel/Replace Messages. A User may, by appropriate entry in 
the System, cancel or replace an existing

[[Page 38466]]

order entered by the User, subject to the following limitations.
    (i) Orders may only be cancelled or replaced if the order has a 
time-in-force term other than IOC and if the order has not yet been 
executed.
    (ii) If an order has been routed to another trading center, the 
order will be placed in a ``Cancel Pending'' state until the routing 
process is completed. Executions that are completed when the order is 
in the ``Cancel Pending'' state will be processed normally.
    (iii) Only the price and quantity terms of the order may be changed 
by a Replace Message. If a User desires to change any other terms of an 
existing order the existing order must be cancelled and a new order 
must be entered.
    (iv) Notwithstanding anything to the contrary in these Exchange 
Rules, no cancellation or replacement of an order will be effective 
until the User has received written confirmation of the cancellation or 
replacement from the Exchange.

Rule 11.12. Cross Message

    (a) Subject to the restrictions of this Rule, Users may enter a 
cross message (a ``Cross'') instructing the System to match for 
execution the identified buy-side of the Cross with the identified 
sell-side of the Cross at a specified price (the ``cross price'').
    (b) Except as provided in paragraphs (c), (d) or (f) below, no 
Cross will be executed by the System, unless:
    (1) The buy-side of the Cross is at a price less (by at least $0.01 
per share) than the lowest displayed order to sell in the NSX Book, and 
(following the compliance date for Rule 611 of Regulation NMS) is at a 
price equal to or less than the Protected NBBO offer; and
    (2) The sell-side of the Cross is at a price greater (by at least 
$0.01 per share) than the highest displayed order to buy in the NSX 
Book, and (following the compliance date for Rule 611 of Regulation 
NMS) is at a price equal to or greater than the Protected NBBO bid.
    (c) Midpoint Cross. A Cross that is priced at the midpoint of the 
Protected NBBO (or, prior to the compliance date for Rule 611 of 
Regulation NMS, at the midpoint of the best bid and offer on the 
Exchange) (a ``Midpoint Cross'') may be executed on the System if it 
improves each side of the Top of Book by at least half the minimum 
increment permitted by Rule 11.3(a).
    (d) Clean Cross. A Cross meeting the following requirements (a 
``Clean Cross'') may be executed on the System at a price equal to or 
better than each side of the Top of Book:
    (1) The Cross is for at least 5,000 shares and has an aggregate 
value of at least $100,000;
    (2) Neither side of the Cross is for the account of the User 
entering the Cross; and
    (3) The size of the Cross is greater than the size of the interest 
at each side of the Top of Book;
    (4) Following the compliance date for Rule 611 of Regulation NMS, 
the price of the Cross is equal to or better than the Protected NBBO.
    (e) If either side of a Cross is for the account of the User 
entering the Cross (a ``Proprietary Cross''), the User must comply with 
Exchange Rule 12.6 (the Customer Priority Rule). Without limiting the 
foregoing, no User shall enter a Proprietary Cross if the User is 
holding a customer order in the security unless the price of the 
Proprietary Cross improves the price that could have been received by 
the customer order by at least $0.01.
    (f) Cross/Sweep. Users may enter a ``Cross/Sweep'' message into the 
System involving both a Sweep Order and a Cross.
    (1) Upon receipt of a Cross/Sweep message, the System will enter a 
Protected Sweep Order for the User's account in an amount necessary to 
execute against all protected quotations that, if not swept, would 
prohibit the Cross from being executed by the System pursuant to 
paragraph (b) above. The Cross will be executed on the System 
simultaneously with the Sweep Order, unless the Protected Sweep Order 
would be for an amount of shares in excess of the size of the Cross, in 
which case both the Protected Sweep Order and the Cross shall be 
cancelled without execution.
    (2) No User shall enter a Cross/Sweep if either side of the Cross 
is for the account of a customer, unless the User fully discloses to 
such customer all of the material facts relating to the Sweep Order, 
including price(s) of the Sweep Order and the fact that the Sweep Order 
is for the account of the User.

Rule 11.13. Proprietary and Agency Orders; Modes of Order Interaction

    (a) Except as otherwise provided in these Rules, Users may enter 
proprietary orders and agency orders for the account of a customer. 
Proprietary orders accepted by the System from Users are subject to the 
same ranking and execution processes as agency orders. A User that 
enters a proprietary order into the System shall mark the order with 
the appropriate designator to identify the order as proprietary. All 
agency orders shall be designated as such and with each agency order, 
the User shall include a unique account number or other identifier that 
enables the User to identify the User's customer on whose behalf the 
order is being entered.
    (b) The System offers two modes of order interaction selected by 
Users:
    (1) If automatic execution is selected, the System shall match and 
execute like-priced orders on an order by order basis only at the 
specific instruction of Users.
    (2) If order delivery and automated response is selected, the 
System will deliver contra-side orders against displayed orders on an 
order by order basis only at the specific instruction of Users. To be 
eligible for order delivery service, Users must demonstrate to Exchange 
examiners that the User's system can automatically process the inbound 
order and respond appropriately within \1/2\ of a second. If no 
response to an inbound order is received within \1/2\ of a second, the 
User's displayed order will be cancelled.

Rule 11.14. Priority of Orders

    (a) Ranking. Orders of Users shall be ranked and maintained in the 
NSX Book based on the following priority:
    (1) The highest-priced order to buy (or lowest-priced order to 
sell) shall have priority over all other orders to buy (or orders to 
sell) in all cases.
    (2) Where orders to buy (or sell) are made at the same price, the 
order clearly established as the first entered into the System at such 
particular price shall have precedence at that price, up to the number 
of shares of stock specified in the order.
    (3) In the event that less than the full size of an order is 
executed, the unexecuted size of the order shall retain priority at the 
same limit price in accordance with paragraphs (1) and (2) above.
    (4) The displayed quantity of a Reserve Order shall have time 
priority as of the time of display. If the displayed quantity of the 
Reserve Order is decremented such that 99 shares or fewer would be 
displayed, the displayed portion of the Reserve Order shall be 
refreshed for (i) the original displayed quantity, or (ii) the entire 
reserve quantity, if the remaining reserve quantity is smaller than the 
original displayed quantity. After the refresh, the displayed portion 
of the Reserve Order shall have time priority as of the time of the 
refresh. The reserve quantity of a Reserve Order shall have no time 
priority until displayed. If all displayed orders and displayed 
portions of Reserve Orders at a given price are executed, and following 
such execution any marketable contra-side orders

[[Page 38467]]

remain outstanding, then such contra-side orders shall be executed 
against the refreshed displayed portions of Reserve Orders at such 
price based on the time priority as determined by this paragraph (4).
    (b) Dissemination. The best-ranked order(s) to buy and the best-
ranked order(s) to sell in the NSX Book and the aggregate displayed 
size of such orders associated with such prices shall be collected and 
made available to quotation vendors for dissemination pursuant to the 
requirements of Rule 602 of Regulation NMS.

Rule 11.15. Order Execution

    Subject to the restrictions on short sales under these Exchange 
Rules or the Act and the rules and regulations thereunder, orders shall 
be matched for execution by following this Rule. For any execution to 
occur during Regular Trading Hours, however, the price must be equal to 
or better than the Protected NBBO, unless the order is marked ISO or 
unless the execution falls within another exception set forth in Rule 
611(b) of Regulation NMS.
    (a) Orders Other than Sweep Orders.
    (i) Execution against NSX Book. An incoming order (other than a 
Sweep Order) shall first attempt to be matched for execution against 
orders in the NSX Book. An incoming order to buy (other than a Sweep 
Order) will be automatically executed to the extent that it is priced 
at an amount that equals or exceeds any order to sell in the NSX Book. 
Such order to buy shall be executed at the price(s) of the lowest 
order(s) to sell having priority in the NSX Book. An incoming order to 
sell (other than a Sweep Order) will be automatically executed to the 
extent that it is priced at an amount that equals or is less than any 
other order to buy in the NSX Book. Such order to sell shall be 
executed at the price(s) of the highest order(s) to buy having priority 
in the NSX Book.
    (ii) Routing to Away Trading Centers. Unless the terms of the order 
direct otherwise, if an order (other than a Sweep Order) has not been 
executed in its entirety pursuant to paragraph (a)(i) of this Rule, the 
order shall be eligible for routing away as follows:
    (A) The order will be converted into one or more limit orders, as 
necessary, to be matched for execution against each protected quotation 
at the Protected NBBO available at away trading centers. Each such 
converted limit order shall be priced at the price of the protected 
quotation that it is to be matched for execution against.
    (B) Each converted limit order will be routed to the applicable 
trading center for execution against the applicable protected quotation 
at the Protected NBBO. No orders routed away pursuant to this 
subsection (ii) shall be marked ISO.
    (iii) Following steps (i) and (ii) above, unless the terms of the 
order direct otherwise, any unfilled portion of the order originally 
entered into the System shall be ranked in the NSX Book in accordance 
with the terms of such order under Rule 11.14 and such order shall be 
eligible for execution under this Rule 11.15.
    (b) Sweep Orders.
    (i) Protected Sweep Orders. A Protected Sweep Order will be matched 
for execution in the NSX Book in accordance with paragraph (a)(i), and 
will simultaneously be converted into one or more additional limit 
orders, as necessary, with sizes equal to the size of each protected 
quotation that is superior (or in the case of a Protected Sweep Order 
designated ``Sweep and Post'', superior or equal) to the limit price of 
the Protected Sweep Order. Each converted limit order will be routed to 
the applicable trading center for execution.
    (ii) Full Sweep Orders. A Full Sweep Order will be matched for 
execution in the NSX Book in accordance with paragraph (a)(i), and will 
simultaneously be converted into one or more additional limit orders, 
as necessary, with sizes equal to the size of each quotation available 
at an away trading center that (A) is the best bid or offer of a 
national securities exchange or association, and (B) is superior (or, 
in the case of a Full Sweep Order designated ``Sweep and Post'', 
superior or equal) to the limit price of the Full Sweep Order. Each 
converted limit order will be routed to the applicable trading center 
for execution.
    (iii) Destination Sweep Orders. A Destination Sweep Order will be 
matched for execution in the NSX Book in accordance with paragraph 
(a)(i), and if it cannot be matched for execution in accordance with 
paragraph (a)(i), will be routed to the specified away trading center 
for execution.
    (iv) Any order converted from a Protected Sweep Order or Full Sweep 
Order for routing to other trading centers or for execution against the 
NSX Book shall be marked as an intermarket sweep order or ``ISO''.
    (v) Following the steps described above, any unfilled portion of 
the Sweep Order will either be cancelled or ranked in the NSX Book in 
accordance with the terms of the Sweep Order.
    (c) Special Rules for Orders Routed to Other Trading Centers.
    (i) An order that is routed away may be executed in whole or in 
part subject to the applicable trading rules of the relevant trading 
center. While an order remains outside the System, it shall have no 
time standing, relative to other orders received from Users at the same 
price which may be executed against the NSX Book. Requests from Users 
to cancel their orders while the order is routed away to another 
trading center and remains outside the System shall be processed, 
subject to the applicable trading rules of the relevant trading center.
    (ii) Where an order or portion of an order is routed away and is 
not executed either in whole or in part at the other trading center 
(i.e., all attempts at the fill are declined or timed-out), the order 
shall be ranked in the NSX Book in accordance with the terms of such 
order under Rule 11.14 and such order shall be eligible for execution 
under this Rule 11.15, unless the terms of the order provide otherwise.
    (d) Display of Automated Quotations. The System will be operated as 
an ``automated market center'' within the meaning of Regulation NMS, 
and in furtherance thereof, will display ``automated quotations'' 
within the meaning of Regulation NMS at all times except in the event 
that a systems malfunction renders the System incapable of displaying 
automated quotations. The Exchange shall communicate to ETP Holders its 
procedures concerning a change from automated to manual quotations.

Rule 11.16. Trade Execution and Reporting

    Executions occurring as a result of orders matched against the NSX 
Book shall be reported by the Exchange to an appropriate consolidated 
transaction reporting system to the extent required by the Act and the 
rules and regulations thereunder. Executions occurring as a result of 
orders routed away from the System shall be reported to an appropriate 
consolidated transaction reporting system by the relevant reporting 
trading center. The Exchange shall promptly notify Users of all 
executions of their orders as soon as such executions take place.

Rule 11.17. Clearance and Settlement

    (a) Each ETP Holder must either (1) be a member of a Qualified 
Clearing Agency, or (2) clear transactions executed on the Exchange 
through another ETP Holder that is a member of a Qualified Clearing 
Agency. Each Sponsored Participant must be a member of a Qualified 
Clearing Agency. If an ETP Holder clears transactions

[[Page 38468]]

through another ETP Holder that is a member of a Qualified Clearing 
Agency (``clearing member''), such clearing member shall affirm to the 
Exchange in writing, through letter of authorization, letter of 
guarantee or other agreement acceptable to the Exchange, its agreement 
to assume responsibility for clearing and settling any and all trades 
executed by the ETP Holder designating it as its clearing firm. The 
rules of any such clearing agency shall govern with respect to the 
clearance and settlement of any transactions executed by the ETP Holder 
on the Exchange.
    (b) Each transaction executed within the System shall be 
automatically processed for clearance and settlement on a locked-in 
basis.
    (c) Except as required by any Qualified Clearing Agency, the 
Exchange will reveal the identity of an ETP Holder or ETP Holder's 
clearing firm in the following circumstances:
    (1) for regulatory purposes or to comply with an order of a court 
or arbitrator; or
    (2) when a Qualified Clearing Agency ceases to act for an ETP 
Holder or the ETP Holder's clearing firm, and determines not to 
guarantee the settlement of the ETP Holder's trades.

11.18. LIMITATION OF LIABILITY

    (A) NEITHER THE EXCHANGE NOR ITS AGENTS, EMPLOYEES, CONTRACTORS, 
OFFICERS, DIRECTORS, COMMITTEE MEMBERS OR AFFILIATES (``EXCHANGE 
RELATED PERSONS'') SHALL BE LIABLE TO ANY USER OR ETP HOLDER, OR 
SUCCESSORS, REPRESENTATIVES OR CUSTOMERS THEREOF, OR ANY PERSONS 
ASSOCIATED THEREWITH, FOR ANY LOSS, DAMAGES, CLAIM OR EXPENSE:
    (1) GROWING OUT OF THE USE OR ENJOYMENT OF ANY FACILITY OF THE 
EXCHANGE, INCLUDING, WITHOUT LIMITATION, THE SYSTEM; OR
    (2) ARISING FROM OR OCCASIONED BY ANY INACCURACY, ERROR OR DELAY 
IN, OR OMISSION OF OR FROM THE COLLECTION, CALCULATION, COMPILATION, 
MAINTENANCE, REPORTING OR DISSEMINATION OF ANY INFORMATION DERIVED FROM 
THE SYSTEM OR ANY OTHER FACILITY OF THE EXCHANGE, RESULTING EITHER FROM 
ANY ACT OR OMISSION BY THE EXCHANGE OR ANY EXCHANGE RELATED PERSON, OR 
FROM ANY ACT CONDITION OR CAUSE BEYOND THE REASONABLE CONTROL OF THE 
EXCHANGE OR ANY EXCHANGE RELATED PERSON, INCLUDING, BUT NOT LIMITED TO, 
FLOOD, EXTRAORDINARY WEATHER CONDITIONS, EARTHQUAKE OR OTHER ACTS OF 
GOD, FIRE, WAR, TERRORISM, INSURRECTION, RIOT, LABOR DISPUTE, ACCIDENT, 
ACTION OF GOVERNMENT, COMMUNICATIONS OR POWER FAILURE, OR EQUIPMENT OR 
SOFTWARE MALFUNCTION.
    (B) EACH ETP HOLDER EXPRESSLY AGREES, IN CONSIDERATION OF THE 
ISSUANCE OF THE ETP, TO RELEASE AND DISCHARGE THE EXCHANGE AND ALL 
EXCHANGE RELATED PERSONS OF AND FROM ALL CLAIMS AND DAMAGES ARISING 
FROM THEIR ACCEPTANCE AND USE OF THE FACILITIES OF THE EXCHANGE 
(INCLUDING, WITHOUT LIMITATION, THE SYSTEM).
    (C) NEITHER THE EXCHANGE NOR ANY EXCHANGE RELATED PERSON MAKES ANY 
EXPRESS OR IMPLIED WARRANTIES OR CONDITIONS TO USERS AS TO RESULTS THAT 
ANY PERSON OR PARTY MAY OBTAIN FROM THE SYSTEM FOR TRADING OR FOR ANY 
OTHER PURPOSE, AND ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A 
PARTICULAR PURPOSE OR USE, TITLE, AND NON-INFRINGEMENT WITH RESPECT TO 
THE SYSTEM ARE HEREBY DISCLAIMED.

Rule 11.19. Clearly Erroneous Executions

    (a) Definition. For purposes of this Rule, the terms of a 
transaction executed on the Exchange are ``clearly erroneous'' when 
there is an obvious error in any term, such as price, number of shares 
or other unit of trading, or identification of the security. A 
transaction made in clearly erroneous error and cancelled by both 
parties may be removed, if the parties do not object, subject to the 
approval of the Exchange.
    (b) Request for Exchange Review. An ETP Holder that receives an 
execution on an order that was submitted erroneously to the Exchange 
for its own or customer account may request that the Exchange review 
the transaction under this Rule. Such request for review shall be made 
via telephone, facsimile or e-mail and submitted within fifteen (15) 
minutes of the trade in question. Upon receipt, the counterparty to the 
trade, if any, shall be notified by the Exchange as soon as 
practicable. Thereafter, an Officer of the Exchange or such other 
designee of the Exchange (``Officer'') shall review the transaction 
under dispute and determine whether it is clearly erroneous, with a 
view toward maintaining a fair and orderly market and the protection of 
investors and the public interest. Each party to the transaction shall 
provide, within thirty (30) minutes of the request for review, any 
supporting written information as may be reasonably requested by 
Officer to aid resolution of the matter. Either party to the disputed 
trade may request the supporting written information provided by the 
other party on the matter.
    (c) Review Procedures.
    (1) Determination by Officer. Unless both parties (or party, in the 
case of a cross) to the disputed transaction agree to withdraw the 
initial request for review, the transaction under dispute shall be 
reviewed, and a determination shall be rendered by the Officer. If the 
Officer determines that the transaction is not clearly erroneous, the 
Officer shall decline to take any action in connection with the 
completed trade. In the event that the Officer determines that the 
transaction in dispute is clearly erroneous, the Officer shall declare 
the transaction null and void or modify one or more of the terms of the 
transaction to achieve an equitable rectification of the error that 
would place the parties in the same position, or as close as possible 
to the same position that they would have been in, had the error not 
occurred. The parties shall be promptly notified of the determination.
    (2) Appeal to CEE Panel. If a party affected by a determination 
made under this Rule so requests within the time permitted below, the 
Clearly Erroneous Execution Panel (``CEE Panel'') will review decisions 
made by the Officer under this Rule, including whether a clearly 
erroneous execution occurred and whether the correct adjustment was 
made.
    (A) The CEE Panel will be comprised of the Exchange's Chief 
Regulatory Officer (``CRO''), or a designee of the CRO, and 
representatives from two (2) ETP Holders.
    (B) The Exchange shall designate the ETP Holder representatives to 
be called upon to serve on the CEE Panel as needed. In no case shall a 
CEE Panel include a person related to a party to the trade in question. 
To the extent reasonably possible, the Exchange shall call upon the 
designated representatives to participate on a CEE Panel on an equally 
frequent basis.
    (C) A request for review on appeal must be made via facsimile or e-
mail within thirty (30) minutes after the party making the appeal is 
given notification of the initial determination being appealed. The CEE 
Panel shall review the facts and render a decision within the time 
frame prescribed by the Exchange.

[[Page 38469]]

    (D) The CEE Panel may overturn or modify an action taken by the 
Officer under this Rule. All determinations by the CEE Panel shall 
constitute final action by the Exchange on the matter at issue.
    (d) Abuse of Process. An abuse of the process described in 
subsections (c) and (d) above may subject the abusing User to 
disciplinary action under Chapter VIII.
    (e) System Disruption and Malfunctions. In the event of any 
disruption or a malfunction in the use or operation of any electronic 
communications and trading facilities of the Exchange, or extraordinary 
market conditions or other circumstances in which the nullification or 
modification of transactions may be necessary for the maintenance of a 
fair and orderly market or the protection of investors and the public 
interest exist, the Officer, on his or her own motion, may review such 
transactions and declare such transactions arising out of the use or 
operation of such facilities during such period null and void or modify 
the terms of these transactions if the Officer determines that the 
transaction(s) are clearly erroneous, or that such actions are 
necessary for the maintenance of a fair and orderly market or for the 
protection of investors and the public interest. Any such action of the 
Officer pursuant to this subsection (e) shall be taken as promptly as 
practicable following detection of the erroneous transaction. Each ETP 
Holder involved in the transaction shall be notified as soon as 
practicable, and the ETP Holder aggrieved by the action may appeal such 
action in accordance with the provisions of subsection (c)(2).

Rule 11.20. Trading Halts Due to Extraordinary Market Volatility

    (a) Trading in stocks will halt on the Exchange and will not reopen 
for the time periods described in this paragraph (a) if the Dow Jones 
Industrial Average reaches Level 1 below its closing value on the 
previous trading day:
    (1) before 1:00 p.m. Central Time, for one hour;
    (2) at or after 1:00 p.m. but before 1:30 p.m. Central Time, for 30 
minutes.
    If the Dow Jones Industrial Average reaches Level 1 below its 
closing value on the previous trading day at or after 1:30 p.m. Central 
Time, trading will continue through the facilities of the Exchange 
until the close, unless the Dow Jones Industrial Average reaches Level 
2 below its closing value on the previous trading day, at which time 
trading will be halted for the remainder of the day.
    (b) Trading in stocks will halt on the Exchange and will not re-
open for the time periods described in this paragraph (b) if the Dow 
Jones Industrial Average reaches Level 2 below its closing value on the 
previous trading day:
    (1) before 12:00 noon Central Time, for two hours;
    (2) at or after 12:00 noon but before 1:00 p.m. Central Time, for 
one hour;
    (3) at or after 1:00 p.m. Central Time, for the remainder of the 
day.
    (c) If the Dow Jones Industrial Average reaches Level 3 below its 
closing value on the previous trading day, trading in stocks will halt 
on the Exchange and will not reopen for the remainder of the day.
    (d) On the occurrence of any trading halt pursuant to this Rule, 
all outstanding orders in the System will be cancelled.
    Commentary:
    .01 Levels 1, 2 and 3 will be calculated at the beginning of each 
calendar quarter, using the average closing value of the Dow Jones 
Industrial Average for the month prior to the beginning of the quarter. 
Level 1 will be 10% of such average closing value calculation; Level 2 
will be 20% of such average closing value calculation; Level 3 will be 
30% of such average closing value calculation. Each Level will be 
rounded to the nearest fifty points. The values of Levels 1, 2 and 3 
will remain in effect until the next calculation.
    .02 The restrictions in this Rule will apply whenever the Dow Jones 
Industrial Average reaches the trigger values notwithstanding the fact 
that at any given time, the calculation of the value of the average may 
be based on the prices of less than all of the stocks included in the 
average.
    .03 The reopening of trading following a trading halt under this 
Rule will be conducted pursuant to procedures adopted by the Exchange 
and communicated by notice to its ETP Holders.
    .04 Nothing in this Rule should be construed to limit the ability 
of the Exchange to otherwise halt or suspend the trading in any stock 
or stocks traded on the Exchange pursuant to any other Exchange Rule or 
policy.

Rule 11.21. Short Sales

    All short sale orders shall be identified as either short sale or 
short sale exempt when entered into the System. Any marketable order 
entered in the System that, if matched for execution, would violate the 
short sale provisions of the Act or the rules and regulations 
thereunder shall be cancelled. The foregoing shall not be in limitation 
of the Exchange's ability to adopt additional Rules, interpretations or 
policies relating to short sales.

Rule 11.22. Locking or Crossing Quotations in NMS Stocks

    (a) Definitions. For purposes of this Rule, the following 
definitions shall apply:
    (1) The terms automated quotation, effective national market system 
plan, intermarket sweep order, manual quotation, NMS stock, protected 
quotation, regular trading hours, and trading center shall have the 
meanings set forth in Rule 600(b) of Regulation NMS.
    (2) The term crossing quotation shall mean the display of a bid for 
an NMS stock during regular trading hours at a price that is higher 
than the price of an offer for such NMS stock previously disseminated 
pursuant to an effective national market system plan, or the display of 
an offer for an NMS stock during regular trading hours at a price that 
is lower than the price of a bid for such NMS stock previously 
disseminated pursuant to an effective national market system plan.
    (3) The term locking quotation shall mean the display of a bid for 
an NMS stock during regular trading hours at a price that equals the 
price of an offer for such NMS stock previously disseminated pursuant 
to an effective national market system plan, or the display of an offer 
for an NMS stock during regular trading hours at a price that equals 
the price of a bid for such NMS stock previously disseminated pursuant 
to an effective national market system plan.
    (b) Prohibition. Except for quotations that fall within the 
provisions of paragraph (d) of this Rule, Users shall reasonably avoid 
displaying, and shall not engage in a pattern or practice of 
displaying, any quotations that lock or cross a protected quotation, 
and any manual quotations that lock or cross a quotation previously 
disseminated pursuant to an effective national market system plan.
    (c) Manual quotations. If a User displays a manual quotation that 
locks or crosses a quotation previously disseminated pursuant to an 
effective national market system plan, such User shall promptly either 
withdraw the manual quotation or route an intermarket sweep order to 
execute against the full displayed size of the locked or crossed 
quotation.
    (d) Exceptions.
    (1) The locking or crossing quotation was displayed at a time when 
the trading center displaying the locked or crossed quotation was 
experiencing a

[[Page 38470]]

failure, material delay, or malfunction of its systems or equipment.
    (2) The locking or crossing quotation was displayed at a time when 
a protected bid was higher than a protected offer in the NMS stock.
    (3) The locking or crossing quotation was an automated quotation, 
and the User displaying such automated quotation simultaneously routed 
an intermarket sweep order to execute against the full displayed size 
of any locked or crossed protected quotation.
    (4) The locking or crossing quotation was a manual quotation that 
locked or crossed another manual quotation, and the User displaying the 
locking or crossing manual quotation simultaneously routed an 
intermarket sweep order to execute against the full displayed size of 
the locked or crossed manual quotation.

Rule 11.23. Riskless Principal Transactions

    (a) A ``riskless principal transaction'' is defined as two 
offsetting principal transaction legs in which an ETP Holder, (i) after 
having received an order to buy a security that it holds for execution 
on the Exchange, purchases the security as principal at the same price, 
exclusive of markups, markdowns, commissions and other fees, to satisfy 
all or a portion of the order to buy or (ii) after having received an 
order to sell a security that it holds for execution on the Exchange, 
sells the security as principal at the same price, exclusive of 
markups, markdowns, commissions and other fees, to satisfy all or a 
portion of the order to sell.
    (b) A last sale report for only the initial offsetting transaction 
leg of a riskless principal transaction shall be submitted to the 
respective consolidated tape in accordance with the rules and 
procedures of the market where that transaction leg occurred. A last 
sale report for the second offsetting transaction leg of a riskless 
principal transaction shall not be submitted by the Exchange to the 
respective consolidated tape provided that the second offsetting 
transaction leg is submitted to the Exchange for execution and 
designated with a riskless principal modifier by the ETP Holder.
    (c) An ETP Holder must have written policies and procedures to 
assure that its riskless principal transactions comply with this Rule. 
At a minimum these policies and procedures must require that the 
customer order be received prior to the offsetting transactions, and 
that the second offsetting transaction leg be executed within 60 
seconds of the initial offsetting transaction leg. An ETP Holder must 
also have supervisory systems in place that produce records that enable 
the ETP Holder and the Exchange to accurately and readily reconstruct, 
in a time-sequenced manner, all orders related to each riskless 
principal transaction.
* * * * *

CHAPTER XII. Trading Practice Rules

* * * * *
Rule 12.6. Customer Priority
    (a)-(c) No change.
    (d) The provisions of paragraphs (a) and (b) of this Rule also 
shall not apply if an ETP Holder engages in trading activity to 
facilitate the execution, on a riskless principal basis, of another 
order from its customer (whether its own customer or the customer of 
another member) (the ``facilitated order''), provided that the 
requirements of Rule 11.23 are satisfied. Any transaction handled by an 
ETP Holder on other than an agency basis that does not satisfy the 
requirements of Exchange Rule 11.23 remains a transaction that, unless 
otherwise exempt, is subject to the provisions of paragraphs (a) and 
(b) of this Rule. This exemption applies to both offsetting transaction 
legs of a riskless principal transaction but only to the extent of the 
actual number of shares that are required to satisfy the facilitated 
order.
Interpretations and Policies
    .01 If [a Designated Dealer] an ETP Holder holds for execution on 
the Exchange a customer buy order and a customer sell order that can be 
crossed, the [Designated Dealer] ETP Holder shall cross them without 
interpositioning itself as a dealer.
    .02 For a pilot period lasting through June 30, 2006:
    (a) [A Designated Dealer] An ETP Holder shall be deemed to have 
violated Rule 12.6 if, while holding a customer limit order (as rounded 
to a penny increment) representing the NBBO, the [Designated Dealer] 
ETP Holder, for his own account, trades with an incoming market or 
marketable limit order at a price which is less than one penny better 
than the price of such customer limit order (not the quoted price) held 
by such [Designated Dealer] ETP Holder.
    (b) [A Designated Dealer] An ETP Holder shall be deemed to have 
violated Rule 12.6 if, while holding a customer limit order (as rounded 
to a penny increment) at a price outside the NBBO, the [Designated 
Dealer] ETP Holder, for his own account, trades with an incoming market 
or marketable limit order at a price which is less than the nearest 
penny increment to the actual price of the customer limit order (not 
the quoted price) held by such [Designated Dealer] ETP Holder.
* * * * *

CHAPTER XIV. Intermarket Trading System Plan

* * * * *
Rule 14.9. ITS ``Trade-Throughs'' and ``Locked Markets''
    (a)-(e) No change.
    (f) This Rule 14.9 shall cease to be operational on the compliance 
date for the provisions of Regulation NMS relating to trade-throughs 
and locked markets.
* * * * *

CHAPTER XV. Listed Securities and Other Exchange Products

* * * * *

15.10. Portfolio Depositary Receipts

    (1) Applicability. This rule is applicable only to Portfolio 
Depositary Receipts. Except to the extent inconsistent with this rule, 
or unless the context otherwise requires, the provisions of the By-Laws 
and all other rules and policies of the Board shall be applicable to 
the trading on the Exchange of such securities. Portfolio Depositary 
Receipts are included within the definition of ``security'' or 
``securities'' as such terms are used in the By-Laws and Rules of the 
Exchange.
    (2) Definitions. The following terms as used in the Rules shall, 
unless the context otherwise requires, have the meanings herein 
specified:
    (a) Portfolio Depositary Receipt. The term ``Portfolio Depositary 
Receipt'' means a security (i) that is based on a unit investment trust 
(``Trust'') which holds the securities which comprise an index or 
portfolio underlying a series of Portfolio Depositary Receipts; (ii) 
that is issued by the Trust in a specified aggregate minimum number in 
return for a ``Portfolio Deposit'' consisting of specified numbers of 
shares of stock plus a cash amount; (iii) that, when aggregated in the 
same specified minimum number, may be redeemed from the Trust which 
will pay to the redeeming holder the stock and cash then comprising the 
``Portfolio Deposit'; and (iv) that pays holders a periodic cash 
payment corresponding to the regular cash dividends or distributions 
declared with respect to the component securities of the stock index or 
portfolio of securities underlying the Portfolio Depository Receipts, 
less certain expenses and other charges as set forth in the Trust 
prospectus.
    (b) Reporting Authority. The term ``Reporting Authority'' in 
respect of a

[[Page 38471]]

particular series of Portfolio Depositary Receipts means the Exchange, 
an institution (including the Trustee for a series of Portfolio 
Depositary Receipts), or a reporting service designated by the 
Exchange, or by the exchange that lists a particular series of 
Portfolio Depository Receipts (if the Exchange is trading such series 
pursuant to unlisted trading privileges) as the official source for 
calculating and reporting information relating to such series, 
including, but not limited to, any current index or portfolio value; 
the current value of the portfolio of securities required to be 
deposited to the Trust in connection with issuance of Portfolio 
Depositary Receipts; the amount of any dividend equivalent payment or 
cash distribution to holders of Portfolio Depositary Receipts, net 
asset value, or other information relating to the creation, redemption 
or trading of Portfolio Depositary receipts.
    (3) ETP Holders shall provide to all purchasers of a series of 
Portfolio Depositary Receipts a written description of the terms and 
characteristics of such securities, in a form approved by the Exchange, 
not later than the time a confirmation of the first transaction in such 
a series is delivered to such purchaser. In addition, ETP Holders shall 
include such a written description with any sales material relating to 
a series of Portfolio Depositary Receipts that is provided to customers 
or the public. Any other written materials provided by an ETP Holder to 
customers or to the public making specific reference to a series of 
Portfolio Depositary Receipts as an investment vehicle must include a 
statement in substantially the following form: ``A circular describing 
the terms and characteristics of [the series of Portfolio Depositary 
Receipts] is available from your broker. It is recommended that you 
obtain and review such circular before purchasing [the series of 
Portfolio Depositary Receipts]. In addition, upon request you may 
obtain from your broker a prospectus for [the series of Portfolio 
Depositary Receipts].'' An ETP Holder carrying omnibus account for a 
non-ETP Holder broker-dealer is required to inform such non-ETP Holder 
that execution of an order to purchase a series of Portfolio Depositary 
Receipts for such omnibus account will be deemed to constitute 
agreement by the non-ETP Holder to make such written description 
available to its customers on the same terms as are directly applicable 
to ETP Holders under this Rule.
    Upon request of a customer, an ETP Holder shall also provide a 
prospectus for the particular series of Portfolio Depositary Receipts.
    (4) Designation of an Index or Portfolio. The trading of Portfolio 
Depositary Receipts based on one or more stock indices or securities 
portfolios, whether by listing or pursuant to unlisted trading 
privileges, shall be considered on a case by case basis. The Portfolio 
Depositary Receipts based on each particular stock index or portfolio 
shall be designated as a separate series and shall be identified by a 
unique symbol. The stocks that are included in an index or portfolio on 
which Portfolio Depositary Receipts are based shall be selected by the 
Exchange or by such other person as shall have a proprietary interest 
in and authorized use of such index or portfolio, and may be revised 
from time to time as may be deemed necessary or appropriate to maintain 
the quality and character of the index or portfolio.
    (5) Initial and Continued Listing and/or Trading. A Trust upon 
which a series of Portfolio Depositary Receipts is based will be traded 
on the Exchange, whether by listing or pursuant to unlisted trading 
privileges, subject to application of the following criteria:
    (a) Commencement of Trading--For each Trust, the Exchange will 
establish a minimum number of Portfolio Depositary Receipts required to 
be outstanding at the time of commencement of trading on the Exchange.
    (b) Continued Trading--Following the initial twelve month period 
following formation of a Trust and commencement of trading on the 
Exchange, the Exchange will consider the suspension of trading in, 
removal from listing of, or termination of unlisted trading privileges 
for a Trust upon which a series of Portfolio Depositary Receipts is 
based under any of the following circumstances: (i) If the Trust has 
more than 60 days remaining until termination and there are fewer than 
50 record and/or beneficial holders of Portfolio Depositary Receipts 
for 30 or more consecutive trading days; or (ii) if the value of the 
index or portfolio of securities on which the Trust is based is no 
longer calculated or available; or (iii) if such other event shall 
occur or condition exists which in the opinion of the Exchange, makes 
future dealings on the Exchange inadvisable.
    Upon termination of a Trust, the Exchange requires that Portfolio 
Depositary Receipts issued in connection with such Trust be removed 
from Exchange listing or have their unlisted trading privileges 
terminated. A Trust may terminate in accordance with the provisions of 
the Trust prospectus, which may provide for termination if the value of 
securities in the Trust falls below a specified amount.
    (c) Term--The stated term of the Trust shall be stated in the Trust 
Prospectus. However, a Trust may be terminated under such earlier 
circumstances as may be specified in the Trust prospectus.
    (d) Trustee--The trustee must be a trust company or banking 
institution having substantial capital and surplus and the experience 
and facilities for handling corporate trust business. In cases where, 
for any reason, an individual has been appointed as trustee, a 
qualified trust company or banking institution must be appointed as co-
trustee.
    (e) Voting--Voting rights shall be as set forth in the Trust 
prospectus. The Trustee of a Trust may have the right to vote all of 
the voting securities of such Trust.
    (6) Limitation of Exchange Liability. Neither the Exchange, the 
Reporting Authority nor any agent of the Exchange shall have any 
liability for damages, claims, losses or expenses caused by any errors, 
omissions, or delays in calculating or disseminating any current index 
or portfolio value, the current value of the portfolio of securities 
required to be deposited to the Trust; the amount of any dividend 
equivalent payment or cash distribution to holders of Portfolio 
Depositary Receipts; net asset value; or other information relating to 
the creation redemption or trading of Portfolio Depositary Receipts, 
resulting from any negligent act or omission by the Exchange, or the 
Reporting Authority, or any agent of the Exchange or any act, condition 
or cause beyond the reasonable control of the Exchange or its agent, or 
the Reporting Authority, including, but not limited to, an act of God; 
fire; flood; extraordinary weather conditions; war; insurrection; riot; 
strike; accident; action of government; communications or power 
failure; equipment or software malfunction; or any error, omission or 
delay in the reports of transactions in one or more of the underlying 
securities. The Exchange makes no warranty, express or implied, as to 
the results to be obtained by any person or entity from the use of 
Portfolio Depositary Receipts or any underlying index or data included 
therein and the Exchange makes no express or implied warranties, and 
disclaims all warranties or merchantability or fitness for a particular 
purpose with respect to Portfolio Depositary Receipts or any underlying 
index or data included therein. This limitation of liability shall be 
in addition to any other limitation

[[Page 38472]]

contained in the Exchange's Articles of Incorporation, By-Laws or 
Rules.

Interpretations And Policies

    .01 The Exchange will trade pursuant to unlisted trading 
privileges, Portfolio Depositary Receipts based on the Standard and 
Poor's Exchange's S&P 500 Index, known as SPDRs.
    .02 The Exchange will trade, pursuant to unlisted trading 
privileges, Portfolio Depositary Receipts based on the Standard and 
Poor's Exchange's S&P MidCap 400 Index, known as MidCap SPDRs.
    Standard & Poor's'', ``S&P'', ``S&P 500'', ``Standard & Poor's 
500'', and ``500'' are trademarks of the McGraw-Hill Companies, Inc. 
and have been licensed for use by the Exchange.

15.11. Trust Issued Receipts

    (1) Applicability. This rule is applicable only to Trust Issued 
Receipts. Except to the extent inconsistent with this rule, or unless 
the context otherwise requires, the provisions of the By-Laws and all 
the rules and policies of the Board shall be applicable to the trading 
on the Exchange of such securities. Trust Issued Receipts are included 
within the definition of ``security'' or ``securities'' as such terms 
are used in the By-Laws and Rules of the Exchange. The Exchange will 
consider for trading, whether by listing or pursuant to unlisted 
trading privileges, Trust Issued Receipts that meet the criteria of 
this Rule.
    (2) Definitions. The following terms as used in the Rules shall, 
unless the context otherwise requires, have the following meanings 
herein specified:
    (a) Trust Issued Receipt. A Trust Issued Receipt is a security (a) 
that is issued by a trust (``Trust'') which holds specific securities 
deposited with the Trust; (b) that when aggregated in some specified 
minimum number, may be surrendered to the Trust by the beneficial owner 
to receive the securities; and (c) that pays beneficial owners 
dividends and other distributions on the deposited securities, if any 
are declared and paid to the trustee by an issuer of the deposited 
securities.
    (3) Designation. The Exchange may trade, whether by listing or 
pursuant to unlisted trading privileges, Trust Issued Receipts based on 
one or more securities. The Trust Issued Receipts based on particular 
securities shall be designated as a separate series and shall be 
identified by a unique symbol. The securities that are included in a 
series of Trust Issued Receipts shall be selected by the Exchange or by 
such other person as shall have a proprietary interest in such Trust 
Issued Receipts.
    (4) Initial and Continued Listing. Trust Issued Receipts will be 
traded on the Exchange subject to application of the following 
criteria:
    (a) Initial Listing--For each Trust, the Exchange will establish a 
minimum number of Trust Issued Receipts required to be outstanding at 
the time of commencement of trading on the Exchange.
    (b) Continued Listing--Following the initial twelve month period 
following formation of a Trust and commencement of trading on the 
Exchange, the Exchange will consider the suspension of trading in or 
removal from listing of a Trust upon which a series of Trust Issued 
Receipts is based under any of the following circumstances: (i) if the 
Trust has more than 60 days remaining until termination and there are 
fewer than 50 record and/or beneficial holders of Trust Issued Receipts 
for 30 or more consecutive trading days; (ii) if the Trust has more 
than 50,000 receipts issued and outstanding; (iii) if the market value 
of all receipts issued and outstanding is less than $1,000,000; or (iv) 
if any other event shall occur or condition exists which, in the 
opinion of the Exchange, makes further dealings on the Exchange 
inadvisable. Upon termination of a Trust, the Exchange requires that 
the Trust Issued Receipts issued in connection with such Trust be 
removed from Exchange listing. A Trust may terminate in accordance with 
the provisions of the Trust prospectus, which may provide for 
termination if the value of securities in the Trust falls below a 
specified amount.
    (c) Term--The stated term of the Trust shall be as stated in the 
Trust prospectus; however, a Trust may be terminated under such earlier 
circumstances as may be specified in the Trust prospectus.
    (f) Trustee--The Trustee must be a trust company or banking 
institution having substantial capital and surplus and the experience 
and facilities for handling corporate trust business. In cases where, 
for any reason, an individual has been appointed as trustee, a 
qualified trust company or banking institution must be appointed co-
trustee.
    (g) Voting--Voting rights shall be set forth in the Trust 
prospectus.
    (5) ETP Holder Obligations. ETP Holders shall provide to all 
purchasers of newly issued Trust Issued Receipts a prospectus for the 
series of Trust Issued Receipts.
    (6) Trading Issues. Trust Issued Receipts may be acquired, held, or 
transferred only in round-lot amounts (or round-lot multiples) of 100 
receipts. Orders for less than a round-lot multiple, will be executed 
to the extent of the largest round-lot multiple.

Interpretations and Policies

    .01 The Exchange may approve a series of Trust Issued Receipts for 
trading, whether by listing or pursuant to unlisted trading privileges, 
pursuant to Rule 19b-4(e) under the Act, provided that the following 
criteria are satisfied:
    (a) Each security underlying the Trust Issued Receipt must be 
registered under Section 12 of the Act;
    (b) Each company whose securities are underlying securities for the 
Trust Issued Receipt must have a minimum public float of at least $150 
million;
    (c) Each security underlying the Trust Issued Receipt must be 
listed on a national securities exchange or traded through the 
facilities of NASDAQ as a reported national market system security;
    (d) Each company whose securities are underlying securities for the 
Trust Issued Receipt must have an average daily trading volume of at 
least 100,000 shares during the preceding sixty-day trading period;
    (e) Each company whose securities are underlying securities for the 
Trust Issued Receipt must have an average daily dollar value of shares 
traded during the preceding sixty-day trading period of at least $1 
million; and
    (f) The most heavily weighted security in the Trust Issued Receipt 
cannot initially represent more than 20% of the overall value of the 
Trust Issued Receipt.

15.12. Index Fund Shares

    (1) Applicability. This Chapter is applicable only to Index Fund 
Shares. Except to the extent inconsistent with this Chapter, or unless 
the context otherwise requires, the provisions of the By-Laws and all 
other rules and policies of the Exchange shall be applicable to the 
trading on the Exchange of Index Fund Shares. Index Fund Shares are 
included within the definition of ``security'' or ``securities'' as 
such terms are used in the By-Laws and Rules of the Exchange.
    (2) Definitions. The following terms as used in the Rules shall, 
unless the context otherwise requires, have the meanings herein 
specified:
    (a) Index Fund Shares means a security (a) that is issued by an 
open-end management investment company based on a portfolio of stocks 
that seeks to provide investment results that correspond generally to 
the price and yield performance of a specified foreign

[[Page 38473]]

or domestic stock index; (b) that is issued by such an open-end 
management investment company in a specified aggregate minimum number 
in return for a deposit of specified numbers of shares of stock and/or 
a cash amount with a value equal to the next determined net asset 
value; and (c) that, when aggregated in the same specified minimum 
number, may be redeemed at a holders request by such open-end 
investment company which will pay to the redeeming holder the stock 
and/or cash with a value equal to the next determined net asset value.
    (b) Reporting Authority. The term ``Reporting Authority'' in 
respect of a particular series of Index Fund Shares means the Exchange, 
a subsidiary of the Exchange, or an institution or reporting service 
designated by the Exchange or its subsidiary as the official source for 
calculating and reporting information to such series, including, but 
not limited to, any current index or portfolio value; the current value 
of the portfolio of any securities required to be deposited in 
connection with issuance of Index Fund Shares; the amount of any 
dividend equivalent payment or cash distribution to holders of Index 
Fund Shares, net asset value, or other information relating to the 
issuance, redemption or trading of Index Fund Shares.
    Nothing in this section shall imply that an institution or 
reporting service that is the source for calculating and reporting 
information relating to Index Fund Shares must be designated by the 
Exchange, the term ``Reporting Authority'' shall not refer to an 
institution or reporting service not so designated.
    (3) Disclosure. Upon request of a customer, ETP Holders shall 
provide to all purchasers of Index Fund Shares a prospectus for the 
series of Index Fund Shares.
    (4) Designation. The trading of Index Fund Shares based on one or 
more securities, whether by listing or pursuant to unlisted trading 
privileges, shall be considered on a case-by-case basis. Each issue of 
Index Fund Shares shall be based on each particular stock index or 
portfolio and shall be a designated as a separate series and shall be 
identified by a unique symbol. The securities that are included in a 
series of Index Fund Shares shall be selected by the Exchange or its 
agent, a wholly-owned subsidiary of the Exchange, or by such other 
person thereof, as shall have authorized use of such index. Such index 
or portfolio may be revised from time to time as may be deemed 
necessary or appropriate to maintain the quality and character of the 
index or portfolio.
    (5) Initial and Continued Listing and/or Trading. Each series of 
Index Fund Shares will be traded on the Exchange, whether by listing or 
pursuant to unlisted trading privileges, subject to application of the 
following criteria:
    (a) Commencement of Trading--For each Series, the Exchange will 
establish a minimum number of Index Fund Shares required to be 
outstanding at the time of commencement of trading on the Exchange.
    (b) Continued Trading--Following the initial twelve month period 
following commencement of trading on the Exchange of a series of Index 
Fund Shares, the Exchange will consider the suspension of trading, the 
removal from listing, or termination of unlisted trading privileges for 
such series under any of the following circumstances: (i) if there are 
fewer than 50 beneficial holders of the series of Index Fund Shares for 
30 or more consecutive trading days; (ii) if the value of the index or 
portfolio of securities on which the series of Index Fund Shares is 
based is no longer calculated or available; or (iii) if such other 
event shall occur or condition exist which, in the opinion of the 
Exchange, makes further dealings on the Exchange inadvisable. Upon 
termination of an open-ended management investment company, the 
Exchange requires that Index Fund Shares issued in connection with such 
entity be removed from Exchange listing.
    (c) Voting--Voting rights shall be as set forth in the applicable 
open-end management investment company prospectus.

Interpretations and Policies

    .01 The Exchange may approve a series of Index Fund Shares for 
listing pursuant to Rule 19b-4(e) under the Act provided each of the 
following criteria is satisfied:
    (a) Eligibility Criteria for Index Components. Upon the initial 
listing of a series of Index Fund Shares each component of an index or 
portfolio underlying a series of Index Fund Shares shall meet the 
following criteria as of the date of the initial deposit of securities 
to the fund in connection with the initial issuance of shares of such 
fund: (i) Component stocks that in the aggregate account for at least 
90% of the weight of the index or portfolio shall have a minimum market 
value of at least $75 million; (ii) The component stocks shall have a 
minimum monthly trading volume during each of the last six months of at 
least 250,000 shares for stocks representing at least 90% of the weight 
of the index or portfolio; (iii) The most heavily weighted component 
stock cannot exceed 25% of the weight of the index or portfolio, and 
the five most heavily weighted component stocks cannot exceed 65% of 
the weight of the index or portfolio; (iv) The underlying index or 
portfolio must include a minimum of 13 stocks; and (v) All securities 
in an underlying index or portfolio must be listed on a national 
securities exchange or The Nasdaq Stock Market (including the Nasdaq 
SmallCap Market).
    (b) Index Methodology and Calculation. (i) The index underlying a 
series of Index Fund Shares will be calculated based on either the 
market capitalization, modified market capitalization, price, equal-
dollar or modified equal-dollar weighting methodology; (ii) If the 
index is maintained by a broker-dealer, the broker-dealer shall erect a 
``fire-wall'' around the personnel who have access to information 
concerning changes and adjustments to the index and the index shall be 
calculated by a third party who is not a broker-dealer; and (iii) The 
current index value will be disseminated every 15 seconds over the 
Consolidated Tape Association's Network B.
    (c) Disseminated Information. The Reporting Authority will 
disseminate for each series of Index Fund Shares an estimate, updated 
every 15 seconds, of the value of a share of each series. This may be 
based, for example, upon current information regarding the required 
deposit of securities and cash amount to permit creation of new shares 
of the series or upon the index value.
    (d) Initial Shares Outstanding. A minimum of 100,000 shares of a 
series of Index Fund Shares is required to be outstanding at 
commencement of trading.
    (e) Minimal Fractional Trading Variation. The minimum fractional 
trading variation may vary among different series of Index Fund Shares 
but will be set at 1/16th, 1/32nd, or 1/64th of $1.00.
    (f) Hours of Trading. Trading will occur between 9:30 a.m. and 
either 4:00 p.m. or 4:15 p.m. for each series of Index Fund Shares, as 
specified by the Exchange.
    (g) Surveillance Procedures. The Exchange will utilize existing 
surveillance procedures for Index Fund Shares.
    (h) Applicability of Other Rules. The provisions of the Exchange 
Rules and By-Laws will apply to all series of Index Fund Shares.
    .02 The following paragraphs only apply to series of Index Fund 
Shares that are the subject of an order by the Securities and Exchange 
Commission

[[Page 38474]]

exempting such series from certain prospectus delivery requirements 
under Section 24(d) of the Investment Company Act of 1940. The Exchange 
will inform ETP Holders regarding application of these provisions to a 
particular series of Index Fund Shares by means of an Information 
Circular prior to commencement of trading in such series. The Exchange 
requires that ETP Holders provide to all purchasers of a series of 
Index Fund Shares a written description of the terms and 
characteristics of such securities, in a form prepared by the open-end 
management investment company issuing such securities, not later than 
the time a confirmation of the first transaction in such series is 
delivered to such purchaser. In addition, ETP Holders shall include 
such a written description with any sales material relating to a series 
of Index Fund Shares that is provided to customers or the public. Any 
other written materials provided by an ETP Holder to customers or the 
public making specific reference to a series of Index Fund Shares as an 
investment vehicle must include a statement in substantially the 
following form: ``A circular describing the terms and characteristics 
of [the series of Index Fund Shares] has been prepared by the [open-end 
management investment company name] and is available from your broker 
or the Exchange. It is recommended that you obtain and review such 
circular before purchasing [the series of Index Fund Shares].''
    An ETP Holder carrying an omnibus account for a non-ETP Holder 
broker-dealer is required to inform such non-ETP Holder that execution 
of an order to purchase a series of Index Fund Shares for such omnibus 
account will be deemed to constitute agreement by the non-ETP Holder to 
make such written description available to its customers on the same 
terms as are directly applicable to ETP Holders under this rule.
    Upon request of a customer, an ETP Holder shall also provide a 
prospectus for the particular series of Index Fund Shares.
* * * * *

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposal and discussed 
any comments it received on the proposed rule change, as amended. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange 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
Background
    The Exchange is proposing a series of rule changes in connection 
with a new electronic trading system (the ``System'') the Exchange is 
developing to replace the Exchange's current National Securities 
Trading System (``NSTS''). The Exchange states that the System would 
provide for a new trading platform and structure in order to take 
advantage of opportunities in the marketplace and the implementation of 
Regulation NMS (``Regulation NMS'') under the Act, as amended, and the 
rules and regulations thereunder.\4\ The System would have different 
priority rules than that of NSTS. For example, NSTS and the Exchange's 
current trading rules allow preferencing by dealers under certain 
circumstances.\5\ The Exchange states that the System (and the proposed 
rule change described in this submission) would provide for strict 
price-time priority execution, with no priority of execution 
distinction made for principal or agency orders.\6\
---------------------------------------------------------------------------

    \4\ 17 CFR 242.600 et seq.
    \5\ See current NSX Rule 11.9, particularly NSX Rules 11.9(l), 
(m) and (u).
    \6\ See proposed NSX Rules 11.13 and 11.14.
---------------------------------------------------------------------------

    The proposed rule change, as amended, also incorporates the trade-
through rule of Regulation NMS \7\ by requiring that, for any execution 
to occur on the Exchange during regular trading hours,\8\ the price 
must be equal to or better than the national best bid or offer that is 
a ``protected quotation'' within the meaning of Regulation NMS (the 
``Protected NBBO''), unless an exception to the trade-through rule of 
Regulation NMS is available.\9\ NSX proposes to route orders that 
cannot be executed at the Protected NBBO on the Exchange to away 
markets for execution.\10\ Finally, with the System the Exchange 
proposes to retain an option for order delivery,\11\ but to require 
that Users requesting order delivery be able to process inbound orders 
and respond within \1/2\ of a second.\12\
---------------------------------------------------------------------------

    \7\ 17 CFR 242.611.
    \8\ ``Regular Trading Hours'' is defined as between 8:30 a.m. 
and 3:00 p.m. Central Time. See proposed NSX Rule 1.5(R)(1). This is 
consistent with the definition of ``regular trading hours'' set 
forth in Regulation NMS. See 17 CFR 242.600(b)(64).
    \9\ See proposed NSX Rule 11.15.
    \10\ See proposed NSX Rule 11.15(a)(ii).
    \11\ See current NSX Rule 11.9(i).
    \12\ See proposed NSX Rule 11.13(b).
---------------------------------------------------------------------------

    With this proposed rule change, the Exchange is proposing to 
substantially revise Chapter XI of its Rules (relating to Trading 
Rules), in order to incorporate priority rules and other features 
consistent with the System. In connection with the proposed changes to 
the trading rules, the Exchange is also proposing changes to certain 
other aspects of its rules as follows:
    1. Revisions to Chapter I to incorporate new definitions and other 
general provisions;
    2. One change to Chapter II concerning the ETP Holder admission 
process and related provisions;
    3. Revisions to Chapter XV, to incorporate provisions relating to 
specifications for other products (e.g., exchange-traded funds) that 
are currently located in Chapter XI of the Exchange's Rules; and
    4. Certain other technical changes in order to be consistent with 
the new trading rules and related changes being proposed.\13\
---------------------------------------------------------------------------

    \13\ The Exchange states that a proposed new Chapter XVI 
relating to dues, fees, assessments and other charges and Exchange 
rebate programs will be filed with the Commission by the Exchange at 
a later date. This will replace the Exchange's current fee schedule 
contained in NSX Rule 11.10, which is being removed in connection 
with the proposed changes to Chapter XI described herein.
---------------------------------------------------------------------------

    Finally, in connection with the new System and the proposed changes 
to the Exchange's trading rules, the Exchange is requesting that the 
Commission approve NSX Securities LLC (``NSX Securities'') to be a 
facility (as defined in Section 3(a)(2) of the Act) of the Exchange.
Trading Rules
    Chapter XI of the Exchange's Rules is proposed to be substantially 
revised in order to accommodate the proposed new market structure. The 
Exchange states that, although certain aspects of NSX's current Chapter 
XI have been retained in part, as noted below, for the most part 
proposed Chapter XI is not based on current Exchange Rules. In general, 
the proposed Chapter is ordered as follows: (1) Introductory 
provisions, such as hours of trading and price variations; (2) 
Registration and obligations of Market Makers (which are optional in 
this proposed market structure); (3) Access to the System; (4) Types of 
orders and messages that can be entered into the System; (5) Order 
priority and execution; and (6) Clearance and settlement, clearly 
erroneous executions, and other miscellaneous provisions.

[[Page 38475]]

A. Hours of Trading, Units of Trading, Price Variations, and Securities 
Eligible for Trading

    Proposed NSX Rule 11.1 generally provides for trading hours as 
determined by the Board of Directors of the Exchange (the ``Board''), 
with notice to ETP Holders.\14\ Current NSX Rule 11.1 provides for 
specific hours of trading.\15\ The Exchange is proposing this change to 
provide greater flexibility to respond to market conditions. The 
Exchange is also proposing to set forth the specific holidays it 
observes.\16\
---------------------------------------------------------------------------

    \14\ See proposed NSX Rule 11.1(a).
    \15\ See current NSX Rule 11.1(a).
    \16\ See proposed NSX Rule 11.1(b).
---------------------------------------------------------------------------

    NSX Rule 11.2 is proposed to be changed to define 100 shares as a 
``round lot,'' any amount less than 100 shares as an ``odd lot'' and 
any amount greater than 100 shares that is not a multiple of a round 
lot as a ``mixed lot''.\17\ The Exchange is also proposing to remove 
current language in NSX Rule 11.2 and elsewhere relating to bonds, as 
it has not traded bonds for many years.
---------------------------------------------------------------------------

    \17\ See proposed NSX Rule 11.2.
---------------------------------------------------------------------------

    The Exchange states that the language of proposed NSX Rule 11.3(a) 
is identical to the language of current NSX Rule 11.3. Proposed NSX 
Rule 11.3(b) requires that Crosses (as described in proposed NSX Rule 
11.12 and Section D below) must improve each side of the Exchange's 
best bid or offer (``Top of Book'') by at least $0.01 per share, 
subject to limited exceptions as described in Section D below. Proposed 
NSX Rule 11.4 provides that any class of securities listed or admitted 
to unlisted trading privileges on the Exchange may be designated for 
trading by the Exchange.\18\
---------------------------------------------------------------------------

    \18\ This proposed Rule is generally consistent with current NSX 
Rule 11.9(b). Current Rules 11.4 and 11.5 are proposed to be 
replaced in their entirety, as they relate to trading ex-dividend 
and related issues that will no longer apply because no orders will 
remain in the System beyond a single trading day.
---------------------------------------------------------------------------

B. Market Makers

    Proposed NSX Rules 11.5 through 11.8 set forth the registration 
process and obligations of Market Makers. NSX states that Market Makers 
are purely optional in this proposed market structure. The Exchange 
states that it does not expect Market Makers to play a significant role 
on the Exchange at the outset, but is including these provisions in 
order to provide flexibility as it expands the System's functionality 
to provide for additional order types and other features that may make 
Market Maker registration more attractive.
    Proposed NSX Rule 11.5 provides for a registration process for 
Market Makers. No ETP Holder may act as a Market Maker in any security 
on the Exchange unless the ETP Holder is registered as a Market Maker 
in the security.\19\ The Exchange plans to administer the Market Maker 
application process in similar fashion to its administration of 
applications for equity trading permits, which is described below. 
Market Makers must file an application for registration in the form 
prescribed by the Exchange. When reviewing such applications, the 
Exchange would consider factors such as the applicant's capital, 
operations, personnel, technical resources, and disciplinary history. 
Market Makers must maintain at least the minimum net capital required 
under Rule 15c3-1 under the Act.\20\ The Exchange may suspend or 
terminate the registration of a Market Maker if the Exchange determines 
that (1) the Market Maker has substantially or continually failed to 
engage in dealings in accordance with the Exchange Rules; (2) the 
Market Maker has failed to meet the minimum net capital requirements 
described above; or (3) the Market Maker has failed to maintain fair 
and orderly markets.\21\ A Market Maker may withdraw its registration 
by giving written notice to the Exchange, subject to the Exchange's 
right to require a minimum prior notice period or to place such other 
conditions on withdrawal (and re-registration following withdrawal) as 
it deems appropriate in the interests of maintaining fair and orderly 
markets.\22\
---------------------------------------------------------------------------

    \19\ See proposed NSX Rule 11.5(a). Registered Market Makers 
will be designated as dealers on the Exchange for all purposes under 
the Act and the rules and regulations thereunder.
    \20\ See proposed NSX Rule 11.5(b).
    \21\ See proposed NSX Rule 11.5(d).
    \22\ See proposed NSX Rule 11.5(e).
---------------------------------------------------------------------------

    Proposed NSX Rule 11.6 provides for the registration of Market 
Maker Authorized Traders (``MMATs'') who are permitted to enter orders 
for the account of the Market Maker for which they are registered. 
MMATs may be officers, partners, employees, or other associated persons 
of Market Makers, and must register as an MMAT on the form prescribed 
by the Exchange.\23\ MMATs must successfully complete a ``Series 7'' 
examination, unless the Exchange waives this requirement for applicant 
MMATs who have served as dealer-specialists or market makers on another 
national securities exchange or association for at least two 
consecutive years within three years of the MMAT application.\24\ The 
Exchange may grant conditional registration as an MMAT subject to 
conditions the Exchange deems appropriate in the interests of 
maintaining a fair and orderly market.\25\ The Exchange may also 
suspend or withdraw the registration of an MMAT if (1) the MMAT has 
caused its Market Maker to fail to comply with securities laws or the 
By-laws, Rules and procedures of the Exchange; (2) the MMAT is not 
properly performing its responsibilities as an MMAT or has failed to 
meet the conditions of registration described above; or (3) the 
Exchange believes suspension or withdrawal is in the interest of 
maintaining fair and orderly markets to suspend or withdraw the MMAT's 
registration.\26\ The Exchange would also withdraw the registration of 
an MMAT upon the written request of the ETP Holder for which the MMAT 
is registered.\27\
---------------------------------------------------------------------------

    \23\ See proposed NSX Rule 11.6(b). Market Makers must ensure 
that their MMATs are in compliance with NSX Rules and are properly 
qualified to perform market-making activities on the Exchange. See 
proposed NSX Rule 11.6(b)(5). Market Makers are responsible for the 
acts and omissions of their MMATs. See proposed NSX Rule 11.8(c).
    \24\ See proposed NSX Rule 11.6(b)(2).
    \25\ See proposed NSX Rule 11.6(b)(4).
    \26\ See proposed NSX Rule 11.6(c)(1).
    \27\ See proposed NSX Rule 11.6(b)(3).
---------------------------------------------------------------------------

    Proposed NSX Rule 11.7 provides for a registration process for 
Market Makers in a particular security. Market Makers must register in 
a particular security by filing a security registration form with the 
Exchange. Unless otherwise provided by the Exchange, such registration 
shall become effective on the first business day following the 
Exchange's approval of the registration.\28\ In considering the 
approval of a Market Maker's registration in a particular security, the 
Exchange may consider the Market Maker's financial resources; the 
Market Maker's experience, expertise and past performance in making 
markets; the Market Maker's operational capability; the effect on 
competition among Market Makers; the Market Maker's clearing 
arrangements; and the character of the market for the security.\29\ A 
Market Maker may terminate its registration in a security by giving 
written notice to the Exchange, subject to the Exchange's right to 
require a minimum prior notice period or impose such other conditions 
as it deems appropriate in the interests of maintaining fair and 
orderly markets.\30\ Proposed NSX Rule 11.7(c) allows the Exchange to 
terminate such registration if the Market Maker has not met its 
obligations as set forth in the

[[Page 38476]]

Exchange Rules or has not maintained fair and orderly markets.
---------------------------------------------------------------------------

    \28\ Id.
    \29\ See proposed NSX Rule 11.7(a).
    \30\ See proposed NSX Rule 11.7(b). A Market Maker may also 
withdraw temporarily from its Market Maker status in a security if 
legal or regulatory requirements necessitate. See proposed NSX Rule 
11.8(e).
---------------------------------------------------------------------------

    Proposed NSX Rule 11.8 sets forth certain obligations of Market 
Makers. Market Makers generally must engage in a course of dealings for 
their own account to assist in the maintenance of fair and orderly 
markets on the Exchange.\31\ Market Makers are specifically required, 
among other things, to maintain continuous limit orders to buy and sell 
for round lots in those securities in which Market Makers is registered 
to trade; to comply with all Exchange Rules; to inform the Exchange of 
a material change in the financial or operation condition or in the 
personnel of the Market Maker; to maintain a current list of MMATs and 
provide an updated version of this list to the Exchange upon any change 
in MMATs; and to clear and settle transactions through the facilities 
of a registered clearing agency.\32\ Substantial or continued failure 
to comply with these requirements may subject a Market Maker to 
suspension or revocation of the Market Maker's registration in one or 
more securities, or other disciplinary action.\33\
---------------------------------------------------------------------------

    \31\ See proposed NSX Rule 11.8(a).
    \32\ See proposed NSX Rule 11.8(a).
    \33\ See proposed NSX Rule 11.8(d). Current NSX Rules 11.6 
through 11.9, which relate to various types of trading on the 
Exchange, are proposed to be replaced in their entirety with the 
proposed Rules described herein.
---------------------------------------------------------------------------

C. Access to the System and Authorized Traders

    Orders may be entered on the System only by Users who have obtained 
authorized access by entering into a User Agreement with the Exchange 
in the form prescribed by the Exchange.\34\ In addition to ETP Holders, 
non-ETP Holders may enter into User Agreements and thereby access the 
System, subject to the requirements of proposed NSX Rule 11.9. A non-
ETP Holder accessing the System is known as a ``Sponsored 
Participant.''\35\ A Sponsored Participant, to obtain access to the 
System, must be a registered broker or dealer and a self-clearing 
member of a qualified clearing agency (``Qualified Clearing 
Agency''),\36\ and must enter into an agreement with a Sponsoring ETP 
Holder \37\ pursuant to which the Sponsoring ETP Holder agrees to be 
responsible for any and all actions taken by or on behalf of the 
Sponsored Participant.\38\ The Sponsored Participant must also (1) 
agree to comply with the Exchange's Rules and procedures as if the 
Sponsored Participant were an ETP Holder; (2) maintain a current list 
of its Authorized Traders who may access the System on behalf of the 
Sponsored Participant (and provide such list to the Sponsoring ETP 
Holder and the Exchange on request); (3) familiarize its Authorized 
Traders with the Sponsored Participant's obligations and assure that 
they receive appropriate training; (4) take reasonable security 
precautions to prevent access to the System by anyone other than the 
Sponsored Participant's Authorized Traders; and (5) establish adequate 
procedures and controls to effectively monitor the Sponsored 
Participant's employees, agents and customers' use and access to the 
System.\39\ The Exchange intends to administer the Sponsored 
Participant access provisions of proposed NSX Rule 11.9 in a fashion 
similar to its current non-member give-up rule.\40\
---------------------------------------------------------------------------

    \34\ See proposed NSX Rule 11.9(a).
    \35\ See proposed NSX Rule 1.5(S)(1).
    \36\ ``Qualified Clearing Agency'' is defined in proposed NSX 
Rule 15(Q)(1) as a clearing agency registered with the Commission 
pursuant to Section 17A of the Act that is deemed qualified by the 
Exchange.
    \37\ See proposed NSX Rule 1.5(S)(2).
    \38\ See proposed NSX Rule 11.9(b). The Sponsoring ETP Holder 
must also agree to pay when due any amounts arising from the 
Sponsored Participant's access to the System. See proposed NSX Rule 
11.9(b)(2)(B)(iii).
    \39\ See proposed NSX Rule 11.9(b)(2)(D)-(H).
    \40\ See Interpretation and Policy .03 of Section 2.4 of the NSX 
Rules.
---------------------------------------------------------------------------

    Proposed NSX Rule 11.10 requires that ETP Holders maintain a list 
of Authorized Traders (``ATs'') who may obtain access to the System on 
behalf of the ETP Holder or the ETP Holder's Sponsored Participant, and 
requires that an ETP Holder provide such list to the Exchange upon 
request.\41\ An ETP Holder must have reasonable procedures to ensure 
that its ATs (1) comply with all Exchange Rules and other procedures 
relating to the System; and (2) maintain the physical security of the 
System and the equipment used to access it.\42\ An ETP Holder must 
suspend or withdraw a person's status as an AT if the Exchange so 
directs after determining that the AT has caused the ETP Holder to fail 
to comply with the Exchange Rules.\43\
---------------------------------------------------------------------------

    \41\ See proposed NSX Rule 11.10(a).
    \42\ See proposed NSX Rule 11.10(b), (d).
    \43\ See proposed NSX Rule 11.10(c).
---------------------------------------------------------------------------

D. Types of Orders and Messages That May Be Entered Into the System

    Proposed NSX Rule 11.11 allows Users (i.e., ETP Holders and 
Sponsored Participants) to enter market orders and limit orders with 
various time-in-force terms and other modifiers. The System would not 
allow a time-in-force term longer than Day +.\44\ Unexecuted Day orders 
would expire at the closing of trading on the exchange where the 
security is listed. Unexecuted Day + orders would expire at the closing 
of trading on NSX.\45\ Other order types permitted to be entered into 
the System include Reserve Orders,\46\ Odd Lot and Mixed Lot 
Orders,\47\ Post Only Orders,\48\ and NSX Only Orders.\49\
---------------------------------------------------------------------------

    \44\ See proposed NSX Rule 11.11(a)(3), which defines a Day + 
Order type.
    \45\ See proposed NSX Rule 11.11(b)(2)-(5).
    \46\ A Reserve Order is a limit order with a portion of the 
quantity displayed (the ``displayed quantity'') and with a reserve, 
or undisplayed, portion of the quantity (``reserve quantity''). See 
proposed NSX Rule 11.11(c)(2).
    \47\ See proposed NSX Rule 11.11(c)(3)-(4). Odd Lot and Mixed 
Lot Orders are only eligible to be protected quotations if 
aggregated to form a round lot.
    \48\ A Post Only Order is a limit order that is to be posted on 
the Exchange and not routed away to another trading center. A Post 
Only Order will be rejected without execution if it is immediately 
marketable on the System when entered. See proposed NSX Rule 
11.11(c)(5).
    \49\ An NSX Only Order is an order that is to be cancelled 
(without routing away to another trading center) if it cannot be 
executed on the Exchange within the System's execution parameters. 
See proposed NSX Rule 11.11(c)(6).
---------------------------------------------------------------------------

    A Sweep Order type is provided for in proposed NSX Rule 
11.11(c)(7). A Sweep Order that is designated as a ``Protected Sweep 
Order'' would be converted into one or more limit orders to be matched 
for execution against protected quotations on the Exchange and at away 
markets to the extent the prices of such protected quotations are 
superior to the limit price of the Sweep Order.\50\ A Sweep Order that 
is designated as a ``Full Sweep Order'' would be converted into one or 
more limit orders to be matched for execution against the best 
available quotation on the Exchange and each other market (automated 
and manual) with a price superior to the limit price of the Sweep 
Order.\51\ The Exchange states that all

[[Page 38477]]

limit orders converted from Protected Sweep Orders and Full Sweep 
Orders would be deemed intermarket sweep orders under Regulation NMS 
\52\ and shall be so marked.\53\ A Sweep Order designated ``Destination 
Sweep Order'' would be routed to an away trading center specified by 
the User, after the order has been exposed to the System's electronic 
file of orders (the ``NSX Book'').\54\ The System would also accept 
incoming intermarket sweep orders from other markets and would execute 
these consistent with the requirements of Regulation NMS.\55\
---------------------------------------------------------------------------

    \50\ See proposed NSX Rule 11.11(c)(7)(i)(A). A Protected Sweep 
Order that is designated ``Sweep and Post'', meaning the unfilled 
portion of the Sweep Order following the market sweep will be posted 
on the NSX Book, will be converted into one or more limit orders and 
matched for execution against protected quotations with prices 
superior or equal to the limit price of the Protected Sweep Order. 
See proposed NSX Rules 11.11(c)(7)(ii); 11.15(b)(i).
    If a limit order that has been converted from a Protected Sweep 
Order cannot be executed against the protected quotation that it was 
routed to execute against because the protected quotation is no 
longer available (due to a race condition), the limit order will be 
available for execution against other orders in the applicable 
market that are priced the same as or better than such limit order.
    \51\ See proposed NSX Rule 11.11(c)(7)(i)(B). A Full Sweep Order 
that is designated ``Sweep and Post'', meaning the unfilled portion 
of the Sweep Order following the market sweep will be posted on the 
NSX Book, will be converted into one or more limit orders and 
matched for execution against the best available quotation on the 
Exchange and each other market (automated and manual) with a price 
superior or equal to the limit price of the Full Sweep Order. See 
proposed NSX Rules 11.11(c)(7)(ii); 11.15(b)(ii).
    If a limit order that has been converted from a Full Sweep Order 
cannot be executed against the quotation that it was routed to 
execute against because the quotation is no longer available (due to 
a race condition), the limit order will be available for execution 
against other orders in the applicable market that are priced the 
same as or better than such limit order.
    \52\ 17 CFR 242.600(b)(30).
    \53\ See proposed NSX Rule 11.11(c)(7)(iv).
    \54\ See proposed NSX Rule 11.11(c)(7)(i)(C).
    \55\ See proposed NSX Rule 11.11(c)(9).
---------------------------------------------------------------------------

    The System would allow Users to enter a ``Destination Specific 
Order'' instructing the Exchange to route the order to a specified away 
trading center, after exposing the order to the NSX Book.\56\ The 
Exchange states that it has included this order type in order to allow 
Users to access manual markets if they so choose.
---------------------------------------------------------------------------

    \56\ See proposed NSX Rule 11.11(c)(8).
---------------------------------------------------------------------------

    Proposed NSX Rule 11.11(e) allows a User to cancel or replace an 
existing order entered into the System by the User, subject to certain 
limitations.\57\ No cancellation or replacement of an order would be 
effective until the User has received written confirmation of the 
cancellation and replacement from the Exchange.\58\
---------------------------------------------------------------------------

    \57\ These limitations include the following: (1) An order may 
only be cancelled or replaced if it has a time-in-force term longer 
than immediate-or-cancel and if the order has not yet been executed; 
(2) An order routed to another trading center that the User wishes 
to cancel will be placed in a ``Cancel Pending'' state until the 
routing process is completed, and executions received while an order 
is in a ``Cancel Pending'' state will be processed normally; and (3) 
Only the price and quantity terms of an order may be changed by a 
replace message. See proposed NSX Rule 11.11(e)(i)-(iii).
    \58\ See proposed NSX Rule 11.11(e)(iv).
---------------------------------------------------------------------------

    Proposed NSX Rule 11.12 allows a User to post a cross message 
(``Cross'') on the System if the price of the trade is better than the 
best bid and offer on NSX, and (following the compliance date for Rule 
611 of Regulation NMS) if it is equal to or better than the Protected 
NBBO. Crosses must improve each side of the Top of Book by at least one 
penny a share, except in the case of a Midpoint Cross and a Clean 
Cross. A Midpoint Cross may improve the Top of Book by as little as 
one-half the minimum increment provided in NSX Rule 11.3(a), if it is 
priced at the midpoint of the Protected NBBO (or, prior to the 
compliance date for Rule 611 of Regulation NMS, if it is priced at the 
midpoint of the best bid and offer on the Exchange).\59\ A Clean Cross 
may be executed on the System at a price equal to or better than the 
Top of Book if (i) it is for at least 5,000 shares and has an aggregate 
value of at least $100,000, (ii) neither side of the Cross is for the 
account of the User, (iii) the size of the Cross is greater than the 
size of the total interest on NSX at the Cross price, and (iv) 
following the compliance date for Rule 611 of Regulation NMS, it is at 
a price equal to or better than the Protected NBBO.\60\ The Exchange 
states that the requirements of the Midpoint Cross and the Clean Cross 
are substantively similar to rules of other national securities 
exchanges.\61\
---------------------------------------------------------------------------

    \59\ See proposed NSX Rule 11.12(c).
    \60\ See proposed NSX Rule 11.12(d). Pursuant to proposed NSX 
Rule 11.3(b), Clean Crosses may not be executed in increments 
smaller than those permitted by NSX Rule 11.3(a).
    \61\ See, e.g., PCX Equities, Inc. Rule 7.6(a), Commentary .05, 
and Rule 7.31(y) (relating to Midpoint Cross); Boston Stock Exchange 
Rules Chapter II, Section 18 (relating to Clean Cross).
---------------------------------------------------------------------------

    NSX Rule 11.12(e) requires that all Users entering a proprietary 
Cross comply with the Exchange's Customer Priority Rule (i.e., the 
price of the Cross must be better than any customer order the User is 
holding by at least $0.01). A User may also post a ``Cross/Sweep'' 
message that enters a Sweep Order for the account of the User sweeping 
all protected quotations that are superior to the Cross price, and 
simultaneously executes the Cross. In connection with any Cross/Sweep, 
the User must fully disclose the material facts relating to the Sweep 
Order to any customer for whose account either side of the Cross is 
being executed.\62\
---------------------------------------------------------------------------

    \62\ See proposed NSX Rule 11.12(f).
---------------------------------------------------------------------------

    Proposed NSX Rule 11.13(a) provides that proprietary and agency 
orders shall be subject to the same ranking and execution processes. 
Users must identify all orders as either proprietary or agency, and for 
all agency orders, must include an identifier that enables the User to 
identity the User's customer on whose behalf the order is being 
entered.\63\
---------------------------------------------------------------------------

    \63\ See proposed NSX Rule 11.13(a).
---------------------------------------------------------------------------

    Proposed NSX Rule 11.13(b) contains the Exchange's proposed order 
delivery rule. The Exchange states that this rule is substantively 
identical to the Exchange's current order delivery rule,\64\ except 
that it requires that Users selecting order delivery demonstrate their 
ability to automatically process the inbound order and respond 
appropriately within \1/2\ a second. If no response to an inbound order 
is received within \1/2\ a second from a User selecting order delivery, 
the User's displayed order would be cancelled.\65\ The Exchange is 
proposing to change the required response time from 1 second to \1/2\ a 
second in order to provide the Exchange with a ``buffer'' to ensure 
that the Exchange meets the definition of an ``automated trading 
center'' under Regulation NMS.\66\ Based on current processing speeds 
in the securities industry, the Exchange believes that its Users should 
have no problem complying with this required response time.
---------------------------------------------------------------------------

    \64\ See current NSX Rule 11.9(i).
    \65\ See proposed NSX Rule 11.13(b).
    \66\ 17 CFR 242.600(b)(4).
---------------------------------------------------------------------------

E. Order Priority and Execution

    Proposed NSX Rules 11.14 and 11.15 set forth the priority and 
execution parameters of the System. The Exchange states that orders are 
prioritized on a strict price-time basis, first by price and then by 
time.\67\ Only the displayed portion of a Reserve Order has time 
priority.\68\
---------------------------------------------------------------------------

    \67\ See proposed NSX Rule 11.14(a).
    \68\ See proposed NSX Rule 11.14(a)(4).
---------------------------------------------------------------------------

    Incoming orders (other than Sweep Orders) are first matched for 
execution against orders in the NSX Book.\69\ Proposed NSX Rule 11.15 
reflects the trade-through rule of Regulation NMS \70\ by requiring 
that, for any execution on NSX to occur during Regular Trading Hours 
(i.e., between 8:30 a.m. and 3:00 p.m. Central Time), the price must be 
equal to or better than the Protected NBBO unless the order is marked 
as an intermarket sweep order or unless another exception to the trade-
through rule of Regulation NMS is available. Orders that cannot be 
executed within these parameters are eligible for routing to away 
trading centers for execution at the Protected NBBO.
---------------------------------------------------------------------------

    \69\ See proposed NSX Rule 11.15(a)(i).
    \70\ 17 CFR 242.611.
---------------------------------------------------------------------------

    Unless the terms of the order direct otherwise, any order other 
than a Sweep Order that cannot be executed on the Exchange would be 
converted into one or more limit orders, as necessary, to match the 
price of each protected quotation at the Protected NBBO available at 
away markets, and these limit orders would be routed to the applicable 
market for execution against the applicable protected quotation at the 
Protected NBBO.\71\
---------------------------------------------------------------------------

    \71\ See proposed NSX Rule 11.15(a)(ii).
---------------------------------------------------------------------------

    Unless the terms of the order direct otherwise, any order not 
executed in

[[Page 38478]]

full on the Exchange which by its terms is not eligible for routing 
away, or which is not executed in full when routed away, would be 
ranked in the NSX Book in accordance with order priority rules of 
proposed NSX Rule 11.14.\72\
---------------------------------------------------------------------------

    \72\ See proposed NSX Rule 11.15(a)(iii).
---------------------------------------------------------------------------

    Sweep Orders would be matched for execution in the NSX Book to the 
extent possible at the Protected NBBO, and simultaneously converted 
into one or more limit orders and routed to away markets to be matched 
for execution against quotations in accordance with the terms of the 
Sweep Order (as described in Section D above).\73\
---------------------------------------------------------------------------

    \73\ See proposed NSX Rule 11.15(b).
---------------------------------------------------------------------------

    Proposed NSX Rule 11.15(d) states that the System would be operated 
as a ``automated market center'' within the meaning of Regulation NMS, 
and would display automated quotations at all times except in the event 
that a systems malfunction renders the System incapable of displaying 
automated quotations. The Exchange states that it would communicate to 
its ETP Holders its procedures relating to any change from automated to 
manual quotations in the event of such a systems malfunction.

F. Other Trading-Related Rules

    Proposed NSX Rules 11.16 through 11.22 relate to other trading-
related matters such as clearance and settlement, clearly erroneous 
executions, trading halts, short sales, and locked and crossed markets. 
Purposed NSX Rule 11.16 describes the Exchange's trade reporting 
processes. Pursuant to proposed NSX Rule 11.16, the Exchange would 
report all executions occurring on the System to an appropriate 
consolidated transaction reporting system to the extent required by 
law, and would promptly notify Users of all executions of their orders 
as soon as executions take place.
    Proposed NSX Rule 11.17 covers clearance and settlement. Proposed 
NSX Rule 11.17(a) requires that each ETP Holder either be a member of a 
Qualified Clearing Agency or clear transactions executed on the 
Exchange through another ETP Holder that (i) is a member of a Qualified 
Clearing Agency and (ii) agrees to be responsible for such clearance 
and settlement. The Exchange states that trading on the System would be 
on an anonymous basis.
    The Exchange states that proposed NSX Rule 11.18 is based on NSX's 
current limitation of liability rule set forth in NSX Rule 11.9(t), but 
has been expanded in three ways. First, proposed NSX Rule 11.18 
describes with greater specificity the categories of actions for which 
the Exchange would not be liable. Second, proposed NSX Rule 11.8(B) 
contains an agreement by each ETP Holder to release and discharge the 
Exchange and its related persons from all claims and damages arising 
from the ETP Holder's use of the facilities of the Exchange (including 
the System). Third, proposed NSX Rule 11.8(C) contains a disclaimer by 
the Exchange of any and all express or implied warranties relating to 
the System.
    Proposed NSX Rule 11.19 provides for a review process for 
determining clearly erroneous executions. The process generally 
involves a review by an Exchange officer upon request of an ETP Holder 
(which must submitted within 15 minutes of the trade in question), with 
an appeal to a Clearly Erroneous Execution Panel available for parties 
affected by the officer's determination.\74\
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    \74\ See proposed NSX Rule 11.19(c). In addition to the process 
provided for in proposed NSX Rule 11.19, the Exchange has adopted 
internal guidelines concerning clearly erroneous executions. The 
Exchange states that its staff uses these guidelines to help 
determine what constitutes a clearly erroneous execution.
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    Proposed NSX Rule 11.20 incorporates the New York Stock Exchange's 
``circuit breaker'' tests based upon reductions to the Dow Jones 
Industrial Average. Proposed NSX Rule 11.21, relating to short sales, 
requires that all short sale orders entered into the System be 
identified either as ``short sale'' or ``short sale exempt''. It also 
provides that any marketable order entered in the System which, if 
matched for execution, would violate the short sale provisions under 
the Act and, therefore, would be cancelled.
    Proposed NSX Rule 11.22 relates to locking or crossing quotations 
and is substantively identical to the proposed rule language that was 
provided to NSX and other national securities exchanges by the 
Commission.
    Proposed NSX Rule 11.23 relates to riskless principal transactions. 
A ``riskless principal transaction'' is defined as ``two offsetting 
principal transaction legs in which an ETP Holder, (i) after having 
received an order to buy a security that it holds for execution on the 
Exchange, purchases the security as principal at the same price, 
exclusive of markups, markdowns, commissions and other fees, to satisfy 
all or a portion of the order to buy or (ii) after having received an 
order to sell a security that it holds for execution on the Exchange, 
sells the security as principal at the same price, exclusive of 
markups, markdowns, commissions and other fees, to satisfy all or a 
portion of the order to sell.''\75\ The Exchange states that only the 
initial offsetting transaction leg of an appropriately designated 
riskless principal transaction would be submitted by the Exchange to 
the appropriate consolidated tape.\76\ An ETP Holder must have written 
policies and procedures to assure compliance with this proposed Rule, 
which must require (at a minimum) that the customer order be received 
prior to the offsetting transactions, and that the second offsetting 
transaction leg be executed within 60 seconds of the initial offsetting 
transaction leg.\77\ The Exchange's customer priority rules applicable 
to proprietary trading would not apply to a riskless principal 
transaction meeting the standards of NSX Rule 11.23 that is executed by 
an ETP Holder to facilitate the execution of a customer order.\78\
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    \75\ Proposed NSX Rule 11.23(a).
    \76\ See proposed NSX Rule 11.23(b).
    \77\ See proposed NSX Rule 11.23(c). ETP Holders must also have 
supervisory systems that produce records enabling the ETP Holder and 
the Exchange to accurately and readily reconstruct, in a time-
sequenced manner, all orders related to each riskless principal 
transaction. See proposed NSX Rule 11.23(c).
    \78\ See proposed NSX Rule 12.6(d).
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Other Proposed Rule Changes

A. Chapter I--Adoption, Interpretation, and Application of Rules; 
Definitions

    Chapter I is proposed to be revised to incorporate certain new 
definitions and other provisions relating to the proposed trading rule 
changes described above. Specifically, proposed NSX Rule 1.4 provides 
for different effective times of certain of the new trading rules 
described above. Proposed NSX Rule 1.4 provides that the Exchange's 
proposed rule relating to Sweep Orders (proposed NSX Rule 
11.11(c)(7)(iv)) shall not become effective until the compliance date 
for Rule 611 of Regulation NMS, and provides that the proposed Trading 
Rules relating to the trade-through rule and locked and crossed markets 
(i.e., proposed NSX Rules 11.15 and 11.22) shall only apply to 
quotations for securities subject to the Intermarket Trading System 
Plan until the compliance date for those sections of Regulation NMS 
relating to trade-throughs and locked and crossed markets, 
respectively.
    NSX Rule 1.5 is proposed to be revised to include a number of 
additional definitions used in the proposed changes to Chapter XI.

[[Page 38479]]

B. Chapter II--Equity Trading Permits and ETP Holders

    In Chapter II, relating to ETPs and ETP Holders, Interpretation .03 
under NSX Rule 2.4 is proposed to be deleted, because it is being 
substantively replaced by proposed NSX Rule 11.9 providing for 
Sponsored Participants.

C. Chapter XV--Listed Securities and Other Exchange Products

    Chapter XV is proposed to be revised to move provisions relating to 
specifications for certain products (e.g. index funds) from NSX Rules 
11.9(v)-(x) to Chapter XV.\79\ The Exchange states that certain 
terminology and cross-reference changes have been made to these 
provisions, but no substantive changes have been made.
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    \79\ See proposed NSX Rules 15.10-15.12.
---------------------------------------------------------------------------

D. Other Technical Changes To Rules

    The Exchange states that other technical changes are proposed to be 
made to certain provisions of the NSX Rules in order to be consistent 
with the proposed changes described above. These changes include the 
following:
    1. A change to Interpretation .01 of NSX Rule 3.6, requiring that 
all ETP Holders who handle customer orders on the Exchange establish 
and enforce fixed standards for queuing and executing customer orders. 
This interpretation formerly only applied to Designated Dealers on the 
Exchange. As the position of Designated Dealer is proposed to be 
removed in connection with the proposed new market structure, this 
interpretation is proposed to be revised to apply to all ETP Holders.
    2. NSX Rule 5.5 (relating to ``Chinese Wall'' procedures) is 
proposed to be revised to apply to any ETP Holder that trades for its 
own account in a security or has a specialist operation in a 
security.\80\
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    \80\ The Rule currently only applies to Designated Dealers.
---------------------------------------------------------------------------

    3. The interpretations under NSX Rule 12.6, the Exchange's Customer 
Priority Rule, are proposed to be revised to apply to all ETP Holders 
that conduct both proprietary and agency trading, rather than only 
Designated Dealers.
    4. NSX Rule 14.9, relating to Intermarket Trading System ``trade-
throughs'' and locked and crossed markets, is proposed to be deleted 
simultaneously with the compliance date for those provisions of 
Regulation NMS relating to trade-throughs and locked and crossed 
markets. The Exchange believes this change is appropriate because 
proposed NSX Rules 11.15 and 11.22 provide restrictions on trade-
throughs and locked and crossed markets that are consistent with 
Regulation NMS and the Commission's guidance on these issues. The 
Exchange is not proposing any additional changes to Chapter XIV 
relating to the Intermarket Trading System (``ITS'') Plan at this time, 
because it understands that the ITS Plan will be phased out of 
existence and replaced with new linkages in the near future in 
connection with the implementation of Regulation NMS.
NSX Securities, LLC
    In connection with the proposed changes to the trading rules 
described above, the Exchange requests that the Commission approve NSX 
Securities, LLC (``NSX Securities'') to be a facility (as defined in 
Section 3(a)(2) of the Act) of the Exchange.
    The Exchange states that NSX Securities, a wholly-owned subsidiary 
of the Exchange, is registering as a broker-dealer, has applied for 
membership in the National Association of Securities Dealers, Inc. 
(``NASD''), and is applying to become an ETP Holder. The Exchange 
states that NSX Securities plans to provide an optional routing service 
for the Exchange, in which NSX Securities would route orders to other 
securities exchanges, facilities of securities exchanges, automated 
trading systems, electronic communications networks or other brokers or 
dealers (collectively, ``Trading Centers'') from the Exchange (such 
function of NSX Securities is referred to as the ``Outbound 
Router'').\81\
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    \81\ The optional routing of orders to away markets by the 
System is described above.
---------------------------------------------------------------------------

    NSX states that, as an Outbound Router, NSX Securities would 
receive instructions from the Exchange, route orders to other Trading 
Centers in accordance with those instructions and be responsible for 
reporting resulting executions back to the Exchange. In addition, all 
orders routed through NSX Securities would be subject to the terms and 
conditions of the Exchange Rules.
    NSX states that it would regulate the Outbound Router function of 
NSX Securities as a facility (as defined in Section 3(a)(2) of the Act) 
subject to Section 6 of the Act. As such, the Exchange states that the 
Outbound Router function of NSX Securities would be subject to the 
Commission's continuing oversight. In particular, and without 
limitation, under the Act, NSX states that it is responsible for filing 
with the Commission rule changes and fees relating to the NSX 
Securities Outbound Router function, and NSX Securities would be 
subject to exchange non-discrimination requirements.\82\
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    \82\ See, e.g., Section 6(b)(5) of the Act, 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    Pursuant to Rule 17d-1 under the Act, where a member of the 
Securities Investor Protection Corporation is a member of more than one 
self-regulatory organization (``SRO''), the Commission shall designate 
to one of such organizations the responsibility for examining such 
member for compliance with the applicable financial responsibility 
rules.\83\ The SRO designated by the Commission is referred to as a 
``Designated Examining Authority.'' As noted above, NSX Securities is 
applying to become an ETP Holder of the Exchange, and has applied for 
membership in the NASD. The NASD is an SRO not affiliated with NSX or 
any of its affiliates. NSX understands that, once NSX Securities is 
approved as a member of the NASD, the NASD would become the Designated 
Examining Authority for NSX Securities pursuant to Rule 17d-1 of the 
Act with the responsibility for examining NSX Securities for compliance 
with the applicable financial responsibility rules.
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    \83\ 17 CFR 240.17d-1. Pursuant to Rule 17d-1 under the Act, in 
making such designation the Commission shall take into consideration 
the regulatory capabilities and procedures of the SROs, availability 
of staff, convenience of location, unnecessary regulatory 
duplication, and such other factors as the Commission may consider 
germane to the protection of investors, the cooperation and 
coordination among self-regulatory organizations, and the 
development of a national market system for the clearance and 
settlement of securities transactions.
---------------------------------------------------------------------------

    ETP Holders' use of NSX Securities to route orders to another 
Trading Center would be optional, as described above. Those ETP Holders 
who choose to use the Outbound Routing service of NSX Securities must 
sign an NSX Securities Routing Agreement (which is incorporated into 
the Exchange's User Agreement). Among other things, the NSX Securities 
Routing Agreement provides that all orders routed through NSX 
Securities are subject to the terms and conditions of the Exchange 
Rules.
    The Exchange recognizes that after its demutualization becomes 
effective,\84\ its ownership of NSX Securities `` by virtue of NSX 
Securities being an ETP Holder `` would be in violation of proposed 
limitations \85\ to be set forth in the Exchange Rules, unless the 
Exchange's

[[Page 38480]]

ownership of NSX Securities is approved by the Commission.
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    \84\ See Securities Exchange Act Release Nos. 53721 (April 25, 
2006), 71 FR 26155 (May 3, 2006) (notice of filing of File No. SR-
NSX-2006-03) (``Demutualization Rule Filing''); and 53963 (June 8, 
2006), 71 FR 34660 (June 15, 2006) (order approving File No. SR-NSX-
2006-03).
    \85\ See proposed NSX Rule 2.10 on page 146 of the 
Demutualization Rule Filing.
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    The Exchange further recognizes that the ownership of NSX 
Securities by the Exchange may pose a conflict of interest between the 
regulatory responsibilities of the Exchange and the broker or dealer 
activities of NSX Securities. This is because the financial interests 
of the Exchange may conflict with the responsibilities of the Exchange 
as an SRO regarding NSX Securities.
    The Exchange believes, however, that such conflict may be mitigated 
with the following proposed undertakings of the Exchange and NSX 
Securities.

A. Proposed Undertakings

    Each of the Exchange and NSX Securities undertakes as follows:
    1. The Exchange will regulate the Outbound Router function of NSX 
Securities as a facility (as defined in Section 3(a)(2) of the Act), 
subject to Section 6 of the Act. In particular, and without limitation, 
under the Act, the Exchange will be responsible for filing with the 
Commission rule changes and fees relating to the NSX Securities 
Outbound Router function and NSX Securities will be subject to exchange 
non-discrimination requirements.
    2. NASD, an SRO unaffiliated with the Exchange or any of its 
affiliates, will carry out oversight and enforcement responsibilities 
as the Designated Examining Authority designated by the Commission 
pursuant to Rule 17d-1 of the Act with the responsibility for examining 
NSX Securities for compliance with the applicable financial 
responsibility rules.
    3. An ETP Holder's use of NSX Securities to route orders to another 
Trading Center will be optional. Any ETP Holder that does not want to 
use NSX Securities may use other routers to route orders to other 
Trading Centers.\86\
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    \86\ An ETP Holder may choose to enter a Post Only Order or an 
NSX Only Order into the System. The terms of each such order provide 
that, if the order is not executable on the System, the order will 
be cancelled and returned to the ETP Holder, at which time the ETP 
Holder could choose to route the order to another market. See 
proposed NSX Rule 11.11(c)(5)-(6).
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    4. NSX Securities will not engage in any business other than (1) 
its Outbound Router function and (2) any other activities it may engage 
in as approved by the Commission.\87\
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    \87\ NSX Securities' outbound routing function includes the 
clearing functions that it may perform for trades with respect to 
orders routed to other trading centers.
---------------------------------------------------------------------------

    NSX is reflecting these undertakings in proposed NSX Rule 2.11.

B. Request for Approval

    In sum, the Exchange believes that the proposed undertakings of the 
Exchange and NSX Securities set forth above would address the potential 
conflict of interest with the regulatory responsibilities of the 
Exchange and the ownership and operation of NSX Securities by the 
Exchange. Consequently, subject to the proposed undertakings set forth 
above, the Exchange requests that the Commission approve NSX Securities 
to be a facility (as defined in Section 3(a)(2) of the Act)\88\ of the 
Exchange.
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    \88\ 15 U.S.C. 78c(a)(2).
---------------------------------------------------------------------------

2. Statutory Basis
    The Exchange believes the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act \89\ in general, and furthers 
the objectives of Section 6(b)(5) \90\ 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 and, generally, in that it protects 
investors and the public interest.
---------------------------------------------------------------------------

    \89\ 15 U.S.C. 78f(b).
    \90\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change, as 
amended, will impose any inappropriate burden on competition.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change, as amended.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    (a) by order approve such proposed rule change, as amended; or
    (b) institute proceedings to determine whether the proposed rule 
change, as amended, should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

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

File Number SR-NSX-2006-08 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-NSX-2006-08. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml
). Copies of the submission, all subsequent amendments, all 

written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of the NSX. 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-NSX-2006-08 and should be submitted on or before July 
27, 2006.

For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\91\
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    \91\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. 06-5961 Filed 7-5-06; 8:45 am]

BILLING CODE 8010-01-P