Document ID: SEC-2006-0079-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-01-23T05:00Z

[Federal Register: January 23, 2006 (Volume 71, Number 14)]
[Notices]               
[Page 3584-3586]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr23ja06-106]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53132; File No. SR-NASD-2005-144]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing of Proposed Rule Change Relating to 
Order Entry and Execution Practices

January 17, 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 December 8, 2005, the National Association of Securities Dealers, 
Inc. (``NASD'') 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 NASD. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240. 19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to add Rule 3380 to prohibit members and 
associated persons from splitting any order into multiple smaller 
orders for execution or any execution into multiple smaller executions 
for transaction reporting for the primary purpose of maximizing a 
monetary or in-kind payment to the member or associated persons as a 
result of the execution of such orders or the transaction reporting of 
such executions. The text of the proposed rule change appears below. 
Additions are in italics.
* * * * *

3380. Order Entry and Execution Practices

    No member or associated person may engage in conduct that has the 
intent or effect of splitting any order into multiple smaller orders 
for execution or any execution into multiple smaller

[[Page 3585]]

executions for transaction reporting for the primary purpose of 
maximizing a monetary or in-kind amount to be received by the member or 
associated person as a result of the execution of such orders or the 
transaction reporting of such executions. For purposes of this rule, 
``monetary or in-kind amount'' shall be defined to include, but not be 
limited to, any credits, commissions, gratuities, payments for or 
rebates of fees, or any other payments of value to the member or 
associated person.
* * * * *

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

    In its filing with the Commission, NASD included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. NASD 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 the 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    ``Trade shredding'' is a term used to describe the practice of 
splitting customer orders for securities into multiple smaller orders 
(e.g., a 1,000 share order is split into 10 100 share orders) for the 
primary purpose of maximizing payments or rebates to the member. Among 
other things, concerns have been raised about market participants 
increasingly engaging in the practice of trade shredding as a means to 
increase their share of market data revenues under the joint industry 
plans (``Plans''),\3\ where the Plan participant has adopted a practice 
of sharing its Plan revenues with market participants who send it 
orders. Specifically, because the current allocation formulas for 
distributing Plan income heavily emphasize the number of trades, no 
matter how small the size of the trade, an incentive can exist for 
market participants to engage in distortive behavior, such as trade 
shredding, as a means to increase their share of market data revenues.
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    \3\ The three joint-industry plans are (1) the CTA Plan, which 
is operated by the Consolidated Tape Association and disseminates 
transaction information for exchange-listed securities, (2) the CQ 
Plan, which disseminates consolidated quotation information for 
exchange-listed securities, and (3) the Nasdaq UTP Plan, which 
disseminates consolidated transaction and quotation information for 
Nasdaq-listed securities.
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    To address these concerns, among others, the Commission adopted 
Regulation NMS, which contains amendments to the current Plan formulas 
used to allocate Plan income.\4\ These modifications incorporate a more 
broad-based measure of a self-regulatory organization's (``SRO'') 
contribution to the consolidated trade stream, including both an SRO's 
quotes and trades, intended to reduce the incentives for trade 
shredding.
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    \4\ See Securities Exchange Act Release No. 51808 (June 9, 
2005), 70 FR 37496 (June 29, 2005).
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    Although these modifications in Plan formulas should reduce the 
incentives for trade shredding, the Commission continues to believe 
that SRO rules prohibiting trade shredding are necessary and 
appropriate and has requested that all SROs implement rule changes to 
inhibit the practice of trade shredding. In response to the 
Commission's request, NASD is proposing to adopt new Rule 3380, which 
would prohibit such practices. Specifically, new Rule 3380 would 
prohibit members and associated persons from splitting any order into 
multiple smaller orders for execution or any execution into multiple 
smaller executions for transaction reporting for the primary purpose of 
maximizing a monetary or in-kind payment to the member or associated 
persons as a result of the execution of such orders or the transaction 
reporting of such executions. For purposes of the proposed new rule, 
``monetary or in-kind amount'' shall be defined to include, but not be 
limited to credits, commissions, gratuities, payments for or rebates of 
fees, or any other payments of value to the member or associated 
person.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with 
Section 15A(b)(6) of the Act,\5\ which requires, among other things, 
that NASD rules must be designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
and, in general, to protect investors and the public interest. NASD 
believes that the proposed rule change will further the goal of 
preventing manipulative acts and practices by prohibiting this 
potentially distortive practice.
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    \5\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD believes that the proposed rule change will impose no burden 
on competition that is not necessary or appropriate in furtherance of 
the purposes of the Act.

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

    NASD has neither solicited nor received comments on this proposal.

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

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

File Number SR-NASD-2005-144 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-NASD-2005-144. 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

[[Page 3586]]

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 offices of NASD. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NASD-2005-144 and should be 
submitted on or before February 13, 2006.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-663 Filed 1-20-06; 8:45 am]

BILLING CODE 8010-01-P