[Federal Register: December 24, 2002 (Volume 67, Number 247)]
[Notices]
[Page 78532-78534]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24de02-139]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47011; File No. SR-NASD-2002-179]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change by the National Association of
Securities Dealers, Inc. to Modify the Reserve Size Refresh Functional
in Nasdaq's SuperMontage System
December 16, 2002.
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 16, 2002, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') through its subsidiary, The Nasdaq
Stock Market, Inc. (``Nasdaq''), submitted to the Securities and
Exchange Commission (``Commission'') the proposed rule change as
described in Items I, and II below, which Items have been prepared by
Nasdaq. Nasdaq filed the proposal pursuant to section 19(b)(3) of the
Act,\3\ and rule 19b-4(f)(6) thereunder,\4\ which renders the proposal
effective upon filing with the Commission. 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.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Nasdaq proposes to modify the way shares are refreshed from reserve
size into displayed Quotes/Orders in Nasdaq's SuperMontage system. New
text is italicized.
* * * * *
4710. Participant Obligations in NNMS
(a) No Change.
(b) Non Directed Orders.
(1) No Change.
(2) Refresh Functionality.
(A) Reserve Size Refresh--Once a Nasdaq Quoting Market
Participant's Displayed Quote/Order size on either side of the market
in the security has been decremented to an amount less than one normal
unit of trading due to NNMS processing Nasdaq will refresh the
displayed size out of Reserve Size to a size-level designated by the
Nasdaq Quoting Market Participant, or in the absence of such size-level
designation, to the automatic refresh size. The amount of shares taken
out of reserve to
[[Page 78533]]
refresh display size shall be added to any shares remaining in the
Displayed Quote/Order and shall be of an amount that when combined with
the number of shares remaining in the Nasdaq Quoting Market
Participant's Displayed Quote/Order before it is refreshed will equal
the displayed size-level designated by the Nasdaq Quoting Market
Participant or, in the absence of such size-level designation, to the
automatic refresh size. If there are insufficient shares available to
produce a Displayable Quote/Order, the Nasdaq Quoting Market
Participant's Quote/Order, and any odd-lot remainders, will be
refreshed, updated, or retained, in conformity with NNMS Rules 4707 and
4710 as appropriate. To utilize the Reserve Size functionality, a
minimum of 100 shares must initially be displayed in the Nasdaq Quoting
Market Participant's Displayed Quote/Order, and the Displayed Quote/
Order must be refreshed to at least 100 shares. This functionality will
not be available for use by UTP Exchanges.
(B) No Change.
(3) Through (8) No Change.
(c) Through (e) No Change.
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Nasdaq included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. Nasdaq has prepared summaries, set forth in sections A,
B, and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Currently, SuperMontage allows Nasdaq Quoting Market Participants
\5\ to use reserve size and select a round-lot refresh amount that the
market participant wishes its quote/order to be refreshed to once its
displayed size is reduced to less than a round-lot. Thus, once a quote
or an order is decremented by executions to less than 100 shares, the
system will refresh that quote/order from reserve size by the round-lot
amount designated by the market participant and combine it with any
odd-lot share amount still remaining. For example, market maker A
(``MMA'') is displaying a 1000 share bid quote/order. MMA has 5000
shares in reserve and has selected a 400-share refresh size. Under
current processing, Nasdaq states that if SuperMontage executed 925
shares against MMA's quote/order, the system would automatically take
400 shares from the 5000 in reserve and add it to the 75 shares
remaining in MMA's quote/order for a total of 475 shares.\6\
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\5\ Nasdaq Quoting Market Participants consist of Nasdaq
National Market System (``NNMS'') Market Makers and NNMS Electronic
Communication Systems (``ECNs'').
\6\ While these 475 shares would be treated as displayed trading
interest for purposes of SuperMontage's execution algorithms,
SuperMontage, which only displays round-lots, would show 400 shares
next to MMA's firm identifier in the montage.
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Recently, Nasdaq states that some SuperMontage participants have
raised concerns about the impact the above processing can have on their
ability to manage quotes/orders so as to trade as often as possible in
round-lot amounts. Because the combination of the odd-lot remainder
trigger and the round-lot refresh amount almost always results in a new
mixed-lot quote/order, these market participants generally can only
return to displaying and having their quote represent an actual round-
lot amount by either: (a) Having their mixed-lot quote/order interact
with an odd or mixed-lot quote/order containing an odd-lot portion
equal to that of their new displayed quote/order (e.g., a 475 share
quote/order interacting with 375 or 75 share quote/order) or, (b)
immediately canceling the mixed-lot quote/order and replacing it with a
new round-lot thereby losing time priority for any previous odd-lot
remainder.
In response to these concerns, Nasdaq proposes to modify
SuperMontage's reserve size refresh function. Under the proposal, once
a displayed quote/order has been reduced by executions to less than 100
shares, the system will automatically refresh that market participant's
quote/order to the round-lot amount selected by the firm as its reserve
size refresh amount. Using the previous example, once MMA's displayed
size was reduced to 75 shares by the 925 share execution, SuperMontage
would refresh MMA's quote/order by automatically adding 325 shares to
create a 400 share round-lot--an amount exactly equal to MMA's selected
reserve refresh amount.\7\ If the amount of shares in reserve for a
particular quote/order is insufficient to produce a displayable quote,
the system will nonetheless combine and retain the reserve size and
odd-lot remainders at the price level for potential execution in the
system. If the amount of shares in reserve for a particular Nasdaq
Quoting Market Participant's quote/order is insufficient to produce a
displayable quote, the quote (including any reserve size share amounts)
would be refreshed or updated pursuant to current SuperMontage
programming and rules.\8\
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\7\ While displayed as a single round-lot quote, SuperMontage
will continue to maintain separate time-stamps for the odd-lot
remainders of the quote/order and the additional share amounts from
reserve that together comprise the new updated round-lot displayed
quote/order.
\8\ See Securities Exchange Act Release No. 46141 (June 28,
2002), 67 FR 44906 (July 5, 2002); 46369 (August 16, 2002), 67 FR
54515 (August 22, 2002) (Approving File No. SR-NASD-2002-42).
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Nasdaq believes that this approach will provide market participants
with greater flexibility in managing their quotes/orders while
continuing to ensure that small odd-lot and mixed-lot orders will be
able to execute.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of section 15A of the Act,\9\ in general and with
section 15A(b)(6) of the Act,\10\ in particular, in that it is designed
to prevent fraudulent and manipulative acts and practices, to promote
just and equitable principles of trade, remove impediments to a free
and open market and a national market system, and, in general, to
protect investors and the public interest.
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\9\ 15 U.S.C. 78o-3.
\10\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
Nasdaq does not believe that the proposed rule change will result
in any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective pursuant to section
19(b)(3)(A) of the Act \11\ and subparagraph (f)(6) of rule 19b-4 \12\
thereunder because it does not: (i) Significantly affect the protection
of investors or the public interest; (ii) impose any significant burden
on competition; (iii) become operative for 30 days from the date on
[[Page 78534]]
which it was filed, or such shorter time as the Commission may
designate. At any time within 60 days of the filing of the proposed
rule change, the Commission may summarily abrogate such rule change if
it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act.
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\11\ 15 U.S.C. 78s(b)(3)(A).
\12\ 17 CFR 240.19b-4(f)(6).
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Nasdaq has requested that the Commission waive the 30-day operative
delay. Under Rule 19-4(f)(6) of the Act, a proposed rule change does
not become operative for 30 days after the date of filing, unless the
Commission designates a shorter time. The Commission believes that
waiving the 30-day operative delay is consistent with the protection of
investors and the public interest. Acceleration of the operative date
will allow Nasdaq to respond quickly to the concerns of SuperMontage
users and allow users to display actual round-lots as their quotes. For
this reason, the Commission waives the 30-day operative delay and
designates the proposal to be immediately effective and operative upon
filing with the Commission.\13\
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\13\ For purposes only of accelerating the operative date of
this proposal, the Commission has considered the proposed rule's
impact on efficiency, competition, and capital formation. 15
U.S.C.78c(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549-0609.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of the filing will also be
available for inspection and copying at the principal office of the
Association. All submissions should refer to File No. SR-NASD-2002-179
and should be submitted by January 14, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-32312 Filed 12-23-02; 8:45 am]
BILLING CODE 8010-01-P