[Federal Register: October 28, 2003 (Volume 68, Number 208)]
[Notices]
[Page 61528-61531]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr28oc03-105]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-48675; File No. SR-NASD-2003-143]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1 and 2 Thereto by the National Association
of Securities Dealers, Inc. To Establish a New ``Auto-Ex'' Order in
Nasdaq's SuperMontage System
October 21, 2003.
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 September 24, 2003, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association'') through its subsidiary, the Nasdaq
Stock Market, Inc. (``Nasdaq''), 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 Nasdaq.
Nasdaq filed Amendment No. 1 to the proposed rule change on October 3,
2003.\3\ Nasdaq filed Amendment No. 2 to the proposed rule change on
October 21, 2003.\4\ 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\ See letter from Mary M. Dunbar, Vice President and Deputy
General Counsel, Nasdaq, to Katherine A. England, Assistant
Director, Division of Market Regulation (``Division''), Commission,
dated October 2, 2003 (``Amendment No. 1''). In Amendment No. 1,
Nasdaq amended the proposal to designate the proposed rule change as
filed under section 19(b)(2) rather than section 19(b)(3)(A) of the
Act and replaced the original filing in its entirety.
\4\ See letter from John M. Yetter, Associate General Counsel,
Nasdaq, to Katherine A. England, Assistant Director, Division,
Commission, dated October 21, 2003 (``Amendment No. 2''). In
Amendment No. 2, Nasdaq amended the proposed rule text and clarified
certain aspects of the proposed rule change which included, in part,
stating that all Nasdaq market participants would be permitted to
enter Auto-Ex orders and that Auto-Ex orders would access liquidity
available at multiple price levels, but under no circumstances would
the order ``trade through'' the Quote/Order of an Order-Delivery ECN
(or an auto-ex participant that charged an access fee).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Nasdaq proposes to establish a new ``Auto-Ex'' order in Nasdaq's
National Market Execution System (``NNMS'' or ``SuperMontage''). Nasdaq
intends to implement the proposed rule change as soon as possible
following Commission approval and will inform market participants of
the exact implementation date via a Head Trader alert on http://www.nasdaqtrader.com.
The text of the proposed rule change appears
below. New text is in italics; deletions are in brackets.
* * * * *
4700. NASDAQ NATIONAL MARKET EXECUTION SYSTEM (NNMS)
4701. Definitions
Unless stated otherwise, the terms described below shall have the
following meaning:
(a)-(jj) No change.
(kk) The term ``Auto-Ex'' shall mean, for orders so designated, an
order that will execute solely against the Quotes/Orders of NNMS
Participants that participate in the automatic execution functionality
of the NNMS and that do not charge a separate quote-access fee to NNMS
Participants accessing their Quotes/Orders through the NNMS.
* * * * *
4706. Order Entry Parameters
(a) Non-Directed Orders--
(1) General. The following requirements shall apply to Non-Directed
Orders Entered by NNMS Market Participants:
(A) An NNMS Participant may enter into the NNMS a Non-Directed
Order in order to access the best bid/best offer as displayed in
Nasdaq.
[[Page 61529]]
(B) A Non-Directed Order must be a market or limit order, must
indicate whether it is a buy, short sale, short-sale exempt, or long
sale, and may be designated as ``Immediate or Cancel'', or as a ``Day''
or a ``Good-till-Cancelled'' order. If a priced order designated as
``Immediate or Cancel'' (``IOC'') is not immediately executable, the
unexecuted order (or portion thereof) shall be returned to the sender.
If a priced order designated as a ``Day'' order is not immediately
executable, the unexecuted order (or portion thereof) shall be retained
by NNMS and remain available for potential display/execution until it
is cancelled by the entering party, or until 4 p.m. Eastern Time on the
day such order was submitted, whichever comes first, whereupon it will
be returned to the sender. If the order is designated as ``Good-till-
Cancelled'' (``GTC''), the order (or unexecuted portion thereof) will
be retained by NNMS and remain available for potential display/
execution until cancelled by the entering party, or until 1 year after
entry, whichever comes first. Starting at 7:30 a.m., until the 4 p.m.
market close, IOC and Day Non-Directed Orders may be entered into NNMS
(or previously entered orders cancelled), but such orders entered prior
to market open will not become available for execution until 9:30 a.m.
Eastern Time. GTC orders may be entered (or previously entered GTC
orders cancelled) between the hours 7:30 a.m. to 6:30 p.m. Eastern
Time, but such orders entered prior to market open, or GTC orders
carried over from previous trading days, will not become available for
execution until 9:30 a.m. Eastern Time. Exception: Non-Directed Day and
GTC orders may be executed prior to market open if required under Rule
4710(b)(3)(B).
An order may be designated as ``Auto-Ex,'' in which case the order
will also automatically be designated as IOC.
(C)-(F) No change.
(2) Entry of Non-Directed Orders by NNMS Order Entry Firms `` In
addition to the requirements in paragraph (a)(1) of this rule, the
following conditions shall apply to Non-Directed Orders entered by NNMS
Order[-]Entry Firms:
(A) All Non-Directed orders shall be designated as Immediate or
Cancel, GTC or Day but shall be required to be entered as Non-
Attributable if not entered as IOC. NNMS Order Entry Firms may also
designate orders as ``Auto-Ex,'' in which case the order will also
automatically be designated as IOC. For IOC orders, if after entry into
the NNMS of a Non-Directed Order that is marketable, the order (or the
unexecuted portion thereof) becomes non-marketable, the system will
return the order (or unexecuted portion thereof) to the entering
participant.
(B) No change.
(b)-(e) No change.
* * * * *
4710. Participant Obligations in NNMS
(a) No change.
(b) Non-Directed Orders
(1) No change.
(A) No change.
(B) No change.
(i)-(iii) No change.
(iv) Exceptions--The following exceptions shall apply to the above
execution parameters:
a.-c. No change.
d. An Auto-Ex order will execute solely against the Quotes/Orders
of NNMS Participants that participate in the automatic execution
functionality of the NNMS and that do not charge a separate quote-
access fee to NNMS Participants accessing their Quotes/Orders through
the NNMS (``Auto-Ex Eligible Participants''). When processing an Auto-
Ex order, however, the NNMS will not deliver an execution to an Auto-Ex
Eligible Participant if the Quote/Order of an NNMS Participant that is
not an Auto-Ex Eligible Participant is priced better than the Quote/
Order of any Auto-Ex Eligible Participant at that time. An Auto-Ex
order (or an unexecuted portion thereof) will be cancelled if it cannot
be immediately executed.
* * * * *
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
Nasdaq proposes to introduce a new SuperMontage order type, to be
designated as the Auto-Ex order. The purpose of the order is to allow
market participants to manage more precisely the timing of executing
orders through SuperMontage. Accordingly, the order will execute solely
against the Quotes/Orders of SuperMontage participants that participate
in the system's automatic execution functionality. According to Nasdaq,
many market participants and their customers place a high value on the
speed of order execution, especially in circumstances where the price
of a security may be moving rapidly. SuperMontage's automatic execution
functionality was designed to offer market participants a speed of
execution that is as fast as technically feasible `` on average, less
than a second between order entry and order execution. However, in
circumstances where a market participant values speed, it may be unable
to receive the benefits of the system's efficiency if all or a portion
of its order is delivered to an NNMS Order-Delivery ECN, which has up
to 30 seconds to respond to the order (and which may respond by
declining to fill the order).\5\ By contrast, many ECNs offer extremely
rapid execution speeds to orders submitted to them directly. As a
result, firms seeking rapid execution may avoid using SuperMontage and
submit order directly to ECNs. The new order type will also allow an
ECN subscriber that has submitted an order directly to an ECN to
simultaneously access liquidity available from SuperMontage auto-ex
participants without running the risk that its SuperMontage order will
be delivered to the ECN to which it has already submitted an order.\6\
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\5\ In a prior filing, Nasdaq noted that the average response
time of order-delivery ECNs is less than one second. See Securities
Exchange Act Release No. 48078 (June 24, 2003), 68 FR 39171 (July 1,
2003) (SR-NASD-2003-72). See also Securities Exchange Act Release
No. 48196 (July 17, 2003), 68 FR 43777 (July 21, 2003) (SR-NASD-
2003-108). Nasdaq notes that the response time to particular orders
may be far longer, however. In addition, in many instances an ECN
responds by declining to execute an order delivered to it. In that
case, a rapid response by the ECN does not translate into a rapid
execution of the order delivered to it.
\6\ See Amendment No. 2, supra note 4.
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Nasdaq believes that its market participants should have the option
of seeking rapid, automatic executions through SuperMontage, as well as
through direct connections with ECNs. Accordingly, the proposed Auto-Ex
order would be eligible for execution solely against the Quotes/Orders
of automatic execution participants.\7\
[[Page 61530]]
Auto-Ex orders will access liquidity available at multiple price
levels, but under no circumstances would the order ``trade through''
the Quote/Order of an Order-Delivery ECN (or an auto-ex participant
that charged an access fee). Thus, an Auto-Ex order would automatically
be designated ``Immediate or Cancel,'' and the order (or any unexecuted
portion thereof) would be cancelled whenever the best price available
through SuperMontage solely reflects the Quote/Order of a market
participant that is not eligible to receive the Auto-Ex order. Nasdaq
believes that this feature of the order will assist market participants
using the order in fulfilling their obligations to obtain best
execution for their customers, and will also encourage ECNs to continue
to offer liquidity through SuperMontage. As is currently the case, NNMS
order-delivery participants will be accessible through all other types
of non-directed orders, as well as Preferenced and Directed Orders.
Auto-Ex orders may be either priced limit orders or market orders, and
all market participants will be permitted to enter Auto-Ex orders.\8\
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\7\ To help market participants control the costs of automatic
order execution, an automatic execution participant that charged a
separate quote-access fee to participants accessing its Quotes/
Orders through SuperMontage would also be ineligible to receive an
execution of an Auto-Ex order. However, it should be noted that none
of Nasdaq's current automatic execution participants charges a
separate quote access fee. Thus, the order would execute against the
quotes of all of Nasdaq's current automatic execution participants,
including the Chicago Stock Exchange.
\8\ See Amendment No. 2, supra note 4.
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Nasdaq believes that the processing of the Auto-Ex order type will
be similar to the processing of orders in Nasdaq's SuperSOES system,
which was operational in 2001 and 2002.\9\ SuperSOES orders executed
automatically against the quotes of market participants at the inside
market that had agreed to accept automatic executions. The quotes of
non-auto-ex market participants, however, were accessible only through
Nasdaq's SelectNet system, which operated in a manner similar to the
Directed Order functionality of SuperMontage. Nasdaq believes that the
proposed Auto-Ex order is also closely aligned in function and purpose
to the ``fill-or-return'' order offered by at least one of the national
securities exchanges that trade Nasdaq stocks.\10\
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\9\ See Securities Exchange Act Release No. 42344 (January 14,
2000), 65 FR 3987 (January 25, 2000) (SR-NASD-99-11); Securities
Exchange Act Release No. 41296 (April 15, 1999), 64 FR 19844 (April
22, 1999) (SR-NASD-99-11).
\10\ See Pacific Exchange Rule 7.31(p) (describing ``fill-or-
return order'' of the Archipelago Exchange facility of the Pacific
Exchange, Inc.).
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At present, moreover, market participants can attempt to replicate
the functionality of an Auto-Ex order by using a Preferenced Order,
which executes solely against the Quote/Order of a recipient identified
by the participant entering the order, and only if the recipient is at
the best bid/best offer. Thus, a market participant seeking to access
liquidity offered by an auto-ex participant at the inside market could
preference an order to that market participant. However, in
circumstances where a market participant seeks to work a large order by
accessing the Quotes/Orders of several auto-ex participants at the best
bid/best offer, use of this option would require the use of several
orders, and therefore a higher cost. The Auto-Ex order, by contrast,
will allow SuperMontage participants to access liquidity at the inside
market as quickly and economically as possible.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of section 15A of the Act,\11\ in general, and with
section 15A(b)(6) of the Act,\12\ in particular, in that it is designed
to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
Nasdaq believes the proposed rule change would provide market
participants with a voluntary tool to use on behalf of their customers
when seeking to execute transactions as quickly as possible and at the
lowest cost possible.
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\11\ 15 U.S.C. 78o-3.
\12\ 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, as amended. The new order type
established by this proposed rule change will allow market participants
that opt to use it to access available liquidity almost
instantaneously, thereby achieving efficient executions at best
available prices for their customers. However, the order will not trade
through the Quote/Order of an NNMS order delivery participant (or an
auto-ex ECN that charged an access fee), and order-delivery
participants will continue to be accessible through all other types of
non-directed orders, as well as Preferenced and Directed Orders.\13\ As
the Commission found when it determined that SuperSOES's comparable
order processing functionality was consistent with the Act, ``it is not
likely that ECNs that choose order entry participation will be
marginalized because ECNs are frequently at the best quote in the
market.''\14\ Nasdaq believes that the processing functionality of the
Auto-Ex order is no more likely to result in an inappropriate burden on
competition than the processing functionality approved by the
Commission in 2000.
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\13\ See Amendment No. 2, supra note 4.
\14\ See Securities Exchange Act Release No. 42344 (January 14,
2000), 65 FR 3987, 3998 (January 25, 2000) (SR-NASD-99-11).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Nasdaq neither solicited nor received written comments.
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 NASD 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, as amended, 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 such
filings will also be available for inspection and copying at the
principal office of the Association.
[[Page 61531]]
All submissions should refer to File No. SR-NASD-2003-143 and should be
submitted by November 18, 2003.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-27093 Filed 10-27-03; 8:45 am]
BILLING CODE 8010-01-P