[Federal Register: June 13, 2007 (Volume 72, Number 113)]
[Notices]
[Page 32692-32693]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr13jn07-121]
[[Page 32692]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-55870; File No. SR-NASDAQ-2007-037]
Self-Regulatory Organizations; The NASDAQ Stock Market LLC;
Notice of Filing of Proposed Rule Change To Modify Order Audit Trail
System Rules To Provide an Exemption From Transmission Requirements for
Proprietary Orders and Amendment No. 1 Thereto
June 6, 2007.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 3, 2007, The NASDAQ Stock Market LLC (``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 substantially prepared by Nasdaq. On June 4, 2007, Nasdaq
filed Amendment No. 1, which replaced the text of the original filing
in its entirety. 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.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
Nasdaq proposes to modify its Order Audit Trail System (``OATS'')
rules to provide an exemption from OATS transmission requirements for
certain proprietary orders. The text of the proposed rule change is
available at http://www.nasdaq.com, at Nasdaq, and at the Commission's
Public Reference Room.
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 modify its OATS rules to adopt a limited
exemption from OATS order data transmission requirements for
proprietary trading firms. OATS is an integrated audit trail of order,
quote, and trade information for Nasdaq securities used to recreate
events in the life cycle of orders and more completely monitor the
trading practices of member firms.
A ``Proprietary Trading Firm'' is proposed to be defined as meaning
a Nasdaq member that trades its own capital with all the trading being
done in the firm's accounts by traders that are owners of, employees
of, or contractors to the firm. Additionally, a Proprietary Trading
Firm does not have ``customers,'' as that term is defined in Nasdaq
Rule 0120(g) and is not a member of the National Association of
Securities Dealers, Inc. (``NASD''). At present, there are no
Proprietary Trading Firms that are also market makers.
Nasdaq also proposes to revise Nasdaq Rule 6955 to add that a
Proprietary Trading Firm, and persons associated with a Proprietary
Trading Firm, only upon request would be required to transmit order
data information for specific time periods stated in a request to
Nasdaq Regulation.\3\ Although a Proprietary Trading Firm would not be
required to transmit the order data information to Nasdaq Regulation
unless requested, it still would be held responsible for maintaining
and retaining the information in a format that could be easily
integrated into the NASD's OATS system in the event Nasdaq Regulation
makes a request for such information.
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\3\ Rule 0130 provides that the term Nasdaq Regulation should be
understood as also referring to NASD staff, NASD Regulation staff,
and NASD departments acting on behalf of Nasdaq pursuant to the
Regulatory Contract. NASD Regulation has agreed to perform certain
functions on behalf of Nasdaq pursuant to a regulatory services
agreement.
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The current requirement for Proprietary Trading Firms to transmit
all data order information is onerous and not offset by an equivalent
regulatory benefit. It is very expensive for firms to develop and
maintain the compliance systems and compliance staff required to
continuously monitor the daily transmission of OATS data. Additionally,
the transmission of OATS data often results in either rejections or
mismatches.\4\
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\4\ OATS rejections may occur for a multitude of reasons
including: Incorrect symbol; duplicate order event; cancelled time
stamp prior to order timestamp; canceled timestamp greater than
current date and time; issue is not reportable to OATS; issue symbol
invalid for order event date; missing or invalid shares quantity or
Buy/Sell code; missing or invalid member type code or issue symbol
ID; missing or invalid cancel quantity; missing time in force code;
missing or invalid firm order ID; and missing or invalid expiration
time.
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Errors can result from a programming error even if it just a
misplaced semicolon. To cure these issues, members may need to spend an
inordinate amount of time correcting a minor glitch with NASD.
Mismatches occur when NASD reconstitutes the order and any
discrepancies exist between the order origination and order execution,
which may be different entities.\5\ Often times the discrepancy is of
very minor consequence, but triage efforts are overly burdensome.
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\5\ Common causes of mismatches include: missing branch/sequence
numbers; improperly formatted branch/sequence numbers on one of the
reports; differing execution timestamps; missing reporting exception
codes and late reporting of OATS execution reports.
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The basis for OATS is customer protection through the transparency
of the executions of customer orders. The proposed rule change does not
impact this, since by definition, Proprietary Trading Firms do not
handle customer orders. OATS was designed to provide an accurate, time-
sequenced record of orders and transactions, beginning with the receipt
of an order at the first point of contact between the broker-dealer and
the customer or counterparty and further documenting the life of the
order through the process of execution. This requirement only came into
effect during the later stages of the OATS implementation. Also, as
mentioned below, no other exchange has a daily transmission requirement
for this category of customer.
This approach parallels, in a much more limited manner, the
approach undertaken by the New York Stock Exchange (``NYSE'') in NYSE
Rule 132C, which requires NYSE members, upon request, to transmit order
tracking data to the NYSE.\6\ The NYSE has stated that it has been its
experience that ``submission of data by request has proven to be
effective and efficient'' \7\ from both the NYSE's and its members'
perspective.
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\6\ See Securities Exchange Act Release No. 47689 (April 17,
2003), 68 FR 20200 (April 24, 2003) (SR-NYSE-99-51).
\7\ Id. at 20202.
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Additionally, much of the information retained by a Proprietary
Trading Firm is otherwise available to the Nasdaq
[[Page 32693]]
Regulation through Nasdaq's systems, and Nasdaq can use such
information and supply it to the NASD, upon request, as well. This
information includes trade reporting data, including order time and
sales data captured by the Nasdaq system.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 6 of the Act,\8\ in general, and with Section
6(b)(5) of the Act,\9\ in particular, in that the proposal is designed
to prevent fraudulent and manipulative acts and practices, 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.
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\8\ 15 U.S.C. 78f.
\9\ 15 U.S.C. 78f(b)(5).
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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.
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
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, 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-NASDAQ-2007-037 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-NASDAQ-2007-037. 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 Nasdaq. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submissions should refer to
File Number SR-NASDAQ-2007-037 and should be submitted on or before
July 5, 2007.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
Florence E. Harmon,
Deputy Secretary.
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\10\ 17 CFR 200.30-3(a)(12).
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[FR Doc. E7-11369 Filed 6-12-07; 8:45 am]
BILLING CODE 8010-01-P