[Federal Register: June 10, 2002 (Volume 67, Number 111)]
[Notices]
[Page 39771-39781]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10jn02-129]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-45997; File No. SR-NASD-2002-58]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of Proposed Rule Change and Amendment No. 1 Thereto by
National Association of Securities Dealers, Inc. Relating to Temporary
Approval of the Primex Auction System[reg]
May 29, 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 April 30, 2002, 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 with the Commission on May 28, 2002.\3\
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.\4\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Peter R. Geraghty, Associate Vice President
and Associate General Counsel, Nasdaq, to Katherine England,
Assistant Director, Division of Market Regulation, Commission, dated
May 1, 2002 (``Amendment No. 1''). In Amendment No. 1, Nasdaq
removed language under NASD Rule 5013(c)(2) that was inadvertently
included in its initial filing. Nasdaq originally removed this
language in Amendment No. 1 to Nasdaq's Form PILOT filing for
Primex.
\4\ This proposed rule change, absent Amendment No. 1, was
previously published in the Federal Register. See Securities
Exchange Act Release No. 45982 (May 23, 2002). However, the
Commission notes that although Amendment No. 1 is dated May 1, 2002,
the Commission did not receive Amendment No. 1 until May 28, 2002,
after publication of the initial proposed rule change. The
Commission now publishes the proposed rule change, as amended by
Amendment No. 1, for public comment.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Nasdaq proposes to continue operating Nasdaq's application of the
Primex Auction System[reg] (``Primex'' or ``System''). The System began
operating as a Pilot Trading System on December 17, 2001, pursuant to
Rule 19b-5 of the Act.\5\ Pursuant to paragraph (f) of Rule 19b-5 of
the Act,\6\ Nasdaq is filing this proposed rule change effective
immediately so that it can continue operating the System until the
Commission grants permanent approval. Nasdaq has filed a companion
proposed rule change which seeks permanent approval of Primex.\7\ The
proposed rule language contained in the companion filing and set forth
below is identical and is the same language that governs use of the
System today.
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\5\ 17 CFR 240.19b-5.
\6\ 17 CFR 240.19b-5(f).
\7\ See Securities Exchange Act Release No. 45983 (May 23, 2002)
(publishing SR-NASD-2002-60 for notice and comment).
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5010. NASDAQ Application of the PRIMEX AUCTION SYSTEM[reg]
5011. Definitions
For purposes of this Rule Series, unless the context requires
otherwise:
(a) ``Application'' or ``Nasdaq Application'' as used in this Rule
Series, and ``Nasdaq Application of the Primex Auction System'' as used
throughout the NASD Rules means the voluntary Nasdaq trading service
facility that permits NASD member firms, among other things, to submit
orders in Primex Eligible Securities to be exposed to a Crowd of
Participants in an anonymous, electronic auction format for the purpose
of obtaining an execution for their own account or the account of a
customer; to have required reports of any resulting trades
automatically disseminated to the public and the industry; and to
``lock in'' these trades as necessary by sending both sides to the
applicable clearing agency designated by the Participants involved for
clearance and settlement, all in accordance with this Rule Series and
other applicable rules and policies of Nasdaq.
(b) ``Primex Auction System Participant,'' ``Participant,'' or
``Participant Firm'' means a broker-dealer registered with the NASD
that, when authorized, can access and participate in the Application
for its customers or its own account, consistent with this Rule Series.
Participants access the Application through one or more Subscribers
associated with that Participant within the Application.
(c) ``Subscriber'' means a user associated with a Participant who,
when authorized, can access and participate in the Application on
behalf of that Participant, consistent with this Rule Series. A user
also can access and participate directly in the Application on its own
behalf, but in the name of a Participant, subject to a sponsored
arrangement with that Participant, and consistent with these Rules.
(d) ``Firm Administrator'' means a Subscriber who, for a particular
Participant, is authorized among other things to: (1) monitor and
control access
[[Page 39772]]
to and participation in the Application by all of that Participant's
Subscribers, including establishing Credit Limits for each of the
Participant's Subscribers who access and participate in the Application
on behalf or in the name of that Participant; and (2) view the status
of the Clearing Limits applicable to the Participant overall.
(e) ``Nasdaq Supervisor'' means the Nasdaq staff responsible for
establishing and supervising certain operational functions with respect
to the operation of the Application.
(f) ``Credit Limits'' means the dollar amount of aggregated
purchases or sales established within the Application by a
Participant's Firm Administrator for each of the Participant's
Subscribers which, when reached, causes the Application to: (1) Inhibit
any future executions or the entry of future interest for that
Subscriber; (2) cancel any orders and withdraw any Indications resident
within the Application for that Subscriber; and (3) send a notice to
that Subscriber, its Firm Administrator, and the Nasdaq Supervisor.
Credit Limits may be established, monitored, and modified by the Firm
Administrator on a real-time basis directly through the Application.
(g) ``Clearing Limits'' means the dollar amount of aggregated
purchases and sales (calculated separately and not netted) of all
Subscribers, collectively for a Participant, effected through or in the
name of that Participant, that is established within the Application
for that Participant, which, when reached, causes the Application to:
(1) Inhibit any future executions for all Subscribers associated with
that Participant; (2) cancel any orders and withdraw any Indications
resident within the Application for all Subscribers associated with
that Participant; and (3) send a notice to that Participant's Firm
Administrator, the Nasdaq Supervisor, and to the clearing broker for
that Participant provided that the clearing broker also is a
Participant. If the clearing broker is not a Participant in the
Application, then the Nasdaq Supervisor will notify the clearing broker
that the Clearing Limits have been reached as soon as practicable.
Clearing Limits for a Participant may be monitored on a real-time basis
by the Participant's Firm Administrator and can be established,
monitored, and modified by the Firm Administrator of the Participant's
clearing broker, provided the clearing broker also is a Participant.
Clearing Limits also can be established and modified by the Nasdaq
Supervisor on behalf of the clearing broker.
(h) ``Crowd,'' ``Primex Crowd'' or ``Crowd Participant'' means
Primex Auction System Participants that, when authorized, can access
and participate in the Application consistent with this Rule Series by:
(1) Submitting orders to be exposed to other Participants; (2) viewing
orders submitted by other Participants; and (3) submitting Responses
and Indications for the purpose of interacting with the orders of other
Participants.
(i) ``Watch List'' means the list of Primex Eligible Securities
identified by a Crowd Participant for which the Crowd Participant will
be notified by Nasdaq electronically when one or more orders in such
securities is exposed in an Auction and made available for response by
the Crowd.
(j) ``Primex Auction Market Maker'' means a Participant that, when
authorized, may participate in the Application: (1) as a Primex Auction
Market Maker consistent with Rule 5020 with respect to those Primex
Eligible Securities for which the Participant is registered as a Primex
Auction Market Maker; and (2) as a Crowd Participant consistent with
Rule 5019 with respect to any Primex Eligible Security.
(k) ``Primex Eligible Security'' means any security listed on the
Nasdaq Stock Market and any exchange-listed security eligible for
participation in the Intermarket Trading System.
(l) ``Mandatory Eligible Order'' means a public customer order, as
more fully defined in Rule 5020, that a Primex Auction Market Maker
must submit to the System for exposure in order for the Primex Auction
Market Maker to maintain its status as such, subject to any exclusions
or minimum permissible amount provided therein.
(m) ``Market Order'' means an order submitted to the Application to
purchase or sell a security at the most advantageous price(s)
obtainable, without a specified, fixed price.
(n) ``Fixed Price Order'' means an order submitted to the
Application to purchase or sell a security at a specified, fixed price
or better.
(o) ``Minimum Relative Price Improvement'' means a condition that a
Participant may attach to a market order consistent with Rule 5014(a),
expressed in terms of the minimum relative price improvement required
to execute the order. This condition is expressed in terms relative to
the best bid (for orders to sell) or best offer (for orders to buy)
displayed in the NBBO at the time the order is eligible to be executed
against within the Application. Neither the existence nor amount of any
Minimum Relative Price Improvement condition is displayed, exposed or
communicated to any Participant when attached to an order.
(p) ``Response'' means an instruction submitted to the Application
by a Participant, for the purpose of responding to an order or orders
being exposed to the Crowd, consistent with Rule 5018.
(q) ``Predefined Relative Indication'' or ``PRI'' means an
instruction that a Participant can submit to the Application for the
purpose of responding to an order(s) in an Auction, and which does not
contain a specific, fixed price, but is expressed in terms relative to
the best bid (for PRIs to buy) or offer (for PRIs to sell) publicly
displayed for the security, consistent with Rule 5018. While resident
within the Application, PRIs are ranked to respond to incoming orders
in relative price/time priority, but are not displayed, exposed or
communicated to any other Participant.
(r) ``Go-Along Indication'' means an instruction that a Participant
can submit to the Application for the purpose of responding to an
order(s) in an Auction, and which does not contain a specific, fixed
price, consistent with Rule 5018. A Go-Along Indication will be
triggered to respond to an Auction at a price equal to the best bid
(for Go-Along Indications to buy) or best offer (for Go-Along
Indications to sell) publicly displayed whenever there has been at
least one contemporaneous Crowd execution at such bid or offer,
provided there are no PRIs or other orders available to execute against
the order(s) in the Auction. While resident within the Application, Go-
Along Indications are not displayed, exposed or communicated to any
other Participant.
(s) ``Auction'' means the automated process through which orders in
Primex Eligible Securities are exposed to Crowd Participants. Orders
for the same security being exposed simultaneously (i.e. those which
have overlapping exposure periods) are available on an aggregate basis,
in whole or in part, for interaction with other Crowd participants, but
only during the period of overlapping exposure. An Auction begins when
an order is accepted by the Application and exposed to the Primex
Crowd, and ends whenever such order(s) (including any orders that
subsequently join the Auction in progress) are completely executed or
their exposure ceases.
(t) ``Public Order'' or ``Public Customer Order'' means an order
for the account of a customer, and not for the account of a broker-
dealer, regardless of whether the customer is that of the Participant
entering the order or another
[[Page 39773]]
firm that has routed the customer order to the Participant.
(u) ``Professional Order'' means an order for the proprietary
account of a broker-dealer, regardless of whether the broker-dealer is
a market maker or specialist, and regardless of whether it is the
Participant's own order or the proprietary order of another broker-
dealer routed to the Participant.
(v) ``Market Maker Guarantee'' means the feature within the
Application that allows a Participant registered as a Primex Auction
Market Maker to provide an automatic execution against public customer
orders it submits to the Application for exposure in an Auction where
such orders are not otherwise subject to an execution. The Application
will automatically execute any unexecuted balance of the order against
that Primex Auction Market Maker, after the Auction exposure period for
the order has expired, consistent with Rule 5020. The Market Maker
Guarantee shall be provided at a price equal to the best publicly
quoted offer price (for orders to buy) or best publicly quoted bid
price (for orders to sell) existing for the security at the time when
such exposure period for the order has expired, for any amount of
shares established by the Primex Auction Market Maker for the order.
5012. Access
(a) The Application shall be available on a voluntary basis to any
NASD member in good standing that chooses to register as a Participant
in the Primex Auction System. Such registration shall be conditioned
upon the Participant's initial and continuing compliance with the
following requirements:
(1) Execution of the necessary agreements with Nasdaq or its
affiliate;
(2) Membership in, or access arrangement with, a clearing agency
registered with the Commission which maintains facilities through which
Primex Auction System compared trades may be settled;
(3) Compliance with all applicable rules and operating procedures
of Nasdaq (including these rules) and the Commission;
(4) Maintenance of the physical security of the equipment located
on the premises of the Participant to prevent the improper use or
access to Nasdaq systems, including unauthorized entry of information
into the Primex Auction System; and
(5) Acceptance and settlement of each trade that is executed
through the facilities of the Primex Auction System, or if settlement
is to be made through another clearing member, guarantee of the
acceptance and settlement of such execution by the clearing member on
the regularly scheduled clearing date.
(b) Non-NASD members may access the Application in the name of a
Participant by becoming a sponsored Subscriber of the Participant,
provided the Participant and sponsored Subscriber have executed the
necessary agreements with Nasdaq or its affiliate, and the NASD member
Participant assumes the responsibilities set forth in paragraph (a) of
this Rule 5012 with respect to any activity conducted by the sponsored
Subscriber.
(c) The Application may be made available through Nasdaq-provided
network(s) via:
(1) Primex Auction System Workstation Service;
(2) An Application Programming Interface (``API''); or
(3) A FIX protocol interface. Certain functionality of the
Application also may be made available via Computer to Computer
Interface (CTCI).
5013. Order Acceptance and Exposure
(a) Order Types
The Application shall accept the following types of orders in
Primex Eligible Securities, subject to any conditions or match
parameters attached thereto to the extent permitted by the Application
and Rule 5014, and other rules applicable to Participants with respect
to the entry of orders. Conditions and match parameters, to the extent
attached to an order, are never communicated to any Participant:
(1) Market Orders;
(2) Fixed Price Orders, when the specified price is equal to or
between the best bid or offer publicly displayed, or is a buy (sell)
order priced higher (lower) than the best offer (bid) publicly
displayed. Fixed Price Orders to buy (sell) priced below (above) the
best bid (offer) publicly displayed will be rejected.
For example: If the best bid and offer publicly displayed in Nasdaq
is $20-$20.10, then the Application will accept orders to buy priced at
$20.00 and higher, including orders to buy priced higher than the offer
of $20.10 (although no execution can take place outside of the NBBO
prevailing at the time of execution). An order submitted to buy at
$19.95, however, would not be accepted by the Application in this
situation and will be returned to the Participant that entered it.
(b) Order Size
The Application will accept orders that are either round lots, or
mixed lots. Odd lot orders will not be accepted.
(c) Exposure Times Available
(1) The Application allows Participants to expose orders to the
Primex Crowd. Only the size associated with an order is communicated to
the Crowd, and only for the time during which the order is available
for execution. Crowd Participants may monitor the availability of
orders exposed in an auction through the use of their Watch List.
(2) For each Market Order submitted to the Application, a
Participant can specify a maximum exposure time of either 0 (i.e.,
immediate), 15, or 30 seconds.
(3) Fixed Price Orders that are accepted by the Application can
only be exposed for an immediate execution, in whole or in part).
5014. Conditions and Match Parameters
(a) For All Participants
Subject to any other rules applicable to Crowd Participants and
Primex Auction Market Makers with respect to the entry of orders, any
Participant may enter an order with the following condition attached:
Minimum Relative Price Improvement
Market Orders may be submitted with a condition for Minimum
Relative Price Improvement. The Minimum Relative Price Improvement
established for an order is the minimum amount of price improvement
superior to the best bid or offer publicly displayed (as applicable)
that the order must receive before it may be executed against in whole
or in part by any interest from the Crowd. This condition must be
attached before the order is entered into the Application. Such
condition may be expressed only in terms relative to the best bid or
offer on the opposite side of the market existing at such time when any
Indication, Response, or other order is or becomes available to
interact with the order in an Auction, as permitted by the Application
and this Rule Series. Neither the existence nor amount of any Minimum
Relative Price Improvement condition is displayed, exposed or
communicated to any Participant when attached to an order. This
condition shall not be available for orders submitted solely for the
proprietary account of a Nasdaq market maker or CQS market maker
(including Primex Auction Market Makers) and not involving a customer
order.
For example: An order to buy 500 shares entered into the
Application may contain a condition for Minimum Relative Price
Improvement requiring that any Indication or Response (or sell order
exposed in an Auction and which
[[Page 39774]]
is available for a match) provide to that order at least a certain
amount (e.g., 3 cents) of price improvement superior to the best offer
publicly displayed at such time the Indication, Response or sell order
is available to be matched with the order to buy.
(b) For Primex Auction Market Makers Only
A Participant registered as a Primex Auction Market Maker for a
particular security is entitled, but not required, to enter customer
orders with any of the following match parameters as discussed below.
These allow the Primex Auction Market Maker to provide liquidity in
addition to that which may be provided by the Crowd. The match
parameters contained in this paragraph are only available to
Participants who are Primex Auction Market Makers, and only for those
securities for which they are so registered. Neither the existence nor
type of any match parameter associated with an order is displayed,
exposed or communicated to any other Participant:
(1) Two Cent Match
A Participant registered as a Primex Auction Market Maker for a
particular security may enter an order with the Two Cent Match
parameter.
(A) If there is interest from the Crowd that can satisfy the order,
the order entered with the Two Cent Match will be executed against such
interest by the Crowd during its exposure, provided that such Crowd
interest offers to provide price improvement greater than two cents
superior to the best quote publicly displayed in the NBBO at the time
such Crowd interest is available.
Note: Because the system will never execute an order at a price
outside of the NBBO, any Crowd interest offering an amount of price
improvement that would potentially be outside of the NBBO will be
executed, if matched with an order, at a price bounded by the NBBO,
in effect adjusting the execution price to allow for the maximum
amount of price improvement within that NBBO without trading through
the NBBO at that time. As a result, it is possible that an order
subject to the Two Cent Match parameter may be matched with interest
from the Crowd, and not the Primex Auction Market Maker that entered
it, notwithstanding the fact that the actual execution price results
in price improvement of two cents or less. This can happen, for
example, where there is Crowd interest available that is offering
three cents of relative price improvement, but the Application
causes the actual execution price to be equal to two cents of price
improvement, due to a prevailing NBBO spread of two cents at the
time of execution.
(B) If there is interest from the Crowd that can satisfy the order
but such Crowd interest would only offer price improvement of two cents
or less in relation to the best quote publicly available, then this
will immediately cause the Application to execute the entire order
against the Primex Auction Market Maker that entered it, and not
against such Crowd interest, thereby allowing the execution of that
order to be retained by the Primex Auction Market Maker. In this
situation, the entire order will be executed with that Primex Auction
Market Maker at the best price the Crowd interest would have otherwise
provided, regardless of the size associated with such Crowd interest.
(C) Any unexecuted balance of the order remaining at the end of its
exposure will be executed against the Primex Auction Market Maker. With
respect to Market Orders, this execution price will be at the best
quote then publicly displayed. With respect to Fixed Price Orders, the
execution price will be the price specified in the Fixed Price Order,
unless such price is outside the best quote publicly displayed, in
which case the execution price will be at the best quote publicly
displayed in the NBBO.
(D) A Primex Auction Market Maker may enter customer orders of any
size with the Two Cent Match parameter.
(E) A Primex Auction Market Maker that enters a Market Order with
the Two Cent Match parameter may elect immediate (``zero seconds''), 15
or 30 second maximum exposure duration for that order. A Fixed Price
Order can be exposed only for an immediate ``zero second'' auction.
(2) 50% Match
A Participant registered as a Primex Auction Market Maker for a
particular security may enter an order a 50% Match parameter.
(A) Orders entered with the 50% Match parameter will be executed
against any interest by the Crowd that satisfies the order during its
exposure at the price(s) and size of such Crowd interest, for no more
than 50% of the order. Any execution with the Crowd will immediately
cause the Application to provide the order with an additional execution
of like size and price against the Primex Auction Market Maker that
entered the order.
(B) Any unexecuted balance of the order remaining at the end of its
exposure will be automatically executed against the Primex Auction
Market Maker. With respect to Market Orders, this execution price will
be at the best quote then publicly displayed. With respect to Fixed
Price Orders, the execution price will be at the price specified in the
Fixed Price Order, unless such price is outside the best quote publicly
displayed, in which case the execution price will be at the best quote
publicly displayed.
(C) A Primex Auction Market Maker may enter customer orders of any
size with the 50% Match parameter.
(D) A Primex Auction Market Maker that enters a Market Order with
the 50% Match parameter may elect immediate (``zero seconds''), 15 or
30 second maximum exposure duration for that order. A Fixed Price Order
can be exposed only for an immediate ``zero second'' auction.
For example: The best bid and offer publicly displayed for a
security is $20-20.10. A Primex Auction Market Maker for that security
enters into the Application a Market Order to buy 2,000 shares for a
customer and selects the 50% Match Parameter. The Participant selects
an exposure time of 30 seconds. During its exposure, the order elicits
the following executions by other Crowd Participants (which could be in
the form of Indications, Responses, or contraside orders to sell): 500
at $20.04, and 200 at $20.05. The Application will execute these
transactions, and immediately match each one as they occur by executing
an additional 500 and 200 shares, at $20.04 and $20.05, respectively,
against the Primex Auction Market Maker entering the order. If there is
no other interest from the Crowd at the end of the 30 second exposure
period, the Application will cause the remaining balance of 600 shares
to be automatically executed against the Primex Auction Market Maker
entering the order at the best offer publicly displayed at that time.
Assuming the best offer publicly displayed is still $20.10 at this
time, this would result in the Primex Auction Market Maker selling the
balance of 600 shares to the customer at $20.10.
(3) Block Facilitation Match
A Participant registered as a Primex Auction Market Maker for a
particular security may enter an order with a Block Facilitation match
parameter, provided the order is for at least 10,000 shares. The Primex
Auction Market Maker may elect to expose the order in an Auction for a
maximum of 0, 15, or 30 seconds: Any Crowd interest that executes
against the order during the selected exposure period, up to a maximum
of 50% of the order size, will be immediately matched with an execution
of like size and price against the entering Participant until the order
is fully executed. If any unexecuted portion remains at the end of the
exposure period, it will be automatically
[[Page 39775]]
executed against the entering Participant. With respect to Market
Orders, the execution price will be the then existing best offer (for
orders to buy) or best bid (for orders to sell) publicly displayed.
With respect to a Fixed Price Order, the execution price will be the
price specified in the Fixed Price Order, unless such price is outside
of the best quote publicly displayed, in which case the execution price
will be at the best quote publicly displayed.
For example: The best bid and offer publicly displayed is $20-
20.10. A Participant enters into the Application an order to buy a
block of 10,000 shares for a customer and selects the Block
Facilitation Match Parameter. The Participant selects an exposure time
of 15 seconds. During its exposure, the order elicits the following
executions by other Crowd Participants (in the form of Indications,
Responses, or contra-side orders to sell): 1000 at $20.05, and 2000 at
$20.07. The Application will execute these transactions, and
immediately match each one as they occur by executing an additional
1000 and 2000 shares, at $20.05 and $20.07, respectively, against the
Participant entering the block order. If there is no other interest
from the Crowd at the end of the 15 second exposure period, the
Application will cause the remaining balance of 4000 shares to be
automatically executed against the Participant entering the block order
at the best offer publicly displayed at that time. Assuming the best
offer publicly displayed is still $20.10 at this time, this would
result in the Participant selling the balance of 4000 shares to the
customer at $20.10.
(4) Clean Cross
A Participant registered as a Primex Auction Market Maker for a
particular security may enter a Clean Cross order for the accounts of
two separate customers where the order represents both sides of a cross
for at least 10,000 shares to be exposed to the Crowd in an immediate,
zero second Auction. The two sides will be executed against each other
at the midpoint of the best bid and offer publicly displayed unless
superior-priced interest within the Application breaks up one or both
sides of the cross. In order to break up a side of the cross, there
must be Crowd contra-side interest resident within the Application
(e.g., resident PRIs) that totals at least 10,000 shares in the
aggregate at a price or prices that are all superior to the bid-ask
midpoint by at least the nearest whole cent. Any portion of a side that
is not executed against either the opposite side of the Clean Cross
order or contra-side interest resident within the Application will be
returned unexecuted.
5015. Public and Professional Orders
All orders submitted to the Application shall be identified as
either a Public Order or a Professional Order, as those terms are
defined in Rule 5011. This Public or Professional status is not
displayed, exposed or communicated to any other Participant in the
Application, but is used to determine whether an order is available to
interact with the Response or Indication of a Crowd Participant. As
indicated in Rule 5018(e), a Participant that responds to orders in an
Auction can choose whether its Responses and Indications interact with
all orders (both Public and Professional Orders) or just Public Orders.
When entering an order, however, a Participant entering an order does
not have the ability to select or control whether Public or
Professional interest may interact with the order.
5016. Option to Route Orders Outside of the System After Exposure in
the Application
(a) All Market Orders submitted to the Application shall include an
identifier as to whether any unexecuted balance, after the order is
exposed to the Crowd, should be forwarded to SuperSoesSM, in
the case of a Nasdaq security, or to ITS/CAES, in the case of an
exchange-listed security, or whether the order should be returned to
the entering Participant. This option to route orders outside of the
Application is available for Market Orders only. Orders submitted to
the Application with a specified, fixed price cannot be automatically
forwarded to Nasdaq's other execution systems. Routing identifiers are
not displayed, exposed or communicated to any other Participant in the
Application.
(b) With respect to exchange-listed securities, only Primex Auction
Market Makers (which also must be ITS/CAES market makers with respect
to these securities, as required by these rules) may elect to have
Market Orders in exchange-listed securities routed out to ITS when
there is a balance remaining following exposure in the System,
provided, however, that customer orders so routed must first be exposed
in the Application for at least 15 seconds. In addition, to the extent
the best price publicly quoted at that time is available within
Nasdaq's CAES system, regardless of whether the same price also is
being publicly quoted by another ITS market center, such orders
designated for routing to ITS/CAES will be delivered to CAES for
execution up to the size publicly quoted by CAES participants and will
not be routed out to another market center through ITS.
5017. Short Sales
Participants are responsible for complying with applicable short
sale rules when using the Application. No Participant shall submit to
the Application an order for a security that, if executed, would result
in a ``short sale'' as that term is defined in Exchange Act Rule 3b-3,
unless the transaction would be exempt from, or otherwise permissible
under, the requirements of NASD Rule 3350 or Exchange Act Rule 10a-1,
as applicable.
5018. Responses and Indications
(a) General--Participants may submit Responses and Indications to
the Application, consistent with this Rule Series, for the purpose of
interacting with orders in an Auction, as described herein. Responses
and Indications are not displayed, exposed or communicated to any
Participant, except to the extent they result in an execution with an
order. Responses and Indications cannot execute against other Responses
or Indications.
(b) Responses--Responses are instructions submitted to the
Application by Participants to interact with available orders exposed
in an Auction. Responses may be either a Fixed Price Response (e.g. buy
1000 at $20) or a Relative Priced Response (e.g., buy 1000 at the bid
plus 3 cents). All Responses must be entered in an amount of at least
one round lot, but also may be for a mixed lot.
(c) Indications--Indications are instructions, with the
characteristics set forth below, submitted to the Application by
Participants to interact with orders exposed in an Auction. An
Indication may be a Predefined Relative Indication (``PRI'') or a Go-
Along Indication.
(1) Predefined Relative Indications
(A) PRIs can be submitted to the Application for the purpose of
automatically responding to an Auction at a point in time when one or
more orders becomes available. PRIs have no specific, fixed price, but
are expressed at time of entry in terms relative to the best bid or
offer publicly displayed at such time when the Application activates
the PRI against orders in an Auction. While resident within the
Application, PRIs are ranked in relative price/time priority among all
other PRIs resident within the Application and any same-side orders
currently being exposed in an Auction, as indicated in paragraph (e) of
this Rule. Neither the existence nor terms of a PRI are
[[Page 39776]]
displayed, exposed or communicated to any other Participant while
resident in the Application. When activated by the Application, a PRI
will match against orders in an Auction at a price equal to the best
bid (for PRIs to buy) or offer (for PRIs to sell) publicly displayed at
that time in the NBBO, plus or minus (respectively) the relative price
term associated with that PRI; provided that such price also satisfies
any applicable condition associated with the order(s) in the Auction to
which it is responding.
(B) At the time of its original entry, each PRI submitted to the
Application must be for the following share amounts:
(i) NBBO PRIs must be for at least 3000 shares upon entry;
(ii) NBBO .01 or .02 must be for at least 2000 shares
upon entry;
(iii) NBBO .03 or greater must be for at least 1000
shares upon entry.
(C) The Application will accept a PRI with the following amounts of
relative price improvement:
(i) If the NBBO, at the time the PRI is submitted, has a spread
equal to three cents or more, the PRI will be accepted if it offers any
amount of price improvement between zero and the actual NBBO spread
prevailing at that time;
(ii) if the NBBO, at the time the PRI is submitted, has a spread
that is less than three cents, the PRI may offer any amount of price
improvement between zero and three cents.
(D) Participants may elect to limit their exposure when using PRIs
by entering a Per Auction Maximum size for each PRI submitted. The Per
Auction Maximum represents the maximum share amount of a PRI available
for a single Auction. It cannot be greater than the size of the PRI,
but is subject to the same minimum values applicable to the original
entry of a PRI with that relative price term. Once the Per Auction
Maximum, if any, for a PRI is exhausted, the Participant will have 15
seconds to withdraw the PRI, during which time no further executions
against that PRI will occur. In the absence of a withdrawal during this
period, the Application will restore the PRI up to the Per Auction
Maximum and the PRI will become available again for any subsequent
Auctions to the extent there is an eligible balance remaining for that
PRI. For purposes of relative price/time priority, the restored PRI
will receive a new timestamp within the Application.
(E) Participants may select a maximum residency period of one (1)
or five (5) days, during which time the PRI remains resident within the
Application unless fully executed or withdrawn. The Application will
automatically withdraw any PRIs that remain at the end of the
applicable residency period.
(2) Go-Along Indications
(A) A Go-Along Indication can be submitted to the Application for
the purpose of automatically responding in an Auction at a point in
time when one or more orders becomes available in an Auction and there
has been at least one other contemporaneous Crowd execution within the
Application at the NBBO; provided there are no PRIs available or orders
being exposed in an Auction (executions resulting from a Primex Auction
Market Maker Guarantee do not trigger Go-Along Indications). Go-Along
Indications have no specific, fixed price when entered, but will match
against orders at a price equal to the best bid (for Go-Along
Indications to buy) or best offer (for Go-Along Indications to sell)
that exists at such time the Go-Along Indication is activated. While
resident within the Application, Go-Along Indications are not
displayed, exposed or communicated to any other Participant.
(B) At the time of its original entry, each Go-Along Indication
submitted to the Application must be for at least 10,000 shares.
(C) Participants may select a maximum residency period of one (1)
or five (5) days, during which time the Go-Along Indication remains
resident within the Application unless fully executed or withdrawn. The
Application will automatically withdraw any Go-Along Indications that
remain at the end of the applicable residency period.
(d) Executions Bounded by the NBBO--The Application will never
execute an order outside of the NBBO prevailing at the time of
execution. Indications such as PRIs that potentially would offer an
amount of price improvement that could result in an execution outside
of the NBBO will be priced at the NBBO if matched with an order, in
effect providing the maximum amount of price improvement permissible
within the NBBO at that time.
(e) Relative Priority of Predefined Relative Indications and
Orders.
(1) While resident within the Application, Predefined Relative
Indications are ranked in relative price/time priority while they await
activation against incoming orders notwithstanding that PRIs have no
specified, fixed price associated with them. For example, among
resident PRIs for the same security on the same side of the market,
PRIs offering greater relative price improvement are ranked ahead of
PRIs offering less relative price improvement. PRIs offering the same
relative amount of price improvement are ranked by time of entry (or
the time the Indication was restored after exhausting its Per Auction
Maximum).
(2) Market Orders being exposed within the Application also are
ranked in relative price/time priority during the life of their
exposure, notwithstanding that Market Orders have no specified, fixed
price associated with them. For example, among Market Orders in the
same security being exposed on the same side of the market, those
orders not seeking any relative price improvement are ranked ahead of
orders seeking some relative amount of Minimum Relative Price
Improvement. Orders seeking a greater relative amount of Minimum
Relative Price Improvement are ranked behind orders seeking a lesser
relative amount of Minimum Relative Price Improvement. Orders seeking
the same relative amount of price improvement are ranked by time of
entry.
(3) Among and between Indications and orders on the same side of
the market, the relative price/time priorities for each are integrated,
based on their respective ranking relative to the best bid and offer
publicly displayed. The Application recalculates and maintains these
relative priorities whenever there is a change in the best bid or offer
prices publicly displayed in the NBBO. Market Orders that are matched
with other Market Orders being auctioned are executed at the midpoint
of the best bid and offer publicly displayed, provided that such price
satisfies any condition for Minimum Relative Price Improvement
associated with each order.
(f) Responding to All Orders or Public Orders Only--All Responses
and Indications shall include an identifier as to whether it may
interact with either: (1) All available orders (both Public Orders and
Professional Orders); or (2) Public Orders only. Such identifier is not
displayed, exposed or communicated to any Participant at any time, but
is used by the Application for determining the universe of orders with
which the Response or Indication may interact.
5019. Crowd Participation
(a) There are two levels of participation in the Application: Crowd
Participant and Primex Auction Market Maker. Becoming a Participant in
the Application automatically entitles the Participant to be a Crowd
Participant for any security, allowing participation consistent with
this Rule 5019. A Crowd Participant may also choose to register as a
Primex Auction Market Maker, but
[[Page 39777]]
only on a security-by-security basis, as set forth in Rule 5020, and
only consistent with the requirements for participation under that
Rule.
(b) Unless otherwise specified, a Crowd Participant may enter
orders, Indications, and Responses in any Primex Eligible Security at
any time, for its own account or for the account of a customer. Crowd
Participants have no mandatory obligation to submit to the Application
any order at any time.
5020. Market Maker Participation
(a) A Participant may register as a Primex Auction Market Maker in
one or more Primex Eligible Securities, and may maintain such
registration while in compliance with the requirements of this Rule.
Unless otherwise specified, a Primex Auction Market Maker is
automatically subject to the same rights and obligations of Crowd
Participants pursuant to Rule 5019 with respect to customer orders in
any and all Primex Eligible Securities. In addition, a Primex Auction
Market Maker is entitled, but not obligated, to use either of the
following features of the Application when submitting customer orders,
but only with respect to those securities in which it is currently
registered as a Primex Auction Market Maker:
(1) A Primex Auction Market Maker, for securities in which it is
registered as such, may submit customer orders to the Application with
any of the available match parameters that enable the Primex Auction
Market Maker to exercise certain matching rights facilitated by the
Application, as set forth in Rule 5014(b). When associated with an
order, these match parameters are not displayed, exposed or
communicated to any other Participant; or
(2) A Primex Auction Market Maker, for securities in which it is
registered as such, may submit customer orders to the Application with
a Market Maker Guarantee enabling the Primex Auction Market Maker to
guarantee an execution within the Application where such orders are not
otherwise subject to an execution as a result of either satisfactory
Crowd interest or matching rights processing elected by the Primex
Auction Market Maker pursuant to Rule 5014(b) for the order.
(i) Public customer orders of any size are eligible for the Market
Maker Guarantee. The Application will facilitate the Market Maker
Guarantee by automatically executing any unexecuted balance of the
order against the Primex Auction Market Maker that submits the order,
after the Auction exposure period for the order has expired.
(ii) The Market Maker Guarantee is automatically provided at a
price equal to the best publicly quoted offer price (for orders to buy)
or best publicly quoted bid price (for orders to sell) existing for the
security at the time when such exposure period for the order has
expired (including ``zero second'' auctions), for any amount of shares
established by the Primex Auction Market Maker for the order.
(b) With respect to each security in which a Participant is
registered as a Primex Auction Market Maker, the Participant shall:
(1) If the security is a Nasdaq-listed security, be registered as a
Nasdaq market maker in such security (or become so registered), and at
all times comply with all applicable NASD rules and interpretations
relating to Nasdaq market makers, including the requirement to enter
and maintain two-sided quotations in Nasdaq for such security, subject
to the excused withdrawal procedures set forth in Rule 4619;
(2) if the security is an ITS/CAES eligible security, be registered
as an ITS/CAES Market Maker (or become so registered) in such security,
and at all times comply with all applicable NASD rules and
interpretations relating to ITS/CAES Market Makers, including the
requirement to enter and maintain two-sided quotations in CQS for such
security, subject to the excused withdrawal procedures set forth in
Rule 6350;
(3) submit to the Application a minimum of 80% \*\ of the number of
its Mandatory Eligible Orders (including customer orders of another
broker-dealer that has directed such orders to the Participant) as soon
as practicable upon receipt by the Participant, for the purpose of
exposing such orders to the Primex Crowd. Mandatory Eligible Orders do
not include:
---------------------------------------------------------------------------
\*\ The 80% test will be applied on a quarterly basis, and will
be phased in as follows: For the calendar quarters commencing on
October 1, 2001; January 1, 2002; April 1, 2002; and July 1; 2002,
any participant may register in any eligible security as a Primex
Auction Market Maker and maintain that status during such calendar
quarters without regard to the percentage of its orders it submits
to the System for such security during that time, provided it also
satisfies all other requirements of a Primex Auction Market Maker
pursuant to these rules.
Beginning with the calendar quarter that commences on October 1,
2002, a participant previously registered as a Primex Auction Market
Maker for a particular security may maintain its status as such
until December 31, 2002 only if it submitted at least 50% of its
Mandatory Eligible Orders during the calendar quarter that commences
on July 1, 2002 (or during such portion of the calendar quarter that
commences on July 1, 2002 in which the participant was so registered
if the participant registered in mid quarter), provided it also
satisfies all other requirements of a Primex Auction Market Maker
pursuant to these rules. A participant that is newly registering as
a Primex Auction Market Maker for a particular security any time
after the start of the calendar quarter that commences on October 1,
2002 may maintain its status as such until the end of the calendar
quarter in which it registered without regard to the percentage of
its orders it submits to the System for such security during that
time.
Beginning with the calendar quarter that commences on January 1,
2003, and each calendar quarter thereafter, a participant previously
registered as a Primex Auction Market Maker for a particular
security may maintain its status as such until the end of that
calendar quarter only if it submitted at least 80% of its Mandatory
Eligible Orders during the previous calendar quarter (or during the
portion of such previous calendar quarter in which it was so
registered if the participant registered in mid quarter), provided
it also satisfies all other requirements of a Primex Auction Market
Maker pursuant to these rules.
---------------------------------------------------------------------------
(A) any customer order that is greater than 1099 shares at
origination, except that nothing in these rules prohibits a Participant
from submitting orders of greater size at any time;
(B) any customer order that, when initially received by the
Participant, is a Fixed Price Order with a specified price that is not
eligible for acceptance by the Application because it is priced outside
the NBBO and is not otherwise marketable pursuant to Rule 5013(a)(2),
regardless of whether or not the order becomes eligible for acceptance
and exposure at a subsequent point in time;
(C) any customer order placed by a customer who authorizes the
Participant to not expose the order, either at the time the order is
placed or prior thereto pursuant to an individually negotiated
agreement with respect to such customer's orders;
(D) any customer order that is an odd lot order (e.g., less than
100 shares);
(E) any customer order to be executed outside of the hours of
operation of the Application; or
(F) any other order that would not fall within the definition of
the term ``covered order'' as defined in Exchange Act Rule 11Ac1-
5(a)(8).
(4) not attach a condition for Minimum Relative Price Improvement
to any order submitted to the Application solely for its own principal
account and not involving a customer order.
5021. Anonymity, Execution, Reporting, and Clearing
(a) Anonymity--The Application will process all activity among
Participants on an anonymous basis until the end of the day. After
facilitating an execution, the Application will send an execution
report to all Participants involved as soon as practicable. The
execution report will indicate the details of the transaction, but will
not contain the identity of the contra-party. At the end of each
trading day, the actual contra-
[[Page 39778]]
party for executions obtained within the Application will be made
available to the Participants involved through Nasdaq's systems. For
regulatory and other necessary purposes, the NASD and Nasdaq will have
the ability to determine the identity of the actual contra-parties at
any time.
(b) Tape Reporting and Clearing--Matches within the Application are
executed and reported through Nasdaq systems for public tape reporting
and forwarding to NSCC for clearing, where necessary. Participants (or
their clearing brokers) are the parties responsible for the clearance
and settlement of all trades executed through the Application. Once a
transaction is executed, Participants do not have the ability within
the Application to modify or reallocate any portion of the execution to
a clearing broker other than the clearing broker that the Application
associates with the Participant at the time of execution. Neither the
NASD (and its affiliates) nor any operator or administrator of the
Primex Auction System shall be directly or indirectly a party to any
transaction entered into, matched, or otherwise effected through the
Application, notwithstanding that, for the remainder of the trading day
after a transaction, the actual contra-parties have not had their
identities disclosed to each other by the Application.
5022. Credit Limits and Clearing Limits
(a) Credit Limits--The Application shall allow a Participant's Firm
Administrator to establish Credit Limits for each of its associated
Subscribers, including sponsored Subscribers, on an individual
Subscriber basis. The limits are established as a dollar amount of
aggregated purchases or sales which, when reached, causes the
Application to: (1) Inhibit any future executions or the entry of
future interest for that Subscriber; (2) cancel any orders and withdraw
any Indications resident within the Application for that Subscriber;
and (3) send a notice to that Subscriber, its Firm Administrator, and
the Nasdaq Supervisor. Credit Limits may be monitored and modified by
the Firm Administrator on a real-time basis directly through the
Application.
(b) Clearing Limits--The Application shall allow a Participant's
clearing broker to establish Clearing Limits within the Application for
the Participant on a firm-wide basis. The limits are established as a
dollar amount of both purchases and sales (calculated separately, and
not netted) of all Subscribers, collectively for a Participant,
effected within the Application through or in the name of that
Participant. When the Clearing Limits for a Participant are reached,
the Application will: (1) Inhibit any future executions for all
Subscribers associated with that Participant; (2) cancel any orders and
withdraw any Indications resident within the Application for all
Subscribers associated with that Participant; and (3) send a notice to
that Participant's Firm Administrator, the Nasdaq Supervisor, and to
the clearing broker for that Participant provided that the clearing
broker also is a Participant. Clearing Limits for a Participant may be
monitored on a real-time basis by the Participant's Firm Administrator
and can be established, monitored, and modified by the Firm
Administrator of the Participant's clearing broker, provided the
clearing broker also is a Participant. If the clearing broker is not a
Participant in the Application, then the Nasdaq Supervisor will notify
the clearing broker that the Clearing Limits have been reached as soon
as practicable. Clearing Limits also can be established and modified by
the Nasdaq Supervisor on behalf of the clearing broker.
5023. Hours of Operation
(a) The Application is available for executing securities
transactions during regular Nasdaq trading hours whenever there is a
free and open quote (i.e., not locked or crossed), subject to the
general authority and regulatory responsibilities of Nasdaq or its
affiliates in operating the Application as a facility of Nasdaq or its
affiliate (including but not limited to its authority to implement
trading halts in one or more securities due to regulatory reasons,
market-wide emergencies, and system malfunctions).
(b) Nasdaq may permit certain functionality of the Application to
be available outside of the time period during which securities
transactions may be effected through the Application, including but not
limited to, the monitoring, entering, canceling, withdrawing, or
modifying resident Indications, Credit Limits, or Clearing Limits.
5024. Limitation of Liability
(a) Neither Nasdaq, the NASD (including their affiliates), Primex
Trading N.A., L.L.C. (including its affiliates) nor any other operator,
licensor, or administrator (including their affiliates) of the Nasdaq
Application of the Primex Auction System shall have any liability for
any loss, damages, claim or expense arising from or occasioned by any
inaccuracy, error or delay in, or omission of or from: (1) The Nasdaq
Application; or (2) the collection, processing, reporting or
dissemination of any information derived from the Nasdaq Application,
resulting either from any act or omission by Nasdaq or any affiliate,
or any operator, licensor, or administrator of the Nasdaq Application
or from any act, condition or cause beyond the reasonable control of
Nasdaq or any affiliate, operator, licensor or administrator of the
Nasdaq Application, including, but not limited to, flood, extraordinary
weather conditions, earthquake or other act of nature, fire, war,
insurrection, riot, labor dispute, accident, action of government,
communications or power failure, or equipment or software malfunction.
If a Participant that enters, authorizes its Subscribers (including
sponsored Subscribers) to enter, or is authorized by other Participants
to enter orders, Responses, or Indications that result in a transaction
through the Application fails to perform its settlement or other
obligations under the terms of such transaction, the NASD (and its
affiliates) and Primex Trading N.A., L.L.C. (and its affiliates) shall
have no liability for such failure to settle.
(b) Neither Nasdaq, the NASD (including their affiliates), Primex
Trading N.A., L.L.C. (including its affiliates) nor any other operator,
licensor, or administrator (including their affiliates) of the Nasdaq
Application of the Primex Auction System makes any express or implied
warranties or conditions to Participants or their associated
Subscribers (including sponsored Subscribers) as to results that any
person or party may obtain from the Nasdaq Application 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 Nasdaq Application are hereby disclaimed.
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.
[[Page 39779]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(1) Purpose
The Primex Auction System is a facility of Nasdaq that has been
operating as a Pilot Trading System, as defined in paragraph (c)(2) of
Rule 19b-5 of the Act.\8\ As such, Nasdaq was not required to file a
proposed rule change under Rule 19b-4 of the Act\9\ as long as the
System maintained its status as a Pilot Trading System. Under paragraph
(c)(2) of Rule 19b-5 of the Act, a system must comply with three
criteria to maintain its status as a Pilot Trading System.\10\ One such
criteria is that, for each security traded in the System, the System
cannot trade more than one percent of the average daily consolidated
trading volume of any such security, during at least two of the last
four consecutive calendar months. Nasdaq represents that Primex has
exceeded this threshold for many securities. Nasdaq also represents
that while not all eligible securities have been phased in as of this
date, Primex has already executed approximately 1.7 million trades
representing almost 500 million shares since it began operation just
over four months ago. Therefore, Nasdaq files this proposed rule change
to continue operating the System until the Commission grants permanent
approval.
---------------------------------------------------------------------------
\8\ 17 CFR 240.19b-5(c)(2).
\9\ 17 CFR 240.19b-4.
\10\ Pursuant to Rule 19b-5(c)(2) of the Act, to qualify as a
Pilot Trading System, a system must: (1) Be in operation for less
than two years; (2) with respect to each security traded on such
Pilot Trading System, during at least two of the last four
consecutive calendar months, has traded no more than one percent of
the average daily trading volume in the United States; and (3) with
respect to all securities traded on such Pilot Trading System,
during at least two of the last four consecutive calendar months,
has traded no more than 20 percent of the average daily trading
volume of all trading systems operated by the self-regulatory
organization. 17 CFR 240.19b-5(c)(2).
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Generally, Nasdaq states that Primex is a hybrid system that
combines an extended, electronic auction mechanism with the speed and
liquidity of Nasdaq's competing market maker environment.\11\ In a
traditional auction market model, market participants gather in a
``crowd'' at a physical location to bid for incoming orders. In
addition, most auction markets employ a single specialist that manages
trading in a security and supplies liquidity when there is no buying or
selling interest in the crowd.
---------------------------------------------------------------------------
\11\ A detailed description of the System is contained in the
Form PILOT and the companion proposed rule change, as well as the
rules.
---------------------------------------------------------------------------
Primex automates many of these elements. By facilitating an
``electronic crowd,'' not bound by the physical limitations of space or
the number of persons that can be at any one place at a given time, the
System can provide the benefits of an auction model on a larger and
more efficient scale. By further combining this within a competitive,
multi-dealer structure that has been Nasdaq's hallmark, Nasdaq believes
it can make available a greater amount of liquidity than would be
available in a market with only one provider of capital. The result of
this combination and automation, Nasdaq believes, is a market-based
solution for providing price improvement opportunities and enhanced
liquidity.
The following is a brief overview of how the System typically will
operate. Additional details on the System and its tools can be found
within the rules of the System, the Form PILOT and the proposing
release seeking permanent approval of the System.\12\
---------------------------------------------------------------------------
\12\ See supra note 7.
---------------------------------------------------------------------------
A customer sends an order to his or her broker, who, in turn, can
forward it to the System. The System is voluntary. Once an order is
submitted, an auction for that order commences. Through a unique
mechanism, the order is exposed to the System's electronic crowd, which
can be composed of market makers, proprietary traders, institutions,
ECNs and even the orders of other customers. The System's electronic
crowd is open to any NASD member (or their customers, through a
sponsored arrangement), and thus the universe of participants who may
have access to these orders is very broad. Using the System's auction
response tools, crowd participants anonymously bid for the order at
prices at or within the parameters of the National Best Bid and Offer
(``NBBO''). The order will be executed if an appropriate match is found
in the electronic crowd or if the participant submitting the order
provided an execution guarantee. The types of orders that can be
submitted and the System's response tools are specified in the above
rules and are generally described below.
Primex is available to any NASD member and other entities members
choose to sponsor. To access the System, a member must be in good
standing and have executed the necessary agreements with Nasdaq.
Members granted access to the System are referred to as Primex Auction
System Participants (``Participants''), and can access the facility for
their customers or for themselves. Participants in the System are
classified as either Primex Auction Market Makers (``PAMMs'') or Crowd
Participants.
The rights and obligations of each class of Participant are
specified in the rules. Generally, however, for any security eligible
for trading in the System, Crowd Participants can: View all orders
exposed in the System; interact with any order put to auction in the
System by responding to auctions; submit orders to be put to auction;
and trade as principal, agent, or riskless principal.
PAMMs have certain obligations when they participate in the System.
With respect to any security eligible for trading in the System for
which a Participant is registered as a PAMM, it must: Maintain a two-
sided quote in Nasdaq (or Nasdaq's InterMarket for CQS securities) with
respect to any security for which it is registered as a PAMM, and
otherwise be in compliance with all applicable NASD rules; and submit
to the System a minimum percentage \13\ of its Mandatory Eligible \14\
public customer orders (including customer orders of another broker-
dealer that directs such orders to the PAMM) for those securities in
which it is registered as a PAMM.
---------------------------------------------------------------------------
\13\ See NASD Rule 5020.
\14\ See NASD Rules 5011 and 5020.
---------------------------------------------------------------------------
PAMMs have the same privileges as Crowd Participants, but because
they have certain obligations, PAMMs also have additional privileges.
PAMMs are entitled but not obligated to: Exercise certain ``matching
rights'' that allow a PAMM to commit capital to its customer orders in
conjunction with the auction exposure process; provide execution
guarantees within the System for its own customer orders submitted; and
use certain types of orders that permit the PAMM to facilitate block
trades and ``clean crosses.'' PAMMs also are entitled to share in
transaction revenue paid by other Participants when those other
Participants execute against a PAMM's customer orders.
The System accepts unpriced market orders, as well as orders that
have specified, fixed prices that are marketable or priced between the
NBBO. Orders can be submitted in any round lot or mixed lot, but odd
lot orders are not accepted. The System is not an ECN Display
Alternative under the Order Handling Rules \15\ because it
[[Page 39780]]
does not display limit orders. Fixed price orders are eligible only for
``immediate or cancel'' treatment, whereas Participants can choose the
duration for which their market orders will be exposed.
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\15\ The SEC's Quote Rule, Rule 11Ac1-1, and Limit Order Display
Rule, Rule 11Ac1-4, together are commonly referred to as the Order
Handling Rules. Specifically, the System is not an ECN Display
Alternative under paragraph (c)(5)(ii) of Rule 11Ac1-1 and paragraph
(c)(5) of Rule 11Ac1-5.
---------------------------------------------------------------------------
Participants also have the option to specify that the balance of an
unexecuted order be returned to them or forwarded to other Nasdaq
systems for execution. Participants must indicate their preference upon
submission of an order to the System. A Participant's preference is not
displayed, exposed or communicated to any other Participant.
Another feature of the System is that it processes all activity
among Participants on an anonymous basis until the end of the trading
day, at which time the counterparties' identities are revealed to each
other. Nasdaq, however, has the ability to determine the identity of
the parties at any time.
In all other aspects, trades executed within the System are
reported and settled using ACT, just as any other trade executed using
Nasdaq systems. Trades are reported to the public tape, included in
ACT's risk management features, and forwarded to DTCC for clearing, if
necessary. The System itself provides additional risk management
controls through which Participants and their clearing firms can
closely monitor and control their exposure specifically with respect to
System activity, both at an individual subscriber/user level, as well
as across an entire firm.
(2) Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of sections 15A(b)(6) \16\ and 11A(a)(1) of the Act.\17\
Section 15A(b)(6) of the Act \18\ requires the rules of the NASD to be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principals 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; and not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers. Section 11A(a)(1) of the Act \19\ sets forth
findings of Congress that new data processing and communications
techniques create opportunity for more efficient and effective market
operations.
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\16\ 15 U.S.C. 78o-3(b)(6).
\17\ 15 U.S.C. 78k-1(a)(1).
\18\ 15 U.S.C. 78o-3(b)(6).
\19\ 15 U.S.C. 78k-1(a)(1).
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Nasdaq believes its application of Primex is consistent with the
NASD's obligations under the Act, as well as the finding of Congress,
because the System provides members with an additional electronic,
execution system, which is designed to provide members with flexibility
in executing orders and the opportunity to obtain price improvement.
Nasdaq states that the System is a hybrid that combines an extended,
electronic auction mechanism with the speed and liquidity of Nasdaq's
competing market maker environment. Nasdaq believes that the System can
improve on the traditional auction market model by automating many of
its elements, including the trading crowd, but will not be bound by
physical limitations of space or the number of persons that can be in
one physical location at any given time. Nasdaq believes this
attribute, combined with a multiple market maker structure, provides an
opportunity for enhanced liquidity.
Nasdaq states that another attribute of the System is that all
orders may be exposed to a wider audience and thus have the opportunity
to obtain price improvement. This provides for order interaction and
can facilitate best execution. At the same time, however, Nasdaq
believes the System can continue to provide PAMMs with incentives to
expose orders and provide liquidity to those orders. To ensure the
protection of investors, orders will not be executed at prices inferior
to the NBBO.
Nasdaq further states that the System also is designed to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions is securities. Trades executed using the
System will be processed through ACT in the same manner as trades
executed using other Nasdaq systems. As such, information on these
trades will be incorporated in Nasdaq's audit trail, ACT's risk
management function, and forwarded to DTCC for clearance and
settlement, if necessary. Trades executed using the System also will be
disseminated on the public tape.
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
Prior to filing the Form PILOT, Nasdaq published a Notice to
Members describing the operation of the System.\20\ One letter was
received in response thereto.\21\
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\20\ NASD Notice to Members 00-65 (September 2000).
\21\ See letter from Antonio Cecin, Managing Director, Director
of Equity Trading, US Bancorp Piper Jaffray, to Eugene Lopez, Senior
Vice President, Nasdaq, dated January 2, 2001.
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III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become effective upon filing pursuant
to section 19(b)(3)(A)(iii),\22\ subparagraph (f)(5) of Rule 19b-4,\23\
and subparagraph (f)(2) of Rule 19b-5.\24\ The proposal would permit
Nasdaq to continue operating Primex until the Commission grants
permanent approval, but not for a period longer than six months. The
proposal does not modify any rule or the operation of Primex. As such,
it does not affect the protection of investors or the public interest;
does not impose any burden on competition; and does not have the effect
of limiting access to or availability of the system.
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\22\ 15 U.S.C. 78s(b)(3)(A)(iii).
\23\ 17 CFR 240.19b-4(f)(5).
\24\ 17 CFR 240.19b-5(f)(2).
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At any time within 60 days of the filing of a rule change pursuant
to section 19(b)(3)(A) of the Act,\25\ the Commission may summarily
abrogate the 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.\26\
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\25\ 15 U.S.C. 78s(b)(3)(A).
\26\ For purposes of calculating the 60-day abrogation date, the
Commission considers the 60-day period to have commenced on May 28,
2002, the date Nasdaq filed Amendment No. 1.
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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, 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
[[Page 39781]]
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. All
submissions should refer to File No. SR-NASD-2002-58 and should be
submitted by July 1, 2002.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
\27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-14433 Filed 6-7-02; 8:45 am]
BILLING CODE 8010-01-P