[Federal Register: November 20, 2002 (Volume 67, Number 224)]
[Notices]
[Page 70096-70098]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20no02-92]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46822; File No. SR-NASD-2002-152]
Self-Regulatory Organizations; Notice of Filing and Immediate
Effectiveness of a Proposed Rule Change and Amendment Nos. 1 and 2
Thereto by the National Association of Securities Dealers, Inc.
Regarding Trade Throughs and Locked Markets in the Nasdaq InterMarket
November 13, 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 October 25, 2002, the National Association of Securities Dealers,
Inc. (``NASD''), through its subsidiary, The Nasdaq Stock Market, Inc.
(``Nasdaq''), filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I and II below, which Items have been prepared by Nasdaq. On
November 6, 2002, Nasdaq filed an amendment to the proposed rule
change.\3\ On November 12, 2002, Nasdaq filed another amendment to the
proposed rule change.\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 Jeffrey S. Davis, Associate General Counsel,
Nasdaq, to Lisa N. Jones, Attorney, Division of Market Regulation
(``Division''), Commission (``Amendment No. 1''). Amendment No. 1
makes a technical amendment to the rule text of the proposal.
\4\ See letter from Jeffrey S. Davis, Associate General Counsel,
Nasdaq, to Lisa N. Jones, Attorney, Division, Commission
(``Amendment No. 2''). Amendment No. 2 makes a further technical
amendment to the rule text of the proposal. For purposes of
calculating the 60-day abrogation period, the Commission considers
the period to begin the date of the original proposed rule change,
October 25, 2002.
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I. Self-Regulatory Organization's Statement of the Terms of the
Substance of the Proposed Rule Change
Nasdaq is proposing to change NASD Rule 5262 (``Trade-Throughs'')
to conform its rule to the Commission order of August 28, 2002,\5\
which establishes a limited exemption from the trade through provisions
of the ITS Plan. In addition, Nasdaq is proposing to change NASD Rule
5263 (``Locked or Crossed Markets''), which addresses locked and
crossed markets in exchange-listed securities, to conform its rule more
closely with the locked markets rule contained in the ITS Plan. Below
is the text of the proposed rule change. Proposed new language is in
italics; proposed deletions are in brackets.
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\5\ See Securities Exchange Act Release No. 46428 (August 28,
2002), 67 FR 56607 (September 4, 2002) (granting a de minimis
exemption for transactions in certain exchange-traded funds from the
trade through provisions of the Intermarket Trading System (``ITS'')
Plan) (``Exemptive Order'').
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* * * * *
Rule 5262. Trade Throughs
(a) A member registered as an ITS/CAES Market Maker in an ITS/CAES
security, shall avoid purchasing or selling such security, whether as
principal or agent, at a price which is lower than the bid or higher
than the offer displayed from an ITS Participant Exchange or ITS/CAES
Market Maker (``trade-through''), unless the following conditions
apply:
(1)-(8) No Change.
(9) The transaction involves QQQs, DIAMONDs, and SPDRs, and the
execution occurs at a price that is no more than three cents lower than
the highest bid displayed in CQS and no more than three cents higher
than the lowest offer displayed in CQS. This
[[Page 70097]]
exemption shall apply for a pilot period ending June 4, 2003, or for
such other period specified by the SEC.
(b) No Change.
(c) No Change.
* * * * *
NASD Rule 5263. Locked or Crossed Markets
(a) No Change.
(b) No Change.
(c)(1)
(A) Unless excused by operation of paragraphs (c)(1)(B) or (d)
below [A]an ITS/CAES Market Maker that [who] makes a bid or offer and
in so doing creates a locked or crossed market with an[other] ITS
Participant Exchange [or ITS/CAES Market Maker] and that receives a
complaint through ITS/CAES from the party whose bid (offer) was locked
or crossed (the ``aggrieved party''), the ITS/CAES Market Maker
responsible for the locking or crossing offer (bid) shall, as specified
in the complaint, either promptly ``ship'' (i.e., satisfy through ITS/
CAES the locked or crossed bid (offer) up to the size of his locking or
crossing offer (bid)) or ``unlock'' (i.e., adjust his locking or
crossing offer (bid) so as not to cause a locked or crossed market). If
the complaint specifies ``unlock'', it may nevertheless ship instead.
[shall promptly send to such other ITS Participant Exchange or ITS/CAES
Market Maker a commitment to trade seeking either the bid or offer
which was locked or crossed, unless excused by operation of paragraph
(d) below. Such commitment shall be for either the number of shares he
has bid for (offered) or the number of shares offered (bid for) on the
ITS Participant Exchange or by the ITS/CAES Market Maker, whichever is
less.]
(B) If there is an error in a locking or crossing bid or offer that
relieves the locking or crossing ITS/CAES Market Maker from its
obligations under paragraph (c)(2) of Rule 11Ac1-1 and if the ITS/CAES
Market Maker receives a ``ship'' complaint through ITS/CAES from the
aggrieved party, the locking or crossing ITS/CAES Market Maker shall
promptly cause the quotation to be corrected and, except as provided in
paragraph (d) below, it shall notify the aggrieved party through ITS/
CAES of the error within two minutes of receipt of the complaint. If
the locking or crossing ITS/CAES Market Maker fails to so notify the
aggrieved party, he shall promptly ship.
(2) An ITS/CAES Market Maker that makes a bid or offer and in so
doing creates a locked or crossed market with another ITS/CAES Market
Maker shall promptly send to such other ITS/CAES Market Maker an order
seeking either the bid or offer which was locked or crossed, unless
excused by operation of paragraph (d) below. Such order shall be for
either the number of shares he has bid for (offered) or the number of
shares offered (bid for) by the ITS/CAES Market Maker, whichever is
less.
(d) The provisions of paragraph (c) above shall not apply when:
1. No Change.
2. The issuance of the commitment to trade or order referred to
above would be prohibited by an NASD rule or by SEC Rule 10a-1 under
the Act.
3.-6. No Change.
7. The locking bid or offer no longer prevails at the time the
complaint is received by the ITS/CAES Market Maker.
* * * * *
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 statutory 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
NASD Rule 5262--Trade Throughs. The ITS Plan requires that each of
the national securities exchanges and the NASD adopt a similar rule
governing the practice of ``trading through'' the quote of another ITS
participant that trades ITS-eligible securities. The trade through rule
prohibits market participants from purchasing or selling such
securities at prices that are lower than the bid or higher than the
offer displayed by another ITS Participant. NASD Rule 5262, the NASD's
trade through rule, governs the conduct of NASD members that have
registered as market makers in ITS-eligible securities.
On August 28, 2002, the Commission issued an order granting a de
minimis exemption (``Exemption'') for transactions in certain exchange-
traded funds (``ETFs'') from the trade through provisions of the ITS
Plan. \6\ At present, the exemption extends to transactions in three
designated ETFs--the Nasdaq-100 Index (``QQQ''), the Dow Jones
Industrial Average (``DIAMONDs''), and the Standard & Poor's 500 Index
(``SPDRs''). Pursuant to the Exemption, transactions in these ETFs may
be ``executed at a price that is no more than three cents lower than
the highest bid displayed in CQS and no more than three cents higher
than the lowest offer displayed in CQS'' (``Exempted Trade-Through'').
The Exemption is effective from September 4, 2002 through June 4, 2003.
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\6\ See note 4, supra.
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According to Nasdaq, the Exemption was proposed by the Commission
to permit the rapid execution of orders in ETFs at prices that may
trade through the quotations of other markets, including the NBBO
price. Because Exempted Trade-Throughs will, by definition, be exempt
from ITS restrictions, a market participant that reports execution of
an Exempted Trade-Through will not be required to satisfy an
administrative request from any ITS participant for satisfaction
following the Exempted Trade-Through. \7\ The SEC will measure the
impact of the Exemption on the trading of those securities during the
pilot period.
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\7\ Pursuant to the ITS Plan, if an ITS participant trades
through the quotation of another ITS participant, thereby violating
the ITS trade through prohibition, the non-violating participant is
entitled to send an administrative message noting the trade-through
and the violating participant is required to respond with a
commitment to trade at the price and size quoted by the non-
violating participant.
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Nasdaq has decided to add the same exemption to its own trade-
through rule, in Nasdaq's case, NASD Rule 5262. This measure will
ensure that ITS/CAES Market Makers are aware that they must operate
under equivalent terms of the ITS Plan as other ITS Plan participants.
NASD Rule 5263--Locked or Crossed Markets. The ITS Plan requires
each of the national securities exchanges and the NASD to adopt a
similar lock/cross rule governing trading in ITS-eligible securities.
The current wording of the NASD rule is more stringent than required by
the ITS Plan. Nasdaq believes that the more stringent wording of the
rule is burdensome and places the NASD at a competitive disadvantage
with other ITS participant exchanges that have adopted the lock/cross
language prescribed by the ITS Plan.
NASD Rule 5263 currently requires ITS/CAES Market Makers that
create locked or crossed markets with another ITS Participant or ITS/
CAES Market Maker promptly to send that other party a commitment to
trade seeking either the bid or offer which was locked or
[[Page 70098]]
crossed. Nasdaq believes that the requirement to promptly send a
commitment contrasts with the current procedure expressed in the ITS
Plan, which requires that a locking participant respond only after a
locked market complaint has been properly registered. Nasdaq believes
that the more stringent NASD requirement could cause ITS/CAES Market
Makers to prematurely send a commitment to trade without having the
input or an understanding of the locked or crossed party's intentions
to trade. To eliminate this disparity and competitive disadvantage with
other markets, Nasdaq will mirror the language of the ITS Plan and
remove the more restrictive language with respect to locks or crosses
that occur between ITS/CAES Market Makers and the exchange participants
of the ITS Plan.
Nasdaq will, however, maintain its current, stricter standard of
conduct with respect to locked and crossed markets that occur between
ITS/CAES Market Makers within the Nasdaq InterMarket, which are not
addressed by the ITS Plan. Specifically, Nasdaq believes that the
requirement that ITS/CAES Market Makers promptly send orders whenever
they lock or cross other ITS/CAES Market Makers, reduces the number and
duration of locks and crosses that do, inevitably, occur within a
competing dealer market. Nasdaq also believes that locking and crossing
behavior can provide valuable price discovery information to market
participants. Nasdaq believes, however, that economic and regulatory
incentives help minimize the extent to which such locks and crosses
interfere with the smooth operation of the InterMarket and with ITS/
CAES Market Makers' internal systems. This is particularly important
because CAES and ITS/CAES Market Makers operate on an automatic
execution basis.
2. Statutory Basis
Nasdaq believes that the proposed rule change is consistent with
the provisions of Section 15A of the Act,\8\ in general and with
Section 15A(b)(6) 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 competition
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. 78o-3.
\9\ 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.
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
Because the foregoing rule change does not: (1) Significantly
affect the protection of investors or the public interest; (2) impose
any significant burden on competition; and (3) become operative for 30
days from the date on which it was filed, provided that Nasdaq has
given the Commission written notice of its intent to file the proposed
rule change at least five business days prior to the filing date of the
proposed rule change or such shorter time as designated by the
Commission, it has become effective pursuant to Section 19(b)(3)(A) of
the Act,\10\ and Rule 19b-4(f)(6) thereunder.\11\ At any time within 60
days of the filing of the proposed rule change, the Commission may
summarily abrogate the proposed rule change if it appears to the
Commission that such action is necessary or appropriate in the public
interest, for the protection of investors, or otherwise in furtherance
of the purposes of the Act.
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\10\ 15 U.S.C. 78s(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6).
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Nasdaq has requested that the Commission waive the 5-day pre-filing
notification requirement and the 30-day operative delay. The Commission
believes that waiving the 5-day pre-filing notification requirement and
the 30-day operative delay is consistent with the protection of
investors and the public interest.\12\ In particular, the proposed rule
changes bring Nasdaq rules into conformity with the approved ITS Plan
and the August 28, 2002 Commission's Exemptive Order. For this reason,
the Commission waives both the 5-day pre-filing notification
requirement and the 30-day operative waiting period.
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\12\ For purposes only of accelerating the operative date of
this proposal, the Commission has considered its impact on
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, 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
filing will also be available for inspection and copying at the
principal office of the NASD.
All submissions should refer to File No. SR-NASD-2002-152 should be
submitted by December 11, 2002.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 02-29483 Filed 11-19-02; 8:45 am]
BILLING CODE 8010-01-P