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On April 10, 2000, 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”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”)  and Rule 19b-4  thereunder, a proposed rule change that would modify the minimum quotation sizes for securities quoted on the OTC Bulletin Board (“OTCBB”), or any other inter-dealer quotation system that permits quotation updates on a real-time basis, at a price exceeding $200 per share. The proposal was published for comment in the Federal Register on June 7, 2000. The Commission received no comments on the proposal. This order approves Nasdaq's proposed rule change.
II. Description of the Proposal
Currently, NASD Rule 6750 provides that every member firm that functions as a market maker in over-the counter (“OTC”) equity securities must honor its quotations for those securities in certain minimum sizes. Quotes for OTC securities priced over $200 per share must be firm for blocks of 50 shares or more. Nasdaq has stated that this rule has had an undesired and detrimental effect on the transparency and liquidity of certain highly priced or thinly traded securities.
Rule 6750 was originally approved by the Commission in 1993  during the early stages of the OTCBB service. Prior to implementation of the rule, all priced quotations on the OTCBB were required to be firm for blocks of 100 shares or more. This approach soon proved unworkable for lower priced securities for which a quote of 100 shares could represent an insignificant aggregate dollar value commitment to the market.
To remedy this situation, the NASD implemented the minimum quotation size rule for securities priced at $200 per share and below on a “graduated” or “tiered” basis. For securities quoted at 50 cents per share or less, the market maker quoting such security is now required to honor that quotation for a minimum of 5000 shares. This approach was extended up to $200 per share, with different minimum quotation sizes at 2500, 500, 200, and 100 shares. For all quotations exceeding $200 per share, the minimum quote size was determined to be 50 shares.
However, the presence of the highly priced securities on the OTC market was not considered when Rule 6750 was originally proposed. A situation has resulted in which market makers have been unwilling to enter priced quotations for highly priced and thinly traded securities for fear of incurring potentially significant liability to their proprietary accounts. Nasdaq states that, to alleviate the risk of posting a firm quote for 50 of these shares, market Start Printed Page 51888makers do not enter firm quotations but instead post only indications of interest for these securities.
In light of these problems, Nasdaq recently amended Rule 6750 to allow certain Nasdaq officers to modify the minimum quotation size for OTC securities with a price greater than $200 per share. Nasdaq has now proposed to amend Rule 6750 again to establish four additional tier sizes for OTC securities quoted at prices in excess of $200 per share and to delete the provision granting certain Nasdaq officers discretionary authority to modify the minimum quotation sizes, as this authority will no longer be necessary. Under the proposal, the minimum quote size for shares priced between $200.01 and $500 will be 25 shares; between $500.01 and $1000, ten shares; between $1000.01 and $2500, five shares; and from $2500.01 upwards, one share.
After careful review, the Commission finds that the proposed rule change is consistent with the requirements of the Act and the regulations thereunder applicable to the NASD. In particular, the Commission believes that the proposal is consistent with Sections 15A(b)(6) and 15A(b)(9) of the Act. Section 15A(b)(6) requires, among other things, that the rules of a national securities association be designed to prevent fraudulent and manipulative acts and practices; to promote just and equitable principles of trade; 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. Section 15A(b)(9) requires that the rules of the association not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Act.
The Commission supports the NASD's efforts to create a more competitive market and to foster enhanced price discovery of the OTC markets. Currently, Rule 6750 requires quotations for OTC equity securities with prices in excess of $200 per share to be firm for at least 50 shares (unless an exemption is granted). As a result, market makers often decline to post firm quotes for these highly priced securities. While posting an indication of interest is permitted on the OTCBB, the Commission believes that it is appropriate for Nasdaq to encourage the entry of firm quotations. Decreasing the minimum quote size for highly priced OTC equity securities should encourage market makers to post priced quotes for these securities. A larger number of firm quotes should help to improve price discovery and transparency in this marketplace. Accordingly, the Commission believes the proposed rule is consistent with the purposes of the Act.
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the Act, that the proposed rule change (SR-NMASD-00-17) is approved.Start Signature
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
4. However, Rule 6750 also provides that certain Nasdaq officers may modify the minimum quotation size for OTC securities with a price greater than $200 per share.Back to Citation
5. See Securities Exchange Act Release No. 32570 (July 1, 1993), 58 FR 36725 (July 8, 1993).Back to Citation
6. This requirement applies only to market makers entering priced quotations. Market makers are permitted to enter unpriced indications of interest into the OTCBB, see NASD Rule 6520, which are not held to the minimum quotation size standard.Back to Citation
7. For example, since January 2000, 246 OTC equity securities have traded in excess of $200 per share, and five of these securities have traded in excess of $10,000 per share. Telephone conversation between Scott W. Anderson, Attorney, Nasdaq, and Michael Gaw, Attorney-Adviser, Commission, on August 17, 2000.Back to Citation
8. See Securities Exchange Act Release No. 41907 (September 23, 1999), 64 FR 52817 (September 30, 1999).Back to Citation
9. Nasdaq has stated that the proposed tier sizes are consistent with those in the original rule in that they require firm quotations for OTC equity securities to represent trading interest of approximately $5000 to $20,000.Back to Citation
10. In approving this rule, the Commission has considered its impact on efficiency, competition, and capital function. See 15 U.S.C. 78c(f).Back to Citation
[FR Doc. 00-21746 Filed 8-24-00; 8:45 am]
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