Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”), and Rule 19b-4 thereunder, notice is hereby given that on November 6, 2000, the National Association of Securities Dealers, Inc., through its wholly-owned subsidiary The Nasdaq Stock Market, Inc. (“Nasdaq”) filed with the Securities and Exchange Commission (“SEC”) or “Commission”) the proposed rule change as described in Items I, II, and III below, which Items have been prepared by Nasdaq. Nasdaq filed the proposed rule change pursuant to section 19(b)(3)(A) of the Act, and Rule 19b-4(f)(5) thereunder. Pursuant to Rule 19b-4(f)(5), Nasdaq has designated this proposal as one effecting a change in an existing order-entry or trading system of a self-regulatory organization that does not: (1) Significantly affect the protection of investors or the public interest, (2) impose any significant burden on competition, or (3) significantly have the effect of limiting the access to or availability of the system. As such, the proposed rule change is immediately effective upon the Commission's receipt of this filing. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons.Start Printed Page 79910
I. Self-Regulatory Organization's Statement of the Terms of Substance of the Proposed Rule Change
Nasdaq is proposing to amend Rule 4710(b) of the National Association of Securities Dealers, Inc. (“NASD” or “Association“), to modify the Nasdaq National Market Execution System (“NNMS”) to reduce from five seconds to two seconds the interval delay between executions against the same market maker in any security included in the Nasdaq 100 Index. Nasdaq will establish this rule change as a pilot program for six months, beginning on the date of launch of the NNMS, during which time Nasdaq will monitor and analyze system performance with respect to the interval delay. Below is the text of the proposed rule change. Proposed new language is italicized; proposed deletions are in brackets.
4710. Participant Obligations in NNMS
(a) No Change.
(b) Market Makers:
(1) An NNMS Market Maker in an NNMS Security shall be subject to the following requirements:
(A) No change.
(B) No Change.
(C) No Change.
(D) (1) Except as provided in subparagraph (2) below, [A] after the NNMS system has executed an order against a market maker's displayed quote and reserve size (if applicable), that market maker shall not be required to execute another order at its bid or offer in the same security until 5 seconds [a predetermined time period] has elapsed from the time the order was executed, as measured by the time of execution in the Nasdaq system. [This period of time shall initially be established as 5 seconds, but may be modified upon Commission approval and appropriate notification to NNMS participants.]
(2) For securities included in the Nasdaq 100 Index, after the NNMS system has executed an order against a market maker's displayed quote and reserve size (if applicable), that market maker shall not be required to execute another order at its bid or offer in the same security until 2 seconds has elapsed from the time the order was executed, as measured by the time of execution in the Nasdaq system.
(c) through (e). No Change.
II. Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, Nasdaq included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. Nasdaq has prepared summaries, set forth in Sections (A), (B), and (C) below, of the most significant aspects of such statements.
(A) Self-Regulatory Organization's Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change
On January 14, 2000, the Commission approved the creation of The Nasdaq National Market Execution System (NNMS), a new platform for trading Nasdaq National Market (NNM) securities. Under the rule changes, the NNMS will become Nasdaq's primary automatic execution trading platform, and SelectNet generally will be used to deliver negotiable orders to market makers and ECNs that participate in the NNMS. The NNMS will enhance the automatic execution system for the trading of NNMM securities by, among other things, reducing from 17 seconds to five seconds the delay between executions against the same market maker. The NNMS will not affect trading of Nasdaq SmallCap securities.
Nasdaq has determined that it is necessary to modify the approved interval delay parameter of the NNMS, prior to implementation of the system. Nasdaq expects that changing SelectNet from a liability to a non-liability system will cause much of the order and message traffic now in SelectNet to migrate to the automatic execution facility, the NNMS. If this occurs, the presence of a five-second interval delay could hinder the efficient and orderly operation of the system by causing a queuing of orders. Following Commission approval to the NNMS, Nasdaq market participants have expressed to Nasdaq their concern that such quering will occur in the NNMS in securities with rapid order flow unless the interval delay parameter is reduced from the current five seconds. Accordingly, Nasdaq proposes to reduce from five seconds to two seconds the delay between executions against the same market participant in the same security for any security included in the Nasdaq 100 Index, which are generally the securities with the heaviest order flow.
As noted in the original rule proposal, SR-NASD-99-11, the interval delay is designed to balance both the need for fast executions and also the necessity of giving market makers adequate time to monitor and update their quotes in response to rapidly changing market conditions. Nasdaq now strongly believes that, with respect to securities included in the Nasdaq 100 Index, the need for fast executions in rapidly moving securities is greater than originally anticipated. Nasdaq shares the concerns of its members that the risk of a queuing of orders in these securities is significantly higher than in other, slower-moving issues. At the same time, the cost of such queuing is also higher in fast-moving markets, as it would delay orders from many market participants for the benefit of a single market participant. Reducing the interval delay from five seconds to two seconds would also protect investors by decreasing the likelihood that the market will move against them after an order is placed.
In addition, Nasdaq believes that two seconds is an adequate time period for market makers in Nasdaq 100 Index securities to monitor and update their quotes. A large number of market makers compete for order executions in these securities, and market makers in these securities have become accustomed to fast-moving markets, and to monitoring and updating their quotations under such conditions. In addition to the interval delay parameter, market makers have several other tools for managing their quotes, including the Actual Size Rule and the system's Auto-Quote Refresh functionality. Considering all these factors, Nasdaq believes that this reduction in the interval delay is reasonable and appropriate to maintaining orderly markets in rapidly moving securities such as those in the Nasdaq 100 Index.
Based on the above, Nasdaq believes that the proposed rule changes are consistent with the provisions of Section 15A(b)(6) of the Act in that the proposed rule changes are designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in the 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 Start Printed Page 79911general, to protect investors and the public interest.
Nasdaq believes that the proposal also is consistent with Section 11A(a)(1)(C), which provides that it is in the public interest and appropriate for the protection of investors and the maintenance of fair and orderly markets to assure: (1) Economically efficient execution of securities transactions; (2) fair competition among brokers and dealers; (3) the availability to brokers, dealers and investors of information with respect to quotations and transactions in securities; (4) the practicability of brokers executing investors orders in the best market; and (5) an opportunity for investors orders to be executed without the participation of a dealer. Specifically, Nasdaq believes that this proposal will improve the mechanism for the efficient display and automatic execution of customer limit orders. Thus, the proposed rule change is consistent with Section 11A and the SEC's Order Handling Rules, and in particular the Display Rule.
(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
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action
The foregoing rule change has become effective pursuant to Section 19(b)(3)(A)  of the Act and Rule 19b-4(f)(5)  thereunder in that it constitutes a change in an existing order-entry or trading system of a self-regulatory organization that does not: (1) significantly affect the protection of investors or the public interest, (2) impose any significant burden on competition, or (3) significantly have the effect of limiting the access to or availability of the system. At any time within 60 days of the filing of such proposed rule change, the Commission may summarily abrogate such 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.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule 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 the file number in the caption above and should be submitted by January 10, 2001.Start Signature
For the Commission, by the Division of Market Regulation, pursuant to delegated authority.
Margaret H. McFarland,
5. See Securities Exchange Act Release 34-42344 (January 14, 2000), 65 FR 3897 (January 25, 2000).Back to Citation
6. Nasdaq represents that it is establishing this rule change as a pilot program beginning on the date of launch of the NNMS and continuing for six months. During that time, Nasdaq will monitor the performance of the system under these parameters to determine whether the Nasdaq 100 Index is the proper measure for identifying stocks that require a shortened interval delay. Nasdaq states that it is also evaluating whether to shorten the interval delay on a stock-by-stock and day-to-day basis to accommodate increased trading in non-Nasdaq-100 issues due to significant corporate or market events.Back to Citation
[FR Doc. 00-32333 Filed 12-19-00; 8:45 am]
BILLING CODE 8010-01-M